Industry insights, market outlook reports and commercial real estate
news, and trends from the Coldwell Banker Commercial brand.
Retailers in the United States are defying historic lows in retail space availability by planning to launch 1,000 new stores this year, underscoring the sector's resilience amid commercial real estate challenges. Despite factors like inflation, elevated interest rates, and the closure of businesses such as Bed Bath & Beyond and Christmas Tree Shops, landlords are reporting unwavering demand for retail spaces, highlighted by The Wall Street Journal. This resilience can be attributed to the reduced retail construction since the 2008-09 financial crisis, allowing the oversaturated sector to absorb its existing real estate. Moreover, retailers are using online sales data and analytics to pinpoint ideal locations for successful stores. Contrary to predictions of online retail dominance, digital-native companies are now establishing physical storefronts after reaching their online customer acquisition limits. Shoppers are returning to stores and restaurants as pandemic restrictions ease, alleviating earlier concerns. Additionally, Commerce Department data from earlier this summer reveals that retail sales increased by a seasonally adjusted 0.7% in July compared to the prior month. American spending has risen for four consecutive months and seems to be outpacing inflation.This retail revival stands in stark contrast to the office market, which is grappling with a 30-year high in office vacancy rates of 18.2%, primarily due to the rise of hybrid work schedules. A whitepaper by Placer.ai highlights the success of Walmart, Target, and Costco amid economic challenges such as inflation and high gas prices. Despite the evolving retail landscape, these retailers serve as prime examples of how challenges can transform into opportunities. Placer.ai's Q2 2023 data suggests that shifting consumer trends are favoring superstores.In fact, both Costco and Target outperformed the broader retail sector in year-over-year (YoY) performance, with visit growth rates of 1.2% and 3.1% in the first half of 2023, compared to the overall retail sector's 0.3% decline. Conversely, Walmart seemed to be more affected by inflation, possibly due to its visitors having a lower median household income compared to Costco and Target shoppers, experiencing a 0.9% decrease in foot traffic compared to H1 2022. However, recent weekly visit data indicates a potential Walmart rebound. Between June 19th and July 24th, the chain recorded year-over-year weekly visit growth, suggesting a positive trajectory and hinting at year-over-year growth in the second half of the year.For commercial real estate investors, staying attuned to retail trends is of paramount importance. The ability to anticipate and respond to these trends can make the difference between a successful investment and a poor decision. Understanding which retailers are thriving and why, as well as grasping the nuances of changing consumer behavior, can inform strategic decisions regarding property acquisitions, leases, and developments. Incorporating these insights into investment strategies can help commercial real estate investors identify prime locations, optimize property portfolios, and ultimately maximize returns on their investments.
As home prices soar and the rental season reaches its peak, the desire to rent has become increasingly prominent, reflected in a surge in demand for apartments. According to RentCafe's research, certain cities are experiencing a significant uptick in listing activity and attracting considerable attention from prospective apartment hunters. June experienced a shift in popularity among renters, with the Midwest emerging as the most sought-after region, closely followed by the South. Notably, the South secures the highest number of spots in the June ranking, with a total of 12 cities. The Midwest closely trails with 10 cities, dominating the top four positions. Atlanta maintains its status as the highest-ranking city in the South for the third consecutive month, securing the seventh spot overall.Among these cities, Kansas City, MO, retains its position as the most desired city by renters in June, maintaining the top spot from the previous month. Overland Park, KS, located nearby, claims the second position, while Minneapolis ranks third. These cities experienced the highest engagement on RentCafe.com, as evidenced by the significant number of rental properties saved to favorites, personalized searches, limited availability of units, and overall high listing views.Nearly half of June's most sought-after top 30 cities are located in the South after six new locations in the region entered RentCafe's ranking. For example, North Carolina tech hub Charlotte made it to the 20th spot, while neighboring college town Greensboro is this month’s 30th most in-demand city for renters. Kansas City Takes the No. 1 Spot for JuneKansas City maintains a consistent reputation as a top-tier destination for living in the United States. This distinction is substantiated by various factors, including its expanding population, an abundance of employment opportunities, affordable cost of living, and a plethora of enjoyable activities to partake in. Additionally, residing in Kansas City grants convenient access to arguably the finest barbecue culinary experiences available. Additionally, Overland Park, the largest suburb of Kansas City, achieved a remarkable ascent in this month's rankings, climbing an impressive 78 spots to secure the second position. In June, Overland Park maintained a similar number of available apartments compared to the previous year. However, renters displayed a significant increase in engagement, with a 27% rise in listing views and a substantial 63% increase in saved personalized searches. Notably, the number of favorited apartments in the city experienced an astonishing nine-fold surge in comparison. For commercial real estate investors, this presents an opportunity to explore investment prospects in Kansas City and Overland Park's rental markets The significant climb in rankings and increased renter interest highlight the potential for strong returns on investment. Furthermore, the stable availability of apartments in the area, combined with the heightened renter engagement, suggests a healthy market with a strong demand-supply dynamic.
In a reversal from sentiment at the beginning of this year, investors are becoming increasingly bearish about the commercial real estate market. Faced with an economic slowdown, inflation, rising interest rates, supply chain issues, labor shortages and the threat of a recession, investors and capital providers to take a step back and reassess their strategies as this year concludes and the next begins.
A majority of adults in the United States currently have access to cannabis, whether medically or recreationally. As of this year, 19 states have legalized recreational cannabis use, while 39 states have legalized medical marijuana use. Over the years, the general perception of cannabis has evolved. Once seen as a danger to communities and to younger children, cannabis is now more readily available and marijuana sales produce taxable income for local economies.
The industrial market has stood as one of the hottest commercial real estate property sectors in the U.S. for several years. In fact, CommercialEdge just released its July national industrial report, analyzing?the U.S. industrial market’s performance through June 2022.?
Last week’s blog touched on the housing recession, which is officially in progress now that builders have pulled back, and its impact on the broader property markets. As would-be buyers increasingly back out of deals, homebuilders are increasingly finding themselves holding the bag. Combine that with astronomically rising costs for construction, materials and labor, and it’s of little wonder that homebuilders have pulled back from the market.
Inflation has been on everyone’s minds lately as increased prices are affecting the entire economy and driving up costs for food, consumer goods, labor, housing, and commercial real estate. To help curtail inflation, the Federal Reserve Bank has been raising the target interest rate with three increases since March of this year for a total increase of two full percentage points. By increasing interest rates, the fed works to cool demand for products and services (by dissuading borrowing) which helps prices come back down to a more normalized growth rate. That means payments normally made with borrowed funds, such as real estate, become even more expensive. In fact, the 2% increase in interest rates equates to about 40% higher payments for borrowers of commercial real estate who typically borrow funds with a 20-year amortization rate. I was recently listening to the Commercial Investment Real Estate Podcast produced by the CCIM Institute and Martha Peyton, PhD., who is the global head of real estate research at Aegon Asset Management. Peyton shared some interesting observations on inflation and its effect on commercial real estate. Through analyzing historical data, she noticed that when inflation hits, people look to purchase CRE as an inflation hedge. While this is a fact supported by past transactions, she delved deeper to find out why. One of the main reasons that CRE is a sound investment during inflationary periods is that commercial leases have escalation clauses giving the landlord the ability to pass along common area maintenance (CAM) costs to the tenant, so as costs increase, net income remains strong. Short-term leases, such as apartment leases which are often one-year, are especially good because rents and terms can be adjusted easily. This is exactly what Redfin reported as happening, with asking prices for rental housing increasing an average of 17% this year nationally.
Despite global market volatility and a variety of challenges in the industry, construction activity still continues to increase across multiple markets. Some of these challenges include universal inflationary trends founded on construction labor shortages, demand exceeding supply, and disruption in supply chains hitting costs and programs. According to Turner & Townsend’s 2022 International Construction Market Survey, when it comes to increasing construction costs—including labor and materials costs—the United States dominates rankings of the most expensive places in the world for real estate development.
Early speculators, investors from all over the world, real estate agents, and celebrities are buying land that doesn’t physically exist in the real world. They are investing in metaverse real estate, a concept that is hard to wrap our minds around.
On June 2, 2022, Coldwell Banker Commercial’s Senior Vice President and Managing Director, Dan Spiegel, hosted Lawrence Yun, chief economist for the National Association of REALTORS® (NAR) for an insightful and fascinating discussion where viewers learned how the American economy is performing at the midyear mark, important factors to consider and how it is affecting commercial real estate across all asset classes.