Commercial Market Trends Q2 2023
by Scott Lyons
Challenges will continue in the commercial real estate market in 2023 given a difficult debt/equity marketplace and corporate America’s challenge of redefining their workplace strategy.
Leasing velocity has been down over the past 6 months and very few large transactions are getting signed as companies navigate these murky waters. Forecasts for relief in the market are mixed but generally real estate developers continue to plan and design with cautious optimism that projects will proceed in mid-2024 when markets (hopefully) improve. That said, bright spots exist and the flight to quality commercial office is real.
Around 75% of real estate executives believe the office is key to their future portfolio, however, office is going through a historic shift. Uncertainty at the outset of the pandemic drove a wave of short-term renewals, but recent trends favor relocation into higher quality space, at higher lease rates.
Office visit patterns have changed with 48% attending 1 time per week, but the data is showing that steadily growing to 2-3 times per week. Many companies are seeking to continue that trend and bring their people back into the office by creating an amenity-rich environment focused on flexibility and wellness with the comforts of home. It is still a historically tight labor market, so the competition to attract and retain quality people remains extremely high.
From a cost of real estate perspective, we are seeing tenant designs with less desks due to the hybrid work approach but a significant increase in collaborative space and a high demand for services (access to restaurants & cafes, fitness centers, outdoor space, and daycare).
For many firms, they may be taking less square footage but at a higher lease rate, thus netting a wash on their corporate income statements.
The repurposing of aged-out buildings is on the rise and gaining traction with potential tenants. The increased awareness of climate change impacts has been a key driver for investors, developers, and tenants to gradually adopt this approach and breathe new life into our downtowns. The possibilities of adaptive reuse are endless and come in many forms but is defined by transforming a current underutilized building for another purpose.
We have seen this with change in industrial to retail, office to multi-family, office to hotel and office to laboratory/research spaces catering to the rise in the life science sector.
How landlords, developers, and banks tackle the repurposement of aged buildings will be a “hot topic” for the next decade.
Getting Clarity: The Next Generation of Office Space
Revitalizing Urban Areas Through Adaptive Reuse
Despite macroeconomic headwinds, geopolitical tensions, and ongoing supply chain disruptions, the global lodging industry remained resilient in 2022 with fundamental performance accelerating towards a full recovery to pre pandemic levels. According to McKinsey & Company, the recovery of the hospitality industry to its 2019 level could happen by 2024 or later. Projects scheduled to start construction in the next 12 months are up 14% YOY, and projects in the early planning stage increased 18% YOY.
The pipeline in hotel development is happening on two tracks. Major hotel brands that paused or postponed their CapEx property improvement programs during the pandemic are still working through the backlog of five-year renovations. At the same time, new developments are happening in locations that are benefiting from residential and business migration. Markets like Dallas and Atlanta are pulling from major markets like New York and Chicago for both business and leisure travel.
Photos: Chad Mellon
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