Real estate markets adjust to the ‘new normal’

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Advantage Commercial Real Estate recently released mid-year market trend reports for 2021 showing industrial real estate is expanding to meet consumer needs despite high construction costs. Meanwhile, retail and office companies in Western Michigan are still adjusting, but some post-pandemic changes may persist.

Advantage has counted several dozen industrial facilities under construction this year. Companies have shown continued interest in Western Michigan due to its location, favorable business environment, skilled workforce, and generally moderate cost of living.

“We have less than 3% free warehouse space in Western Michigan,” said Mark Ansara, managing director of Advantage. “When it is built, it is rented out. If you are in the market with 10,000 to 100,000 square feet, you will be hard pressed to find it. ”

The average number of days on the floor space rental market fell 15% from the first to the second quarter of this year. The total number of signed leases increased by 54% in the first half of this year compared to the same period last year. In addition, the number of purchase and sale transactions has more than doubled; at the same time, the number of vacant space continued to decline to less than 3%.

According to Advantage, the reason for this surge in manufacturing activity is the demand for goods. While the demand for goods has barely changed during COVID-19, the way these goods are delivered to consumers has changed. Online shopping became ubiquitous as people stayed at home, an increase of 39% over last year in the US. In order to fulfill these online orders on time, new distribution networks had to be planned.

“The cost of construction is extremely high and the lead time has been increased. However, the demand in our market is so high that new construction is still ongoing, ”said Jeff Heiner, Research Director at Advantage. “The earth is being dug up faster. This type of property is so valuable that people know that the only solution to meet demand is to create supply. They are willing to pay more for land and are willing to pay higher construction and labor costs to do so. ”

Manufacturing times and construction costs are currently the biggest challenges faced by industrial users and developers. Advantage reported continuing challenges both domestically and internationally with sawnwood and steel production, as well as supply chain and international tariff issues. These factors contributed to major delays and overpricing. The report says that increased public investment in infrastructure projects has also exacerbated the situation.

From a retail perspective, the biggest market constraint in the first half of 2021 was the lack of employees willing to fill open positions. But some submarkets do better than others.

“Overall, if you’re talking about shopping, these types of retailers have not been hit that hard for employees compared to catering,” Ansara said. “We are approaching a critical holiday recruitment season, which usually begins in September-October. As far as I understand, they are still pretty good. Catering and hospitality are where the problems arise. You can see that the minimum number of people subscribes to hundreds of vacancies. “

To date, the federal government has committed more than $ 4.55 trillion in total budget resources to help individuals and families cope with the pandemic. With soaring childcare costs and still low minimum wages, Advantage says, many people will not be financially disadvantaged by low-paying retail jobs.

In April, 2.7% of all workers quit voluntarily, the highest rate since the Bureau of Labor Statistics began recording statistics.

As the pandemic closed, retailers learned several new tricks. Many were forced to switch to online ordering and either contactless pick-up, or drive-through or delivery.

Some restaurants with additional kitchen capacity have begun to effectively divide their space with other delivery-only concepts. Even with the ability to serve a canteen full of diners, many choose to keep the pandemic era models they have created and keep those canteens closed, largely due to staffing.

Examples of such ghost kitchens in Grand Rapids include Blacklist Bagels, 9th Street Steaks, Pronto Pasta, Li Grand Zombi and the recently announced opening of Mitten Pizza Co. in Rockford – none of which has a physical dining room, just a rented kitchen.

Many retailers in Western Michigan, both local and national, continue to push their plans to open new stores. Chick-fil-A is building a new store on the southeast corner of Lake Michigan Drive and Wilson Avenue in the northwest in Standale, scheduled to open in September. Dollar General’s new DGX concept opens its first local downtown location at 111 Lyon St. NW. Total Wine and More opened at 34,000 square feet in July on SE 28th Street. AutoZone is building a new 38,000-square-foot mega-center in Wyoming that will open in August.

The main question related to the current office market is “what will be new?” Unsurprisingly, most employees quickly adapted to the pandemic. The use of technology accelerated, and most employees quickly became comfortable with home offices. Employees found that the flexibility of teleworking allowed them to better manage their work-life balance, and many of them actually found their productivity improved – and employers agreed.

“There are so many variables now, but we saw that every company is a little different,” Heiner said. “Overall, it’s safe to say that traditional office use and environments have changed. People who learned to work from home continued to do so. Some employers want their workers back, but they also want them to be happy. If the work gets done, they are ready to do it because there is such a shortage of talent right now – especially in retail, but also in the office world. “

In Western Michigan, average leases were down 23% in 2020 compared to 2019, indicating that tenants were not as willing to commit large areas as there was a lot of uncertainty at the time of the shutdown. Rentals fell slightly and vacancies increased as some tenants either allowed their leases to expire or consolidated / decreased. Some of them, which had recently found underutilized space, were able to sublet some of their space, which had no net impact on vacant space.

However, traditional offices are not obsolete. According to Heiner, people who have worked remotely in the past are eager to come back because they miss this social interaction.

“People don’t want to stay in their home all the time, but they have families and are still trying to understand the new world we live in,” Heiner said. “I think that in the second half of this year we will see that the office real estate market will find its place. The activity has increased. People are returning to the office. “

“I can tell that people are returning to the office,” Ansara said. “They may not come back to the office that often.”

Spectrum Health is a prime example of what the new normal is likely to resemble. The healthcare system is the largest employer in Grand Rapids, with more than 25,000 employees across the region and approximately 1,500 in downtown office positions.

While uncertainty still prevails, Spectrum is in the process of consolidating its leases across the city into a new Transformation Center that is being built on North Monroe Avenue. The complex will employ 1,200 employees and is expected to save more than $ 15 million in annual rent. In addition, Spectrum is committed to offering these employees flexible work options.