Archives for January 2022

Owners and developers will need to make significant changes to their properties.

The electric vehicle market is charging up, as Barron’s notes. GM, Ford, Honda, Renault, Volvo, and even consumer electronics giant Sony are in the race. The near future looks to be more than mentions of Tesla.

Commercial real estate needs to pay attention because there are some significant impacts on building and facilities design that mean special considerations and, for existing properties, changes that will likely be needed.

Whether consumer vehicles that workers or customers would bring to a parking lot or delivery trucks that needed charging, there are practical implications of electric vehicles.

“For most commercial and corporate occupiers space impacts should be minimal. EV charging will likely occur in already designated parking spaces converted for use,” Chris Willis, vice president at Turner & Townsend, tells GlobeSt.com. “In older urban centers where space for parking is already limited, the desire for charging from consumers may lead to some reduction in attractiveness. Commercial charging is likely to occur either as additions or conversions of existing fuel station networks or in new-build sites.”

Then there’s delivering the necessary power. “The minimum power requirement will be 100 kilovolt-amps or more, assuming 10 parking spots are dedicated for the commercial installation of chargers,” Hemal Doshi, president of Universal Green Group, tells GlobeSt.com. A kilovolt-amp represents the power being used in an electrical system and is less than the available power because of efficiency losses. At best, 100 kilovolt-amps would mean power of 100 kilowatts. More likely, the necessary power in kilowatts would have to be higher.

Charging takes time. “It can take 6 to 12 hours to charge a Tesla on a Level 2 (240-volt) home charger,” says Adam Lubinsky of design firm WXY Studio.

Although the fastest commercial chargers can get the job done in far less—15 to 20 minutes according to Doshi, depending on the type of vehicle, faster charging means more available power.

Charging also costs money.

“Electric vehicle charging adds significant load to properties and increases demand charges, which can represent as high as 70% of a commercial owner’s energy bill,” says James Geshwiler, chief strategy and investment officer at Catalyze, which consults in adding renewable power generation to properties. “In the case of a multi-family or mixed-use property, when everyone comes home from work and charges their vehicles at the same time, the demand charges spike. Converting the blueprint for commercial property to accommodate electric vehicle charging can be deceptively challenging and requires significant scale to be successful.”

And, as Willis adds, “Advancements in technology may require future upgrades to charging docks, which should be budgeted so the equipment does not become obsolescent.”

“Monetizing this real estate use or defraying costs for charging is critical to real estate,” Lubinsky says.

With current technology, electric trucks bringing loads will likely have to recharge before returning to their origin.

Power requirements in urban centers can become even trickier as the nearest substation may or may not have the capacity to deliver what multiple companies will all need.

Source: “The Future of Electric Vehicles Poses Challenges for CRE“

“The signals provided by the Dodge Momentum Index continue to suggest that construction activity will improve in 2022—and, more importantly, that this growth will be more balanced than what was seen in 2021.”

Planning for commercial and industrial buildings reached 13-year and 14-year highs, respectively in the Dodge Momentum Index.

Throughout the year, the overall Momentum Index increased 23%, the strongest annual gain since 2005 despite the lingering risks of COVID-19 and low demand for some types of nonresidential buildings, said the Dodge Construction Network, which prepares the index.

“The signals provided by the Dodge Momentum Index continue to suggest that construction activity will improve in 2022—and, more importantly, that this growth will be more balanced than what was seen in 2021. However, the ever-present risks of the pandemic and tight labor force will work to counter these trends, leading to moderate growth over the new year,” DCN forecasted.

December, though, saw some backsliding.

The Index fell 3% in the last month of the year to 166.4 (2000=100), down from the revised November reading of 170.7 with commercial planning down 4%, and institutional planning slipping 1%.

In December, a total of 21 projects with a value of $100 million or more entered planning, according to DCN.

The firm said the leading commercial projects were the $300 million OKANA Resort in Oklahoma City, OK, and the $200 million Project Tarpon Amazon distribution center in Daytona Beach, FL with the leading institutional projects being the $250 million University of Michigan Detroit Center for Innovation in Detroit, MI, and a $150 million laboratory in Lexington, MA.

The December decline followed a falloff in November, the company’s research showed.

Total construction starts fell 14% in November to a seasonally adjusted annual rate of $867.8 billion.

The short-term outlook remains cloudy due to continued escalation in material prices and labor shortages, said Richard Branch, chief economist for Dodge Construction Network.

He added that while construction should see some reprieve in 2022, these challenges will restrain the industry’s ability to fully capitalize on both the large number of projects in planning and funding resulting from the infrastructure package. The result will be moderate growth in construction starts over the near-term, according to the report.

Nonbuilding and nonresidential building starts bore the brunt of November’s decline, falling 30% and 21%, respectively, after seeing sharp increases in October as three large projects broke ground. Residential starts gained a modest 3%. Without October’s large projects, total construction starts in November would have increased by 5%.

Source: “Commercial, Industrial Building Planning Highest In Over A Decade“

“Low yields in other asset classes in combination with the ability to increase rents acting as a partial inflation hedge should continue to drive demand for investments but not enough to dampen CRE investment.”

The CMBS market enjoyed a strong 2021, buoyed by a high number of single-asset/single-borrower and CRE collateralized loan obligation transactions⁠—and the pace is expected to continue well into this year.

A new analysts from DBRS Morningstar predicts that despite the emergence of omicron, “continuing economic resilience in 2022 will buoy US real estate fundamentals,” with the industrial and multifamily sectors poised to outperform office, retail, and hotel thanks to gaining e-commerce tailwinds and the sky-high costs of homeownership, which have eluded many would-be buyers.

“As more workers return to the office, demand for office space will improve and hotels will see higher occupancy from an increase in business travel,” Morningstar’s Steven Jellinek and Erin Stafford write. “More efficient use of retail space, particularly in grocery- and discount-anchored centers, as well as a modest construction pipeline, will aid the recovery.”

While rising inflation could threaten growth, Jellinek and Stafford opine that the fundamentals behind recent hikes suggest the inflationary environment could moderate over the next year, relieving pressure on the Fed to increase rates and risk contraction in 2022. The analysts also predict that as consumer spending notches closer to pre-pandemic levels, the supply chain pressures that led to price increases should also moderate.

DBRS Morningstar predicts that near-term heightened inflation as the Fed tapers asset purchases will likely push both long- and short-term interest rates higher; “however, the outlook for rates remains low compared with historical levels,” according to Jellinek and Stafford.

“Low yields in other asset classes in combination with the ability to increase rents acting as a partial inflation hedge should continue to drive demand for investments but not enough to dampen CRE investment,” they write. “With strong investor demand and abundant capital flow into the real estate sectors, deal volumes are likely to increase further.”

Morningstar projects a 10% to 15% rise in CMBS originations in 2022.

“We expect origination volumes to remain elevated through 2022 (building on the 2021 increase) as borrowers lock in low rates ahead of the Fed’s tightening, which we don’t think will be prolonged enough to dampen investor demand for floating-rate SASB or CLO transactions,” Stafford and Jellinek write.

Source: “Why the CMBS Outlook Remains Strong for 2022“

Innovation and commercial real estate (CRE) go hand-in-hand.

Every businessperson understands that innovation is essential. In commercial real estate, however, this principle is especially true. Since early 2020 when the coronavirus pandemic rocked the commercial real estate world, professionals in the industry came up with innovative ideas for not only surviving, but thriving. That kind of cutting-edge innovation will become more and more necessary in the future of the industry.

Real-estate professionals who want to thrive in the long term will have to become the most innovative in their field. Each year, the need for innovation only grows stronger. Luckily, the commercial real estate industry is capable of keeping up.

Sustainability needs will increase every year

As climate change causes harsher weather and the world races to become more and more sustainable, the commercial real estate industry will have to do its part. Both investors and tenants will be looking for companies with strong sustainability metrics.

Real-estate professionals will also need to find ways to keep up with new sustainability initiatives to remain profitable. A 2020 study found 40 percent of real-estate professionals saw increasing demand for sustainability among tenants, while 47 percent had seen increasing sustainability demand among investors.

As advancements in sustainability technology improve, real-estate professionals are likely to lose both investors and tenants to their competitors if they can’t quickly implement the latest tech.

Additionally, the requirements for sustainability may increase over time. Many U.S. states have implemented laws requiring commercial buildings to meet certain standards. California passed a law requiring new buildings to operate through solar power.

If you’re operating an older building that does not use solar power, you’ll soon be competing with solar-powered buildings, as consumer trends suggest that tenants will be more likely to choose the solar-powered options.

Other sustainability initiatives require companies to pay large fines if they do not meet certain standards. Failure to keep up with these standards could have a huge impact on the profitability of your investment. As the world’s goals for sustainability become more and more ambitious, real-estate professionals will have to become ambitious as well.

The cultural shifts from the pandemic require

A 2020 report from commercial real estate company JLL found four main factors are impacting the change in need for office space: remote work, office design, commuting patterns and technology.

Many people expected remote work to change the commercial real estate industry — however, some of the changes are unexpected. Rather than everyone working at home, many companies are only partially remote. This requires office space to be optimized for video calls. The traditional open floor plan makes video calls more difficult, so office spaces will require more enclosed space than before.

Additionally, there will be greater demand for smaller offices, as companies have fewer employees on site. This allows commercial real estate investors to divide up their buildings and provide smaller spaces to a greater number of tenants.

Commuting patterns are also shifting. During the pandemic, many people moved away from cities and toward more suburban or rural areas. This means there will be more demand for office space in these areas.  Commercial real estate investors should look at less centralized locations for their new investments.

Demand for multi-functional places will require creativity

One of the largest upcoming trends in the commercial real-estate industry is the need for multifunctional buildings. As consumer trends shift, real-estate professionals will have to be creative to create buildings that can operate in many ways.

Coworking spaces will be especially popular as remote work continues, but remote workers will also want to be near others during the workday. It’s not enough to simply call a former traditional office space a coworking space and expect customers to come flocking.

To be profitable, you must take into consideration the interests of workers. They’re looking to be social, but not distracted. Unlike in traditional office spaces, employees don’t have to be in coworking spaces, so your space must be enticing enough that people choose to be.

Successful commercial real estate buildings of the future will likely have the capability for tenants to rent office space, retail stores, yoga studios, salons and any other type of business. Often these buildings may even include residential living. Real-estate investors should look at investing in properties where mixed-use is an option because it will be the most profitable.

Automation technology will be a requirement

Automation technology will continue to advance in the coming years. It’s not enough to adopt technology that is already available and stop paying attention as new technology enters the market. Commercial real estate professionals will have to remain ahead of the curve in adopting new advancements in automation technology to compete.

The most successful real-estate companies to date have implemented new technology before their competitors. As the rate of advancement in technology speeds up, those in the CRE industry should become well-versed in the new tech tools available so they can advertise the upcoming possibilities to customers.

Source: “Why the Need for Innovation in Commercial Real Estate Will Only Increase With Time“