While the mass exodus of office occupiers that some feared in the early days of the pandemic did not materialize, even the most optimistic industry players agree that the next three to five years will remain fluid and challenging. Beyond that though, the variety of opinion on where the sector is headed is vast.

More bullish decisionmakers believe that the economic downturn and the inevitable increase in unemployment will hand power back to employers to enforce a full return to the office. Others believe companies will look to cut expenses by giving up large parts of their footprints. Others yet point to the current wide spectrum of hybrid work set-ups as a new normal.

Hybrid Consensus

Although some voices still predict a full return to the office, the wider consensus is that hybrid work is here to stay for the foreseeable future. While nuances differ from company to company, the overarching sentiment is the need for a home base, with 86% of tenants believing in the ongoing necessity for a physical office space, according to the 2022 BOMA International COVID-19 Commercial Real Estate Impact Study which surveyed more than 1,200 space decision-makers.

Additionally, 60% of employees and employers favor a partial return to the office with an average of 3.5 days per week. But reacquainting workers with the office environment is proving more challenging than most industry players expected. Also, a large contingent of workers simply favor a telework setup for the increased work-life-balance it offers, reduced commute times and expenses, as well as the opportunity to live in more affordable housing markets.

However, the wider consensus within the industry is the need for each company to take an individual approach. After all, the past two plus years proved that successful telework is most influenced by the role of an employee, rather than the location, industry, or the company itself.

The Need for Individual Approach

It is precisely this need for flexibility that has spurred the reemergence of the coworking sector after the hits taken during the pandemic. Not only are employees choosing to work in coworking environments, but corporate presence in the industry has also surged. While the nearly 118 million square feet of coworking space that CommercialEdge estimates to exist nationwide represent only 1.7% of all office space, the sector is expected to grow, and not just in the short term.

But changes in the industry go far beyond the growing interest in coworking. New lease contracts are increasingly foregoing the traditional 10-year term in favor of three-to-five-year terms. And while 75% of office decision-makers plan on renewing leases, nearly the same number are reevaluating their needs. Of those, half lean towards reducing footprints and just a little over one-third plan to increase it.

Occupancy variations have also become tied to industries, regions, location and building class. Occupiers of Class A space over 5,000 square feet place the highest importance of maintaining an office hub. But occupiers with the largest footprints and highest rents are the ones increasingly reevaluating space needs, especially in the Northeast, California and Texas. At the same time, office occupancy as well as new project starts remain highest in Sunbelt markets.

The latest CommercialEdge data shows that right behind the Bay Area, Boston and Manhattan, Austin and Dallas had the largest development pipelines in terms of square footage. Furthermore, Charlotte and Nashville, along with Austin, had the largest pipelines in terms of percentage of stock.

Office As Destination, Not Obligation

Net absorption turned positive this year, but there is a sharp demarcation line between building classes.

High-quality spaces, especially new buildings with the latest amenities experienced rent growth in both 2021 and 2022, while Class B and C assets are facing increasing vacancies, decreasing lease rates and little new development.  CommercialEdge data shows that A and A+ projects under construction totaled 129 million square feet at the end of Q3, whereas Class B developments accounted for just 9.7 million.

Location is also playing an important role in the performance of office properties, with much of the surge in office vacancy rates originated from CBD assets. Conversely, suburban properties have remained more stable, with lower declines in vacancy rates. Specifically, the latest figures show an 18.3% vacancy rate for CBD assets and 16.2% for suburban properties.

It is essential, however, to emphasize that this stems not from a flight to suburban offices but is pushed on by flight from downtown cores. That trend is also evidenced by under-construction pipelines and planned developments. New CBD developments totaled 25 million square feet at the start of Q4, while suburban starts stood at nearly 52 million square feet and urban projects outside CBDs were set to add 62 million square feet.

Office Enters Its Service Era

With the flight to quality not expected to let up, office amenities have started going from fitness centers, catering and outdoor spaces to a range of services like concierge setups. The demand for top-tier office spaces and their increasing rent rates suggest that the most fundamental change for the industry might be that office environments are no longer simply locations and products — instead they have become a service.

This shift in the way office spaces are perceived and lower usage rates have led to even the most optimistic outlooks to expect a decrease in demand of at least 10% — a figure that could go as high as 25%. The most likely spaces to take that hit will be where owners and operators are unwilling to or unable to upgrade and quickly realign with new usage trends, especially since rent growth is expected to remain weak while operating costs continue to rise.

Companies should make the workplace a destination instead of an obligation.

That in turn has upended cap rates. Rising interest rates, risk premiums and debt costs have softened both the volume and price of office transactions overall. Exceptions to this outlook are expected to be niche sectors, like the life sciences sector, which has kept markets with significant such footprints ahead of traditional gateway markets.

Where Next: Conversions and Rediscovering Customer Needs

While early voices did predict a significant increase in office-to-housing conversions, that trend too failed to materialize. Although many of the largest office markets in the country would be open to such projects, such adaptive reuse projects will likely be few and far between, since each potential office conversion must be treated on a case-by-case basis, which already increases the cost of conversions.

Further major roadblocks include the simple fact that most office buildings have floor plates that are incompatible with residential needs. Furthermore, demand, local attitudes (such as NIMBYism), regulations, tax and incentive packages all must fit in just the right way for conversions to be feasible. Not only that, but the costs of financing as well as acquisition prices need to soften enough to make them profitable. Few notable cities have managed to successfully readapt large, concentrated amounts of office space and those that did, required heavy support from the public sector.

For office owners and investors with an eye to future profitability, it seems more crucial than ever to truly understand all ongoing changes, face the fault lines within the sector and act. The pandemic may have brought on a host of specific challenges, but it also exposed and exacerbated existing pain points in the industry.

After all, densification, shrinking spaces and suboptimal seating setups pushed worker dissatisfaction to new heights in 2019. As one industry analyst framed it: “Any real estate investor that is not taking seriously the possibility that the market is being fundamentally upended is going to get a real shock. Office owners must understand the customer like never before; if not, they will have a problem.”

The post The Future of Office 2023: Clarity, Adjustments and Emerging Trends appeared first on CommercialEdge.

Given Andrew Cuomo’s recent resignation as Governor of New York, the fate of his commercial real estate (CRE) conversion proposal for New York City is now uncertain. However, with a number of commercial asset classes still on their knees right now in New York City (NYC), Cuomo’s successor Kathy Hochul will need to act swiftly to address this issue.

As such, Coumo’s plan should be used as a starting point or as the basis from which Governor Hochul will build her proposal around. Therefore, it’s important we assess the existing proposal critically.

Placing the Proposal in Context

Right now, commercial real estate in NYC is a tale of two cities: On the one hand, landlords of many hotel, retail, restaurant and office buildings are struggling to fill vacancies due to the effect of ongoing COVID restrictions. For example, the office vacancy rate in the city is currently 15.1% — the highest it’s been in three decades. At the same time, many of the city’s retail landlords have also been pummeled: About one in seven chain stores closed for good last year. And, behind the statistics, we’ve also witnessed firsthand how NYC institutions — such as the Roosevelt Hotel and the Hilton Times Square — toppled like dominoes. 

On the other hand, light industrial is booming. Since the onset of the pandemic, the explosion in e-commerce has fueled demand for warehouse space in strategic locations across the city — most notably in Brooklyn and the Bronx, with rents up 5.6% year-over-year in 2020. Amazon is one of the big names signing on. The company recently signed leases for 311,000 and 200,000 square feet of space in Brooklyn and the Bronx, respectively.

What Is & Isn’t Included in the Proposal

The proposal applies to the following property classes:

• Hotels with fewer than 150 rooms
• Class B and C office buildings 

What’s more, there are also specific geographic limits to the proposal:

• Hotels in Manhattan must be between the Financial District and 110^th St. Note that There are no geographic restrictions when it comes to the outer boroughs.
• As far as offices, the proposal only applies to those based in Manhattan. More precisely, they must be between Park and Ninth avenues and 14th and 60th streets.

Furthermore, as reported by The Real Deal, office buildings must either have had a certificate of occupancy as of January 1, 1980, or as of December 31, 2020, and must also be bankrupt or under receivership.bAnd perhaps most significantly for developers, in terms of overhead, 25% of the residential units in these conversions must be set aside for affordable housing.

Notably, despite the fact that retail and restaurant premises are also suffering, these types of businesses are not included in this proposal, in spite of the fact these operators are also suffering. However, this is most likely due, in part, to a desire to retain first-floor commercial uses in buildings as these are the lifeblood of a livable city. And it’s also partly due to the theory that more residents living in these districts will increase the customer base for retailers and restaurants — which will help get these businesses back on their feet, as well.    

What Could Be the Effect of the Proposal?  

After a difficult 2020, we’re beginning to see the green shoots of recovery in the Manhattan residential market. Specifically, transactions have started to increase, which has driven price recovery. At the same time, lease signings are also beginning to pick up. However, the velocity of this recovery depends on structural factors: chief among them when — and, more crucially, if — workers return to offices.

Granted, the market dynamics of this initial recovery are delicate. As such, the prospect of tens of thousands of new homes entering the market via conversions throughout the next few years will surely have an impact. However, the extent of that influence will depend on how quickly the NYC market is able to make a full recovery.

For example, if we take a worst-case scenario and forecast a slow recovery spread across a few years, then the effects of these new units on the supply end could further throttle price recovery. But, even in this situation, it would likely only be felt at a very localized level where major schemes are located.

Meanwhile, the demand side of the equation is the more gnarly issue. That’s because rents likely won’t return to their pre-pandemic levels until Manhattan firms bring all of their workers back to the office. And, while some large NYC employers are already making plans to bring staff back to the office, plenty of other businesses are announcing that employees can work from home or in a hybrid of home and office work model indefinitely.  

Therefore, conversion developers need to anticipate how the demand may shift during the next few years. For instance, this could result in reduced demand in the luxury end of the market — the part of the residential market hit hardest to date by the pandemic. And, while details are yet to be confirmed, if conversion developers are eligible for 421a tax exemption (recently rebranded as the Affordable New York Housing Program), expect to see plenty of affordable rental units being included in these conversions.   

Of course, the effect of the policy will be felt sooner in CRE. Even before the policy goes into effect, expect to see transactions and empty office units removed from the rental market in anticipation of conversion and as they await a better price. And, while this should aid the price recovery of existing office and hotel stock, the extent of this will depend heavily on structural factors — more precisely, demand for office space in a hybrid-work world.

However, Governor Hochul may amend what’s on the table, as there are definite sections of the proposal in need of improvement. These include expanding the geographical boundaries of the scheme, as well as stress-testing the affordability requirement to ensure affordable housing needs are balanced with the economic reality of costly conversions.

Overall, the proposal as it stands should be welcomed by the development community. After all, offices that can no longer attract tenants — or hotels that no longer attract guests — are now redundant in the new normal. Thus, the city should allow these assets to be converted into more productive and profitable uses.

About

Ruben Izgelov is co-founder and managing partner of We Lend LLC, a New York-based private lender with a national reach focused on serving real estate investors by providing quick and low-cost capital.  

The post Examining New York City’s Commercial-to-Residential Conversion Proposal appeared first on CommercialEdge.

I moderated a recent roundtable discussion with industry experts to answer these and other questions. Brought to you in collaboration with CommercialEdge and Bisnow, the seminar covered a rich landscape of data and behavioral points.  

How Have Interactions with Tenants Changed in the Last Few Years?  

The most significant change seen by Allison Marsales, Managing Director, Office Leasing, Canada, Cushman & Wakefield, is in the influencers making business decisions regarding leasing. In the past, it was the CEO or other head of business, while today, she’s seeing COOs and operational sides of businesses, such as Human Resources, taking the lead.  

Nadir Settles, Managing Director, NY, Nuveen, agreed with Alison and added that many tenants or potential tenants have many more questions today than they did in previous years about building health and wellness protocols. They want to know what landlords have done to enhance air filtration and other steps taken to make offices safer. These were conversations he did not see in the past.  

Likewise, Settles has seen an increase in the conversation about amenities. Pre-COVID, people were interested in gyms. Today they want to know about outdoor spaces, rooftop access, and flexibility.  While co-working as a part of a sub-operation had been part of the landscape pre-COVID, now flex space is being integrated into spaces and has become a bigger amenity.  

From the perspective of Charlie Musgrave, Senior Director, Office Leasing Investments, Ivanhoé Cambridge, the historical role of the owner was to be a service partner and true partner. The landlord’s mission is today to enable the individual and collective performance of its tenant partners. He points out that this was not new thanks to COVID, but the thinking and discussion about landlord/tenant partners and landlord role and responsibility in enhancing the overall business and performance of its tenant partners have increased.  

For Spencer Levy, Global Chief Client Officer & Senior Economic Advisor, CBRE, the bottom line of all of this is agile spacing, flex space, and short-term leases. However, he hasn’t seen a shift in the capital market’s position on the asset’s impact and value and whether this flexible route is only an advantage in the short term. 

Marsales points out that she has not seen commercial clients going for flexible space as much as was predicted in Toronto but believes it’s too early to tell where the trend is truly going. Spencer has not seen this in the U.S. and says he sees companies still prioritizing shorter leases.  

When analyzing the competitive set of your property, commercial real estate professionals must consider the changes in tenant priorities and the tenant approach to leasing new space. You should start with a quantitative base for competitive sets and then layer on top the qualitative understanding of tenant behavior in that market. 

Environmental Concerns Are Still a Top Priority  

Prioritizing environmentally-friendly builds is nothing new, but Levy believes that it is changing. In the past, if a company was LEED or EnergyStar certified, the client was “good to go.” But he believes that is no longer the case. Today, companies must be sure they pass U.N. Standards, the Paris Accord, and other measurements, especially if they want to get international investors interested. This is true beyond the office sector into industrial and retail, too.  

Charlie believes that this is happening largely because younger generation employees prioritize sustainable features in the buildings they work in. For him, it is a very progressive trend in the market that he’s glad to see.  

Again, eco-friendly considerations are not new, but what Spencer says is new is that tenants and employees drive the need for further greening of buildings. Nadir brought local law into the conversation and discussed the importance of buildings complying with state and city laws, another big driver. Spencer agreed and further pointed out that today’s building owners are calculating the cost of making their buildings compliant versus the downsides and costs of not doing so. 

Owners, brokers and asset managers would do well to consider adding in environmental impact and sustainability factors into their competitive sets. It’s also important to approach a possible acquisition with this in mind; will this asset become obsolete if it’s not environmentally friendly enough for modern tenants.  

The Economics of Modern Leases 

We also asked our panelists to discuss the impact of actual economics of how space is leased at the deal level. This is an important thing to consider in the context of competitive sets and building analysis. Spencer began by saying it all comes down to costs and who pays for what. He doesn’t believe it should be looked at on only a cost basis – that is binary. He describes it more as a gating issue and notes that some buildings will be “personal non grata to some tenants.”  

Nadir discussed how not doing something can impact liquidity pointed out that if a company wants to future-proof their building, sustainability is the way to go. Alison sees a “mass flight to quality.” Buildings that are fully built out and “activated” are getting multiple offers while the same space across the street sits vacant.   

What Can a Building Offer to Help Companies Attain or Retain Talent? 

Nadir suggests that companies should look more at becoming “lifestyle brands,” which are somewhat insulated from market ups and downs. Yes, he acknowledges some increase in remote work, but points out that this is an excellent time for companies to stress what makes it worth coming into the office: culture, mentorship, amenities and development.  

He also wants office space to accommodate the lifestyle of the workers. He imagines scenarios in which a worker can wake up and web conference into a morning meeting, then head to an office space in a different market or even country owned by the same landlord that owns their own office space. On a micro level, it could be as simple as allowing talent access to conference room Uptown when their main space is Downtown. Nuveen has begun experimenting with “portfolio access” to enable tenants to lease a primary space but offer other Nuveen building access to their employees to meet evolving needs and employee locations.  

As Charlie put it, the workforce has become “nomadic” and landlords that help tenants offer this lifestyle to their employees will win. Understanding what your asset offers your prospective and current tenants vs its competitive set is critical to understand.  

Charlie went further into ideas on how to get people to choose to go to the office over working at their dining room table. His ideas focused on outdoor space, parks, and food and beverage offerings. He suggests engaging occupants from the moment they set foot in the building until they leave.  

From Spencer’s perspective, none of this is new – he points to the tech companies that brought in bars and other food and beverage options a years ago to recruit and retain top talent. The main difference is that these were amenities that the tenants provided in the past, while now the landlords are starting to provide them. 

All panelists agreed that while data is an essential part of making decisions on which assets to invest in, the human aspect cannot be overlooked. Says Spencer,” Why do people want to go back to the office? Because it makes them better and happier. People go to restaurants when they could cook at home. Why? The human element.”  

When it comes to creating, maintaining and utilizing your competitive sets and market intelligence data, my biggest take away from my roundtable discussion with these panelists is the importance of layering together quantitative data with a real qualitative understanding of the market your assets are in. That means working with local brokers, visiting your buildings and engaging in the market and listening closely to what tenant trends are telling you.  

As Spencer put it, “data is a tool, it is not the answer” but without the right tools how can we arrive at the optimal answer? 

The post Your Building’s Competitive Set: Industry Experts Meet to Discuss How to Use Market Intelligence to Make Better Decisions appeared first on CommercialEdge.

Covered topics will include how landlords can learn what’s going on in their target areas and utilize that knowledge to make space pricing decisions, as well as what indicators matter most to tenants in the market — including insights on the importance of lease structures, location, amenities, walkability score, parking convenience, and more.

The expert panel will also discuss the evolving demands of tenants and the right way to benchmark against similar properties. Competitive sets and their value in the industry will get special attention and attendants will learn how to leverage customized analytics on similar properties in their region to manage and market spaces more competitively. Sign up to learn how to use reliable data regarding net rents, occupancy, lease spreads and listings to generate the greatest possibilities for clients.

Moderated by Turner Levison, senior account executive at Yardi, the webinar will host as speakers Spencer Levy, global chief client officer and senior economic advisor at CBRE; Nadir Settles, New York managing director at Nuveen; and Charlie Musgrave, senior director of office leasing investments at Ivanhoé Cambridge.

Attended by brokers, developers, owners, property managers, contractors, attorneys, bankers, prop tech firms, private equity investors and local officials alike Bisnow webinars bring the industry’s top experts and latest insights to the forefront of the conversation.

Reserve your spot at Your Building’s Competitive Set now.

The post CommercialEdge Teams Up with Bisnow for Competitive Sets Webinar: Ideas on Using Market Intelligence to Make Better Decisions appeared first on CommercialEdge.

Co-presented by CommercialEdge and Yardi Matrix, the presentation covered:

• Demand for industrial space as consumption begins to move back from goods to services
• Industrial supply forecast given constraints to build
• Operating fundamentals for both industrial and office properties
• Sensitivity analysis on the future of work and its effect on office utilization in urban cores and gateway markets

Check out the recording of the webinar here.

Strong Fundamentals Continue for Industrial Assets

Industrial fundamentals have continued to strengthen as national vacancy declined and average rents increased, with major ports and large population centers leading rent growth. Moreover, industrial cap rates are low compared to other asset types, reflecting the industry’s fundamentals and investor appetite.

Meanwhile, e-commerce continues to be a major contributor to industrial’s success, but the backbone of the industry is general goods distribution and small-scale manufacturing. Granted, e-commerce won’t have the same double-digit increase as it did in 2020 due to pandemic constraints at the time, but demand is, nevertheless, still expected to remain consistent.

Notably, 37% of industrial stock is owner-occupied — which makes sale-leasebacks an attractive entry point for investors — and institutional investor appetite is high for industrial, all of which makes this an industry that both Adler and Kolaczynski agreed would be strong moving into the future.

Unease Persists for Office Market

At the same time, office vacancy rates continue to climb in San Francisco and Seattle due to lack of demand driven by continued work-from-home arrangements. Similarly, vacancy rates are also climbing in Austin and Nashville — but, in these areas, it’s more of an oversupply issue. Plus, listing rates have not moved significantly in the last year in most markets, as most of the movement is undercover for now

Nationally, the number of active listings and vacancy rates seem to have leveled off and vacancy rates are climbing across markets. And, despite a population shift to the suburbs, vacancy remains higher in the suburbs than in their urban counterparts in some markets.

Likewise, the increase in subleasing space — which is widespread across markets — is becoming a genuine concern. In the end, how the work-from-home situation plays out will ultimately determine how fast metros can recover — especially gateway markets. Every market has seen a significant increase in sublease space, even tech hubs with solid fundamentals during the pandemic. Yet, sublease space is primarily concentrated in urban submarkets and Class A properties.

Future of Work Will Have Greatest Effect on Potential of Office Spaces

Work-from-anywhere and company views on remote work post-pandemic will redefine office demand and determine the recovery of the urban core. That’s because the work-from-home revolution has turned work into something you do, rather than somewhere you go.

What’s more, the timing of organizations’ return to the office will vary, but will certainly be slower in cities that are highly dependent on public transit. Remember that, pre-pandemic, 10% of the workforce worked from home. Now, some experts are predicting that 25% of employees will work from home full-time in the long-term, with others working from home part-time. As a result, employees are moving out of dense, costly metro areas to less-expensive locations.

In the meantime, leasing activity will most likely be dominated by minor space reductions, shorter lease terms and an increase in subleasing, which has already been seen. But, in the longer term, the effect on the office sector might be more significant, as the implementations of hybrid work arrangements further decrease demand. To that end, Texas markets will lead the way with office utilization, but all markets will remain well below pre-pandemic levels.

There is also industry consensus that, for medium to large companies, the average employee will spend two to three business days in an office setting. However, companies with fewer than 20 employees seem likely to go without office space at all, which may be a boon for the coworking sector.

Yardi analysts have developed a post-COVID sensitivity analysis tool that would anticipate the number of employees who may return to the office based on three mathematical scenarios. The plausible vacancy rates for major markets are then derived for each. However, even in the most optimistic scenario in which 90% of workers return to an office four to five days a week, vacancy rates are still anticipated to be above 20% in most cities.

Curious to know more? Listen to the full webinar for more details, analysis and predictions.

The post 2021 Spring Webinar: Changes Continue & Expectations Adjust for Future of Industrial & Office Sectors appeared first on CommercialEdge.

• Record-breaking growth trend expected to continue for foreseeable future
• Amazon and other e-commerce solutions largely driving increases in industrial property leasing
• Consumer & business confidence indexes best indicators of growth
• Brokers watching increases in demand, shorter lease rates & higher rent growth as potential signs of future bubbles
• Average rents on the rise with no indication of declining anytime soon

What does the future of industrial leasing hold? Will the 2020 explosion in e-commerce continue to drive an increased need for warehouse and other industrial space? Will supply outpace demand to the detriment of the market?

These and other essential questions were recently discussed by a panel of industry experts at the National Industrial Broker Roundtable. The event was emceed by Hussain Masumi, market manager at Bisnow, and moderated by Turner Levison, senior account executive at Yardi.

Q4 2020 industrial activity surpasses historical sales volume

Levison began with data that has blown away many in this industry, including the fact that the fourth quarter of 2020 had the highest sales volume of any quarter since CommercialEdge began collecting industrial data.

Specifically, Q4 logged $11.9 billion in completed sales, an increase of 18.2% year-over-year (Y-o-Y). The average price per square foot was around $100. Many of the questions that followed reviewed those numbers more closely, as well as the likelihood that growth could continue at this rate.

Were increases a flash in the pan reaction to the pandemic, or will industrial assets continue to rise?

Jackie Orcutt, panelist and senior vice president at CBRE, brought additional data to show just how influential the year was for the industrial market. For example, CBRE’s record-number absorption came in at 223.5 million square feet — an increase of more than 11% compared to 2019.

Similarly, new construction was up 9.5% Y-o-Y to 264.7 million square feet delivered, and much of this activity was seen in the last few months of the year. Specifically, the 104 million square feet absorbed in the last three months of a year has never been seen before in Q4, especially.

Orcutt acknowledged that Amazon was a factor in these numbers — in fact, she held it at 15.6% of the total growth in the industrial market. And, although she recognized that some people might find it risky to assume that the trend would continue, Orcutt identified other factors playing a role in that, and continued growth.

 For example, she noted that there had been a shift in the reshoring of medical- and defense-related manufacturing and technology; battery manufacturing; and other industrial shifts to the U.S. market. Finally, while the bubble is unprecedented, Orcutt also said she believed that it was sustainable and would trickle down to sales volume.

Beyond ecommerce, what other economic factors are affecting industrial assets?

Jeffery Cole, vice chairman at Cushman & Wakefield, agreed with Orcutt, but pointed to indicators other than e-commerce that his company had been tracking. In particular, his research group has been looking at:

• A rise in the weakened consumer and business confidence indexes, with the business confidence index now at 68%, as opposed to 71% pre-COVID
• A positive effect on consumer confidence from vaccination roll-outs — which directly affects industrial real estate and business confidence
• The effect of the stimulus and Payment Protection Program (PPP), which have added to business confidence
• Companies are using their new capital to invest
• Labor and inventory are both increasing
• Durable goods are almost back to 2019 levels
• The manufacturing index has started to rise and is close to its previous peak in 2017
• Retail reports are starting to rise after dropping since 2017

Cole also noted that, while e-commerce was currently driving much of the growth, it wasn’t going anywhere anytime soon. In fact, he believes that the way Americans shop has changed for good and that other companies will continue to mimic Amazon’s models.

Where are industrial rents headed?

Meanwhile, Levison pointed out that average industrial rents were $6.45 per square foot in February — which was a more than 5% increase in 12 months — with record levels of new supply. Specifically, he pointed to a projection of more than 264 million square feet just this year and asked the panel: Will demand be able to keep up? Will the new supply affect the direction that rents are headed? What will happen to the new supply? And, what were other indicators that should be considered, according to the panelists?

Mark Duclos, president of Sentry Commercial and current president of SIOR, was quick to state that rates were not going down. He explained that this was due, in large part, to the quality of the product, which has increased significantly in the last decade. Duclos added that he believed that today’s occupiers were more interested in location, functionality and access to highways than they were in getting the lowest possible price.

Likewise, Kim Ford — CEO of Rise Pittsburgh — said that one of the challenges her clients had as tenants was that they had unrealistic expectations about price, especially when it came to new buildings. She shared that they thought they could come to a “second-tier city” like Pittsburgh and save money — and that they should get a discount on rent because of the pandemic. However, Ford said she believed that, as leaders in the brokerage community, the panel and their colleagues were responsible for helping their clients reset their expectations.

Niche assets and second-tier markets – what’s next?

With the current supercharged activity in the industrial market and many players from other sectors, such as office and retail now exploring this asset class, Levison closed the panel by asking what newcomers should be on the lookout for.

Cole’s take was that regardless of experience within the industrial market, alternative industrial investment was the way to go, targeting assets that are a little different from the usual suspects. Refrigeration space is one industrial asset type that remains underserved and thus less competitive, with storage space and life science space conversions also continuing to deliver results.

Cole also brought up covered land plays for short-term holding to be followed by redevelopment in the mid- to long-term, for those looking to make inroads into industrial holdings. Cole also circled back to industrial assets in what are historically considered second-tier markets, emphasizing that many are showing fundamentals just as strong as traditional primary markets.

Orcutt, too, spoke of the interest and activity in second-tier markets, especially in the context of being driven by specialized manufacturing that is choosing to avoid the regulatory challenges being experienced in larger markets such as Southern California. In her view, spaces with sticky tenants – tenants that have themselves invested heavily into specialized infrastructure within leased spaces – are to be watched as well.

The post Flash in the Pan or Continued Growth for Industrial Market – CRE Experts Weigh in at National Industrial Broker Roundtable appeared first on CommercialEdge.

Join us to learn how the top industrial brokers are currently identifying opportunities and utilizing data to create new opportunities, as well as the methods they’re using to find the right deals at the right time. There’s no question that the accelerated shift to e-commerce will have a permanent effect on the health of the sector, and this seminar will clarify trends in that direction.  

Don’t miss out on this great opportunity! Sign up for the National Industrial Broker Roundtable now.  

The post Get Ready for a Deep Dive into Industrial Real Estate Trends at the Bisnow Broker Roundtable appeared first on CommercialEdge.

The panel was comprised of the following industry experts:

• Arjun Rao, director of commercial global solutions at Yardi
• Marijke Lantz, senior vice president at Billingsley Company
• Paul Wittorf, executive managing director at Transwestern
• Sara Terry, executive vice president at Colliers International

During the session, each of the panelists spoke openly about the ways in which the pandemic had presented challenges in leasing, as well as the innovative solutions they had seen or implemented.

The Current Situation

According to Rao, CommercialEdge has seen a big boost in the number of tenants who need space — a fact that was not a surprise to his fellow panelists. Nonetheless, Wittorf noted many reasons that tenants were pausing initiatives to renew their current spaces, including a lack of financial visibility and more people working from home. He also reported not seeing many reductions in rental prices in his area in Texas, but that he was seeing better terms being offered to lessees.

Meanwhile, the COVID-19 crisis hit Lantz’s company just as it completed two office structures. Despite having to immediately cease tours of the properties, one was 100% leased last year, and the other has had activity, as well. Lantz also mentioned that she was seeing more back and forth or stop and go before clients eventually signed their leases.

Terry discussed the changes in negotiation tactics: small and mid-sized companies continue to rent, but now they want shorter renewals and are generally more cognizant of the term than they had been in the past. Conversely, large companies want additional flexibility — and they’re willing to pay a premium to get it.  

What’s Changed & What Hasn’t

Some of the trends that were well on their way when the pandemic hit have slowed, while others have sped up. For example, a decade ago, there were an average of four people for every 1,000 square feet in commercial real estate, whereas the average was closer to six people in the same space just prior to the pandemic. Some companies even packed in 10 people per 1,000 square feet.

However, when employers start bringing employees back en masse, it will be a challenge to fit them all into smaller spaces — especially while encouraging social distancing. To address this issue, many solutions have been proposed and some have already been implemented, including hub-and-spoke designs, as well as shorter buildings with wider stairwells in place of elevators.

The Future of Working from Home

Initially, some major employers predicted that their employees would work from home indefinitely. But now, many of those companies have reported that working from home has not been as successful as expected, and both the employees and their employers miss the lack of collaboration that they were used to in the office environment.

Ultimately, the panelists explained that the long-term effect was likely to be twofold: more employers will embrace a hybrid or flexible work environment in which employees work both at home and at the office, and those employers will seek out more affordable areas for these larger buildings.

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