What Do Out of Town Buyers Know About New Haven That We Don't?

Investment property is hot these days--that's hardly a secret.  What is surprising is how many of the buyers are coming from somewhere else.  Even when the buyers are local, the money may be coming from another part of the country, or even the world.  Why is that happening?

Our real estate prices have been languishing in Connecticut.  Our economy has lagged behind other areas.  Even the new Governor of Virginia exhorted that Virginia should not become Connecticut in terms of job creation.  Jobs, businesses, attitude toward business, taxes--all of these things can change. What can't change is the amount of land, or its location.  That classic real estate valuation phrase--location, location, location--has never been truer than when applied to property in Connecticut.  Nestled between two huge metro areas, it only makes sense that the value of what is here would rise as prices skyrocket in Metro NYC and Metro Boston.  

Wouldn't it be a shame if the benefit of a run-up in prices in our region went to people from out of town?  Sometimes we are more negative about our area than others are, and it's likely that this is one of those occasions.  Given everything we know about the future of work, the need for a skilled workforce (where Connecticut excels), and the positivity toward business shown by the present State administration, our  future fortunes look bright.  And we should jump on them before others do.

Office Space is Filling Up Again in New Haven

 There is great interest in the few buildings that have been, or are in the process of being, built recently.  Much of that has to do with the character of new buildings.  They tend to have lab space or tech space, communal spaces for collaboration, amenities for eating and exercising, and easy commutes by bike or walking.

Density tends to improve value.  That's interesting, considering the pandemic, because it used to be that people wanted to work in buildings with wooded spaces around, and ample parking, near highway exits.  Now it seems as though just the opposite approach is warranted.  

Maybe that's not counterintuitive.  Maybe the drive toward more outdoor space at home, combined with flexible work options for telecommuting, means that people are choosing to spend their time outside near home, with work being for interacting with others, having restaurants and stores nearby, and socializing on days in the office.  While that's a big shift, it's consistent with the way we work today:  We go into an office to be with people, and, when we don't want or need that, we retreat into our homes and yards.  

That means that center cities, and advanced office spaces, will do well in the future.  Given what some pundits have been saying about the end of offices, that's good news for those of us in the industry!

Why Do Real Estate Professionals Care About State and Local Debt?

 It was recently announced that Connecticut has a debt load per taxpayer of $62,500, against an average across all states of $9300.  There are many ways to calculate debt, and to measure it versus average income, but this is a high number by any measure.  The reasons go back decades, most specifically to the 1980s, when Connecticut was flush with tax money, and many programs and benefits were instituted.  That, combined with the unusual strength of the public sectors unions in our state, left us with problems that still persist, and in some cases are getting worse.  The looming issue of State employee retirements, due to the benefit changes that begin in 2022, is leaving us, thanks to many exiting the workforce this year or next, with a much bigger roster of retired State employees, still entitled to the old package.

Why does this matter?  Ultimately, it affects property values.  The certainty of large future State expenses almost guarantees future tax increases.  Because we are not gaining population, as many other places are, the number we have to cover is not being spread over a larger group. This compounds itself as an issue, when those left to pay more decide to move out of state themselves.  For example, 37% of Connecticut's retired employees live outside of Connecticut.  So they don't pay taxes here, but get mailed checks every month.  So, to make up for that, we have put in very high estate taxes compared to other states, making older taxpayers move away even faster, since they don't want to die in Connecticut.  

This becomes a vicious cycle.  More people moving out means that taxpayers left owe more, which causes more people to move out.  You get the idea.  When fewer people stay or relocate into Connecticut, there are fewer buyers for property, making the market softer.  There are issues that go the other way, such as the fact that very little has been built over the past three decades, and that we have little land available for future construction.  COVID has actually helped us, given our open spaces and proximity to NYC and Boston.  That has caused shortages in housing and industrial real estate, for two examples, which is raising prices for those sectors.  

Within Connecticut, some cities and towns have their own debt loads that are high.  Hamden is a good example.  Taxes are higher on similar property than in surrounding towns, as Hamden struggles to reduce its debt.  Even though it is doing the right thing, there is pain for taxpayers in the solution.  It's easy to see how that scenario could play out on a statewide level.

What should you do?  Vote for fiscally responsible candidates.  Write to the ones already in office, and express your concern for added entitlements or givebacks.  Read the facts and take action as citizens.  And, above all, remember why you love living here, and work to preserve that, as well as promote Connecticut to others.  

Will Offices Rebound?

 While we know that the future of office working is uncertain in the short run, and we suspect that the long term will bring more flexible schedules, there is still reason for hope for office use and demand. 

 We have never had so many people in our country working from home, and yet employees in general seem more unhappy than they have ever been.  Some of the malaise clearly has to do with COVID, and what that has done to people's lives.  But, when we examine that statement more closely, what we know is that many workers--and retirees as well--miss the interaction with others that they used to find in their places of work.  

Not just connection, but collaboration--working on projects, receiving input, brainstorming--has been missing as well.  Some parts of work just can't be done alone, or at least can't be done as well.  The social aspects of sharing office space seem obvious, and hard to replace.  The sense of ease you do or don't have with coworkers comes from interaction, and not many have had much of that lately.  That makes us think that offices aren't dead yet.  Although dressing up (and that may not come back anyway) and commuting (but think coffee and podcasts, plus a separation between work and home) may not be something everyone looks forward to, the intangibles of sharing space may win out, at least part of the time.

Then there's the social distance issue.  Even if fewer people are in an office at any given time, they each may need more space, or more privacy, or both.  It could turn out that half as many people take up just as much square footage, so downsizing may not take place the way we once thought it might.  

For lots of reasons, don't count the office sector out just yet.  Let's just wait and see.  Community takes all kinds of shapes, and coworking is one of them.

Land Rush in Connecticut

The old saw, that they aren't making any more land, is still true.  The pandemic has made people look for room to spread out, whether it be to live or to work. We've been seeing more land sales as a result.  

It's probably also because land is harder to finance, and requires more money down.  Money is cheap now, and also doesn't have a lot of value just stored in a bank.  In addition, most people with investments have seen them go up in value, so they have cash with which to diversify.

 

Given our prime location in Connecticut, between NYC and Boston, land should be at a premium.  And, since so much of what's already built is being repurposed for newer uses, it makes the cost of building from scratch look less steep.  Plus, you can have exactly what you want. The lack of supply feeds into this too.  If you can't find it, build it yourself.

 

Finally, entrepreneurship is at a high level these days.  Risk takers take other risks as well.  Building is often seen as riskier than buying an existing property, and certainly building on spec is always a risk.

  

What does this all mean?  If you have land, now just might be the best time to sell.

Restaurants!

During the spring, while people we knew were getting vaccinated, a common question to ask was "What is the first thing you will do when you are fully vaccinated?".  Sometimes, it was a trip to see children or grandchildren, but the other common answer was "Go to a restaurant".  One enterprising person made his reservations the day of his second shot!

This can be seen as somewhat surprising, since restaurant visitation doesn't show up quite that often as the above anecdote would predict, when people are queried about their passions.  Those tend to be travel, sports, time with family, or hobbies. 

The other really surprising news to us recently was the number of employed workers who quit their jobs this spring.  Why? Usually, it was because the pandemic had changed their priorities, either for what they did all day, or where they wanted to live going forward.

So what do this two factors mean for real estate in Connecticut?  That there is a great pent-up demand for eating out, and therefore a likely higher rate of success for new restaurants than history would predict.  Dining places with outdoor tables would come in at a even greater premium. 

Also, leaving a job without another one, even when jobs are plentiful, shows a tendency toward risk taking, which is certainly true for entrepreneurs.  Many people dream of one day owning a restaurant.  Now would seem to be the perfect time to test that reality, and open a place of their own.  

Landlords should therefore consider changes in use for more commercial kitchens to be built, and perhaps zoning requests for outdoor seating.  Tenants should feel safe in taking more chances now, when the stars seemed to be aligned for success.

Return to Commercial Real Estate Normalcy?

Everywhere we go these days, we see signs of the region opening up.  Since we in Connecticut were so locked down compared to some other parts of the country, the difference is palpable.  There are many fewer masks, at least outside, and more open storefronts.  Traffic has also picked up.  Economists are predicting a surge in consumer spending, with price increases and supply shortages.  Tour operators and airlines are seeing strong demand, with many trips around the country and the world sold out.  

What will this mean for commercial real estate in our area?  With people venturing back to "normal" life, and not as much to spend their money on, with building projects and delivery of many consumer goods backed up, they are likely to patronize restaurants, stores, and other attractions.  Summer weather will likely bring a boom in the retail sector.  

Rental and multifamily housing will also remain strong.  Families who have sheltered together may have come to the end of that phase, and younger--and maybe older--members will seek new apartments, especially if the supply of single family homes continues to be so scarce.  Greater New Haven and Greater Hartford are primed for more demand in this sector, with lots of new projects, and affordable prices. Given our vaccination rates, we are likely to attract those from other places as well.

Industrial real estate is like toilet paper was last year--there just isn't enough to go around.  That leaves office space as the wild card--how will it do?  Some changes in commuting patterns and remote work seem permanent, or at least semi-permanent, so that will have an impact.  But, if the economy booms, will new companies take that leftover square footage for new ventures?  Let's hope so.  

In the meantime, let's enjoy Connecticut's moment in the sun--literally and figuratively!

Greater New Haven is Poised for Liftoff (Literally)

For decades, Greater New Haven business leaders have been pointing to the dwindling fortunes of Tweed New Haven Airport as a major barrier to economic development in the region.  This week's announcement that the airport will be privatized for at least the next 43 years, with a longer runway and a new carrier offering flights to several cities, is a huge boon to our area.  

Connecticut has spent most of its air transportation money on Bradley, which is now offers international, as well as domestic, flights, and is the biggest of the State's three airports.  There has been a great deal of rivalry between Sikorsky in Stratford and Tweed in East Haven.  Neither one has made much, if any, progress.  Both have been hampered by surrounding residential developments, short runways, and poor prospects for big carriers.  Nor has either location garnered steady support from its legislative delegation.  

It's a new day now for Tweed. By inking a private deal, public sector funds are no longer necessary.  The powers that be in Hartford don't need to be courted, and they should be nothing but enthusiastic about this outcome.  Both New Haven and East Haven, whose borders it straddles, will see upsides from this arrangement, apart from a boost to the region as a whole.  The terminal will be moved, which will ease the traffic burden on the Morris Cove neighborhood.  Jobs will be created for both municipalities, and other development should spring up on the terminal side.  

Once we can offer residents convenient flights to hubs or favored destinations, within minutes of their homes, people who travel regularly on business, or even for pleasure, will reap major benefits.  Whether they park at the airport, get dropped off, or take a short Uber ride, they will save hours of time now taken up with congestion leading to the NYC airports.  The certainty of the amount of lead time required to get to Tweed, and the small size of the TSA line, will outweigh in many cases the need for stopover plane changes to many cities.  

Regional business leaders have long known the untapped demand for a viable local air transportation option.  With the huge increase in remote work possibilities brought on by the pandemic, many more people are likely to choose to live in Greater New Haven.  We have recreation, schools, health care, and the arts, all in abundance.  Now we will have commutability as well.  Let the commercial expansion begin!

Industrial Real Estate in Connecticut is Flying Off the Shelves

Actually, the real problem is that there isn't enough to fly off anything.  For many years now, industrial real estate has languished, and much of it has been converted into other uses.  Little new square footage has been built.  As a result, there is a real dearth of supply.  With demand booming in many industries, and PPP money shoring up cash balances, people are looking.  And not finding anything, in most cases.

If you need more space, or are planning to move in the next few years, this is the time to put your current property on the market.  As buyers in the residential market abound, there is evidence all around of residents putting down roots in Connecticut.  They will need jobs, or they will own or open businesses.  This is a great opportunity for sellers, since supply cannot simply catch up with demand in the short run.  

It may be cheaper to buy new, and sell what is outgrown. Sellers with land, or extra land around a facility, should consider monetizing that property.  With so much pent-up movement, and a year of doing nothing behind us, 2021 is shaping up to be a great year for real estate.  Why not join in the party now?

Ecommerce is Still on the Rise

A recent article about retail sales in the New York Times indicated that, while online retail--especially Amazon--had done very well during the pandemic, it still only amounted to about a quarter of retail sales.  That has some interesting implications for commercial real estate in Connecticut.

Given our location between Boston and NYC, and our high average income within the State, it stands to reason that, if ecommerce has not reached its peak yet, our warehouses, flex spaces, and raw land should do well in the future.  Distribution is the key to timely deliveries, and the ability to get something within a couple of days is a key factor in deciding whether or not to buy it online.  Whether goods are traveling further up into New England, or being delivered to homes around us, there will need to be warehousing available near our highways, railroads, and airports.  

Although our roads and bridges have been a challenge for trucks and overland traffic, Governor Lamont's call for a stronger focus on infrastructure, combined with President Biden's emphasis on the same, seem to point to a brighter future for distribution in and through Connecticut.  Smart buyers will begin to develop properties that have been languishing, and take advantage of changes coming down the pike (pun intended!).  Even if there is only a small continued shift toward home delivery, the amounts in question are enormous. Those developments should get filled, and provide income for the owners well into the next economic cycle.  

Commercial Real Estate Lags Nine Months to a Year After Residential

We all know that real estate sales go in cycles.  Buying at the top is expensive.  Buying at the bottom is lucky, but usually only known in arrears.  What we should think about now is this:  Commercial real estate activity usually follows residential patterns, but nine months to a year later.  So what do we know about the housing market in Connecticut now?  It's hot, hot, hot. And what does that tell you about waiting longer to purchase commercial space?  Do not, not, not! 

This is the time to lock in real estate, before a booming surge in new homeowners leads to a need for other kinds of real estate.  All those buyers will need furniture, cars, food, tools, and other things that come along with a new lifestyle or location.  We already know that restaurants and other entertainment locales are just waiting for spring and summer patrons.  But what about everything else that they haven't bought during the past year?  While it's true that ecommerce has filled a big part of people's needs, there will still be an uptick in bricks and mortar for all kinds of purposes.  

If the second Roaring 20s are going to hit us soon, why not position yourself to make money just through foresight?  Buy now, and reap the rewards as the economy recovers from the pandemic.  Your investment portfolio will thank you later, if you fill it with some commercial real estate now.

Pop-Up Real Estate

 We know that office space is now offered in co-working spaces, with shared amenities.  Both VRBO and Airbnb are the same concept for residential living.  While we have seen pop-up restaurants and other retail in cities, it seems to be a concept that may evolve further.

Once the population of the US begins to approach herd immunity with vaccinations, states and cities will ease restrictions.  Many people want to be in a restaurant, but there will still be occupancy limits in many places.  To fulfill that demand, and the demand for other retail, we may see a lot more shared space.  So not only pop-ups in empty spaces, but shared spaces.

We've seen that work in churches, where congregations will share one building, and hold services in the same sanctuary at different times.  Why not the same in restaurants?  Beauty salons?  Entertainment venues?  Retail generally?  Landlords may become a lot more flexible, and entrepreneurs who have been waiting for the economy to open up may be able to ply their wares with less risk that way.  It makes sense, especially for anything where there are fixed costs of operation and equipment, so that use by more than one owner will cut down the overhead.

How about a brunch pop-up in a restaurant only open for dinner?  How about a family cafe in a neighborhood watering hole?  This would require cities and states to be flexible about use of space with liquor permits, for example, but would help urban areas to be more trafficked at all times of the day.  What about food carts and beer carts on weekend nights in dog parks or parking lots?  

As we all wait for life to return to normal, let's stop and think how the future could be even better than normal.  

What Will the Biden Administration Bring to Commercial Real Estate?

 We've been through four years with a real estate owner and investor as our President, and we are about to transition to a very different administration.  Whatever we thought of President Trump, many in the field thought that he would help us, and, in some ways, he did.  Now we are moving forward with another team, and the jury is out.  What should we expect?

While taxes will likely rise, it won't be instantly.  It also may well focus more on income in general, and not on the type of income that you have, meaning that real estate would not be targeted.  Would we expect that business meals will continue to enjoy complete deductibility?  I'd guess not.  That may help us slightly now, but removing it isn't aimed at real estate, and it won't be a big surprise.  

Some of the tax advantages that real estate has had are pretty obscure for the population as a whole, and maybe even for Congress.  Are there enough 1031 exchanges to have a focus on eliminating them, or tightening the rules?  Again, probably not.  

What could help us?  First of all, interest rates.  There are signals that they won't be increasing any time soon, and that helps real estate more than anything else could ever do.  After all, it's the payments that matter, more than the price.  

Biden will also be helping those who have been impacted by the pandemic, and they have to live somewhere.  It seems plausible that rental properties will do very well in the upcoming year, and that tenants will get enough help to be able to afford the rents.  This may be particularly true in Connecticut, as a blue state.  We have been at the bottom of the list for so much federal aid in recent years, and the new administration should change that.  Cities may benefit, which is where the bulk of renters live.  

Once we achieve herd immunity from COVID-19, or when a majority of the population receives the vaccine, there should be a big upswing in retail, restaurant, and entertainment activity.  In fact, it may well exceed the norm for some period of time, as people revel in getting out and doing things.  Travel will help hotels, as well as the other categories listed above.

All in all, it's a new day, and one that savvy investors will use to determine where to place money.  More of us may switch from stocks to real estate, and those who have moved to Connecticut for the open space will often stay, and spend money here.  Prices for real estate will continue to rise, and only supply will limit growth.  Since there is more supply on the commercial side, that's even better news for investment property owners.  

Happy New Year!

Start Ups are Starting Up All Over

 There are three primary motivations fueling the current boom in start ups.  One is that many people have left, by choice or otherwise, their employment elsewhere, and are following their dreams into their own businesses.  The second is the availability of cheap capital, with banks looking for loans, The third is the real wild card, because most of us can't remember an earlier pandemic.  The health crisis over COVID is spurring entrepreneurs to look for solutions to new problems, or to fulfill needs that aren't being met currently, such as with PPE.  

These three reasons have combined to make this year, despite all of its terrible downsides, a fertile one for new ventures.  There has never been a greater need for people to look outside the box for answers, and smart businesspeople everywhere are capitalizing on that need.  It usually also means that those same risk takers will also think differently about commercial real estate.

In the recent past, we've seen other trends, such as the repurposing of old industrial buildings and schools for residential or commercial use, or the rise of "green" as the ultimate amenity.  To court millennials, landlords have developed more open space, more areas for socializing and recreation, and paired food and drink with workplaces.  One residential landlord told me recently that he has a dog washing station at his newest project, a nod to the proclivity of millennials to have pets in urban areas.  

What will the COVID crisis bring us in innovative trends?  Maybe shared space that's shared by day, by time of day, or even by season.  Perhaps there will be more and better use of stairwells, to cut down on elevators, and probably different eating options (more picnic areas outside, fewer cafeterias).  Outside heaters and fire pits will definitely feature in chic workplaces.  Cleaning processes will become big factors in rental choices. 

What should landlords do?  Maybe begin by thinking more favorably about start ups, looking more at the people involved, and less at the company history.  Be more willing to consider drastic or unusual changes in floor pattern or layout.  What about putting the gym next to a garage door of a sort, where a whole wall opens to the outside?  Or a year-round pool, heated with geothermal energy?  It may be that shorter leases with more options for extra space or an early exit are entertained. 

If this year has taught us anything, it's that no one knows what the future will bring.  Remember that fortune favors the brave!

Commercial Real Estate in Connecticut is Looking Good

 Much has been written recently about the exodus from the NYC area to Connecticut.  Connecticut is finally one of the hottest markets in the country, thanks to proximity to New York along with privacy and open space.  Residential prices are going up quickly, and supply is short.

And what do we know about the relationship between residential markets and commercial ones?  Commercial needs follow the people who move into the residential spaces.  Once there are more residents, there becomes increasing need for retail and rental units in particular, but also for office space and even investment and industrial properties.  

This is especially true before the election.  With plenty of uncertainty, the stock market is bouncing around.  Tangible property is looking better and better.  Why not invest in a growth area, and take the money out before stock prices possibly tumble?  

In addition to that incentive, there is the added benefit of lower interest rates before any election, especially a presidential one.  That will lower the cost of buying even further.  Banks are eager to lend, and it's a good time to shop for credit.

It's hard to imagine such a rosy report, given what most of 2020 has been like, but there you have it--the silver lining we've all been seeking.

Too Much Space Is Now Just the Right Amount

 For years now, commercial real estate users have been looking to divest property and downsize in square footage.  This trend picked up rapidly as the pandemic set in, and workers began telecommuting from home.  Once we started to take a long view, however, things changed.

Now we can see far enough ahead to realize that bigger buildings may be an asset.  It allows all kinds of users to have space for their workforce to spread out, or for retail tenants like exercise studios or restaurants to occupy enough real estate to have customers socially distance.  As I've been writing for months now, warehouses were already hot, because of the trend toward ecommerce and the need for distribution hubs.  Now we know that they can also be repurposed for other buyers and tenants.  

As we work our way toward the new normal, whatever that turns out to be, the lack of new supply will force creativity on the part of property owners and investors.  New businesses are springing up, and people are finding ways to work and play in new circumstances.  We can see that there may be a demand for space for learning pods for students, for telecommuters who don't want to or cannot work from home, for pick up and drop off sites for businesses that want customers to be able to stay apart while doing errands, for studio space serving online business and arts production, and for last-mile delivery hubs for all kinds of products.  Can you imagine a giant warehouse full of toilet paper?  If you can, you are probably not alone.  

The world has changed in so many ways, but the creativity and resilience of entrepreneurs and existing industries will be up to the task of figuring out a path forward.  If you are a property seeker, or an investor, location should still be a key factor.  However, don't pay as much attention to size, condition, or current usage.  Whatever you have, a buyer or tenant is probably out there looking for something like it.  And those buyers will certainly have favorable financing terms today.  So think about now as a great time to sell, lease, or sublet. There's no time like the present!

Old Real Estate Maxim Still Rules

 When I was in business school, now decades(!) ago, I had a professor whose current work then was focused on how CEOs decide where to locate company headquarters.  His conclusion, after much research, was that the biggest factor in choosing a location was where the CEO him/herself wanted to live.  

While that isn't a shocking result, it is a little surprising that big organizations, with all kinds of considerations for transportation, labor force, infrastructure, taxes, and a myriad of other factors, would in the end have personal preference of one person as the greatest determinant.  We can see evidence of this still, in the recent behaviors of business executives during the pandemic.

Connecticut has been the beneficiary of a move out of New York City, and thousands of people have moved here in the past six months.  Yet we didn't expect that companies themselves would move, and that's turning out to be the case.  And that isn't just in the office arena--manufacturers and other seemingly less mobile property users are also in the mix.

We are getting showing requests and offers from buyers out of state, who are looking to locate where they plan to live.  There are many reasons for their choices, but it points to a brighter future for Connecticut than was predicted while tax policy and weather was causing a rush to warmer climates and distant vistas.  Now, the proximity to major metropolitan areas, combined with family dynamics, is helping us catch us with the economic progress made by other areas over the past two decades.

There are good reasons for this to continue.  Our location between Boston and NYC is obviously key.  Company owners and investors don't necessarily have to live here, but they will have employees and tenants who do.  Many family business owners also want to be where their children and grandchildren are, whether or not those generations are in the company or not.  The current focus on low density and outdoor space work in our favor, and our natural assets have become more important to real estate decisions.

Looking forward, we can see from the residential market that supply may become a limiting factor.  While none of us expected it, this uncertain age has become one of increased real estate activity, and a good time for sellers to consider putting properties on the market.  Who knew that the old research about company location would be so relevant now?

Pearce Commercial Agent Carl Russell Does Biggest SIOR Deal Nationwide in June

We can make big real estate news here in Greater New Haven!  Carl Russell, SIOR, CCIM, of Pearce Commercial, was featured in the most recent issue of the Society of Industrial and Office Realtors (SIOR) News. Carl sold 35,000 sf of medical office condominiums in Orange, CT.  The center is called Springbrook Commons, and it was the largest office sale reported nationally in the SIOR network for the month of June.

Carl also handled the sale of a large Family Dollar Store in the same month, showing not only his versatility, but the strength of the market across sectors.  While we have been focusing in this blog recently on warehouse and industrial properties, these two sales represented the retail and office portion of the current strong sales climate.

News sources reported last week that real estate was the only part of economy showing exceptional growth.  We all know that Connecticut is the beneficiary of New Yorkers seeking more residential space, but it's important to note that this extends to other types of space as well.  That broad performance suggests that there is somewhat general agreement that tangible property is a good investment, both for users and for investors.

This argues that we are in a seller's market, and that owners should consider listing now, even at a time of year that is normally slow (perhaps especially now, given the Northeast lull in COVID cases).  While we wouldn't have expected that our sales would boom in a pandemic, nor would we have chosen such a scenario, we are all surprised at the robust nature of the current climate for real estate.  Don't be left behind--this is your chance.

Residential Homes Statistics 2020 (Through 2nd Quarter)



U.S. may need another 1 billion square feet of warehouse space by 2025 as e-commerce booms

By Lauren Thomas, CNBC, click here to read article online

KEY POINTS

• With more people clicking "buy" online, demand for industrial real estate could reach an additional 1 billion square feet by 2025, according to commercial real estate services firm JLL. 

• The boom for fulfillment centers comes as the traditional retail real estate industry is suffering with store closures piling up and rents plummeting, as companies look to negotiate new leases. 

With online sales proliferating during the coronavirus pandemic, the U.S. is going to need more warehouses to store hoards of boxes and handle those orders. 

Holed up at home, and with many bricks-and-mortar stores temporarily shut, shoppers have turned to their computers and smartphones to buy everything from fresh groceries to new home furnishings to pet toys. And even after the pandemic subsides, the trend of people buying more and more online is expected to stick around. 

And so with more people clicking "buy" instead of venturing to the mall, demand for industrial real estate could reach an additional 1 billion square feet by 2025, according to a new report from JLL. 

The commercial real estate services firm said that prior to the Covid-19 crisis, about 35% of its industrial leasing activity was related to e-commerce. But now, it said, as much as 50% of that leasing activity has already been tied to the online retail industry in 2020. 

"The first quarter was our largest leasing quarter in three years," said Craig Meyer, president of JLL's Americas industrial division. "We're seeing more pressure on [e-commerce companies] than the typical holiday season ... to meet consumer demand." 

He explained a recent situation where a retail-related company requested a lease on a 1.2 million-square-foot warehouse space in Delaware about 30 days ago, and moved in almost immediately to begin fulfilling orders for fresh items. Part of the warehouse included a cold-storage component, for foods that need to be kept refrigerated, Meyer explained. 

"That is unheard of," he said. "The lease was signed and they moved in in less than 30 days." Typically, deals will span the course of nine months, from signing a lease to moving in, according to Meyer. 

JLL is projecting the U.S. needs another 100 million square feet of cold-storage facilities just to keep up with consumer demand and sales trends. 

To put into perspective how much extra warehouse space is needed, Prologis, a real estate investment trust that is also Amazon's largest landlord, has estimated that e-commerce companies require 1.2 million square feet of distribution space for each $1 billion in sales.  

The firm eMarketer, meantime, is predicting U.S. e-commerce sales will make up about 14.5% of total retail sales, or $709.78 billion, this year. By the end of 2024 that percentage will grow to 18.1% of all retail sales, with online sales surpassing $1 trillion for the first time, it said. 

Industrial real estate is the "darling" of the commercial real estate industry today, Meyer said.

The sector certainly has a brighter outlook than some of its peers — including office, retail and hotel space, where vacancies are increasingly growing and fewer new deals are being done. 

In retail specifically, store closures are piling up and are on track to break a record this year, pressuring landlords to find new uses for emptied spaces. Rents are also under pressure, as companies looking to keep their stores open are working to renegotiate deals, hoping to leverage the market's disarray in their favor. Former department store executive Jan Kniffen has predicted a third of America's malls will vanish by 2021. This could also deal a blow to the towns that depend on their malls for tax purposes. 

Warehouses could be one solution, since supply is harder to come by. 

In some instances, dead malls have already been converted into sprawling logistics hubs. In Memphis, Tennessee, for instance, a shuttered Sam's Club store is now home to a Sam's Club e-commerce fulfillment center. 

Still, there are hurdles in taking a former retail space and turning it into something else, Meyer cautioned.

"There are things like zoning laws, these are residential areas," he said. "There's going to be a lot more involved with imagining these things."