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That super hot industrial market? Brokers are losing confidence and seeing strain, according to the first quarter sentiment report from the Society of Industrial and Office Realtors. Office, though, is still on the rebound.

The industrial sector might seem an odd subject for a loss of confidence. The sector has led CRE through the pandemic, scoring top marks time after time and continuing to crush cap rates. But nothing can go on forever.

“The red-hot industrial market is starting to see the effects of high demand and lack of space catching up with each other,” the report stated. “This strain caused by limited supply caused confidence in the industrial sector to drop for the first time in sentiment reporting.”

On-schedule industrial transactions had been increasing for almost a year. That changed in the first quarter of 2022 as they fell by 3%. On-hold transactions were up by 10% and cancelled transactions went from 4% to 6%. A “lack of space seems to have caught up to the industrial sector, which saw a 25% decrease in leasing activity in Q1. Only 61% of industrial SIORs reported high leasing activity, compared to 81% in Q4 2021.” It was the lowest leasing activity in over a year and 93% of respondents said vacancy was lower than a year before.

If you’re a broker, you need property to lease and sell. Without it, there’s little you can do other than perhaps donning a hard hat and heading to a construction site.

There’s been other growing evidence that areas of real estate were pressing the bounds. The CRE Finance Council (CREFC) found that overall sentiment among its board of governors took a nosedive for the first quarter of 2022. Similarly, according to the 2022 RCM Lightbox Investor Sentiment Report, another star, multifamily, is facing headwinds this year. And while there’s some room for cap rates to fall more with additional upward pressure on prices, as First American Financial Corporation notes, things have been getting closer to modeled cap rate bottoms.

 

Source:  GlobeSt.

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The commercial real estate industry has undergone a rocky road over the past two years, as pre-Covid-19 predictions have been upended due to the unforeseen nature of the pandemic. But as the world begins its shift toward post-pandemic life, I believe that commercial real estate is on track for a serious rebound this year. While not every area of commercial real estate is set to see an upswing, there are a few predictions that are safe to make based on trends in the market.

Here are a few of my commercial real estate predictions for 2022:

Commercial Real Estate Will Bounce Back

First and foremost, the biggest prediction for 2022 is the recovery of the commercial real estate industry. While it has taken a beating during Covid-19 (and the Omicron variant does present a hurdle toward full recovery), sound fiscal policy could help the industry recover. Monetary policy could also ease some of the long-term inflation pressures as commercial real estate values rise. The demand for real estate will be high, though the areas in which people are investing might look a little different than in previous years.

Industrial Real Estate Will Keep Growing

Industrial real estate has blown up over the past year thanks to the rise of e-commerce. Online retailers such as Amazon are driving the construction of warehouses to house their products, while retailers like Walmart and Kroger are snatching up distribution facilities left and right. Manufacturers are also going to keep investing in commercial real estate as they increase the amount of inventory they keep onsite.

Office Real Estate Won’t Be Out Of The Woods Yet

The one part of commercial real estate that still has some trouble ahead is office real estate. While it won’t be terrible, demand won’t be nearly what it was in previous years as companies continue to hold off on returning to the office. As working from home both full-time and part-time becomes more of the norm, office space utilization will most likely be on a downward trend.

Hospitality Will Rebound

It will be good news for hospitality, as business and leisure travel seem inclined to grow this year. The travel boom will drive luxury hotels to continue to embark on renovation projects that may have stalled during the pandemic. These projects will likely be driven by both city centers and the hotels themselves as the demand for more hospitality spaces continues its upswing.

The Supply Chain Will Be Retooled

The supply chain has suffered quite a blow during the Covid-19 pandemic, which will require some retooling over the next year. Because the space near seaports is not widely available, many developers will have to invest in commercial real estate inland. In order to account for rising transportation costs, manufacturers will most likely have to add distribution facilities in closer proximity to manufacturing facilities.

Although nothing is set in stone for the future of commercial real estate, it’s safe to say that the economy behind commercial real estate is here to stay and that these predictions are well on their way to becoming reality.

 

Source:  Forbes

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Landlords of warehouse and distribution properties may look to shorter leases to capitalize on burgeoning e-commerce-driven demand, with the pace at which average lease terms are shortening picking up major speed.

A new analysis from Moody’s Analytics notes that pricing and fundamentals of the sector never decreased as a result of the pandemic, and instead posted record high occupancy and rents as retailers clamored to deliver goods faster and more efficiently. E-commerce as a share of total retail sales now stands at a record high of 15.7%.

And accordingly, “landlords may seek shorter lease term lengths to capitalize on this demand, likely looking for flexibility to sign new tenants or renew existing leases at inflating rates while the sector experiences strong rent growth,” notes Ricardo Rosas and Ermengarde Jabir in the report. “This avoids locking in a tenant at a ‘lower’ rate without a boost to their net operating income for an extended period of time.”

An analysis of 101 metros by Moody’s Analytics shows that from 2017 to 2019, the average lease term for warehouse and distribution space changed around the 36 month mark. Since that time, the average lease term fell 20% to 29 months, and the last two quarters of 2021 saw lease terms declining by an average of 4% per quarter. The proportion of newly inked leases from 25 to 60 months in duration declined by 24% over the last three quarters of 2021, while the share of properties with lease terms of two years or less saw a 22% increase. And “leases whose terms fell into the 13- to 24-month range gained the greatest share of the market in 2021, increasing by 14% over the last three quarters,” according to the report.

“On the supply side, these shorter lease terms appear to allow for the renewal of existing leases or to sign new tenants for existing space at rising rental rates,” Rosas and Jabir note.

The biggest decline in lease term lengths was in the Midwest ,which also had the lowest rent levels and the second lowest occupancy rate amongst the areas Moody’s tracked.

“These landlords most likely desire to boost rents in a shorter period of time since they see sustained heightened industrial demand,” Rosas and Jabir note.  “Additionally, tenants may also desire shorter lease terms if they think the market will eventually cool off and do not want to be locked into a particular rental rate while they contemplate business uncertainty and perhaps view this additional warehouse space as a bridge to mitigate supply chain stress in the interim. On the demand side for distribution properties, there is a ‘take what is available and then see’ approach in the short term.”

 

Source: GlobeSt.

 

 

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Industrial is thriving and has risen to become an especially important sector in commercial real estate. On the other hand, retail had already experienced a few challenging years before the pandemic hit, particularly Class A and B malls with large retail anchors. Partner Insights spoke to Judy Guarino, managing director for commercial mortgage lending at JPMorgan Chase, to learn more about where both sectors stand today.

Commercial Observer: Since the beginning of the pandemic, industrial has become the darling of commercial real estate. What is its current state?

Judy Guarino: Thanks to e-commerce, industrial continues to boom, as it did before the pandemic. Now it’s even more in demand since consumers fully embraced online ordering to get items delivered directly to their doorstep. The businesses without an e-commerce operation pre-pandemic certainly saw the importance of it over the last couple of years. Industrial will remain a hot asset class, especially in the Northeast among densely populated markets.

How significant is the shortage of U.S. warehouse space right now?

Space has always been an issue in New York, for every property type. In the boroughs of New York City, old stock is being renovated and developers are learning how to best utilize the space with some unique projects. There’s a bit more land for new development in northern New Jersey. It’s probably the one market where you’ll continue to see growth as it pushes its way down to the southern part of the state. There’s definitely a need for more space, and everybody is working together to figure out how to make it work.

How is everything we’re discussing affecting JPMorgan Chase’s lending in that sector?

We’re very busy. There’s a lot of activity in all the commercial mortgage lending assets, be it retail, industrial or mixed-use. Rates are low and refinancing activity has been high. We haven’t left our clients’ side. We have and will continue to lend. In fact, I have been expanding my team to help support our clients as we experience expected growth.

Brick-and-mortar retail has been in a tenuous position, with the continued rise of e-commerce and lockdowns resulting from the pandemic. What is the current state of brick-and-mortar retail?

We focus mostly on neighborhood retail. There’s always going to be a need for retail, though the type will likely change with the environment. For example, we don’t see as many shoe and clothing stores as we did in the past. But we continue to see strength in service businesses: hair and nail salons, various food takeout, etc. Twenty years ago we saw more video rental stores, local pharmacies, photo printing shops and delis. Now, we see so many more variations of food establishments and businesses that focus on health and wellness and personal improvement, because that’s what people are looking for. A lot of medical has come to retail. It used to be that only retailers needed street visibility. Now, doctors, dentists and other health professionals are forming medical groups where visibility is important. We see a lot less vacancy in neighborhood retail now compared to the beginning of the pandemic. Where we continue to see stress on retail is in areas that are dominated by office, like Midtown Manhattan, or tourist spots like Times Square. When we all get back to the office and tourism continues to improve, those retailers will come back, and new business will fill vacancies.

How do you think industrial will fare five years down the line?

I think it will still be very strong. It might start to look a little different. We’re going to see a lot of new industrial facilities being built, some of them with showrooms. Some will be multi-tenant and multi-story, allowing truck delivery on multiple levels. We’re going to see industrial properties with mother’s rooms, employee gyms, complimentary snacks and other amenities that were typically available only in office space. This notion of keeping the front office and manufacturing together in one facility is on the rise.

Is there anything else you wanted to touch on as far as interest rates?

One important thing to note: There was a time when interest rates were at 9 or 10 percent. Everyone became so used to seeing low 3s or high 2s, but current rates are not terrible. It marks a slow rise. Some people forget history, when rates were 10 to 16 percent in the late 1970s through early 1980s, or the 1990s and early 2000s when rates were 9 to 10 percent. In the current low-rate environment, investors continue to take advantage.

 

Source:  Commercial Observer