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Shopping malls have been at the forefront of commercial real estate conversations for years now.
After a seemingly endless discussion, the future outlook of the American shopping mall remains hazy. We still don’t know exactly what will save malls and bring these public shopping centers back into the spotlight for consumers.
Back in 2019, many predictions were made. The most prominent forecast for retail’s revival of the shopping mall was based on experiences. Fun, social, personalized, and specialty – malls were to become a place where you could do it all. Prominent retail brands were teaming up with eateries and entertainment companies to offer a totally new era of mall culture.
However, 2020 happened – and those predictions quickly became irrelevant.
When the coronavirus pandemic hit the commercial scene with unexpected intensity, the needs of the American mall took another drastic turn. Right now, the attention has shifted away from luxury experiences and towards health, wellness, and safety.
These pressing demands have changed the course of mall development, but they’ve also added a welcomed dose of certainty. Unlike the quickly passing trends of experience, the ‘new normals’ of the coronavirus are here to stay.
CRE’s retail sector now has a better idea of where to take malls than it has in years, and these actionable items are set to reshape malls in 2021 and beyond.
Here’s an idea of what the malls of the future will look like:
The trend of omnichannel retail has been growing since 2018, but as we move forward, it will become standardized. Brick and mortar will continue to team up with e-commerce to meet consumer demands and keep up with industry competition.
Delivery, BOPIS, and same-day pick-up options for online orders will restructure the way shoppers interact with malls.
With COVID-19 displaying immense resilience, health and safety will remain top of mind within mall development.
The addition of minute-clinics and small scale medical offices into the pool of mall tenants is expected to rise in 2020. Not only does this assist in promoting health and wellness for shoppers, but it will also coincide with the growing med space trend of smaller, more accessible offices.
Offering quick and convenient services combined with the need for COVID safety measures will initiate a blend between malls and CRE’s medical arena.
The med space isn’t the only sector that is forecasted to merge with malls. Multifamily will also be taking steps to rebuild the modern mall as on-site living options are integrated within these commercial sites.
Multifamily is eyeing malls as a potential place to develop lifestyle communities. Whether the development projects completely recycle a weak mall location into an apartment site or retail and multifamily will be blended in a single asset will vary between projects.
This trend of combining work, life, and play into one model is expected to reverberate throughout CRE in 2021. What are your predictions for the next phase of retail’s mall scene?
The question as to what to do with the skeletons of the once-great American shopping scene has been on the table for years now. And, as much discussion circulates throughout the industry, little progress has been made in finding new functions for the many dead and dying retail spaces all around the country.
Over the years, commercial real estate has speculated solutions for these spaces, but none of the proposed answers has stuck. Malls to mixed-use, offices, apartments, and even schools have been potential candidates for the notoriously pending retail retrofitting projects.
But, could the solution that really works finally be upon us?
According to Prologis, the answer is yes and it’s in the form of logistics centers. Their recent report dives into why logistics facilities are the ideal replacement for failing retail assets and why now is the time for this adaptation to actually roll out. Here’s a breakdown of the findings:
COVID’s Role in Stimulating Growth
While these past few months were certainly a pain, it’s impossible to disregard the amazing amount of growth that was precipitated by the pandemic.
According to Prologis, COVID-19 has actualized more than 5 years’ worth of retail evolution in less than 5 months. This growth has been most intense in the realms of digital retail and online shopping. The report states that in 2020, online sales have accelerated to hover around annual gains of $340B. Looking ahead, Prologis predicts the percentage of total U.S. retail goods sold online will reach 25% by 2024.
The Solution: Recycling Retail
As a result of these massive gains, logistics real estate has seen a major burst in demand – and there’s a tangible need for CRE to embrace logistics as a sizable tenant.
In efforts to find viable solutions to the new challenges introduced by retail’s pandemic-inspired reformation, many brands have been considering transforming their low-performing stores into high-quality logistics centers. This strategy leverages retail’s massive physical footprint in order to solve one of its own needs.
Not All Conversions Look the Same
According to the report, the process of converting retail to logistic centers will vary depending on the asset’s format.
For example, freestanding retail is the most promising source of logistics conversions as they’re easy to reformat and plenty in number. On the other hand, the large enclosed mall asset is cited as the most complex, time-consuming, and intensive conversion project. As the open-air shopping center remains brick-and-mortar’s best hope post-pandemic, it’s not likely that these high-performance assets will be turned over to logistics.
If the trend takes hold, paying mind to the various asset types will help CRE strategize conversion potentials.
Blending the Online and the Physical
The value in converting lacking retail assets into logistic centers lies in its inherent support back into the retail scheme. Utilizing unsatisfactory store locations as logistic centers to facilitate e-commerce expansion takes the concept of blending online and physical retail to an entirely new level.
Stores to logistics is a symbiotic solution for the collection of retail assets waiting to be revamped.
At a time when many of CRE’s sectors are taking hits from all sides, 2020 is going to be a strong year for investment in multifamily.
We’re already approaching Fall, and despite all the external turbulence, multifamily investment has been standing its ground – and doing considerably well. We’ve seen a pandemic, a nationwide market closure, and a global disruption to business – and even so, the multifamily outlook has remained strong.
Multifamily investing provides a strong and stable outlook this year and beyond. Here’s why 2020 is a offers a profitable and stable investment opportunity for commercial real estate:
2019’s Sparked the Momentum
The nation’s transaction volume for multifamily assets in 2019 attained $92.5 billion.
Needless to say, 2019 was a momentous year for the multifamily sector. This CRE arena achieved a record-breaking volume of acquisitions paired with a wave of investor interest, boosting the overall outlook and success of this industry.
Multifamily mortgage originations were also breaking records for the third year in a row. 2019 mortgage originations leveled out at $600.6 billion with YOY growth of 5% from 2018. While the enthusiasm was clearly disrupted by the pandemic, this upwards growth hasn’t fully fallen out of favor.
Another key reason why the 2019-2020 junction for multifamily has been so positive is because of the opportunity zone.
OZ developments picked up speed in 2019 as savvy commercial real estate investors turned to tertiary markets to gain a solid foothold for their portfolios. The financial stimulus and benefits associated with these development projects were another reason why OZ’s drew such heavy investment towards multifamily.
Despite a general pause on investing at the introductory stage of COVID’s U.S. impact, opportunity zones continue to be stimulated as expanding affordable housing stands as a prerogative after the pandemic.
Faring Better than Expected
At the beginning of the pandemic, industry professionals and analysts assumed the very worst for commercial real estate.
When unemployment was rising at a threatening pace, markets shutting down across the globe, and holds on rent collection were persisting to unknown ends, the general expectations for the multifamily sector were bleak.
But, the situation was already faring better by April. Data from Moody’s Analytics reported that the impact of rent collection disruption on ROI was 5% to 15% less than what many clients had expected at the introduction of the pandemic.
By August, analysts are reporting that national rent collections are already near-normal – further placing multifamily investing in a great light. The National Multifamily Housing Council reported that 92.1% of apartment households paid rent as of August 27th. In light of the issues linked to the coronavirus, the multifamily sector has been able to pave ahead. It seems as if the worst may be behind us – and even that was met with resilience by the multifamily arena.
Commercial real estate professionals, if you want a solid and profitable investment arena to dive into this year, look towards multifamily. It’s gearing up to continue 2020 strong and enter the new year with success.
Long live the American mall. These dreamy retail hubs were once bustling scenes of activity, fun, and commerce. If you needed to shop, you went to the nearest mall. There was no question, no contest, and no real competitors. The mall was the golden child of the US retail footprint.
But that was years ago. Today’s mall scene has turned bleak as brick and mortar retail has fallen to the wayside in light of e-commerce. The vacancy rate of malls reached the highest point in 2 decades this year. And, thanks to the coronavirus pandemic’s massive disruption to physical retail, malls have since seen even more closures.
While shopping centers with a fresh spin still do hold irrefutable promise for commercial real estate, there’s no doubt that the massive square footage currently occupied by dying mall spaces will be reconfigured.
In the past, there has been a lot of talk about the future of vacant mall spaces. The possibilities for abandoned malls were manifold. From schools to mixed-use centers, the options were at the forefront of CRE retail analyst’s forecasts.
But right now, as affordable housing is in high demand, the new move for malls may be decided.
A New Future for Mall Spaces
Housing is being examined as the next possible phase for mall CRE. The U.S government recently went public with their prospective plans to convert retail spaces into residential communities.Transitioning empty storefronts into micro-apartments would flood supply into metropolitan markets, helping to ease the housing shortages plaguing cities all around the country.
In essence, mall spaces would be transformed into multifamily communities. In many cases, these would become mixed-use developments that blend retail, office, and living spaces all in one set up.
After a few alterations to the physical space, failing malls could easily be retrofitted into attractive housing options.
Is Housing the Right Move?
There are so many options for the future of empty malls – is housing really the best bet?
Despite all of the potentials, housing is an imminent need, and malls are inherently built with many of the in-demand resources that housing developers are looking for.
By their very nature, malls do make strong prospects for multifamily projects. Malls are located in centralized areas that are geared around attracting traffic and remaining accessible. In order to accommodate changing tenants, the units are easy to renovate. Malls are also built around public transit options, making transportation a key benefit of these locations.
It’s impossible to deny the fact that malls hold immense promise in creating community hubs for living and working.
Paving the Way
In light of the market’s hesitant response to converting malls into communities, a few brave players have already made headway into this trend. By taking the first steps, they’re providing a model for the industry to gauge the reality of these transformational projects.
Keep an eye on the progress of this trend to stay ahead of the curve – it may be one of the biggest areas of opportunity for CRE into 2021 and beyond.
The coronavirus pandemic has undoubtedly shaken up every market in the country including the demand for Mid-Atlantic warehouse space. While all eyes are on Class A cities to see how the very best in the game are faring during these times, other locations aren’t getting much consideration.
In the middle of all of this market-madness, how are opportunity zones doing right now?
Opportunity zones are officially defined as “economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.” This system was introduced with the 2018 Tax Cuts and Jobs Act by the IRS.
Throughout the United States, there are more than 8,500 locations officially designated as opportunity zones. By outlining communities around the country that need the most aid, the IRS is able to stimulate the direction of development projects by offering significant tax benefits for investors who enhance these locations.
Besides the inherent tax benefits, opportunity zones have proved themselves to be strong investment options. Competition is low, the returns are usually substantial, and it’s a strategic way to nationally expand commercial portfolios.
But, now that the conditions have changed, how are these locations doing? Here’s what the ‘right now’ of opportunity zones looks like:
In the midst of a pandemic and an economic downturn, investors are shying away from opportunity zone investments. As projects all around the country have been subject to the widespread disruptions relating to COVID, opportunity zone investments aren’t picking up speed the way they were in the past.
It’s clear that investors are wary about funneling their capital into any investment right now. In a time of long term uncertainty, it’s difficult to pivot strategically. It’s impossible to know where the virus’ next hotspot will be, or if there will be another country-wide market closure anytime soon.
Because of these outstanding circumstances, investors are giving all investments, including opportunity zones, a second thought before moving forward.
Even while investors are skeptical about moving forward with an opportunity zone development projects, the momentum is being fueled by the announcement of new incentives for these deals.
The IRS is set to offer further tax relief for opportunity zone investments by nullifying some of the more stringent qualification factors that block many development projects from being able to claim the benefits of these specified areas of investment.
These current aid programs are making the benefits associated with opportunity zone investments more accessible, which is pivotal during these COVID-19 hardships.
While commercial real estate’s opportunity zone arena has hit a stalemate during the pandemic, this area of investment isn’t set to fall out of favor. As soon as the pandemic’s climate settles down enough to have a clear outlook on the future, expect the investor interest to pick back up again.
But, for now, keep an eye on the progress of opportunity zones. When they start to expand again, you won’t want to miss out.
With reports coming out that Google employees won’t return to offices until Summer 2021 and the likelihood many large tech companies could follow suit, the demand for office space could continue to fall.
From our perspective the longer remote work continues, the greater the chance companies and employees will find a new paradigm as far as office use goes.
Though the positives and negatives of working from home can be debated, one area which I haven’t heard anyone complain is reducing their commute down to zero. As more people better fit-out their home offices and more schools reopen, the percentage of people and companies who find the benefits outweigh the negatives is likely to continue.
As a recent article from GlobeSt.com, Breaking Down the Case for Scaling Back on Office Space, pointed out the actual cash savings for companies and employees is huge:
Global Workplace Analytics estimates that companies can save roughly $11,000 per employee with a flexible work-from-home arrangement. This decrease is attributed to savings on office leases and an increase in productivity from the employee. Employees themselves can save up to $4,000 on commuting and food costs.
As a number of recent articles have found, more and more companies are starting to look hard at these costs.
Reuters has a captivating look at how Office landlords, beware: More of corporate America is looking to reduce space
An analysis of quarterly earnings calls by Reuters found that more than 25 large companies across different sectors are planning to downsize their office footprint, posing a threat to office landlords’ bottom lines.
Ronald Philip O’Hanley, CEO of financial services company State Street, said on his company’s earnings call last week that observers “should expect and hold us to a much lower footprint really starting quite soon.”
Another article found, 40% of bank execs plan to reduce real estate footprint: survey.
While banks have begun the slow, careful process of returning employees to the office, most executives aren’t expecting everyone to come back.
A survey by professional services firm Accenture found that about 61 percent of bank executives don’t expect to call all employees back to the office. And more than 40 percent of those surveyed are also planning to reduce their real estate footprints accordingly.
CommercialObserver.com had some observations on the state of shadow office space, Is There an Excess Shadow Office Space? It’s Complicated:
Several dealmakers who usually play up the bright side of things declined to comment. Even as yet-to-be-leased, newly minted space is coming online at One Vanderbilt and at several Hudson Yards towers, and Larry Silverstein still lacks a tenant to get Two World Trade Center off the ground, Manhattan continues to lose office jobs to the pandemic, with around 150,000 office jobs lost so far amid the outbreak.
Globest.com reported some are calling for a pretty significant decline in coastal Metros, Office Space Demand Expected to Drop 10-15% as More People Work From Home
A new report suggests the office real estate sector, especially in gateway cities like New York, San Francisco and Washington, DC, will feel the pain for years from the pandemic-led work from home trend.
“The notion that a well-located office building full of highly paid workers in or near a dense, expensive city is the best way to operate a successful firm has been challenged by the acceptance of remote work,” said the report by Green Street Advisors, a real estate research company. ”Coupled with an increase in individuals who no longer regularly go into the office, many more may consider moving further away from coastal city centers.”
While many forecast a significant decline in office space around major cities the opposite forecast is being given for industrial real estate especially distribution centers and warehouses in the Mid-Atlantic. One thing is for certain, there will be change coming out of 2020. Off-market and distressed asset investors may find success looking at ways to re-purpose office space or convert existing office space into what’s needed for the new normal.
As we’ve been highlighting the commercial real estate market is seeing a lot of changes in 2020. With many people moving from densely populated coastal cities like Philadelphia and New York to more rural and urban areas, the effect on commercial real estate is just beginning.
As we continue to see more hotels and retail properties go into special servicing, savvy off-market real estate investors are going to have to look at trends to determine where to make a good investment.
Jessica Fiur, Managing Editor of Commercial Property Executive has an interesting article, Post-COVID-19, Could This Be the Next Hot CRE Asset?, with a potential good commercial real estate investment asset class, parking garages. She highlights some potential reasons why.
But could COVID-19 cause a resurgence in driving? As people go back into the office, safety and cleanliness will be at the forefront of everyone’s minds.
Fewer people may feel comfortable taking public transportation going forward. And don’t even mention Ubers or cabs or other shared driving services. Who knows who was in the car before you, and if the driver wiped everything down!
Cars might be the answer. And if so, could parking structures be the new, hot CRE asset class?
It’s already being predicted that more people will drive post-COVID-19, particularly when it comes to vacations (after all, what is a plane if not a big, flying bus?).
And people who can no longer work from home will still have to get there.
Suburban offices have to consider parking structures anyway. And the novel Coronavirus might have investors considering suburban offices going forward, at least for the near future. Even coworking spaces, which might have had some troubles at the beginning of the pandemic, might do well in the suburbs.
As she points out the move from dense urban areas to the less crowded suburbs could force suburban office building owners to consider new parking arrangements and potentially in cities, we could see more investment in parking garages.
David Randall has an interesting report in Reuters, Who still needs the office? U.S. companies start cutting space, on how more and more companies are considering reducing their office space. This will definitely end up having an impact on real estate investors and potentially could lead to the growth of rural areas. Below are a couple highlights from the article which really stood out.
One additional item mentioned in the article was the movement of people away from coastal cities and toward more open areas including the Sun Belt. While we definitely see migrations taking place, the actual time-frame may be slower than some experts are predicting. In many cases, we see the suburbs and rural areas around major East Coast cities growing in popularity as people are continuing to work from home but have some obligations which will require city office space.
This trend may change as companies move from city office space to suburban office buildings and corporate complexes. Suburban offices could see increased demand as companies look to move into less densely packed buildings.
Investors looking to capitalize on these trends should consider speaking with local investor friendly real estate agents to get local intelligence on what types of trends they are seeing in their markets.
CRE has long been a favorite place for investors to explore. Commercial investing is commonly known as being safe and reliable and this process comes with the bonus of the appreciation of wealth.
Are you thinking about investing in commercial real estate? If so, play it smart with winning strategies to streamline the process and skip over popular mistakes.
These are things 4 to consider before making the jump into commercial real estate investments:
Always Start with Due Diligence
If you’re not up-to-speed with all things commercial real estate, be sure to explore the industry before diving into any investment projects.
This is especially vital in today’s quickly-changing circumstances. New investors shouldn’t be relying on data, tips, and market insights dating years back. It’s certainly important to research the field’s history, but in light of the recent developments to global business, focusing on 2019-2020 data is key for planning current movements.
The more you know about commercial real estate, the better you’ll be able to cultivate lasting success as an investor. Read industry-related books, see what professionals have to say about their experiences, and follow some CRE community pages on social media to immerse yourself in the culture.
Organize Your Finances
As with any investment, make sure that your finances are all in order before starting any new projects. Spend some time examining your personal financial situation and make sure you’re prepared to take on the new responsibilities.
Investing in a commercial property requires a substantial initial investment. Beyond examining your own financial status, most investors will need to explore outside lending options, such as private commercial lending agencies and banks. You’ll want to get this all in line before taking the first steps.
Start Slow, But Consider Branching Out
Commercial investments cover multifamily, retail, industrial, mixed-use, office, and more. Even though they all technically fall under the umbrella of commercial properties, each sector is completely different.
Juggling multiple property types while building a portfolio can be extremely difficult. New investors should start slow and branch out over time.
There are plenty of benefits associated with owning a commercial portfolio spanning across multiple sectors. Diversified portfolios are revered for their market stability and economic resilience, so don’t avoid expansion altogether. Just make the growth is steady enough to handle in a balanced and successful way.
Be Ready to Manage Your Properties
One of the biggest differences between commercial real estate and other investment types is that properties require hands-on upkeep. New investors need to plan out how they are going to care for their portfolio assets before they make the purchase.
Commercial property management includes leasing and marketing, paying the bills, performing maintenance, basic daily upkeep, cleaning, and tenant interactions. It’s a completely new set of responsibilities so make sure that you have a standing plan to cover them.
Successful property management is the first step to a successful, profitable asset. Falling short with negligent management here can tarnish even the greatest commercial property potentials.
Good luck with your journey of commercial investments! These 4 tips will get you off to a strong start.
Right now, net-zero construction is in the spotlight of the press. To meet the updated eco-conscious business plans introduced at the beginning of 2020, many companies have committed to a net-zero model.
June 5th was World Environment Day, and in dedication to the cause, the World Green Building Council launched their latest campaign.
The #ActOnClimate movement included a net-zero goal, and the WGBCouncil announced that more than 100 companies signed The Net Zero Carbon Buildings Commitment pact to make all of their buildings net-zero in the next decade.
Obviously, this pledge has big implications for commercial real estate.
As the masses adopt the net-zero building trend, it looks like it may become the norm for CRE. Property owners who are slow to adopt this green solution may be left in the dust of environmentally-friendly competitors.
Soon, everyone will need to choose to embark on this route or not. Is this the best solution for you? Here’s an in-depth look at the details of the net-zero system and what it means for commercial real estate:
What is Net Zero?
Also referred to as zero-energy buildings, net-zero means that a property has no net energy consumption.
In a nutshell, this means that the annual total of energy consumed by the building is equivalent to the amount of energy generated on the site. Theoretically, this can be described as a building that uses 100 units of energy per year, but also generates 100 units of energy annually. Ultimately, the result of use-and-produce is balanced out.
This symbiotic system is far different from the one-sided consumption pattern where a building uses massive amounts of resources without replacing it in the big-picture.
How To Achieve this Standard?
Applying the net-zero standard means implementing green options throughout the property to balance out the annual energy usage.
Common ways to do this is through solar panels, advanced insulation, passive heating and cooling, and energy-efficient lighting. Creating a sustainable and productive green infrastructure that can generate just as much energy as the property consumes is the key to going net-zero.
Why is Net Zero Popular?
With today’s society being surrounded by environmental concerns, it’s not difficult to see why the net-zero trend is attractive to both people and businesses. WGBCouncil’s #ActOnClimate net-zero initiative is set to reduce carbon emissions by 3.3 million tons.
Commercial real estate is at the forefront of many green movements because of the large scale footprint commercial properties have on the global consumption of resources. According to the International Energy Agency, in 2019 buildings consumed 36% of the world’s fossil fuels.
With over one-third of the entire world’s used resources being funneled by the commercial scene, it’s impossible to ignore the issue. Even slight changes in this arena can yield massive benefits for green initiatives, and as more and more companies make the switch to net-zero, the trend will undoubtedly gain momentum.
Should You Adopt the Net-Zero Trend?
Sooner or later, net-zero will become the norm for commercial properties.
It’s a good idea to start thinking about how your properties can slowly convert to the net-zero goal. Even if it’s gradual, it will be a future-proof way to keep a commercial portfolio current and competitive.
As we move forward in 2020 and beyond, green concerns will only intensify. Start thinking about net-zero now to stay one step ahead.