Tuesday, January 26, 2016
Recovery and Transition
Efficiency really is the name of the game. It is the reason capitalism, with its focus on competition, beats mercantilism (i.e. crony capitalism) and socialism. Efficiency in this regard means cutting costs – getting the most for the least – and commercial real estate is a great place to make those cuts. For one thing, values were forced to reset after the Great Recession. But more importantly, computers and the internet continue to change the way people work. Office tenants have been trending towards less office space per worker. Computers are only getting smaller, and smart phones and broadband allow more workers to be productive away from the office. So even when office firms are hiring and signing leases, it’s likely that they’ll be taking smaller spaces, relatively, than they did in the past, and this extends the time it will take for the office market to fully recover.
Medical office has been going through a similar transition. The day of the artisan doctor – one man in one office with his own receptionist and assistants – is over, and the new era of medical groups has arrived. Doctors become salaried employees who are not on call 24 hours a day, 7 days a week, several doctors share a receptionist and office staff, and ultimately take less medical office space per employee than they would have in the past. The reason for this transition is the screwed up world of health insurance and government regulations, of course, not technology, but it’s a transition just the same, and one that brokers should pay attention to. Moreover, healthcare providers are moving into retail centers to get closer to customers and, more importantly, to probably pay less for rent.
Retail has other problems though, in the form of online retail. Shopping online doesn’t cost more, and it’s often more convenient (two generations of rampant narcissism has done nothing to make the shopping experience more pleasant), so it’s on the rise. More online sales means less demand for physical retail real estate – witness mass closures of Staples and Radio Shack, and shrinking retail concepts from grocery to electronics.
The big winner in all this might be industrial space. If the trend is towards spending less on commercial real estate, industrial product, which tends to be less expensive than either retail or office space, becomes an option. This is particularly true when it comes to online retailers. While they do not need physical retail space, they do need physical warehouse space, and giants like Amazon appear to be aiming to have warehouse space in every major and minor city in the country to allow them to ship to their customers, and accept returns from their customers, as quickly as possible.
The slow post-Great Recession recovery is not just slow because it’s slow, it’s slow because businesses are forging a brand new identity and are finding brand new ways to do business. Commercial real estate will adapt to this transition, but only if real estate professionals recognize it. Those who do will likely reap the reward of being ahead of the competition.