Archives for February 2024

Retail is positioned to become the US’ highest occupancy commercial real estte category, according to a new report from Marcus & Millichap.

The firm said this long-term forecast is bolstered by a consumer base that is expected to grow by more than 4.8 million households from 2024 to 2028, notably eclipsing the prior five-year tally.

“Candidates in place to backfill space,” according to the report.

Urban retail has reclaimed its prominent position in the market in 2024 with its resilient tenant demand, robust occupancy rates, and steady rent growth, according to a new report from JLL, as reported last week by GlobeSt.com.

Additionally, Marcus & Millichap sees that retailers are acting on consumers’ resiliency as the U.S. retail sector remained in expansion mode last year. Store openings surpassed closures by roughly 1,000 locations.

This activity and moderate supply growth translated to minimal vacancy adjustment, with the segment’s rate just 10 basis points above its all-time low entering 2024, according to the report.

“Vendors expect the record spending that occurred across multiple retail categories last year, and consumers’ prioritization of necessities and experiences, to continue in 2024, as indicated by store opening plans,” said the report.

Marcus & Millichap finds that 36 of 50 major markets are slated to expand stock expansion of 0.5 percent or less this year as many retailers comb metros for available space to grow their footprint.

This will lead to positive net absorption and asking rent growth, while also holding vacancy 100 basis points below its long-term mean.

Potential headwinds could emerge in some segments of retail.

For example, revolving debt has reached record highs, with total outstanding credit card debt surpassing $1 trillion a year ago.

Given that consumer demand for discount goods is expected to rise, retailers Dollar Tree, Dollar General, and Five Below – which ranked as top retailers for square feet leased last year – should continue to grow their footprints.

It’s a dynamic that bodes well for vacated spaces of less than 20,000 square feet, the report said.

The increased presence of health providers and specialists in retail settings is poised to extend a streak of 14 straight years of positive net absorption in the multi-tenant segment.

Medtail continues to be a leading subsector. Last year, 1,000-plus retail leases were inked by medical-related groups, including urgent care providers and health systems.

Animal hospitals should also thrive given that nearly 87 million U.S. households and climbing own a pet.

What won’t survive, Marcus & Millichap said, are 125 Champs Sports, a group of Rite Aid, Walgreens, and CVS stores, and underperforming Family Dollar locations.

Source: “Retail’s Occupancy Expected to Be Highest in CRE“

The future of industrial CRE is strong, but advancing in a new direction, according to a report from Newmark and NAIOP.

CRE for advanced manufacturing is the wave of the future, while warehousing and distribution take a back seat, the report finds. It predicts new construction related to the high tech, automotive, energy and biomanufacturing sectors will add 6% to 13% to the nation’s existing manufacturing space within the decade. And the U.S. will not be the only beneficiary. Canada and Mexico, as well as U.S. cities along the border with Mexico, will also see significant growth in these sectors.

“Since 2020, over 300 major manufacturing facility announcements have been made across North America, representing approximately $400 billion in pledged project investment, at least 210,000 new proposed jobs, and a minimum of 250 million square feet of new development over the next decade,” the report stated, calling this “a watershed moment”.

The projected growth is being driven partly by the Biden administration’s push to spur a revival of manufacturing in the U.S. and to encourage reshoring and nearshoring following the economic disruptions caused by the Covid pandemic. The administration’s three landmark pieces of legislation each contained billions of dollars in incentives to accomplish this goal. The Infrastructure and Investment Jobs Act provided $8 billion for subsidies and infrastructure investment to stimulate manufacturing especially related to electric vehicles and energy. The CHIPS and Science Act set aside $50 billion for semiconductor manufacturing and R&D, including $39 billion in direct incentives. And the Inflation Reduction Act directed $400 billion to help reduce greenhouse gas emissions and adopt clean energy initiatives. A later executive order provided $2 billion to expand domestic biomanufacturing.

Real private manufacturing construction spending grew at an annualized rate of 62% in August 2023. The computer/electronic/electrical subsector saw the largest investment of any sector on a per project basis, soaring to 56% by August 2023 – compared to just 10% in 2019.

The high-tech/digitalization and automotive/transportation sectors are expected to have the biggest impacts on manufacturing, the report said. That’s because they constitute the greatest volume of new projects and proposed jobs, as well as the largest project size as measured in square feet. They “have unique and complementary drivers that will propel further manufacturing growth,” the report said.

The growth is taking place in many states, but the South and Midwest especially are benefiting. “New manufacturing clusters are forming and existing clusters are expanding as a record number of new projects are either underway or set to break ground in the next decade,” the report found.

“The regions poised to benefit most from advanced manufacturing employment projections, development and attendant economic growth are predominantly secondary and tertiary markets with higher-than-average levels of preexisting advanced manufacturing talent, relatively lower-cost energy supplies and abundant, affordable land,” the report predicted. Nearly 50% of the manufacturing jobs announced in recent years are in 15 markets, both large and small.

Phoenix ranked first by number of manufacturing jobs announced – 15,466 (14 projects), followed by Atlanta – 12,713 (7 projects) and Austin – 11,465 (6 projects). Mid-sized metros also saw many jobs announced like Syracuse, NY – 9,000 (1 project) and Savannah, GA – 8,840 (2 projects) while micropolitan Brownsville, TN added 7,490 (3 projects) and Sherman, TX added 4,500 (2 projects).

“At the end of 3Q 2023, manufacturing construction reached 62.2 million square feet, a record high in data going back to 2003, representing 11.5 percent of the total national industrial pipeline (540 million square feet),” the report noted. “This comes as development for many other commercial real estate sectors (including logistics) wanes due to the slowing economy and difficulty in sourcing construction loans, especially for speculative construction.”

The multiplier effects of advanced technology projects will make their impact even greater, though the effects will be uneven. In addition to suppliers and related industries, other companies may move in.

The report cites the example of Tesla’s EV 10 million SF gigafactory and Navistar’s 900,000 SF EV truck production facilities in Austin. It attributes to them at least 3 million SF of warehousing/manufacturing absorption nearby. The plants have also spurred complementary companies to cluster nearby. And demand for multifamily, retail and hospitality space has increased to accommodate population and wage growth.

However, one challenge developers may encounter is opposition from some community groups or regulators to massive projects disrupting rural or small-town lifestyles.

Another major challenge for manufacturers in advanced sectors – in addition to their growing power needs and limited capacity — will be attracting or training the needed educated or skilled workforce. “Sourcing talent globally will also be critical in relation to attracting labor with specialty skill sets (as in certain semiconductor production processes). Immigrants account for about 40 percent of highly skilled workers in America’s semiconductor industry,” the report noted.

Fewer than one-third of announced projects have actually broken ground, suggesting that the development pipeline will keep growing. Most facilities will be owner-occupied or build-to-suit, though demand for leasable manufacturing space is growing. Speculative manufacturing space will remain an expensive and risky proposition.

Amidst all the excitement about the high-tech ahead, there is one cloud on the horizon. “It is unclear what changes might be enacted to existing federal programs following the 2024 election,” the report noted.

Source: “The Changing Direction of Industrial CRE“

Office landlords are increasingly willing to invest in and collaborate with local retailers, making upfront investments to sustain the space and bolster the overall building environment, according to a new report from Colliers.

This is vital for all parties, including jurisdictions with the capability of converting some space to residential, which could ease demand for affordable housing while enhancing the area’s livability.
The symbiotic relationship between the office and retail sectors emerges as critical in driving long-term growth, Colliers said.

“Together they can strategically leverage mutual benefits to navigate dynamic market forces,” according to the report, suggesting short-term tenancies as an option.

“These short-term arrangements with small business tenants require minimal landlord investment in converting spaces for subsequent use,” Colliers said. “And in some cases, salvage their financial investments.”

For retailers, this could create a more diversified tenant mix, potentially attracting foot traffic to well-established brands in a physical setting.

Given the struggle to bring workers back to the office, many existing retailers such as sandwich shops, dry cleaners, and daycare providers, are out of business, Colliers reported, and many of the goods and services that supported the office ecosystem have disappeared, limiting, and straining the remaining stores.
“The ideal scenario would be for office owners to invest and re-think the traditional retail market rent model in partnering with mature local retailers, particularly in food and beverage, to support those businesses and help bring back additional office tenancy,” Michael Lirtzman Head of Office Agency Leasing, US, Colliers, said in a prepared statement.

One example Colliers offers is an initiative in Arlington, Va., that expanded the diversity of businesses permitted within office buildings, to include breweries, urban farms, dog boarding facilities, virtual golf centers, commercial kitchens, labs, entertainment venues, and indoor recreation facilities, among others.

“These communal retail spaces can be considered an avenue for fostering personal interaction and revitalizing foot traffic patterns through alternative modes of walkability and transportation,” according to the report.

Source: “Office and Retail Can Find Value in Teaming Up“

The tremors rattling US commercial real estate are spreading to other countries and sectors, and threaten to escalate into a financial earthquake as refinancing deadlines loom.

Some investors aren’t worried about falling through the cracks, though. They think the climate of fear and confusion is serving up prime properties at bargain prices.

There are growing signs that commercial real estate is in serious trouble.