With everyone from Colliers to Newmark biting their nails about the commercial real estate sector, especially urban office markets, there’s never been a better time to prioritize strategies that add value to commercial real estate assets, while recalibrating portfolios for the new reality. Thankfully, Newmark has identified the six fundamental trends emerging in commercial real estate, which can serve as astrolabe for the intrepid navigator of this ever-changing sector:
- Rising Construction Costs are Translating into Increased Tenant Improvement Allowances
Growth of Food & Beverage E-Commerce is Increasing Demand for Cold Storage
Baby Boomers are Enhancing Demand for Multifamily Units
The Technology Sector is Driving Creativity in Office Design
New Hotel Brands & Concepts are Emerging in a Competitive Market
Office and Multifamily Development are Increasingly Intertwined.
As trade policies and skilled labor shortages continue to impact the construction sector, landlords faced with ballooning tenant improvement allowances may have to dip into the dry powder of restructured lease agreements, to extract more value when attempting to add value to commercial real estate assets. Applying a RUBS approach to subleased utility contracts can reduce exposure to a fluctuating bottom line and lock-in net positive contributions to the cashflow of each property. This can be especially effective if matched by an aggressive campaign to rent out unused and idle storage space, by the square foot, with a contractual line item linked to utilities.
Continuing with the storage theme, a repurposing of commercial property portfolios may be in the offing, as the boom in e-commerce grocery sales drives a manic hunt for available refrigeration facilities nationwide. This is beginning to look a little like the drive-in cinema, drive-through food, and drive-away car wash booms of the previous century – but this time powered by the awe-inspiring pace of digital connectivity. We may never see such overnight repurposing mayhem again in our lifetimes, but if this trend is here to stay, then commercial landlords may be staring a gift horse of opportunity in the mouth, as the service sector scrambles to meet the demands of the home-office bound gig economy while adding value to commercial real estate assets at the same time.
Urban commercial real estate landlords should chin up and refocus: the Baby Boomers aren’t going anywhere. If anything, they’re leveling up, refurbishing the attic, and extending a spare bedroom into the garage, as Millennials and Zoomers struggle to leave home – and the digital economy offers greater opportunities for itinerant remote workers. This residential trend in the inner city will inevitably bolster receipts for commercial properties into the next decade, as long as commercial landlords hone in on the needs of multigenerational families, building new identities within and around urban retirement neighborhoods.
As the technology sector continues to take the gale-force brunt of change sweeping the global workforce, those courageous companies that do decide to maintain an urban office presence are having to double-down on their efforts to attract the most life-work balance sensitive generation in the history of employment. Commercial landlords seeking to close with this constituency must have an intimate understanding of the collaborative work-spaces and highly-amenitized office environments expected by this aspirational group.
The hotel industry remains a bell-weather indicator for the commercial real estate sector, providing an insight into the flow of humanity through the economy. Encouraging data has proven that the underlying fundamentals driving the Trump-era economic boom are more resilient, long-term, and robust than the age of doom would perhaps suggest. Savvy analysts at the major commercial real estate firms should sharpen their pencils in the coming months, to assess where this energy is gathering, and decide how best to serve the commercial needs of the traveling workforce. Deep investments in logistics, storage, courier post, taxi technology, data hosting, and conferencing innovations could pay enormous dividends as the global workforce continues to forgo the office and take to the open road.
Driven by social trends led by Boomers, their Millennial offspring, and their Zoomer kids, combined commercial/residential spaces are surely the next major real estate sector to dominate the 21st Century. Proof of this need and emerging preference abound across every graph and data point – and deserve a special mention, as both the summary and theme of this short pep-talk. If you’re pulling your hair out at the calculator, looking for ways to dodge the many bullets of these trying times, the life/work living habits of the Boo-Mill-Zoomers may give you some solace, hope, and inspiration for your properties.