There were 5 common themes through most of the presentations that will have a significant impact on commercial real estate industry in the coming years.
- Foreign Capital
- Low CAP rates
- Rising Interest Rates
But this time, I’m really going to do it. I’m finally going to take the time to write a post about the conference in an effort to not only relay some of the key messages from the conference but to try to make sense of where the commercial real estate industry is heading and to identify emerging opportunities.
Before I go to far, Development ’14 is NAIOP’s annual conference that attracts institutional, regional and local developers, commercial real estate brokers, asset management companies, lenders and other CRE professionals. The speakers at the sessions include C-level Executives of some of the worlds largest REIT’s and brokerage companies, professors from major universities and other esteemed industry leaders. It is truly the who’s who in the CRE development world and this year Denver received the nod to host.
The sessions that I attended were:
- Beyond the Border: Foreign Investment in U.S. Real Estate
- The Weakest Link: Benefits of Understanding the Supply Chain
- CEO Insight: Heavy Lifting of Industrial Real Estate
- Switching Gears from Traditional to Alternative Investment Options
- The E-commerce Effect: How and Where Commercial Real Estate Will Next Develop
- The New World: The Influence of Social Trends, Workforce Issues and Population Growth on Development
Online and mobile shopping in the U.S. has increased at or above 18% annually for the past 3 years that that trend is expected to continue and grow significantly. If you look at emerging markets such as the Asia Pacific Region and Middle East, the numbers are off the chart. As a result, major retailers are making adjustments to their real estate portfolio to better align themselves with the demand for next-day (or even same-day) delivery of online purchases, the need to streamline the merchandise return process, are making improvements to warehousing systems and processes, and adopting multichannel and omnichannel retailing. In addition to a brick-and-mortor storefront, retailers are making significant investments in their digital storefront to accommodate the increased adoption of online and mobile shopping. Below are several of the many evolutions in the needs of retailers and warehousers of commodities.
E-Commerce Distribution and Fulfillment Centers
- Automated inventory systems in warehouses that can utilize higher clear-height buildings
- 36’ clear is the new minimum and 40’ is preferred for BTS transactions
- Can be labor intensive requiring increased parking ratios for employees
- Increased trailer storage capabilities
- Super flat floors for robotic pickers
- Integration of mezzanine spaces for increased productivity
- Sophisticated inventory management systems for automated picking, packaging and conveyor systems
- Wider column spacing
- Micro-DC's: Preference to locate in downtown areas with high population densities
- Foreign Trade Zones are preferred where available
The modern consumer is embracing cross-channel retailing. They may see a product of interest in a catalog, go view it at a retail store and then shop the internet for reviews and the best pricing for the product. Often which channel they make the purchase will depend on delivery time. The discerning customer is also demanding multi-channel ways to return purchases as well.
This is putting increased pressure on retailers to embrace omni-channel retailing by providing a seamless and consistent experience between all of the potential channels a customer may interact with them. The various retail channels include brick and mortar, television, catalog, social media, e-commerce and m-commerce.
To adapt to these changes, retailers are reconfiguring store layout and sizes to involve the customer on a more intimate level. This may included touchscreens, in-store activities, and other new experiences. Traditional retail stores may include more or less inventory depending on the product types. Also, there is a trend to re-purpose dark big box stores by flipping the uses to allow for more inventory/warehousing and less retail space.
When asked what is coming – the industry experts discussed ways for consumer to purchase online and pick-up on the same day in the store, online order fulfillment from retail locations or a fulfillment center to cut down on shipping time and duplicate inventory levels, direct-to-consumer shipments, and the ability to return online orders directly to the store. Efficient inventory management though all channels of distribution with be critical in a retailers success as e-commerce and m-commerce continue to transform the retail experience.
One of the most significant drivers in the evolution of the CRE industry is the growing purchasing power by the Millennial generation. In case you’ve missed, it this identifies people born from the early 1980’s to the early 2000’s, also referred to as Generation Y. This generation grew up with the internet, watched their parents live through a significant recession, witnessed unprecedented foreclosure rates, experienced global terrorism at an unprecedented level and have seen long periods of wars in the Middle East.
One speaker referred to this generation as “Digital Natives” who embrace mobility, social integration, health & wellness, collaboration, are conservative, and have a global perspective on the world. Two commercial real estate segments that they are having a large impact on are multi-family housing and office space.
Impact on Multi-Family
- Prefer smaller spaces in the urban core
- Demand Wi-Fi capabilities
- Embrace the ability to work remotely and like collaborative live/work space
- Tend to rent vs own their home
- Seek arts and culture
Impact on Office Space
- Embrace collaborative type spaces
- Value sustainable building practices and “green” spaces
- Want the ability to work remotely reducing size requirements of office tenants
- Appreciate a fun work environment that may feature flat screen TV’s, game and break spaces and exercise facilities.
One speaker did stress - do not overlook the power of Immigrants and Aging Boomers! These market segments have their own preferences that should not be overlooked.
The Globalization of the world’s economy has had a significant impact on financial markets, global trade and commerce. Advancements in technology and a world view of markets has also impacted the availability of foreign capital and demand by foreign investors for U.S. investment real estate. There are several key drivers for sovereign wealth funds, foreign pension funds, international investment banks and high net-worth families/royals investing in the U.S.:
- Perception of Less Risk
- Availability of Trophy Properties in key gateway coastal markets
- Ability to obtain U.S. Green Cards for making investments
In many top-tier U.S. markets, capitalization rates for investment real estate is at or approaching pre-recession levels. While this is great news for sellers of properties, many institutional investors have been forced to the sidelines because of compressing yields. Instead of chasing stabilized properties at incredibly low CAP rates, many are focused on development and build-to-suit transactions, deleveraging and securing long-term capital, by selling assets in non-core markets to re-align portfolios, disposing of excess land to fund development deals, and looking to reposition or create value in well located properties.
Even though many buyers are letting property values get ahead of fundamentals, developers for the most part have remained very disciplined. Part of this discipline has been moderated by stricter lending practices limiting speculative development and weary equity sources.
This unprecedented low interest rate environment has proven beneficial in the U.S. recovery from the latest recession. Everyone clearly acknowledges that it cannot continue forever and incremental increases in rates are inevitable and could actually be a good thing for the market. Larger investment companies are quickly de-leveraging or are working to secure the longest-term fixed capital as possible.
Coincidentally on the day after the conference, the Federal Reserve announced “the end of quantitative easing” and its plans to increase interest rates as a result of sustained economic growth in the U.S. The FOMC also announced the end of its bond-buying program.
Any increases in rates should be incremental and moderately paced so not to shock the national and global markets. The occurrence of a “World Event” could also delay the increase in interest rates even further.
Phew, I did it. I hope you found this post of interest and please feel free to contact me at 303.949.6443 or Brady@creSherpa.com if you would like to discuss in more detail. Please follow me on Twitter as well via @BradyWelsh_CRE for the latest local and national CRE industry news.