PARTNERS, Thought leadership

Bear or bull: CRE’s investment prospects

The commercial real estate (CRE) reporter Konrad Putzier recently published a fascinating article in the Wall Street Journal (WSJ) about the sector’s resilience, and specifically investors’ confidence in that resilience. Published in May 2020, the article unpacks the factors that have worked into the sentiment analysis, showing that despite the hard knocks of the pandemic, there is a lot of positivity about the future of CRE.

No small troubles

In many ways, CRE was a prime candidate to be severely impacted by shelter-at-home orders and the migration of workers to their homes. High-rise office buildings, the report starts, stood largely empty, and around a half of hotel rooms went unoccupied. Retail was also under severe pressure. Despite these layered burdens, the CRE market in the US remained relatively strong and is looking up in 2021.

“Prices fell far less than after the 2008 financial crisis and are already rising again,” he writes. “The number of foreclosures barely increased. Pension funds and private-equity firms are once again spending record sums on buildings.” This is, the article argues, partly due to the federal government taking bold measures to support landlords and protect them from “suffering steep losses”.

According to Green Street analytics quoted in the piece, CRE prices did fall some 11% in the March to May 2020 period (compared to 37% after the 2008 crash), but have rebounded by 7% – “erasing more than half their pandemic declines”.

Investor confidence

The sector’s other saving grace is that it remains a darling of investors. The WSJ points to “big global pension funds… raising their allocations to commercial real estate”. Private investment funds with a real estate focus had $356 billion in cash reserves in April, and a study from Cornell University and Hodes Weill & Associations found that 29% of large institutions said they planned to increase their CRE exposure.

Inflation haven

Analysis from Globe St underlines some of the same findings as the WSJ report, specifically in that real estate is profiting from its perception as an inflation hedge, and despite a high vacancy rate for offices, it describes analysts as “still bullish on the sector”. In fact, real estate investment trusts (REITs) have been the best performing asset class in 2021 so far.

Moody’s however takes a more cautious view. Also speaking to Globe St, they say, “while industrial will remain steady and multifamily family rents and vacancies will turn around in the short term, the future of office, retail, and some hotel subtypes is uncertain”.

Part of the package

The contemporary CRE investor can however bet on both outcomes through diversification. Writing for the Forbes Real Estate Council, Andrew Lanoie of The Impatient Investor has penned an even-handed explanation of the divergence of real estate and CRE prospects in tough economic times, and how CRE in the investment portfolio – diversified by type and region – can still carry its weight in your wealth strategy.

In fact, he concludes “investing in commercial real estate the right way can shield your portfolio from the next downturn.”

Social: Are you bullish or bearish on the CRE investment prospects? Tell us what’s driving your investment choices in this volatile time…

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.

Click-to-collect and e-commerce: a windfall for CRE

Pivoting from in-store sales to tech-enabled sales was one of the saving graces of retail in 2020 when stores emptied out, and shelter-at-home orders dragged one. The data now shows that companies and markets better positioned to shift to e-commerce fared better than those that didn’t. 

The upside to shifting sales online, though, was that it contributed to a longer holiday shopping season, and drove record-breaking extension in e-commerce market penetration, with some reporting as much as 70% e-commerce sales growth last year. 

When a door closes…

On the commercial real estate (CRE) side of the retail coin, it has also driven demand for warehousing, fulfillment, and shipping spaces – a shift that creates an opportunity for a savvy agent or broker. 

…A warehouse opens

The World Property Journal, for example, reports that 99.2 million square footage of industrial space was taken up in the last quarter of 2020, making it the strongest quarter on record. Some 203.7 million square feet were absorbed during the course of the year, which is 27% up on 2019’s net growth.  

This overview perspective echoes the reports coming from regional data, such as in Wisconsin, as well as abroad in the UK and Europe, and Australia. According to Bizjournals.com, in Southeast Wisconsin, the industrial property market in 2020 took up square footage equal to that of all the new builds coming to construction completion in the area. 

In the UK, FM Magazine reports, that available space is outpaced by demand, and this is tricky at a time when companies will have to manage their supply chain very carefully due to Covid-19 and ‘Brexit’. 

Standing out

This kind of growth is a beacon of light in the otherwise dismal statistics of 2020, where economies around the world took huge strain – but it also draws attention to itself, which means more competition too. 

“Just because you have industrial or warehousing space on your books, don’t assume it’s a done deal,” cautions Jay Olshonsky, President and CEO of NAI Global. “Some companies are also cautious and risk-averse at the moment, so you’ll have discerning clients looking for only places that fit their needs and not every warehouse building will do that.”

At this point, analysts generally expect this trend to continue into the second quarter of 2021, although the growth line may flatten out somewhat as we begin to see a stronger return to in-person shopping in Q3 2021.

Data demonstrates 2020’s brutal construction slump

The Real Estate Board of New York (REBNY) confirmed this week that construction activity on New York City’s Manhattan Island had – predictably – slumped in 2020, to almost its lowest level in a decade.

The World Property Journal detailed the findings of REBNY’s Q4 2020 New Building Construction Pipeline Report, highlighting that “new building filings in 2020 represented a proposed 42.67 million construction square feet, which is an approximately 28% decline compared to proposed construction square footage in 2019”. This was, the report said, the lowest total since 2012.

Residential units proposed for construction in 2020 declined by roughly 17% compared to 2019, the report found.

Promising plans

The study, however, is not all ‘doom and gloom’, stating: While this new analysis highlights the ongoing challenges faced by the construction industry due to the devastating impacts of the Covid-19 pandemic, it also follows some promising recent infrastructure and construction plans being put forth.

Global effects

These sectors are important job creators around the world, and many states and countries are still counting the costs of the ongoing pandemic:

  • A new report by the Associated General Contractors of America shows that Texas had the sharpest construction jobs loss decline in the US shedding 33,600 building industry jobs in December, compared to the same period the year before, according to Dallas News.
  • In Northern Ireland, says the Irish Times, data indicates “firms reporting a deterioration in profit margins outnumbered those reporting an improvement by 11 to one”.
  • London’s Southwalk Council is calling on construction workers to participate in their rapid testing project, as the UK government begins rolling out vaccines to those that cannot work from home.
  • And ConstructionCanada.net is reporting that both construction jobs and the economic recovery of Ontario is at risk if their government doesn’t bed down the post-pandemic “restart” agreement and plans for financial assistance. This comes from the Residential and Civil Construction Alliance of Ontario who say municipalities will have to scrap repair projects if funds aren’t forthcoming.

“The ramifications are ongoing,” says Jay Olshonsky, President and CEO of NAI Global, “A set-back like this is painful, but if we’re looking for silver-linings it does give the industry pause to consider how it can return stronger, in sustainable and greener ways.