Suburban Office and Industrial Cross Paths
January 10, 2023 • Maintaining high-performance real estate portfolios will require constant vigilance and adaptability as we grapple with inflation, increasing interest rates, and the challenges and ramifications of climate change. Here’s a snapshot of what we’re seeing across industrial, office, and retail markets nationally.
Suburban Office and Industrial Cross Paths
The former corporate headquarters for Allstate Insurance in north suburban Chicago will, in the not-too-distant future, be transformed into a 10-building, 3.2M sq. ft. logistics park. What was inconceivable pre-COVID: tearing down office buildings to make way for warehouses, has now become a trend. JLL estimates that 57% of suburban office buildings built in the 1980s and 1990s is functionally obsolete. In the past, these buildings would have been updated. But according to JLL’s managing director of research and strategy, in most suburban locations today, office rents are not strong enough to justify that kind of investment. Construction of the first 1.2M sq. ft. of warehouse space at the former Allstate campus will commence on spec, in other words without tenant leases in place, and is expected to be completed in early to mid-2023. Learn more.
COP 27: The Decarbonization of Real Estate
Commercial real estate leaders who attended the recent UN Climate Conference (COP27) agreed that while there’s been progress in decarbonizing the built environment — new buildings are on average 40% more efficient than in the past and existing buildings in urban environments are being retrofitted at the rate of 1% per year — massive challenges remain. In order to meet current carbon reduction goals, the European Commission estimates that 70% of existing buildings need to be retrofitted. According to experts, if we don’t triple the current rate of retrofits, we will fall further and further behind. Learn more.
The Ups & Down of the Manhattan Office Market
Overall, the Manhattan office market improved year over year in 2022: leasing volume totaled 2.9M sq. ft., an almost 17% increase from 2021; average asking rents increased by 0.5%; and there was positive net absorption of 1.3M sq. ft. up from 17.3M sq. ft. of negative net absorption in 2021. In the 4th quarter, however, leasing activity plummeted by 43% compared to Q4 2021, with office tenants taking just 4.9 M sq. ft. It was the steepest quarter-to-quarter decline (47% from Q3 2022 to Q4 2022) since the pandemic started. Stay tuned as the public and private sectors align to facilitate alternate uses for obsolete Manhattan office buildings in response to reduced demand and the flight to quality. Learn more.
Brick-and-Mortar Retail Remains Strong
According to a variety of retail landlords, retailers are opening stores across the country, notwithstanding a possible recession in 2023. Kimco’s CEO Conor Flynn told Yahoo Finance that the powerhouses of e-commerce are opening stores in Kimco centers, not only to sell merchandise but for last-mile distribution fulfillment. According to Flynn, this combined utility of physical stores is driving robust results for Kimco. Meanwhile, Simon Properties’ CEO David Simon said on a Q3 earnings call that even retailers with lackluster revenues and restless shareholders are moving forward with plans to open stores at Simon centers at steep rent hikes. According to Simon, their strong NOI growth is a result of retailers realizing that investing in physical retail is more profitable than investing in e-commerce. Learn more.
Managing Shopping Centers in Inflationary Times
Ellen Sinreich and ICSC + Legal Forum recently convened a panel of retail real estate professionals to discuss how they are managing their shopping centers and stores in this age of escalating costs. The panel was moderated by Ellen and consisted of Lauren Holden, EVP & COO of ShopCore, Kevin Perry, Director, Store Development, Sephora USA, and Mary Rottler, COO of First Washington Realty. Topics discussed included the implications of inflation on insurance premiums, labor costs, construction, and the cost of goods sold. The panelists shared their strategies for managing these costs and their long-range planning for minimizing the impact of inflation on their properties, companies, and businesses. View the Webinar.
Looking Ahead
Is your leasing process ready to withstand the challenges of today’s volatile business environment? Call us today to make sure. You can’t afford not to.