While office rents in the hottest markets – such as Manhattan, San Francisco, and Washington, D.C. – soften, landlords are looking for new ways to remain profitable. One area that is gaining the attention of building owners is flexible space – a relatively new market where landlords offer flexible options to tenants who desire temporary space or a lease commitment under three years. The reasoning behind a tenant’s need for flexible space can vary from shorter business cycles, increase in contract assignments and temporary staffing, and flexibility for growth of early-stage incubators.

Building owners are recognizing this need by providing flexible workspaces that are move-in ready, complete with open floor plans, technological tools and collaborative software, and a full-range of amenities. As more office occupiers are downsizing due to only using 40% of their desks, landlords are leveraging the shed square footage to establish flexible space that will not only attracts tenants among the likes of technology companies, consulting firms, and financial services, but that does so at about $139 per square foot, compared to the average rent of $49.59 per square foot for traditional Class-A office space as reported by a JLL Shared Workspaces report. The number of office landlords entering the flexible market is rising but it might be just a glimpse of what’s yet to come due to the continued innovation of how and where work gets done.

Another new trend for landlords with empty office space located in prime markets, is to rent virtual space to tenants on a need-by-need basis. This solves the building owner’s vacancy dilemmas, while also fulfilling many small business’ needs of maintaining a prime business address in a major market. The benefits to the landlord are many – no build-outs, little to no common area management – as the tenants don’t actually occupy the space. Instead, tenants pay a monthly fee for the desired business address, a local phone number, a receptionist to answer calls, and the option to hold occasional meetings in the space.  While this model may work with strong office market fundamentals, it’s unclear as to how it will fare when those markets soften.

Sources:

National Real Estate Investor, Landlords Enter the Flexible Office Marketplace

Bisnow, Landlords with Empty Prime Space Turn to Virtual Offices for Profits

Bisnow, Tech’s Greatest Impact May Be in the Workplace Itself

Trepp, Office Rents in Top Markets Begin to Soften

Despite uncertainty as to how President Trump and Senate Republicans will approach tax reform ideas and several controversial proposals, NAIOP’s annual study of “Economic Impacts of Commercial Real Estate,” published by the NAIOP Research Foundation, showed positive improvements made by the commercial real estate industry. Namely that commercial real estate generated significant economic growth to the U.S. economy. Development, construction and operations of office, industrial, warehouse and retail property types, at the state and national levels, supported 6.25 million American jobs and contributed $861 billion to U.S. GDP in 2016. With 410 million square feet of commercial space built in 2016, the industry continued to improve infrastructure and create places to work, shop and play.

Cushman & Wakefield’s report that assessed President Trump’s impact on nationwide commercial real estate in his first 100 days in office highlighted several positive points, including a 2.4% increase in commercial real estate values since the election, and a 10% rise in the S&P stock index. Although the first 100 days rendered some positives to the industry, there are still some key policy issues that could affect commercial real estate demand.

1. Defense Spending —the rollback of the defense budget sequester and increases in defense and Homeland Security spending could benefit commercial real estate professionals in jurisdictions that have historically attracted these budget dollars.
2. Trade Policy — Potential changes to U.S. trade policy is a hot topic, and trade-related movement of goods is an essential part of the industrial market. Trade policy uncertainty can slow companies’ site selection, leasing and investment decisions.
3. Border Adjustment Tax — Trump’s proposed Border Adjustment Tax (BAT) is opposed by the retail industry, among others, because it would levy a 20% tax on all imports of goods and services into the U.S. This increase may influence commercial real estate occupiers’ decisions regarding expansion or relocation.
4. The wall and immigration — Trump’s plan for a wall along the U.S. – Mexico border that has yet to move forward but might be funded through a destination-based “cash flow tax” applied to U.S. – Mexico trade could raise import prices and disrupt the flow of workers.
5. Health Care Reform — Due to the uncertain status of health care reform, new medical office and health care property development and demand may slow and soften.

Sources:

NAIOP, Latest Report: U.S. Commercial Real Estate Development Supports 6 Million Jobs, Contributes $861 Billion to the Economy

San Diego Business Journal, Political Changes Begin to Play Out in Real Estate

NAIOP, While Waiting for Tax Reform, Do Not Overlook Recent Victories

If you’re a warehouse laborer or freight stocker looking for work, you’re in luck. Warehouse fulfillment and distribution employers are competing for qualified labor, meaning wage growth is underway in these sectors. E-commerce is the leading factor behind this trend, with every $1 billion in added e-commerce sales equaling 1 million square feet more in warehouse space. It’s also been the most active industrial sector over the past two years in the U.S., representing 22.5% of all big-box deals with 500,000+ square feet.

Driving the high demand for e-commerce workers is the fact that fulfillment operations require two-to-three times more labor than nonfulfillment operations due to the intensive picking, packing, and shipping an array of product types in varying combinations to consumers or pick-up centers. With signs pointing towards big-box leasing being mid-cycle and still on the rise, site location and warehouse technologies have become key factors in making market conditions successful. Logistics, access to markets and transportation routes, and consumer demand are all driving industrial site selection. With the demand for same or next-day delivery and demographic shifts to urban areas, vacant offices and parking centers are being repurposed into fulfilment and distribution centers.

Another new type of industrial use is making headway, “creative industrial” – integrating the creative office environment with modern industrial elements. By incorporating the onsite amenities in desired locations that the younger generation of workers demand and seek, industrial users are able to deliver their goods or services while building their corporate images. Consolidation is also a leading factor in the creative industrial trend as industrial users seek to consolidate their engineering, R&D and corporate operations under one roof to reduce operating costs and maximize efficiency.

Sources:

NAIOP, It’s All About the (Industrial) Fundamentals

NAIOP, It’s a Small World with Big Economic Challenges

NAIOP, E-Commerce Is Growing, and So Is Demand for Warehouse Labor

BISNOW, How North America’s Shifting Demographics Are Changing Industrial Real Estate Trends

NAIOP, Creative Industrial Workspaces

Even with retail job losses declining by 30,000 in March, retailer bankruptcies and an estimated 300+ department store closings in 2017, the U.S. retail market is overall “quite healthy” according to a report from Reis, a commercial real estate analytics firm. After sampling shopping centers of 10,000 square feet or greater in more than 75+ markets, the report concluded that the retail vacancy rate for Q1 2017 was steady at 9.9% – which mirrored the previous quarter and previous year. Even with 36 million square feet becoming vacant, the good news keeps coming with asking and effective rents having increased year-over-year as well.

So what will happen with all the empty space?

Rather than sitting idle, property owners and landlords are looking to fill empty department store space with tenants that pay higher rents, such as restaurants, entertainment venues and grocery stores. While this might be good news for retail operators, robots are expected to eliminate more jobs in the near future. Whether it’s Starbucks with an automated barista or McDonald’s self-ordering kiosks, artificial intelligence and algorithms may soon replace jobs around the world.

The focus on how to find creative solutions to problems – from empty retail space to workforce reduction – will still remain and deals will still be made between people, but facts may be gathered beforehand by software.

Sources:

NAIOP, Retail Property Market Holding Steady, Reis Says

Bisnow, Vacant Department Stores? These 3 Concepts Could Fill The Space

NAIOP, Retail Job Losses Outpace Mining Gains in 2017

Bisnow, Higher Minimum Wage: Good Or Bad For The Economy?

NAIOP, The Rise of Robots May Mean Fewer White-collar Jobs

The suburbs seem to be quickly replacing the appeal of urban markets due to large companies’ continued search for young, qualified talent. With more walkable, amenity-rich neighborhoods in the works, the commercial real estate industry is producing a blend of urban metros and suburban markets known as “hipsturbias” or “urban burbs.” The new market provides that all appealing live/work/play that Millennials are after, while office occupiers are embracing the burbs due to lower costs and more affordable rents.

It was thought that Millennials preferred downtown locations but a U.S. census data shows that only 30% of Millennials lived within urban areas as of last summer and that a market’s appeal has less to do with its physical location and more with whether it has access to public transportation, walkability, housing options, and access to jobs and amenities. Suburban markets that offer mixed-use developments – with office, multi-family, and retail – and have an urban feel will experience stronger absorption. A new setting that cropped up for the much sought-after collaborative environment is the trend of converting former newspaper headquarters located in highly sought-after urban or central business district areas into creative office space due to their inherent open design.

In terms of attracting tenants in the urban burb setting, employers and occupiers should institute concierge services that contribute to the “customer experience” – where outside-of-work needs and wants are being met – and entertain the idea of allowing dogs in the workplace. The more progressive companies who know about value creation agree that workers private lives are blending into their workdays. Plus, dogs can play an important role in employee morale and having man’s best friend at work is a big appeal to Millennials. Traditional employers are concerned about the potential for slowed productivity and liability risks. However the business environment as we know it has shifted, becoming more round the clock and more relaxed, as can be seen in workers always being plugged in with fido at their sides.

Sources:

Bisnow, Experts Signal Continued Strength In Suburban Office

Bisnow, The West Coast’s Office Dog Obsession Is Spreading East

NAIOP, Redeveloping Newspaper Headquarters

CBRE, Blueprint, What to Do When Real Life Comes to the Office

Although commercial real estate investors had major concerns over the rise in interest rates following the presidential election in November, rates have moderated and are having a minimal impact on commercial real estate transactions, according to a CBRE study. The study found the rate hike so far has had little or no impact on two-thirds of deals nationwide, with an average 3% downward price adjustment (from 0.4% to 11%) on the other one-third of transactions. However, the Fed is expected to raise rates three more times this year, as well as two or three times in 2018 and three times in 2019. Interest rates impact cap rates and ultimately property valuations, and the biggest risk to the commercial real estate sector is that under proposed GOP tax reform and a subsequent boom in investments, the economy could get so overheated that the Fed might raise rates higher than expected, which could throw the nation into another recession.

Source:

BISNOW, CBRE Research Head Discusses Future of CRE under GOP Leadership

NAIOP’s Industrial Space Demand Forecast, First Quarter 2017 Report, predicts industrial quarterly net absorption to average approximately 64 million square feet, a level similar to that in 2016. The model indicates that areas involving consumer products and e-commerce distribution are likely to remain the largest generators of demand for industrial space in 2017. Contributing to the growth is marijuana legalization where operators in this sector are occupying run-down industrial buildings in tertiary markets that act to offer value-add opportunities for investors due to in part to companies working in the cannabis trade typically paying above market rate for space given the challenges facing the business. Legal pot sales hit $6.7B in 2016 and are expected to rise above $20B by 2021, according to Acrview Market Research, creating an entirely new sector in the industrial real estate market. However, some experts believe that investors supporting these projects could lose over the long term due to unclear state and federal regulations.

Sources:

BISNOW, Marijuana Legalization To Drive High Demand In Industrial Real Estate

NAIOP, Industrial Space Demand Forecast, First Quarter 2017

As big-box stores such as Sears and Macy’s continue closing their doors citing e-commerce as the straw that broke the camel’s back, brick-and-mortar landlords wonder if there’s any hope left for retail. Fortunately, sales at restaurants and drinking establishments grew to the tune of $155 billion. A report from Reis, Inc., Is the Retail Real Estate Industry Doomed?, found that spending at restaurants and drinking places offset 92% of the retail lost to e-commerce sales. The increase in restaurant sales is also leading to the creation of jobs, which will help contribute to keeping retail spaces occupied. Among retail restaurants, food halls are quickly gaining in popularity due to Millennial foodies searching for experiential dining. Food halls differ from food courts in that they provide a cultural experience and offer both prepared and unprepared food, with farm-to-fork vendors and artisanal restaurants. Demand for food halls is expected to double in the next few years, which is good news for restaurant operators, mall landlords and big-box space owners.

Sources:

BISNOW, An Explosion Of Food Halls: 7 Things You Need To Know

NAIOP, Will Restaurants Save the Mall?