Archives for July 2023

JLL’s recent chart of the week, showing gross office leasing activity, presented what might be a surprise given the doom and gloom the sector faces. Leasing activity improved in the second quarter with the fastest growth rate since 2021 Q2.

However, tempering the good news somewhat is context. The 41.9 million square feet of leasing, is still not at the 47.9 square foot level of 2022 Q2. Compared to pre-pandemic 2019, it is 27% lower.

Out of 53 tracked markets, 35, or 66%, saw quarter-over-quarter growth. Since Q1 2019 where 74% of markets saw growth, only in Q1 2021 was a greater percentage, 72%, of markets growing.

Helping to drive the growth was an increase in signed lease transactions for more than 100,000 square feet. Net absorption is still negative but has decelerated. Also, the pace of sublease vacancy additions has begun to slow.

Jacob Rowden, manager of JLL Research attributed the growth to several reasons, “the primary being that we saw large-scale transactions drop to the lowest rate throughout the pandemic in the first quarter, but that’s started to bounce back in Q2. In Q1 we had 38 leases over 100,000 square feet and for Q2 we have seen 46.” He said the number would likely climb through retroactive data collection.

But another important factor is flight to quality. “The dominant trend during the pandemic has been for tenants to upgrade into higher-end space when leases have expired during the pandemic, and that continues to be the case in Q2,” Rowden tells GlobeSt.com. “Buildings constructed since 2015 saw 9 million square feet of positive absorption in Q2 and have generated 112.5 million square feet since the pandemic began. As tenants have become more defensive over the past 12 months, we are seeing more renewals, but it remains a very strong trend even in recent quarters.”

Not all growth was equal. “Ranges can be very wide especially in smaller markets where large transactions took place during Q2,” Rowden says. “For instance, the fastest growing market quarter over quarter was Baltimore at 182%, but to get a sense of how it’s spread out there were six markets that grew by more than 100%, five that grew by 50% to 99%, seven that grew by 25% to 49%, and 17 that grew by 0% to 25%. On the declining side, eight markets fell by 0% to 25%, seven fell by 25% to 49%, and three fell by more than 50%, the highest decline being 75%.”

“We also see office attendance continuing to improve and a large volume of employers issuing return-to-office mandates, which have impacted at least 1.5 million office-based workers in the U.S. already this year and will take effect for at least 1 million more through the end of the year,” he said. “We think that vacancy rates in the U.S. will peak over the next 12-24 months and then begin to improve. Construction starts have declined by about 80 percent over the past 12 months, so that is going to significantly decrease the amount of new supply delivering to the market in 2-3 years. At the same time, we’re seeing a record volume of inventory removed for conversion, demolition or redevelopment, which will potentially lead to reductions in U.S. office inventory as deliveries slow.”

Some good news for property owners: JLL hasn’t seen a large move for price bargain hunting on the art of tenants “because we’re also in a situation where landlords are less able to fund large tenant improvement allowances, which increases out-of-pocket costs for the tenant if a buildout is required,” Rowden says. “One area it is cropping up is that we’ve seen more leases signed in the last nine months in some of the recent sublease listings, many of those spaces strike a balance between quality newer construction with discounted rates because of the sublease.”

Source: “Office Leasing Posts Fastest Growth Rate Since 2021“

Lending in the commercial real estate shrank for the first time since 2021, a sign that higher mortgage rates and tighter credit conditions are weighing on the sector.

Outstanding commercial real estate debt dropped to $5.44 trillion in June, marking the first drop in commercial real estate lending recorded in two years, according to Refinitiv data cited by Capital Economics.

That’s largely due to the overall slowdown in lending on multifamily properties, with demand slumping as rates rise. Multifamily property debt fell by $21.6 billion last month, the research firm said.

Still, commercial property debt saw sluggish growth in June, increasing by just $7.4 billion last month.

“CRE lending is likely to remain weak in the second half of 2023,” Capital Economics assistant property economist Charlie Cornes said on Monday, pointing to rising delinquencies on US commercial mortgage-backed securities.

The delinquency rate for loans back commercial mortgage bonds rose for the second-straight month to 1.91% in June.

Banks began to pull back on lending in the aftermath of failures of several regional lenders earlier this year. In April, credit availability for small businesses saw its largest drop in two decades, per Morgan Stanley data.

That could spell trouble for the commercial real estate sector, which has struggled with anemic demand and has around $1.5 trillion in debt approaching maturity in the next few years.

Those factors could lead to a rise in commercial mortgage defaults experts say, as property owners feel the pain of tighter financial conditions. Commercial real estate prices could plunge as much as 40% from their peak, Morgan Stanley previously estimated, which would mark an even more severe crash than what was seen in the 2008 financial crisis.

Source: “Commercial real estate lending fell for the first time in 2 years last month as credit conditions tighten“

The U.S. economy isn’t the only thing unwilling to capitulate despite sharply higher interest rates.

Commercial real-estate prices have been heading lower in the wake of the pandemic and the Federal Reserve’s inflation fight, but the bulk of the pain still looks poised to come, according to Morgan Stanley analysts.

ith workers only venturing into the office a few days a week, it’s no surprise that spending is being re-directed to retail districts closer to where people live, according to a new report from CBRE.

This has resulted in an uptick in CBD retail availability in US central business districts, which now exceeds that of suburban space for the first time since 2006.

Suburban availability has fallen, according to the report, upending a well-established pre-pandemic trend whereby urban and suburban fundamentals were closely correlated, the report said.

Analysis of consumer data from Placer.ai suggests that urban and suburban malls can continue to coexist as they recover from the effect the Covid pandemic had on shopping patterns.

“Foot traffic data indicates that there is plenty of room in the retail space for both types of venues,” according to that report.

Still, Matt Hammond, Partner / SVP Brokerage, Coreland Companies, tells GlobeSt.com that downtown environments have faced a variety of post-pandemic challenges significantly affecting CBD shopping patterns.

“Retailers and restaurants need daytime and nighttime traffic,” Hammond said. “They depend on employees going out to lunch, as well as professionals living in the area to enjoy evening dining, events, and shopping.

“This flight from CBDs, as well as ongoing security concerns in prominent areas, has deterred retailers and restaurants from expanding. There was a time when downtown had the best new restaurants and most unique environments, but this is no longer the case.”

For the past decade, opportunistic owners of suburban centers have invested in experiences and creating destinations, he said.

“Elevated design with a larger focus on outdoor dining areas, community art, and gathering spaces. Recognizing that restaurants can be a significant draw, they often have a distinctive design and are often centrally positioned or clustered to create synergy.”

Simon malls in New England has made similar changes.

Laura Schwartz, Simon Regional Vice President—Leasing New England, tells GlobeSt.com that Simon has adapted to a shift in consumer desire for experiences at the malls and outlets other than shopping.

“With workers operating on fully remote or hybrid models, they’re seeking convenient weeknight and weekend activities for the entire family much closer to home than previously,” Schwartz said.

“We’ve implemented robust programming schedules across our suburban centers in the Greater Boston area that include free and low-cost events appealing to a variety of audiences which have seen extremely successful turnout–for example, at Burlington Mall, visitors have enjoyed Salsa dancing lessons, fitness classes, a cornhole league, and special events throughout the summer at The Park, the shopping center’s new green common space.

“Accommodating an increased demand for sit-down food & beverage experiences has also been paramount as we have eagerly acclimated to this shift.”

Molly Morgan, Executive Vice President-Retail Leasing at JLL, tells GlobeSt.com that as millennials and Gen Z start families of their own, they are leaving in-town neighborhoods and heading to the suburbs.

“However, they still want the great chef-driven restaurants and trendy retail they had in town.  Developers have created these mixed-use/ suburban downtown areas – such as at Halcyon in Alpharetta, Ga. and Birkdale Village in Huntersville, N.C. – that create an experience these hip retailers and restaurants are looking for, and they are seeing great success.

It’ll ‘Never’ Be Five Days a Week

Gary Glick, partner, Cox, Castle & Nicholson, tells GlobeSt.com that although workers are slowly migrating back to in-person work, it has been slow and will probably never be back to five days a week.

As a result, retail businesses, especially restaurants, fast food providers, bakeries, and coffee shops located in downtown business districts have been significantly affected.

“In many cases, these businesses have failed due to the lack of a customer base,” Glick said.

“Whether this business comes back will depend greatly on how quickly, if ever, business workers return to their offices, or whether many downtown office buildings are turned into multifamily uses.

“The corollary is that suburban retail is doing much better due to [remote business workers]. The longer workers remain in their suburban neighborhoods working remotely, the greater the number of shoppers for local businesses, especially food.

“This is a situation that will play out over the next few years as the downtown office markets stabilize and reach what will be a ‘new normal.’ ”

Brandon Svec, national director of US retail analytics at CoStar Group, tells GlobeSt.com, “Suburban retail has benefitted from a few factors including post-pandemic migration patterns, the growth of the (increasingly suburban) millennial household, and the significant rise in spending seen coming out of the pandemic.”

With new supply still minimal and strong demand from tenants across a range of sectors, suburban availability rates have declined to a more than 15-year low of 4.6%, a contraction of over 1.5% since 2020 alone, Svec said.

One often overlooked factor, especially in light of recent Bed Bath and Beyond and Tuesday Morning headlines, has been the pullback in tenant move-outs (or store closures), Svec said.

“The pace of tenant move-outs has declined to an annual rate of 222 million square feet per year since the start of 2021, a significant reduction from the over 330 million square feet of annual tenant move-outs recorded from 2017-2020.”

Consumers ‘Cocooning’ Even More

Rob Ury, Partner, Beta Agency, tells GlobeSt.com that in areas such as Greater Los Angeles, where traffic is a daily consideration, the pandemic’s upending of the traditional 5-day work week has resulted in consumers cocooning even more within the areas surrounding where they live.

“By not going into the office five days per week, consumers are saving on traditional ‘break’ expenses like $6 lattes and $15 salads that may have been previously part of their Monday through Friday routine,” Ury said. “They’re using some of this extra cash on retail therapy.”

With online shopping and returns continuing to rise and some of the internet’s biggest retailers – like Amazon and Target offering curbside pickup and convenient returns for online purchases – consumers have more reasons to visit neighborhood centers anchored by tenants like Whole Foods and Target which translate to additional spending; not just at those anchor stores but at surrounding stores as well.

“Consumers continue to crave convenience,” Ury said. “Shopping in urban cores in cities where consumers don’t heavily rely on mass transit – such as Los Angeles – was never especially convenient unless the consumer was already there for another purpose, such as their office.

“Neighborhood and power centers with surface parking are far more convenient than a parking garage or structure in an urban core.”

Doug Healey, Senior Executive Vice President – Leasing, Macerich, tells GlobeSt.com that Macerich’s Regional Town Centers in attractive suburban markets are firing on all cylinders in the current environment.

Many of the highest-performing properties across the Macerich portfolio are set in buoyant suburban markets – from our #1 center in terms of sales per square foot, Broadway Plaza in San Francisco’s East Bay community of Walnut Creek, to Washington Square outside Portland and Tysons Corner Center outside Washington, D.C.

“Post-pandemic, people are demonstrating entrenched preferences to continue shopping, dining, and finding great entertainment close to home,” he said.

“Hip retailers are certainly mindful of this ongoing trend and continue to select our outstanding suburban properties. Great names opening soon at Tysons Corner Center alone include ARC’TERYX and Dr. Martens, on the heels of the new and expanded Apple flagship that just opened in May.”

Dining and Shopping All Times of Day

Carina Donoso, vice president of retail experience & incubation at WS Development, tells GlobeSt.com that, post-Covid, its spheres are tighter; people are staying closer to home, which has translated to more people dining and shopping during all parts of the day. This is ramping categories like fast casual, coffee, services, and uses that provide communal spaces for professional and casual meet-ups.”

Shlomo Chopp, managing partner of Terra Strategies, tells GlobeSt.com that before investors start making multi-year investment decisions based on trends, they should consider that the resurgence of the suburban shopping center may not in itself be a secular trend, but rather a reflection of where people live.

“The consistent theme always will be localization and meeting the consumer wherever they may be,” Chopp said.

“The future of shopping centers combines e-commerce fulfillment and stores so that the savings of distance is combined with providing the consumer with what they want when they want and how they want it.”

Wickham Zimmerman, CEO of OTL, tells GlobeSt.com, “One big reason that suburban shopping is hip again is that design-and-build firms like Outside the Lines (OTL) are making it possible for retail centers to bring genuine Vegas-scale attractions to shoppers, providing experiences they won’t see elsewhere.”

On June 23, OTL launched one of its largest projects to date – the spectacular Illuvia fountain at the EpicCentral development in Grand Prairie, Texas. Illuvia features water jets up to 60 feet high and coordinated light shows that include eye-popping projection effects

Source: “Urban Retail Availability Increases as Suburbs Flourish“