National trends that affect local market
June 16, 2014
In commercial real estate vernacular, Nevada County is classified as a "tertiary" (or small) market. While our local economy has certain unique attributes and economic drivers, it remains dependent on and influenced by what is happening regionally and nationally. For this reason, this article will review current national (macroeconomic) trends in each of the four commercial property sectors, which have and will inevitably continue to affect our local markets.
OFFICE PROPERTY SECTOR
U.S. employment growth since the end of the Great Recession might best be described as plodding. Contributing to this slow rate of job growth are changing work habits and a tendency among employers to increase productivity by using temporary workers and independent contractors, rather than full-time hires. In addition, the newest generation of professionals in the workforce — the "millennials" (ages 20-34) — prefer to work with mobile devices and in project groups rather than at traditional, permanent workstations. This allows employers to embrace the concept of shared workspaces, telecommuting and other efficiency measures that effectively reduce lease space requirements.
At the beginning of the century it was common real estate practice to allocate approximately 250 square feet of office space per employee. Today, however, this benchmark stands at only 110 square feet per employee.
Furthermore, younger workers are now leaning toward living, working and playing in vibrant urban environments, which is funneling much of the nation's office absorption into central business districts, thus leaving suburban office buildings and the communities in which they exist lagging behind.
INDUSTRIAL PROPERTY SECTOR
In comparison to the office segment, industrial real estate is making a surprising comeback in certain U.S. markets. This is due to a combination of lower U.S. energy costs brought about by new technology, as well as increasing labor costs in China, both of which are beginning to stem the tide of offshore outsourcing.
Another trend is the growing consumer demand for same-day delivery of online purchases. To meet this demand, product distributors are seeking to minimize the distance and time required to ship goods from the warehouse to consumers. The result is new development of millions of square feet of distribution centers located in or in close proximity to major population centers. These highly efficient, modern industrial facilities are rendering much existing industrial stock functionally obsolete due to low ceilings, inefficient layouts and other constraints common in older buildings.
RETAIL PROPERTY SECTOR
This segment is dealing with profound impacts caused by shifts in consumer habits related to e-commerce. The online world is here to stay and is now an entrenched component of consumer shopping, resulting in reduced demand for traditional brick and mortar stores. To stay competitive, retail tenants are now seeking highly refined and efficient spaces, thereby further reducing retail space requirements.
Nationally, we are starting to see a retail divide develop due in part to income disparities. On one side we have stores catering to either:
1) value- and necessity-oriented consumers; or
2) high-end retailers serving well-off clientele largely unaffected by the recession. These retailers at both ends of the economic spectrum are enjoying brisk sales and embarking on nationwide expansion programs.
On the other side, middle-tier stores that typically target middle class consumers (for example, Target) are now curtailing plans for multi-city rollouts due to continued cautious consumer spending.
APARTMENT PROPERTY SECTOR
Apartment properties were the first sector to emerge from the recessionary slump and this sector has posted several years of strong investment activity, rent growth, and more recently, new construction.
As a result, in certain markets (Las Vegas to name one) overbuilding and declining rents are already becoming a concern.
However, investors still have good reason to expect further increases in apartment demand for several reasons:
i) job growth from the recovery, even though relatively slow throughout much of the country, will enable more working-age adults to form new households;
ii) millennials have shown a stronger preference to rent than previous generations, with studies indicating that about one-half are renters, compared to only one-third of adults across other age groups; and
iii) baby boomers are trading single-family homes for urban apartments as they approach retirement age. Nationally we are seeing an urbanization trend in which household groups prefer to live, work, dine and spend leisure time in central, walkable, mixed-use neighborhoods with excellent amenities.
Our local commercial real estate market is affected in varying degrees by these national trends. By identifying and understanding them, hopefully we can better prepare and position ourselves for the future.
Lock Richard specializes in acquisitions, dispositions and leasing of commercial and investment properties. He has more than 25 years of experience in the field, including over 15 years in the Grass Valley/Nevada City area. His "Commercial Property Review" newsletter, full of current Nevada County market trends and specific property details related to industrial, office and retail properties, is available at http://www.svnhighland.com or by calling Lock at 530-470-1740.
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