CRE Trends: Today and Into the Future
The NAIOP Research Foundation’s annual meeting of research directors, which took place during CRE.Converge 2018 in Washington, D.C., produced a wide-ranging discussion of trends affecting the commercial real estate industry. Here are the six biggest takeaways.
Industrial Won’t Replace Bricks and Mortar – Yet
With the seemingly unstoppable rise in e-commerce, it almost feels like industrial facilities are becoming the new retail in most communities across the U.S. But are they?
Dean Violagis, the vice president of research with CoStar in Washington, D.C., said the trend should remain very attractive to investors. However, industrial won’t fully replace brick-and-mortar stores anytime soon, said Mark Stapp, a NAIOP Distinguished Fellow from Arizona State University. For example, Stapp said successful retailers will use a “bricks and clicks” strategy, referring to the integration of physical and digital presences.
And despite all the attention paid to e-commerce in recent years, it’s important to remember that Americans still do most of their shopping in physical stores, said Josh Harris of New York University, also a NAIOP Distinguished Fellow.
U.S. City Tier Definitions: Varied Criteria
Research directors discussed city designations such as “Tier 1,” “Tier 2,” “Gateway,” “24-Hour,” etc. It’s important to note that there are no official definitions for these categories. Metro area rankings can be based on criteria as varied as population, the number of jobs or the base building inventory.
That’s why it might be worthwhile to look outside the commercial real estate industry for ideas. For example, Harris said he recently took part in a consulting project that used Nielsen rankings of TV markets to sort cities into tiers. According to Harris, it generated actionable data that was also independent of investor sentiment.
Several attendees noted the importance of a diversified economy for city rankings. Anthio Yuen, senior manager, research and strategy with GWL Realty Advisors in Vancouver, British Columbia, said his company measures a city’s relative share of jobs in each industry versus the relative share of those jobs in the entire country. The distribution of employment across sectors can shed light on which cities tend to be more diversified.
Measuring Development Approvals
According to C. Kat Grimsley, a NAIOP Distinguished Fellow from George Mason University in Fairfax, Virginia, the approval process for commercial real estate development can be inefficient and risky for developers. A development approvals index could help speed things along by ranking jurisdictions across several performance metrics that can be quickly and easily compared.
While some index components would be standard measures, such as average number of days to receive basic approvals, the addition of a technology component would be unique. Grimsley noted that jurisdictions often don’t use technology effectively in the approval process. Two relevant examples of technology metrics include “e-review” systems and the use of mobile applications to supplement public hearings in order to more thoroughly capture a community’s sentiment.
Yuen said NAIOP Vancouver already does a cost-of-business survey conducted in partnership with a local magazine. Municipalities with the lowest fees and quickest approvals are recognized through an awards program.
Office Space: Flexibility is Key
Space flexibility is an important consideration for up-and-coming businesses, and that’s exactly what disruptive office space companies such as WeWork provide, Harris said.
“WeWork is basically a services-based hotel model,” Harris said. “When you’re locked into a 10-year lease in a traditional office space, it’s hard for a business to plan. The flexibility you get with WeWork is extremely valuable.”
Stapp said WeWork could be challenging how the commercial real estate industry deals with built space, and Harris said WeWork is providing “space as a service” to businesses.
Adaptive Reuse on the Rise
Attendees noted that adaptive reuse and renovations have really taken off in the past few years because of resistance to greenfield development and the increasing popularity of “surbs,” densely populated suburban locations that look and feel like more urbanized areas.
Some attendees said they were starting to track renovations or adaptive reuse as a separate category from net new buildings under construction.
Robert Hartley, director of research for Colliers in Washington, D.C., said tracking potential projects suitable for adaptive reuse can be difficult, but figuring out a way to do that could provide a huge benefit to the industry.
Stapp said a crucial aspect of adaptive reuse is to create spaces that attract talent, specifically historic buildings that have a lot of character and uniqueness. While it can be extraordinarily expensive to take an old structure and make it comply with modern building standards, the payoff can be huge.
As for the next few years, tariffs, fears of inflation, rising interest rates and labor shortages were among the top concerns of the research directors. Several attendees noted that workforce issues could be far more impactful than other factors over the long term.
On the positive side, most attendees agreed that the tax cuts signed into law at the end of 2017 appear to be stimulating the economy, and despite concerns expressed by some in the group of the possibility of a recession in 2020, there was agreement that the industry’s strong fundamentals could protect it from a sharp downturn.