Thought leadership: A new lease on life for old retail spaces

In a recent announcement, LightBox principal analyst Dianne Crocker predicted that as many as 25% (a quarter) of America’s malls can be expected to close down within the next three to five years.

This is, obviously, a trend that commercial real estate (CRE) professionals – like us within NAI Global – have been aware of and tracking for many years, but the LightBox prediction goes on to offer some idea of what we can expect to see filling these spaces in future and what investors see as the opportunities created by this trend – both projections worth exploring.

The “death of retail” has been hanging over the industry’s head for the better part of a decade, but what is more likely – Crocker and NAI agree – is a move away from brick and mortar towards e-commerce, with a hybrid model in future. This trend was merely heightened by the Covid-19 pandemic.

The Amazon effect

This is in line with what trend analysts and futurists like Doug Stevens are forecasting. Stevens told RetailDive last year that by “2033 the majority of our daily consumption will be transacted online”.

“In the future, all but the most convenience-based retailers will begin to use their stores as media to acquire customers and their media platforms as stores to transact sales…” – Doug Stevens, author of “The Retail Revival: Re-Imagining Business for the New Age of Consumerism”.

This tracks: Our most recent Real Estate Outlook study, Q42020, found that over half of the survey respondents (57%) said the “Amazon effect” was expected to have an even larger impact on their CRE markets than the pandemic itself.

A buyer’s market

Crocker argues that the slowdown in deal volumes initiated by the pandemic has left a supply gap, and described the demand from investors as “pent up”.

“Institutional capital right now is focusing its repurposing investments on the safest benefits, the suburban metro areas that have seen meaningful growth in the past year…” – Dianne Crocker, LightBox principal analyst.

Multifunctional malls with a lifestyle component are not only the darling of consumers, but of investors too including private equity firms looking to score a bargain on a distressed CRE asset.

We are seeing this interest spiking too, and not just for straight sales. There is much interest in reusing these generously sized spaces in novel ways.

There are many such developments on the cards around the country. In Benton Harbor, Michigan, plans have been suggested to reconfigure the Orchards Mall with some 116 luxury two-bed apartments, with six-month leases to attract business travelers. Chapel Hill Mall in Akron, Ohio – which was foreclosed – expects to see new life as a business park.

There are also some less-traditional buyers in the market for malls these days. Gaming giant Epic Games recently bought up an almost 90-acre defunct mall in Charlotte, NC, that will be refitted into their new international headquarters.

Repurposing and extended life

The malls that outpace the trend will be those with a strong anchor tenant and those that offer the live-work-play balance. Crocker argues that malls that are grocery-anchored, or those “featuring medical services, pharmacies, gyms, and lifestyle amenities are more likely to survive in their current forms.” This is the kind of mall that will become a hub of urban life, she says.

An anchor tenant with a multichannel presence and a pandemic-proof loyalty is a gamechanger for mall and retail leasing.

Malls also have, we believe, a long life ahead of them as places to showcase goods and establish brand experiences. Raydiant makes digital experience tools for real life spaces. Writing for Forbes in 2020, Raydiant CEO Bobby Marhamat wrote that “in-store experience defines retail for people”.

“Touching products is part of that experience, but helpful staff, well-organized showrooms, unexpected activities, smart technologies and other components all combine to create exceptional experiences…” – Bobby Marhamat, Raydiant.

These factors combined are why smart money is betting on not ‘a death’, but ‘an evolution’ for our malls.

Imagining the Hospitality and Hotel CRE recovery

One of the hardest pandemic-hit sectors in the last 12 months is travel and tourism, a space with significant overlap with commercial real estate (CRE). For those who trade in and invest in hotels and hospitality CRE, it has been a dark time – and sadly analysts aren’t promising a rapid bounce back. Rather, we are hearing estimates in the region of two to three years for a return to pre-Covid-19 levels – or longer, if major markets are affected by further “waves”.

Economic Impact

According to research by Northern Trust, tourism and travel are worth an estimated 10% of global GDP, and provides jobs for 330 million people. Forecasts from Oxford Economics and the United Nations World Tourism Organization (UNWTO) in 2020, predicted that international arrivals would drop by “over 70%, contributing to about 200 million job losses”.

That was their “worst case scenario” last year, but with multiple waves of this health crisis still being felt around the globe, the final impact is still to be assessed. 

Sector specifics

There are many things contributing to this, not least of all the correlation between travel and the spread of the coronavirus. Because this link was so immediately clear, international travel was all but shut down in 2020, and for many countries that remains the case with borders closed for anything other than essential travel.

As investors at Northern Trust explain, hotels are a “highly cyclical sector that experiences an overnight collapse in demand”. That speaks to the viability of tenants and operators in tough times, as well as the investment prospects that flow thereafter.

The acceptance for work-from-home will also keep more business travelers away and for longer, so areas that have economies built on conferencing and eventing are unlikely to see an uptick in business soon. Tourism recovery will, instead, start in cities that have clear pandemic-mitigation measures in place and those that can promise a safe “bubble” for tourists.

Looking forward for sustainability

On a more positive note, commentators have made the point that this is an opportunity to reset in many ways – shifting towards more sustainable tourism and hotel development practices. Deals with clear environmental, social and corporate governance (ESG) principles will sweeten the deal for investors.

Outliers and options

A handful of destinations are expected to buck the trend, with sharper tourism increases, and a swifter hospitality CRE recovery in conjunction. Parts of Australia, for example, are already seeing a shift towards new inventory.

Hotel shares movements also reflect optimism. As Million Acres reports, “As of March 19, 2021, Park Hotels and Resorts (NYSE: PK) was up 33.4% YTD, Pebblebrook Hotel Trust (NYSE: PEB) 35.4%, and Hersha Hospitality (NYSE: HT) up 47%”.

“That makes a good case for real estate investment trusts (REITs), says Steven Vazquez, NAI Global Capital Markets Hotel Expert, “and shows a willingness to buy in now as people think the bottom was reached and things looking up.”

What’s happening in… Seoul, Korea?

A quick reminder to NAI Professionals and clients: NAI Global’s reach is, well, global. We are proud of all NAI Offices around the world as well as their regional and local insight. For today’s edition of the ‘What’s happening in…’ blogs, we turn our attention to Seoul, the capital of South Korea – and specifically its office real estate vertical.

Located in the north-west of the country, Seoul is home to some nine million people (including over 400,000 non-nationals), and is the largest city in Korea. It is strongly associated with technology, finance, and business, and some 14 companies from the Fortune Global 500 are headquartered here, including Samsung, Hyundai, and LG.

Changing lives

In Seoul, our local experts and partners describe a commercial real estate (CRE) and office space environment that is relatively stable despite the hardships of the Covid-19 pandemic, with a limited amount of new supply expected to come on to the market in 2021. In early Feb 2021, Korea, as a country, had some 80,000 infections and a death toll of 1464, and Seoul was a key concern for pandemic management because it is such a densely populated city.

Still, there have been considerable social and work-life changes in Seoul as a result of the pandemic. The Korean Herald reports that residents of Seoul worked less and relaxed more during 2020. This comes from the findings of a city government survey that shows a 12-minute decline in daily working time compared to 2019.

Seoul itself offers a vibrant and diverse community, and it is a regional center of economic activity, in easy travel distance of many of Asia’s highlights. Industrial action has however led to a decline in working days, and tourism has been greatly slowed by Covid-19 fears. As the vaccination efforts roll out, these are some of the economic areas where analysts are hoping for a recovery in 2021..

Latest data

Despite the pressures of lockdowns and distancing, 2020 was reportedly a record-breaker year for office investment volume. Analysts suggest that this is underpinned by a healthy investor appetite for stable real estate assets and see Seoul as offering this.

According to the NAI Korea [HM1] monthly data analysis focusing on its market, published in January 2021, the average vacancy rate of office buildings in Seoul’s central business district (CBD) is 7.62%, with the average net occupancy cost (NOC) at $52.39 as of December 2020. NOC is the cost that 1㎡ of gross floor area incurs to a tenant who rents the property. NOC can be useful to compare different types of office buildings.

On the residential side, driven by low supply, there has been strong growth in prices, and this is likely to see policymakers relaxing some restrictions.

For a detailed breakdown of NAI Korea’s Seoul data, click here.


At your service: the role of CRE retail management services

We all know the old real estate adage – “location, location, location” – but economies in the 21st century are tending towards “as a service” thinking, a trend characterized by a handful of big-name disruptors like Uber (transport-as-a-service) and Airbnb (accommodation-as-a-service).

In this model, the hassle and upkeep, the peripheral add-ons, are all rolled into the cost for clients and can make a compelling ‘sales pitch’ for would-be buyers.

“The other downstream effect of this is the emphasis on service itself – the quality thereof, more than its existence,” says Cliff Moskowitz, EVP, NAI Global. “Commercial real estate (CRE) professionals and firms that offer competitive, value-adding services can set themselves, and their listings, apart.”

A partner in time

For the owner and occupants of a retail property, having access to smart, speedy services as part of your property contract is a game-changer.

Services for occupiers include the obvious (like group marketing, facilities management, and lease administration), and then superior service offerings (such as omnichannel real estate solutions and supply chain advisory).

With services for investors, this category might include property marketing, valuation, and advisory services, and project management, which all exceed the traditional-but-still-essential landlord representation and leasing, and property management.

Next generation services

Retail properties can now include considerable benefits to occupants and tenants on the “as-a-service” model, including technological infrastructure, security, renewable energy generation and management, event management, and even click-to-collect services.

The increasing availability of these kinds of options means that retail property managers can offer far more for their clients without intense capital expenditure on their part or the client’s part, as these are now shifting to the operational expenses column in the books.

X marks the spot

When we pivot to thinking of ourselves as CRE service providers, we shift from a “sales first” approach to one of “service first”, and we also see the corresponding language shift from “renter” to “customer”.

This encapsulates the contemporary approach to business which centers the customer experience (CX) above everything.

With CX as a guiding principle, CRE professionals can position themselves for longer-term partnerships with their retail clients, and as premium providers, achieving both better numbers for themselves, and a higher return on investment for their clients – and that is the definition of a win-win deal.

Thought leadership: How CRE fits into corporate strategy

The cliché of “Location, location, location” applies in commercial real estate (CRE) as much as residential, but what factors you bundle into that assessment are, naturally, vastly different and should be explicitly tied to corporate strategy. That’s the realm of corporate real estate management (CREM).

Corporate decisionmakers

A savvy corporate client on the hunt for premises will be asking whether a proposed site will support their corporate goals.

When considering a potential position for offices or logistics, for example, an assessor might ask about the transport links, the nearby shops and facilities. They may consider perception and whether the location is in keeping with brand identity.

They will need to understand the current and future demands the company will make of a location, and how the lease or sale terms will be perceived by a board or management team.

Access to (human) resources

There is another oft-overlooked location factor that NAI argues should form part of a CRE strategy: talent and access to the right people.

This is the nature of cities or areas that become hubs for specific industries and sectors: they have a rich pool of workers with the right mix of skills to draw from. If you’re looking for the top geologists in the world, you probably want to focus on an area associated with mining. Want people who are passionate and knowledgeable about the ocean? Try Hawaii. Silicon Valley, and increasingly Texas, are meccas for the technically minded.

There’s remote work and transferable skills to consider, of course, but generally speaking a talent pool linked to an area is self-sustaining, in the way that Silicon Valley and Stanford will always be linked in their mutual development paths.

What type of staff you envision filling your hallways and boardrooms will also inform other location considerations: like access to good schools, parks, or public transport.

Property as an asset

Last but definitely not least, the right property is an asset and an investment with future dividends. This is why a smart broker, or their corporate client isn’t just looking at what is now, but what could be, what’s on the horizon, and any prevailing trends that need to be considered.

A client with explicit return on investment (ROI) expectations or a particular appetite for risk – as just two examples – should place that information on the table from the get-go, as premises can be (and often are) serving the dual purposes of functional and financial.

Remember: business strategy should drive a real estate decision, not the other way round.