Archives for January 2022

Increased institutional interest is creating more transparency, which will aid in the maturity of the sector.

The “work from anywhere” trend will continue to pick up steam in 2022, a team of Colliers analysts predicts, with some imbalance to be expected between car-dependent secondary suburbs and dense urban cities.

That’s good news for the burgeoning flex space sector: while office occupancy levels in cities like Dallas and Houston have reached more than 40%, utilization rates are closer to 15-20% in dense urban centers like Manhattan and San Francisco. The very nature of office work is undergoing a “sea change,” according to Colliers, with work patterns shifting to a more hybrid model and employees demanding more flexibility about where they work.

“While operators have largely regeared their agreements with landlords over the last 18 months, user interest in flexible workspace has expanded as firms reassess their occupational portfolio needs in the light of the COVID-19 pandemic and ongoing shifts in work patterns,” the report notes. “Owners are being much more creative in their approach to delivering flexible workspace solutions by carefully looking at their product mix and delivery models. Concurrently, increased institutional interest is creating more transparency, which will aid in the maturity of the sector.”

Colliers predicts a greater emphasis on user experience going forward, as owners look to provide an extensive suite of quality amenities to elevate the tenant experience by either providing services in-house or outsourcing to trusted partners in areas like fitness, wellness, hospitality, technology and flexibility.  But “having one operator allows for better integration of amenities, helping create a seamless experience for the end user,” the report notes.

Colliers also predicts more attention will be paid to content creation and programming, both of which are “critical to engagement” with end users.

“How occupiers interact with a building will be fundamental to real estate decision making,” the report notes. “Providing high-quality tenant experience is becoming essential, particularly for Grade A and trophy buildings. We expect more specialist operators to emerge into this space, together with hospitality operators stepping in and flexible workspace providers pivoting towards it.”

As the physical work environment evolves to meet customer demand, expect the line between flex space and traditional office offerings to blur and become more holistic. These days, flex space is increasingly viewed as a need-to-have, not a temporary solution.

“Asset owners are increasingly adding components of flexible workspace to their product mix and engaging in creative delivery models to provide for occupier demand,” according to Colliers. “Turnkey suites are becoming more prevalent as landlords look to capture behavioral changes in occupier demand and some are continuing to develop their own flex products.”

Against that backdrop, Colliers predicts more product offerings will be on the horizon this year, and the flight to quality assets will continue.

Big changes are also expected this year in how flex space operators earn revenue. Research late last year from Yardi Matrix predicts that franchising and management agreements with revenue sharing will become more common. In management agreements, landlords are typically responsible for the cost of fit-outs but can receive a larger share of the revenue from operators.

Source: “Flex Space Demand Expected To Boom In 2022“

A number of issues, from labor to inflation and rising interest rates, will make healthcare acquisitions and development more challenging in the coming year.

In 2021, healthcare investor and developer Meridian had a banner year, closing more than $100 million in transactions, all located in the State of California, and $40 million in new development activity, with projects located in five states. As the firm looks ahead into 2022, it plans to remain an active buyer, but CEO John Pollock says this will be a more challenging year for both purchases and new construction.

“All arrows point to a more challenging year in 2022 for acquisitions and development,” Pollock tells GlobeSt.com, citing expanding bid-ask spreads, supply chain issues, labor shortages, rising interest rates and inflation as contributing factors. “Those are all going to make it more challenging to purchase and build in 2022.”

When it comes to new development, labor and material shortages are, perhaps, the biggest challenges facing the delivery of healthcare product. “Our clients expect us to give them a number early in the process, usually with a back-of-the-napkin sketch, and due to the perfect storm of market disruptions, we are finding it increasingly difficult to predict the availability and/or prices of material,” says Pollock. “We pride ourselves on having never missed a budget or schedule and the current environment is really challenging the team.”

While there are several factors that make it challenging to transact, investment appetite for deals is not among them. “The continued appetite by capital allocators to acquire healthcare assets should make selling much easier. I expect the feeding frenzy that occurred in 2021 with portfolios will continue in 2022, it will just be a question of available product to sell,” adds Pollock.

Last year was one of the biggest on record for the firm. The biggest deals include the acquisition of Beverly Hills Medical Plaza, a 67,510-square-foot, three-story Class-A medical office building in Beverly Hills and a development site in Livermore, California. Meridian also launched new developments in California, Arizona, Nevada, Florida and Texas.

Source: “2022 Will Be a More Challenging Year for Healthcare Acquisitions“

Supply chain hiccups, rising material costs and shortages have plagued the industrial construction market throughout much of the pandemic. And although some of these problems cleared up in 2021, a new shortage arose in the past few months that could set back the expansion of many product distributors.

In cold weather markets such as Chicago, new warehouses and distribution centers need insulated precast concrete panels. As the cost of transporting the massive panels is prohibitive, builders must depend on local producers, but the escalating demand for consumer products delivered through e-commerce means demand for new warehouses is also hitting a historic high, outstripping the capacity of local precast manufacturers.

“Typically, there was a four-to-six-week lead time for precast panels, and now the lead time is 14 to 16 months,” Cresa Chicago Managing Principal Ed Lowenbaum said. “Anybody who needs to put something up can’t do it until mid- or late next year.”

Markets in warmer climates like Dallas still suffer from the nationwide skilled labor shortage, along with shortages of roofing materials, electrical supplies and many other commodities, but builders there don’t need insulated panels, so the pieces can be poured on-site and then tilted up into place.

Industrial buildings in cold places, by contrast, need walls that include an internal layer of polystyrene insulation built by specialist manufacturers in their own factories. These panels are typically 12 feet by 37 feet, can weigh 5 to 6 tons and are shipped by trucks to the development sites. The cost of shipping these behemoths is prohibitive, so developers typically depend on local manufacturers.

“Precast wall panels are the most obvious of the [delays] in the industry, because without a building envelope, you can’t do much else,” Opus Design Build Regional Vice President Jim Caesar said.

The Minneapolis-based firm has projects underway across the Midwest, including the Chicago area, southeast Wisconsin and Michigan.

“We’re seeing precast lead times pushing past historic norms in every Midwest market,” Caesar said.

And precast firms can’t accept orders due more than 14 to 16 months away, Caesar added, because there’s too much risk such deals would fall apart due to market shifts or financing falling through.

“There’s a lot of risk for the precast builders that they haven’t had to deal with before,” he said. “We’ve had precast manufacturers say, ‘We can’t take your order.’”

Solving this problem won’t be easy. The demand for spec warehouses continues to soar, and expanding capacity isn’t easy for precast producers. It would cost millions to do so, and such a capital investment could go to waste if warehouse demand returns to normal in 2023. That will force users to simply put their plans on hold and wait for space or go out on the marketplace to buy up available warehouses at premium prices.

There are four major precast producers for the Chicago region. Together, they typically fabricate and deliver about 10M SF of wall panels in a typical year, enough to handle the number of new warehouses that rise annually in Chicagoland.

“We’ve been chugging along, doing that year in and year out,” ATMI Precast Vice President of Development Mike Walsh said.

The Aurora, Illinois-based company produces about 60% of the precast panels needed in the Chicago region, he said.

But that 10M SF of wall panels is no longer enough. Even as the amount of new supply remained relatively steady, Chicagoland users set a new record in 2021, absorbing almost 46M SF, according to statistics from JLL.

“That’s more than 2019 and 2020 combined,” JLL senior associate Kate Coxworth said.

With spaces getting occupied as soon as they receive the finishing touches, it is a landlord’s market, with soaring rents and few choices for tenants, she said. The vacancy rate for the Chicago region sank to just 3.5% by the end of 2021, another record, and average asking rents rose 37 cents last year to $5.65 per SF, with new spec spaces near O’Hare International Airport garnering rents of up to $9. Prices like those have some users that normally use Class-A warehouses seeking out older Class-B and even Class-C buildings.

“We’re seeing rent hikes across the board,” Coxworth said. “And as long as somebody is willing to pay it, this will keep going.”

What’s more, household names like Best Buy, LG Electronics, Home Depot and Walgreens, as well as parcel delivery companies such as FedEx, United Parcel Service and DHL, are planning further expansion.

Developers are doing their best to grow the region’s inventory. After several years when deliveries totaled between 20M SF and about 23M SF, nearly 29M SF are now underway across Chicagoland, according to Coxworth, and about 68% of that is on a speculative basis, meaning buildings that don’t have a signed tenant.

With so much construction material going toward spec projects, private companies that want to own their own buildings, or need to construct a customized building for complex uses such as food manufacturing rather than renting a simple box, may find it especially hard to line up deals, Lowenbaum said. The longest lead times for wall panels that he can remember were during the industrial boom in the early 2000s when it could take eight or nine months, instead of today’s 14 to 16 months.

“It’s been a long time since we’ve seen anything like this,” Lowenbaum said. “They’ve always had the capacity to serve the market.”

Walsh said his firm can manufacture several dozen panels every day. And a typical distribution building of 250K SF needs hundreds of precast concrete panels, each with several inches of insulation, which ATMI can complete in about 10 days.

“We can pour a panel on a Monday, and it’s ready to go to storage on a Tuesday,” he said. “There’s nothing off the shelf; everything is custom-made.”

He estimates Chicago-area precasters would need to produce about 17M SF of wall panels each year instead of the usual 10M SF to meet current demand. But ATMI is already producing as much as it can. Increasing capacity even further would mean expanding its plant, a big capital expenditure that comes with real risk.

“Is this a 17M SF market or a 10M SF market?” Walsh said. “That’s the $8M question.”

Companies like ATMI would get stuck with the bill if they expanded and developers returned to a construction pace closer to historical norms. Furthermore, there is still a shortage of skilled labor, Walsh added, so it isn’t guaranteed that precast builders could even staff up their plants after spending millions on expansions.

Caesar agreed developers, suppliers like ATMI and tenants are in a tough bind with no easy solution.

“There’s really not any quick way to increase the capacity of a precast plant,” he said.

But Opus isn’t just sitting around waiting, Caesar added. The firm is starting to experiment with new construction methods, hopefully in ways that will speed completion.

At its Tollway Corporate Center in west suburban North Aurora, the company got a building underway last October that will offer 543K SF and a 36-foot clear height. Typically, Opus would first place a building’s precast walls as they rolled in on trucks. Once that was done, Opus would add the building’s internal steel infrastructure. But with the walls not set to arrive until February, the steel skeleton began rising over the site on Dec. 13.

It isn’t a complete solution, Caesar said. It is just one way the company discovered it can get a project started and keep it underway even in the face of critical shortages.

“The way precast lead times are going, we have to be creative,” he said.

WBS Equities CEO Wendy Berger agreed developers have to rethink their construction process. Her Chicago-based firm, which specializes in creating food manufacturing and food distribution facilities, is developing a 28-acre site in Florida and doesn’t need insulated precast walls, she said. But numerous other shortages remain, so it is also trying out new materials with shorter waiting times.

“I do think we’re all getting more creative,” Berger said.

Even though some shortages look impossible to overcome, most materials are becoming more available as supply chain kinks get worked out and builders come up with workarounds, she added. There was, for example, a 52-week wait for steel in 2021, and that has shrunk to between 30 and 40 weeks now.

“There are bottlenecks everywhere, but it seems that at the core, things are getting better and better,” Berger said. “Overall, people are excited and upbeat, and this is in part because while the supply chain issues will be here awhile, the demand for space remains incredibly strong.”

Source: “Cold Weather Markets Now Seeing Severe Shortages Of Precast Concrete, And There Aren’t Many Options“

Predicting the Headlines of 2022

Should we start with the good news or the, well, not so good? On the good news side, the industrial market is pretty much where we left it in SIOR Report’s Q2 market update. Namely, the national market is so tight that B product is still gaining allure for prospective tenants, even those who a few years ago would have considered only A product for their needs.

Further, “CBRE researchers anticipate that another 300 million square feet of industrial space will be absorbed on the back of e-commerce alone,” the article continues. “However, due to the need to research and develop, produce, and store COVID-19 vaccines, the explosive growth of life sciences and cold storage have also thrived in the pandemic and are expected to continue.”

Clearly, industrial is a market enjoying robust interest from tenants and investors alike, a far cry from the current situation that exists in the office sector. “Overall U.S. office absorption remained firmly in the red in Q2 2021,” reports Colliers, placing it at negative 18.6 million square feet. The report does give a nod, although slight, to a little good news, stating that at least this is “markedly lower than the negative 46.1 million square feet seen in Q1 2021, which was the worst quarterly total on record.”

Let’s get back to the good news. “The industrial market remains strong as e-commerce continues to gain more and more share of the sales that would normally go to retail brick-and-mortar stores,” agrees Sim Doughtie, SIOR, president of King Industrial Realty, Inc./CORFAC International in Atlanta.

Of course, this is not to say the industrial market is without its own woes, as major, months-long disruptions in the supply chain—also noted in Q2—continue to plague the industry, both in terms of on-time deliveries to e-commerce clients as well as the building delays and price hikes caused by hang-ups in the delivery of construction goods. “If you ordered steel to build an industrial building on Oct. 1, you won’t get the steel to the site until July of 2022,” says Doughtie.

One possible solution, in motion as we speak, is more onshoring and nearshoring with a greater reliance on backyard countries such as Mexico. “China has had significant labor increases over the past 10 to 15 years,” says Dallas-based Conrad Madsen, SIOR. “When you factor in the logistics costs, port delays, and challenges with China, Mexico is now on the same playing field for manufacturers.”

In fact, Madsen, who is cofounder of Paladin Partners, has personally handled, “dozens of deals” on the other side of the Rio Grande river over the course of his career. “Final product can be in your distribution center in Dallas/Fort Worth or San Antonio within a day’s truck drive from any of those border towns, and in your customers’ hands in literally days as opposed to four to six months from the east.”

That assumes, of course, that labor shortages and rising fuel costs don’t continue to plague the trucking industry. Madsen adds parenthetically that other offshore nations such as Thailand and Vietnam, nations with whom we have smoother relations than with China, could also share in global shifts in supply chain sourcing.

In the meantime, delivery issues can be seen as a boon, at least for brokers, if not for tenants. “In the past 10 to 20 years, most manufacturers relied on just-in-time inventory,” he says. “Now the trend is more toward just-in-case inventory strategies, meaning that they need extra space for additional storage. Most are seeking 10-15% extra inventory to prevent future supply chain interruptions.”

Which, of course, cranks up the demand still further for those landlords. “It’s great news for the industrial sector,” he says.

THE HEADLINES FOR 2022

“Sheds and Beds,” says Madsen frankly. “That’s the headline for next year.” He explains that industrial and residential (including single and multifamily) are the “two most attractive asset classes in commercial real estate for institutional and private capital, far out-distancing office and retail,” both of which are “currently on the backburner. We’re pre-leasing a speculative distribution center just north of the (DFW) airport. We broke ground three weeks ago, and we have countless proposals on the table right now.” He says the owner won’t even consider tire-kickers or anyone looking for less than a 10-year term, “That’s how robust the market is for well-located industrial.”

Office might be taking a temporary pause in Dallas. But the ups and downs of commercial real estate’s fortunes shift from market to market. Unequivocally, for brokers such as Ted Konigsberg, SIOR, president of Infinity Commercial Real Estate in Miami, the 2022 headline will be “Commercial Markets on Fire.”

An influx of corporate tenants is driving what Konigsberg calls “a shift in population and capital flows. In effect, the northeastern markets and—believe it or not—the far west markets, like California, have descended upon us. The investment community perceived our purchase prices, lease rates, and lifestyle as significantly better than what they were experiencing.” The adoption of technology enabling remote work during the pandemic has only accelerated the trend.

CBRE research seems to agree, reporting that in Q2, some 1.1 million square feet of “new-to-market” tenants have indeed stormed the so-called Magic City. In downtown Miami alone, investors splurged to the year-to-date tune of $763 million, with “another $203 million in Airport/Doral and Aventura for a grand total of $966 million, exceeding total investment sales in pre-pandemic 2019 at the mid-year point.”

But don’t go by the headline alone, not without reading down the column. Konigsberg adds that the office market is subject to nuances that are less than stellar. He sees the suburban markets as stronger currently, owing in part to a rise in hub-and-spoke leasing strategies and more remote and hybrid work policies. And older vertical buildings in the central busines district can’t hold a candle to newer construction coming out of the ground. (CBRE reports more than one million square feet has been developed year-to-date in the suburbs.)

In fact, Konigsberg is pushing more into secondary markets due to the tightness of space in Miami, especially due to a lack of developable land. “An enormous percentage of our business now is in secondary Florida markets around the state with good infrastructure and amenities.” He does add, happily, that through his SIOR network, his firm is making further inroads nationally.

CAUTION IS STILL A MARKET FUNDAMENTAL

However, even markets riding a counter-cyclical wave of leasing and investment activity cannot escape the ongoing impact of COVID-19, now in the form of its Delta variant. And while the industrial market by all counts seems to be on an ongoing growth trajectory, “caution” is still the word of the day.

So, not surprisingly, on one hand, Konigsberg says he’s optimistic about the long-term outlook, yet he admits to being “conflicted in the short term.” And the major cause is the ongoing health issues as COVID-19 rolls into more variant strains.

But he’s also concerned about potential changes to interest and cap rates, as well as the cost of funds. “You can buy something at a four cap and still make money,” he says. “But what happens when the Fed starts tightening up the bond market? Between the funding market and our national health situation, there’s too much that’s out of our control to be completely optimistic about the short term.”

Doughtie piles on with other concerns of a political nature: “The outlook really depends on our government and if their policies will help or hurt the markets.” On one hand, he supports the $1 trillion infrastructure bill that’s currently being kicked around inside the Beltway. “It’s something the country needs, as long as the dollars actually go to infrastructure.”

But the $3.5 trillion “Reconciliation Bill,” has him a bit nervous. “It would increase taxes on everyone,” he says, “and that would cause our economy to slow down.”

On a scale of one to 10, he puts his overall optimism quotient at eight. It’s an optimism based more on the private sector than on politicians. “It takes into consideration that the government will continue to make mistakes, and the free market and smart businesspeople will find a way to make it all work.”

Madsen too is conflicted, but his focus is closer to home—on the fundamentals of industrial and office asset classes. Not surprisingly, “in terms of industrial in Dallas/Fort Worth, and on a scale of one to 10, I’m at 11,” he says. “DFW is the most diverse and prosperous economy on the globe today. We’re the catcher’s mitt for the majority of the large corporate relocations, the epicenter for logistics in North America and we see almost 400 people a day relocate here. I would not want to do business anywhere else in the world right now.”

Also not surprisingly, the office outlook for 2022 raises a bit more caution. “Too many firms, especially the Fortune 500, are still trying to figure out how to move forward. They’re scared to make a decision due to liability concerns, which is odd because all of the Fortune 500 paused only briefly on industrial-sector operations because they had to crank up the assembly lines and distribution centers to get their product to the customer. Ultimately, they cannot continue to kick the can down the street concerning their office footprint operations.”

And as long as uncertainty overhangs the office market while the light continues to shine on industrial, “that will be the headline for 2022.”

Source: “Looking Ahead”