We’re a solid two years into the COVID pandemic, and it has had a profound impact on commercial and industrial real estate, not to mention daily life across the nation. From the microcosm of a single family to the macrocosm of the US economy, everything has changed, and many of these changes aren’t going anywhere. Coupled with economic inflation and sanctions on Russia due to the aggression in Ukraine, 2022 has become a little complicated.
In 2021, we saw an increase in industrial construction and distribution centers for e-commerce, a climbing demand for residential developments outside of major city centers, and a downturn in retail traffic and occupation, coupled with increased rent on leased retail and office spaces. Has any of this changed in 2022? And what do we expect to see in the remaining financial quarters for 2022?
Let’s take a look:
Stalling Populations & Migration Trends mean New Priorities
In the last 10 years or so, the US population has stopped growing. Millennials can’t afford to settle down, and they definitely can’t afford to have children at the same times and rates as past generations. Coupled with the lowest immigration rates in decades, CRE experts are expecting this trend to last for at least the next few years.
Meanwhile, COVID created a mass exodus of Boomers from the job market, and Gen Z is very close to entering the job market, which will be a completely different (and much better) landscape than it was for Millennials. These dynamics are all going to affect the commercial real estate market and the economy at-large in different ways. However, the issue with a population that isn’t growing is that, eventually, it could eventually starve the commercial real estate market. It’s not yet a definite issue, but it is a worry on the long-term.
The other aspect of US population that is having a direct effect on commercial and industrial real estate is people exiting major urban centers (think LA, NYC, Chicago) in favor of secondary cities (think Nashville, Austin, Cincinnati). Corporate giants like Amazon are setting up new distribution centers all over the country, injecting once slow-growth economies with jobs and capital. The result? Increased migration to those places, and, in turn, increased need for commercial properties like office space, residential developments and more.
This means great things for our region, specifically: not only is the Cincinnati-Dayton corridor already an area of consistent economic growth, it’s also a gateway city into the Midwest markets. That means that our region and other secondary-city and gateway regions will have resilient economies and growing industry, whatever comes next.
Industrial Real Estate Continues to Grow
The growth and prevalence of e-commerce shot up during the first few waves of the pandemic, and it doesn’t look like that’s going to change. This has meant industrial real estate is in higher demand than ever – occupancy rates for existing industrial properties are over 95%, and rent on leased industrial spaces has steadily increased, and will continue to do so.
This all means a boom in constructing new manufacturing plants, storage warehousing, distribution facilities, data centers and more in these secondary and gateway regions. Industrial real estate remains attractive for investors, and we’re seeing this play out in real time with the growth of industrial spec buildings in Cincinnati and Northern Kentucky real estate markets.
An interesting bit of trivia: the niche sector of cold storage warehousing is suddenly piquing the interests of investors in industrial real estate nationwide.
Another factor facilitating the continued value of industrial real estate is inflation. It might seem like a contradiction, but it’s actually quite simple: with construction material costs skyrocketing, existing industrial property values are more valuable assets than in the past. It’s much easier, and more cost-effective, for a growing company to expand into an existing industrial facility, whether they lease or buy, than it is to begin a construction project for a new facility and deal with soaring costs of steel and lumber, coupled with timeline complications that ripple from disrupted supply chains.
Mixed-Use Zoning Rises as Retail & Office Occupation Falls
Retail is where CRE experts start to be a bit wishy-washy on their predictions. It’s no secret that COVID damaged the retail real estate market, between lockdowns and social distancing measures that retail spaces just weren’t designed for. The pandemic hit offices similarly, leading to the nearly 20% vacancy rate we’re seeing nationally for leased office spaces. To combat these shrinkages in office and retail space value, mixed-use zoning has become more prevalent.
The great thing about mixed-use zoning is it allows investors to change existing commercial spaces. Empty office buildings can be converted to medical facilities, hotels can be converted to apartment buildings. Zoning flexibility means a more resilient retail property market.
On the other side of the coin, people really do want to get out of their houses, go have a drink at a bar, dinner at a restaurant, an in-person doctor’s visit instead of those awful tele-health appointments. So, not all is lost for retail. It’s a little unclear whether it will come out ahead by the end of the year, or remain somewhat stable, but 2021 trends and predictions for retail, looking back, were a bit dramatic in their pessimism.
Multi-Family Residential Developments are In-Demand
An obvious consequence of people exiting urban centers is that single-family homes are in high demand. And that means that near-100% occupancy rates have led to a shortage of available homes. This has meant great things for developers of residential communities, especially investors in the build-to-rent game; average rent for an apartment is expected to increase by as much as 10% in the next decade.
Multi-family housing developments mean more people can move to these secondary and gateway regions. That means more money into those economies, more talent in the job market, and more opportunity for local and national business growth. Starting to see how everything is interconnected in the US commercial real estate market?
The other factor at play here is the work-from-home culture COVID took from 0 to 100 real quick. Where work-from-home jobs before the pandemic were primarily sales and tech-centered, during the pandemic, hundreds of thousands of two-income household became two-office-mate households. And working from your living room couch isn’t for everybody – people want more space for home offices.
Office Spaces Renos & Hybrid Work are Here for the Long-Haul
Just because most of us used to work at offices doesn’t mean we’ll all be going back when (or if) COVID isn’t a problem anymore. When people went from 9-to-5 office life to work-from-home life, many employers realized that their company could function just as well on Zoom calls and occasional in-person meetings as it ever did when everyone was physically together all the time.
Office buildings across the country are being renovated to accommodate this new normal, re: social distancing. And employers, in turn, are weighing the cost-benefit ratio of offloading overhead costs of maintaining an office space in favor of keeping hybrid work the standard. Why bear the burden of an entire building when you really only need to lease a few office spaces and a conference room or two?
This has meant good things for office space rent occupancy in 2022, which had a terrible hit in 2020 and 2021. That’s not to say the office sector has nothing to worry about, though; leasing or investing in office space will continue to be a risky and opaque move for the foreseeable future. However, the increase in mixed-use zoning has softened the blow to investors in office buildings that aren’t ever going back to their normal occupancy rates.
Navigating the New Landscape of Commercial Real Estate
By no means are these the only factors changing, shrinking, growing or stalling various sectors of the commercial real estate market. There’s the government – CRE investors are not sad the Senate never passed the Build Back Better Act. There’s environmental concerns – sustainability is more at the forefront of industrial construction and facility operation than ever. And then there’s the absolute explosion of the proptech industry.
So, while many things are unclear, it looks like the commercial real estate market is adapting and transforming in a way that is going to spread capital and commerce throughout the country. And commercial real estate brokers, developers and contractors who stay at the front end of these transformations will find themselves a part of that optimism and growth.
