Commercial Real Estate is enjoying a long 9th inning of sorts. With the last smoke of the 2007 crash drifting away we find ourselves looking back over the shoulder of 2016 and can’t believe how far we have risen.
Commercial Real Estate has come back to rise up 144% over the trough of the 2007’s and the BIG question has become where is the market headed. Loan to Value ratios are the hard-limits and the U.S. market is already hitting that wall there and starting to look for niche places that can offer ROI as well as long term common sense.
Retail is the first stop on CRE and 2016 finds ultra-competition beginning to take a toll on this market. Online retail has been chipping away at the foundation of brick-and-mortar for 10 years. Macy’s Backstage, Off/Aisle by Kohl’s and Find @ Lord & Taylor are just the latest off-price offshoots to enter the market as retailers look for additional revenue sources to offset declining foot traffic at their full-line stores. Need hard facts? Nordstrom has more discount “rack” locations now than they have full-price store locations. Delivery of e-commerce is already planning to use drone technology to further cut the ties with brick-and-mortar.
Class-B is impersonating Class-A. With the Class-A prices hitting the stratosphere there is only 1 route left for Class-B: Upward and Onward! We estimate rents in Class-B to be nearly 30% below those of A, making them especially appealing to new upstarts, and new businesses run by millennials who are hunting on two grounds: Location and Affordability. Proof is in demand which shows a rising demand for Class-B even as availability of Class-A continues.
The “Retailization” of Healthcare. The term “Drug Store” is from the 1900’s when the first consumer accessible store-front pharmacies began to appear and the trend never stopped – we just stopped noticing it. In the very, very near future there will be a medical express-type care retail location in every shopping center. This rise of community-based medical care access is a major driver of CRE now and in the future: this is no bold prediction and this trend has been in full effect for over 10 years with no sign of changing.
Create, Adapt, Re-use, Repeat: The future in CRE is not in “new” but in “adaptation.” There is no model in existence that can beat the adaptive re-use of existing commercial space. Rising cost of energy, materials, manpower, planning, and logistics have all turned adaptation into the hottest trend in commercial real estate. A great example is the famous Houston Astro-Dome which is in the midst of being re- purposed into a combination of parks, hotels, and shopping.
While some tend to spend a lot of time looking for the signs of the next bubble pop – we see many angles and aspects to the current market cycle that put a silver lining on it. Our advice: don’t wait, buy the best location you can find NOW near urban centers and transportation corridors, and let a well heeled property manager keep it fully leased and spend your time focusing on the future.