Wow! Already moving into February 2022, the commercial real estate world has been keeping an eye on out for any and all disruptions that may affect the industry; with many still wondering what this next will bring. As has been the case in previous months, supply chain issues, rising material costs, and labor shortages will continue to play a prominent role. However, some new factors that have had residual effects on the industry include a nationwide housing shortage and inflation rates that haven’t been seen in years. For February, SCG takes a closer look at the current commercial real estate environment and trends in the retail industry!
Inflation’s Effect on the Industry
With the announcement of the Fed’s decision to increase interest rates in the coming year to combat the nationwide inflation, the commercial real estate market could be amongst the hardest hit industries. Being that inflation has mostly been caused by supply chain issues, the decision to increase interest rates by the Fed has been met with much criticism. Still, the Fed has deemed this the best route, however this will “put upward pressure on interest rates, raising the cost of capital for CRE investors”, stated Marcus & Millichap’s John Chang in a Globest.com article.
With inflation on the rise over the past year, many general contractors in the industry were simply eating costs to stay on projects and continue working; we noticed that in the fourth quarter of 2021 the tipping point is was reached and GC’s nationwide raised their prices to level with the rising costs. Data is showing general contractor bids have risen anywhere from 5% – 15% depending on the size and dollar amount of the project. With so much volatility in the market, contractors are no longer able to absorb these costs; forcing them to put in higher bids to meet their own margins. Even with these price increases, “the higher prices contractors charge now still do not reflect all the cost increases they absorbed since the start of the pandemic” states Ken Simonson in a Wealthmanagement.com article.
As previously touched upon, supply chain disruptions and labor shortages continue to hold the market hostage. Many ports are reaching maximum holding capacity, facing shipping container shortages, and backlogs. Combine the effects that the labor shortage has had, and it is no surprise that we are experiencing year-over headline inflation of 7.1%. Adding to this, is the nationwide issue of a housing shortage; with housing prices “up 14.9% last year in response to the shortage”, according to a GlobeSt.com article.
Omicron and the Recovery
With the new Omicron variant of COVID comes new restrictions on the economy; however, this fresh headwind will not have as much of a derailing effect on the economy’s recovery efforts as have other variants had. Specifically, within commercial real estate, the new variant is expected to impact hospitality and office settings more than other sectors. With more companies likely to accept “remote work as a new reality” and “increasingly fewer holding on to the idea of the ‘return to office’” according to a GlobeSt.com article. While there are hindrances within the market, the overall sentiment from the commercial real estate world is to continue pushing through these headwinds. In an article posted on Real Estate New Jersey, the author, Kristian Cichon states that developers “appear optimistic with a record amount of projects entering a planning phase, signaling that the one- to three-year outlook is expecting stabilization” with forecasts projecting “about 3 percent growth” in construction and development spending for 2022.
As previously touched upon, the housing market is facing a shortage that is indirectly affecting other sectors of the economy. Not all is bad however, as one of those sectors is Multifamily in the commercial real estate industry; with Marcus & Millichap expecting to add 400,000 new rentals in 2022 alone. All eyes are on the Sun Belt region as they are poised “to account for one-fourth of the new units with Dallas-Fort Worth, Phoenix, Austin, Houston, Nashville and Atlanta leading the way” according to Globe St.’s article titled “This Year’s Multifamily Pipeline to Set Record” by Ted Knutson.
Competition for Retail Pad Sites
As COVID continues to linger, the effects on retail have not slowed. With massive closures in the beginning of the pandemic, retail was viewed by many as dead. Fast forward to now and the virus is still affecting the retail sector, but this time in a positive manor. As retail center owners search for ways to make up for lost revenues, the demand for retail pad sites has grown significantly. Previously undersized or “odd-shaped” retail spaces are now at a premium as many fast-food and QSR chains are snatching up spaces. This is in response to consumer demand, and pandemic restrictions; causing consumers to look for easy and convenient food. Taking it a step further, healthier fast-casual restaurants similar to Chipotle have begun to incorporate more drive-thru and take out options for customers.
Another interesting trend in the retail space is the rise of “multi-tenant pad sites”. Historically retail pad sites were single tenant occupied; however, retailers are better understanding their space requirements, and this allows for smaller spaces to be utilized more efficiently. On the flip side, landowners of multi-tenant pad sites are a beneficiary of this as “combining several tenants in a single pad site allows owners to double or triple their NOI” says Alex Sharrin of JLL in a Wealth Management article. As retail continues to be a bright spot in the commercial real estate market, the capital for these types of properties is flooding in from other sectors. As pointed out in shoppingcenterbusiness.com’s article, “there’s a number of investors searching for retail properties, including many who haven’t owned commercial real estate before” with many “looking to invest in retail properties simply as an allocation of their investment management”.
CRE and Electric Vehicle’s
As the push towards environmentally friendly power sources intensifies, and the demand for electrical vehicles continues to grow, real estate is being forced to include electrical vehicle friendly features in their spaces. Determining the level of investment for parking lots and commercial charging stations is one of the larger issues faced by developers, investors, and architects alike. Furnishing parking spaces to accommodate electrical vehicle charging is not the costly part, that comes from the electrical bill associated with these types of spaces; with these charges “[representing] as high as 70% of a commercial owner’s energy bill” according to a GlobeSt.com article.
With the costs associated with planning for these types of upgrades, it can be viewed as an unnecessary item for some investors and owners. Charge time, cost to charge, higher electric bills, and the effort associated with future planning are all issues that need to be addressed in the design of these spaces. On the flip side however, being able to charge consumers for these spaces and creating a new source of revenue will interest many. As Adam Lubinsky of WXY Studio said in a Globe St. article, “monetizing this real estate use or defraying costs for charging is critical to real estate”.
The economic environment of the CRE world is a fast adapting, well informed community; with the uncertainty of interest rates, inflation, and the omicron variant, understanding what is happening in commercial real estate is more vital than ever. We hope this piece has provided you with some insights into the current state of real estate. I Interested in learning more, opening a new location or redeveloping your commercial property? To learn how our proprietary 3 phase process is different.