Technology Advancements Influence Commercial Real Estate Demand

Parkway Center Two

14145 Danielson Street

Poway

117,354 square feet, Industrial

The fully-leased 14145 Danielson Street industrial building sold in May to new corporate-user Sorrento West Properties Inc., a real estate holdings entity of San Diego-based General Atomics, for $20 million according to CoStar. Meissner Jacquét’s valued commercial real estate industry associations and relationship with the previous owner, also a current client, prompted the new ownership to retain Meissner Jacquét as the property management service provider.

Meissner Jacquét provides commercial real estate management services to the property’s tenants, Mitchell 1 and General Atomics, including maintaining the property’s 7.21 acres and managing vendor contracts. General Atomics does manufacturing, research and development related to technologies including unmanned aircraft systems, surveillance and radar imaging. It is a prominent contractor in the defense, aerospace and related industries.

Five Policy Issues Hindering Commercial Real Estate Demand

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

Big-Box Leasing Shows No Sign of Slowing Down

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

Retail Market Healthy Despite 300+ Store Closings

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

Hipsters and Suburbs Make for a Winning Investment

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

Commercial Real Estate Industry Up in Arms over Dual Agency Ban

Assembly Bill 1059, introduced in February by Assemblywoman Lorena Gonzalez Fletcher, D-San Diego, was proposed to ban dual agency commercial property transactions in the state of California. The bill’s supporters claim that dual agency creates a conflict of interest and the only solution is a legislative ban in the commercial setting. The sponsor of AB 1059 is using the recent California Supreme Court decision in the Horiike v. Coldwell Banker Residential Brokerage case, which dealt with residential disclosure issues, as a cover to pursue an agenda that would codify its business model, limit competitors, upend commercial real estate transactions, and ultimately harm consumers.

Despite proponents’ claims, AB 1059 will hurt small and large tenants alike by driving down competition, raising costs and making transactions more difficult.  Under this bill, real estate transactions will be more complicated, costly, and adversarial than they currently are by banning the ability for one firm – mutually agreeable to both parties – from coordinating purchase and/or lease transactions.  Senate Bill 1171 is already in place to mandate disclosure of dual representation in commercial property transactions to limit conflicts of interest and increase transparency.

On April 25th the author, Gonzalez-Fletcher, informed BOMA CAL that they will be pulling the bill from consideration this year. It appears the author was caught off guard by the level of opposition to the bill and has decided to focus on other measures at this time.

The commercial real estate community appreciates that the author of the bill heard their concerns and chose to reevaluate, but it is very likely that this measure or an amended version of it will be revisited next year. It is prudent to assume that the sponsors of AB 1059 will continue to press this issue and therefore the commercial real estate industry should continue to work to communicate the benefits of dual agency with policymakers, commercial real estate professionals, property owners, and the public at large, and why banning the practice would harm the entire commercial real estate industry.

Major Points

  • Anti-consumer and anti-choice. Today’s marketplace empowers buyers, sellers, tenants, and landlords to choose a full-service commercial real estate firm that best meets their business needs. If the bill is approved, tenants/buyers will be forced to either work with a tenant rep broker from a firm other than the listing firm or represent themselves, which will result in higher transactions fees and could stifle small businesses’ ability to close transactions.
  • Conflict of interest argument is false. In dual agency commercial real estate transactions the role of the broker is to provide information that creates an understanding of the market on both sides of a transaction in order for both parties involved to make informed business decisions. Many parties involved in commercial real estate transactions purposely choose to work with dual agency brokers, and mandating against this practice is imbalanced.
  • Not a means of protection.  There are currently stringent disclosure requirements in place that ensure all parties to a transaction are fully informed, including an obligation to provide written notice of the commercial real estate agency’s relationships and whether they are acting as a buyer/tenant agent exclusively, a seller/landlord agent exclusively, or as a dual agent representing both sides of a transaction.
  • Adversely affect CRE industry and economy. Approximately 90% of commercial leasing in California’s largest markets is conducted through full service firms generating billions of dollars annually and creating jobs and tax revenues that benefit local communities throughout the state. Mandating single agency would dismantle the commercial real estate sector, affecting companies large and small, and would position California as an even more difficult state in which to do business.


Sources:

AB 1626 (Irwin D) Real estate brokers: dual agency 

AB 1059 (Gonzalez Fletcher D) Dual agency: commercial real estate transactions 

CoStar, California to Consider New Legislation On Dual Agency Read more

Rising Interest Rates Could Throw Nation into another Recession

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

Marijuana Legalization Creates New Sector in Industrial Real Estate Market

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

Restaurant Sales Keep Retail Market Afloat

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?

Top 4 Challenges Facing Office Occupiers

Interested in what’s driving office occupiers? In an attempt to temper the uncertainties spurred by the political climate, the shift in office design and the amenities required to remain competitive, companies are juggling a lot as they search for the right mix to stay relevant. Find out the top 4 areas office occupiers see as challenging.

  1. Economic Uncertainty – According to a CBRE survey, economic uncertainty is a top three concern of commercial real estate executives as the job market and interest rate environment can affect the value of commercial assets.
  2. Skilled Labor – Due to a shortage of talented workers in affordable markets and the possibility of losing immigrant workers due to President Trump’s proposed immigration policies, employers are expanding their search to secondary markets.
  3. Reducing Waste – In order to combat looming economic challenges and optimize real estate, companies are reducing their workforce and downsizing floorplans in an effort to pursue cost-cutting initiatives and attain competitive advantages.
  4. Workplace Amenities – As Millennials continue to dominate the workforce, employers work to meet their demands for environments that incorporate design and culture with open, creative, team-oriented spaces and access to exercise facilities, food and wellness services.

Source:

BISNOW, This Is Where Office Occupiers Are Focusing Their Efforts In 2017