Archives for March 2022

Arizona had about 73 adult-use dispensaries licensed when recreational sales began at the start of 2021.

Colorado had 156 licensed retail stores in 2014 when their sales began, according to data from the state’s Marijuana Enforcement Division.

New Mexico, meanwhile, has more than 200 retail premises across the state, Cannabis Control Division spokeswoman Heather Brewer told the Journal – and counting.

But the question is: Will New Mexico’s adult-use retail market become oversaturated?

That depends on who you ask.

Ben Lewinger, executive director of the New Mexico Cannabis Chamber of Commerce, said he isn’t concerned about the state’s adult-use retail market becoming oversaturated.

“New operators are going to bring healthy competition,” Lewinger said, adding that people entering the cannabis industry for the first time are living the “American dream.”

But ask Duke Rodriguez, CEO and founder of Ultra Health – the state’s largest vertically integrated cannabis company in the state – and he’ll give you a different response.

“It’s going to be the New Mexico nightmare,” Rodriguez said.

How many dispensaries?

The state is touting some 228 retail operations statewide as of Tuesday. A retail license holder can operate multiple storefronts on that license.

But pinning down the number of actual physical storefronts is tricky, and the official tally may be undercounting those premises.

When the Journal asked for detailed numbers on the amount of retail premises Albuquerque and Santa Fe currently have, the state sent a document outlining a list of premise locations from legacy operators and newly licensed cannabis businesses.

Making it tougher to navigate, the state’s licensing portal search doesn’t currently include all data for legacy operators and their retail premise locations. Robert Sachs, deputy director for CCD, said in an email that the licensing portal “is expected to be fully operational with all data (including legacy licensees) no later than early April.”

City of Albuquerque spokeswoman Maia Rodriguez, meanwhile, says legacy operators account for 48 storefronts in the city after checking data from the state’s Department of Health. Fifty-five more retail locations have received approval from the city, including some new locations from legacy operators and newly licensed retailers.

Ultra Health, meanwhile, has been tracking numbers on its own. Using data from the state’s licensing portal and accounting for legacy operators with retail locations across New Mexico, Ultra Health estimates that around 311 retail stores are currently licensed in the state. Of that number, 110 are in Albuquerque and 25 in Santa Fe, said Marissa Novel, chief marketing officer for Ultra Health.

“The saturation is mathematically verifiable now,” Duke Rodriguez said. “It’s not going to get better – it’s only going to get worse.”

Rodriguez estimates that with New Mexico’s population and the amount of retail locations statewide, “we are looking at about 12 months out having to pare back close to 100 plus locations.”

‘Ample supply’

Brewer said the division doesn’t expect all to open come April 1.

“Licensees may choose to open some locations on April 1 and not open others until later this year,” Brewer said, adding that, “based on current supply data, the Cannabis Control Division is confident that there will be ample supply – without oversaturation – on opening day.”

Indeed, that is the case for Canvas Organics, who plans to open one store at a time, said co-founder Billy Giron.

Giron, who also opened CBD Boutique in 2015, said he and his business partner were approved for a retail license that will allow them to operate six locations across the Albuquerque area. But the plan is to start with one store, Giron said. The approval needed from the city for zoning delayed the construction and outfitting of their first store but they have remained positive throughout.

“It feels like we’re trying to pull off some sort of miracle right now to make it work,” he said.

Fortunately for Giron, Canvas Organics was able to find a supplier for cannabis products and will have a supply ready for when sales begin. He did say that finding cannabis flower and concentrates has been harder to find with the limited number of producers and manufacturers currently in the state but that as the months go on, he expects the amount of product for retailers to increase.

Rodriguez said smaller retailers have reached out “almost daily” asking for products to outfit their stores. For him, that signals a need for more supply.

“(State regulators) are not going to be the ones feeling the pain,” Rodriguez said.

Brewer said that the way the legislation was written prohibits CCD from putting a cap on future retail licenses and that an amendment to the legislation would have to be made. But it’s possible that the division can up the plant count again if needed.

“We have heard concerns ranging from fears of over saturation to predictions of dire product shortages,” Brewer said. “However, based on the state’s market analysis, the CCD believes that the current supply will be adequate for opening day and that the market will quickly settle into a balance of supply and demand that meets business and consumer needs.”

Source: “New Mexico Cannabis Industry Divided Over Market Saturation Fears“

Service-Oriented Firms Lead the Way While Larger Corporations are Holding Back.

Is the “Great Wait” for things to return to business as usual finally over, or is COVID-19 still rearing its ugly head? Well, that seems to depend on who you are and what your business is. For some SIORs and their service-oriented clients—attorneys, accounts, etc.—things are most definitely at least back to a “new normal.” Though such pandemic remnants as hand sanitizers and masks can still be found in workplaces around the world, and virtual meetings are likely here to stay, people have returned to their offices (if they ever truly left). On the other hand, larger corporations are moving much more slowly, with many taking a “hybrid” approach when it comes to having their employees in the office. And with the emergence of the omicron variant, some that planned a January re-opening are taking a “wait and see” approach—at least for the short term.

“It’s a changed framework,” says Frank Martin, SIOR, senior associate broker with Hall Associates, Inc., in Roanoke, Va. “My clients are not at full density.” As far as his own firm, however, he says “Everyone feels much better from an organizational standpoint to have people under one roof, trading institutional knowledge.”

“Our brokerage team was back operating essentially full-time in the office by May or June of 2020,” says Andy Westby, SIOR, president and managing broker of Goldmark Commercial Real Estate, Inc., in Fargo, N.D. “We have room to distance in our own offices, and our clients generally prefer more face-to-face meetings than virtual interactions.” Agents can set their own schedules, he notes, but adds that, in his opinion, the most productive ones choose to be in the office on a full-time basis.

“Our team is back in the office, and it has been for over a year,” says Adam Kaduce, SIOR, R&R Real Estate Advisors, Des Moines, Iowa. “We have found that having our team members together has brought new opportunities and new customers, and we have not had any health or safety issues.” He adds that his industrial and flex tenants are back in the office, and most never left. “Office is the slowest type of space to return, but 60% of our office customers are back in the office.”

“My people are back,” asserts John Culbertson, SIOR, manager at Cardinal Real Estate Partners, LLC, Charlotte, N.C. “Most people I know in commercial real estate—developers, investors, brokers, attorneys—the breadwinners, the stars of the office, never left. It seems like the more salaried types in supportive, administrative roles, left and worked remotely, but if it’s a healthy, small- to medium-sized business, they are back in the office.” He adds that his large headquarters and corporate clients, like Bank of America and Wells Fargo, are “not back to normal,” but that their leadership is.

“We don’t have a protocol; everyone can do as want they want,” shares Hans-Ulrich Berendes, SIOR, with Berendes & Partner Consulting in Hamburg, Germany. “But bigger companies have to be more formal. Siemens says people can choose two to three days to stay at home. Others say part of the company can come in Monday-Tuesday, the others Wednesday-Thursday, and organize day-per-day.”

Louise Frazier, SIOR, president of Blue Ridge Realty, Inc., in Knoxville, Tenn., says “The Great Wait” is most definitely not over. Her company manages and leases about 600,000 square feet of Class A office space in Knoxville, and about 50,000 square feet of specialty retail centers. Of those, she notes, “There are about 30% of the employees actually in occupancy in those offices, although the properties are 95% leased at this time.” Most of her tenants, she adds, are regional offices or headquarters for major corporations. However, the trend for smaller tenants in those buildings is to be almost entirely back at the office full-time.

“Many [larger clients] had recently planned for most of their employees to return in January (after postponing a return to the office in September) on a flexible basis,” she continues. “However, the omicron variant is starting to wreck those plans for the corporate user. I think we are going to see some version of the work-from-home stretching much into 2022.”

“Our business is a people business,” notes Grant Pruitt, SIOR, president and managing director of Whitebox Real Estate in Dallas. “It’s a real struggle to be able to communicate in a virtual environment.”

Law firms are in a similar situation, he adds. “In Houston, 53.6% of firms are back in the office, but it’s 77% of law firms,” he shares.

Interestingly, Colliers seems to be the lone CRE firm of those contacted that is not fully back in the office. “Colliers has very strict protocols,” shares Jeffrey Weil, SIOR, executive vice president in Walnut Creek, Calif. “In the beginning, we totally shut down, and re-opened under strict rules—masks in the office, social distancing, temperatures, extra cleaning, a health check—and some of us have HEPA filters running 24/7. There are no visitors allowed—even now. Broker open houses, which had been stopped for a while, are now ‘distant,’ with masking.”

While things among tenants loosened up last summer, that changed with the delta variant, he says. In San Francisco, Weil notes, 25% of employees have returned, with some other cities in the 35%-40% range.

WHAT’S ‘NORMAL’ NOW?

Even in markets where many clients are back in the office, experts note that things are different. “Corporations will continue to transition to a hybrid environment and move away from the totally open concept—which has been the trend for the past 15 years—to a blend of collaborative space and private offices,” says Frazier. “Many companies may keep their current footprint but renovate to accommodate the ‘new normal.’ All companies are feeling pressure to allow continued flexibility in work schedules, but they need to see an increase in productivity.”

“I’m building a new building for a shipping industry client and we’re discussing the fit-out—how many cells, group rooms, [and] social space. It is changing,” says Berendes. “People want to have meeting possibilities, so it has to be flexible. Desk sharing will be a real topic for the future, so you do not go every day to the same room and the same desk. You may have to go on the internet to make a reservation. Companies calculate about half their employees might be at home two days a week.”

“I’m working on a Class-A office deal now with a large consulting firm, and the floor plan almost feels like a coffee shop,” adds Culbertson. “What they’re trying to do is create a place for people with flex days so when they want to be in the office it’s very informal—lots of food, lots of services.”

“Most of the employers in our market have re-opened their offices and are having employees work in the office full-time, or on hybrid schedules,” says Kaduce. “It appears that will be the new normal, with employees having greater flexibility on when they are in the office. Our customers have embraced a variety of hybrid models, but most require attendance in the office two to four days per week.”

Most of his meetings, he adds, have returned to in-person, “but we have embraced Microsoft Teams for meeting with those customers located out of town.” He says his office has also increased usage of Teams for sharing documents and presentations “to create more collaboration with team members and customers located in different locations,” and will continue to do so.

“I think we are back to a new normal,” says Westby. “We do have some clients that now prefer to meet virtually or are more open to handling business or contracts electronically. We have a full set of tools available to us now to conduct business [both] virtually and in-person that were not perhaps as commonly used ‘pre-COVID-19.’ We are also experimenting with new marketing approaches that may reduce the need to physically tour spaces—which could help speed deals up and qualify real prospects from pretenders faster than before.”

“DocuSign is huge,” notes Weil. “Virtual 360 tours are huge. There’s less use of hand sanitizers. There’s going to be more use of Zoom and Microsoft® Teams, but not exclusively.”

He says he got a new laptop because of COVID-19, and now has a state-of-the-art home office. “Our dress is more relaxed,” he adds. “I used to wear a coat and tie in meetings; now, it’s just a sport coat. I’ve even gone to meet people wearing jeans.”

“I would say we’re back to a new normal,” says Martin. “We have a different mask protocol—in the office with a mask, and maybe the option for people to work from home more than one day a week if they feel it’s necessary.”

In addition, he says, smaller operators (2,000-3,000 square feet) may have some uncertainty on how to use their space going forward, although “that’s not true with the ones that are growing.”

LOOKING AHEAD

It’s clear that some of the changes in CRE that COVID-19 has “wrought” have become a permanent part of the landscape, according to SIORs. For example, “Every lease done in the last year and a half has added pandemic language for force majeure [clauses]; that will stay with us forever,” says Martin.

“I think it’s really smaller things—hand sanitizers, having more day porters in terms of cleaning staff; I don’t know if we’re ever going to go back to being OK with filth,” says Pruitt. “Air filtration systems are here to stay, with cleanliness as a general rule of thumb.”

“We are watching the next generation of design trends and their impact on office space design,” adds Kaduce. “With hybrid office occupancy, the outcomes that customers are looking for from their space have changed. We are seeing spaces that look more like airport lounges, with a variety of drop-in spaces and isolated spaces for heads-down and collaboration. Many of these don’t have reserved workspaces for every employee, and fewer private offices are planned.”

With virtual meetings becoming the everyday norm, internet security will become “a great problem for the future,” says Berendes. “I had a conference call this morning, and after 10 minutes they asked if I was having problems with my computer,” he shares. With continuing health and safety concerns, he adds, he predicts offices becoming “smarter,” with technology, for example, that will enable you to open a door without touching it.

Weil agrees. “We’re coming in with a lot of safety—health ventilation, filter systems, not having to touch a door to get in, or elevator buttons—and taking advantage of technology to make them healthier and safer buildings,” he says.

Frazier says that the recent growth in the power of her clients’ employees may have sprung from the pandemic, but it is going to continue in the future. “In discussions with the managers of these corporations, they do not think that employees are at their most productive continuing to work solely from home, but they feel compelled to have flexibility in order to keep employees,” she notes.

Frazier adds that at some point there is going to be a demand from the corporate executives to return to pre-pandemic status, but flexibility and transparency will need to remain. “Employees will want to see that the company leaders are also coming into the office to work and not Zooming in from their luxury vacation homes,” she observes. “The sense of fairness for workers has been heightened during this chaotic pandemic period, as have the issues of equity and inclusiveness. These are fundamental changes that are going to impact the office environment moving forward.”

Source: “The Great Wait? Or The Great Return?“

Landlords and Developers Adapt as COVID-19 Rearranges CRE Landscape

As the pandemic heads into its third year, multiple asset classes in commercial real estate are undergoing profound change—some due to COVID-19, others as an acceleration of trends that were already underway. And while industrial, multifamily, self-storage, and life science are thriving, the outlook for the hospitality, retail, and office sectors is much murkier.

“Significant change in commercial real estate across multiple industries is evolving and has accelerated the need for strategic changes,” affirms Scott DiGuglielmo, SIOR, vice president of brokerage at Burns Scalo Real Estate, a Pittsburgh boutique firm that develops, manages, leases, and provides third-party real estate services across multiple asset classes. “So it’s important for property owners and operators to have a long-term view.”

Some investors and developers are adjusting to that changing landscape by rethinking strategies to reinvigorate cash flow, investing in upgrades to existing assets or repurposing those assets to meet the increased demand in the multifamily, life science, and industrial market segments. For the hospitality industry, that means converting some struggling hotels and motels into multifamily rental properties, creating affordable workforce housing. Retail conversions of malls and strip centers are gaining traction, and although many have encountered zoning challenges, some municipalities are re-assessing their stance to allow for alternative uses as they face the reality of lost tax revenue.

THE OFFICE MARKING IS EVOLVING

For the office sector, the persistence of COVID-19 variants continues to delay a return to the office, but the pandemic had already permanently altered how workplaces will operate post-COVID-19—with a hybrid model the most likely solution for many companies. DiGuglielmo believes this will present problems for a significant portion of the office market, particularly for older buildings. “With so many people working from home, the smartest companies are leveraging their real estate to create a place where their employees want to be,” he says. “If you’re working from home in a beautiful office and your corporate office is in a Class B or C building, why would you want to go back?”

DiGuglielmo says companies are using high-end amenities such as cafés and tenant lounges as well as natural light, open space, and sophisticated air filtration systems to produce a work environment that appeals to employees. “We’re seeing companies take less square footage (10% to 15%) while they figure out the hybrid model, but they’re willing to pay the higher rent to get into a new building to attract and retain the best talent,” he says. As for the older buildings, DiGuglielmo thinks those properties will be difficult to lease, even when the pandemic eases. “I believe there will be a massive bifurcation between the new and old office product, and I think owners of Class B and C high-rises in downtown Pittsburgh may be compelled to convert to multifamily.”

Although the trend began before the pandemic, office conversions are picking up steam as the market responds to COVID-19. Since 2018, 45 office properties totaling 11.3 million square feet (MSF) in the 10 largest markets have been converted to industrial product, according to a Q3 2021 report by Newmark. CBRE reports that there were more than 8.6 MSF of office conversions in the pipeline in New Jersey in late 2021, including 4.4 MSF of residential and 2.3 million of industrial. And with life science demand exploding in markets like Boston/Cambridge, the San Francisco Bay Area and San Diego, office-to-lab conversions represent more than 20% of total lab space under construction in six out of the 11 largest U.S. life science markets. There was 8.5 MSF of office-to-lab conversions planned or underway in 2021 in Greater Boston alone, fueled by average asking rents of nearly $100 per square foot, according to a Newmark report.

The draw of life science is spreading to other markets as well. DiGuglielmo’s firm, which primarily develops Class A office, recently switched gears during the spec construction of a 155,000 square foot Class A office building. “The University of Pittsburgh came to us and said, ‘We love your building and all the amenities, but you’re building the wrong building. We need wet lab space.’ So we made the pivot and converted the building to 100% wet lab life science building.”

RETAIL CONVERSIONS

On the retail front, the debate over the practicality of mall conversions has garnered the lion’s share of press, but high-vacancy strip centers are also being converted to other uses. “We’re seeing an interesting phenomenon of Class B and C retail being converted into flex/service centers, depending on the functionality of the building,” says Sarah LanCarte, SIOR, president of LanCarte Commercial in Fort Worth, Texas. “Typically, it’s blighted centers in cities that are allowing for conversion because the properties are sitting vacant and not doing much for the city, so they’re willing to work with us on zoning so we can bring new life to the area.”

LanCarte recently worked with developers on two such projects: a 57,000 square foot center in Fort Worth located within one mile of the interstate that was 70% vacant, and a 40,000-plus square foot strip center in Dallas with less vacancy but expiring leases. Both were purchased by developers who re-purposed the assets into service-oriented product that will target tenants like plumbing and electrical contractors or other small industrial users, while retaining some solid-credit retail tenants. “Investors are seeing this as an opportunity because these assets are viewed as traditional retail, but the acquisition pricing is below that of industrial, so there’s a serious value-add component.”

CONVERTING MALLS AND OTHER LARGE SITES

The idea of converting malls to industrial uses has always been enticing, given their proximity to population centers and connectivity to roadways and infrastructure, but the reality of such conversions has always been more complex, with numerous well-documented challenges. Still, the repurposing of malls into fulfillment centers, housing, medical uses, or mixed-use has been gaining momentum, as evidenced by 2021 deals like the 92-acre Paradise Valley Mall in Phoenix that will be transformed into a mixed-use development comprised of 3.25 MSF of residential space, office buildings, and restaurant/retail space.

Shopping malls are not the only large sites that are being re-purposed into higher and better uses. David Robinson, SIOR, is principal of the Montrose Group in Columbus, Ohio, which helps national developers prepare sites for industrial, office, and multi-family development. Montrose is working with Atlanta-based Stonemont Financial Group to redevelop the Columbus Steel Castings factory, a 70-plus acre urban infill site in Columbus. The site will be redeveloped for approximately 860,000 square feet of industrial, although the specific use had yet to be determined at press time. “The site has a strong history of manufacturing, but the logistics market is really hot and it’s close to a large population base in Columbus, so it could be either,” says Robinson. “Breathing new life into former industrial sites makes total sense from a real estate perspective, with a location with dual rail service and a ready workforce, serving as a critical job center in a distressed neighborhood.”

In redeveloping large sites, Robinson emphasizes the need for public-private-partnerships that may include local and state site development grants (including brownfield remediation), property tax abatement, and infrastructure financing. “Unless you can develop an approach where the local governments and the schools can gain something from the development project, it’s very rare that it can get the necessary abatements because redevelopment sites can be very complicated.”

THE RESURGENCE OF RAIL

In addition to the repurposing of assets, there are other shifts underway in the world of development, including an increased focus on rail. “Rail is becoming the flavor of the day again, and more companies are now looking at it as a significant piece of their intermodal transportation model,” says John Colglazier, SIOR, partner at NAI Partners’ San Antonio office.

He cites issues within the trucking industry—a lack of drivers due to both wage and benefit competition from Amazon and major retailers, as well as the government crackdown on substance abusers in the industry, which has sidelined over 60,000 drivers since 2020. And as traffic issues in major metros mount, rail offers a more timely alternative.

Colglazier’s firm recently partnered with developer RCR Rail Co. to develop a 750-acre rail-served logistic/industrial park with dual rail service in Taylor, Texas, located adjacent to Samsung’s planned $17 billion chip plant, 35 miles from Austin’s central business district, between the DFW Metroplex and Mexico. The master plan calls for 13 warehouse buildings, with eight of the warehouses at 500,000 square feet. The first building, a 350,000-square-foot spec rail-served distribution building, will deliver in Q4 of 2022. “Historically San Antonio has had some rail positions, but Austin has not, so this will basically serve the rail needs for central Texas,” says Colglazier.

As the CRE industry continues to undergo change, successful owners and developers—as well as the brokerage industry—will adapt to meet those challenges and continue to thrive.

Source: “A Changing Landscape“