Commercial real estate professionals are maneuvering over how best to place bets across various property types in the wake of the Federal Reserve’s recent rate cut.
When it comes to making such a decision on offices, the lingering impact of the pandemic remains a key watchpoint for executives at the just-concluded NAIOP CRE.Converge annual event in Las Vegas.
“There’s massive distress in the general office market across the country, but what we are seeing is a barbell activity,” said Adam Showalter, managing director of national office investor services at Stream Realty Partners. “Trophy office is at its lowest vacancy on record with the highest rent on record. The fallout between the haves and have-nots is wider than ever.”
The “imbalance” in the office sector where supply has outpaced demand began a long time before the pandemic caused the desire for physical office space to fall off “significantly” and create a “structural shift,” he said.
“We’ll see a lot more conversions,” he said, referring to office buildings turning into apartments and other properties. “Slowly the oversupply will be demolished.”
Added mixed-use interest
John Wiedner, principal of global media practice area leader at architectural firm Gensler, said companies are reassessing their space needs and design as more employers want to bring workers back to the office.
“There’s a whole conversation about back to office” among employers, he said. “Adapting buildings to be more bespoke is something we are going to see more of.”
As landlords seek to add more amenities, which include, say, desirable restaurants, health clinics or parks outside, mixed-use properties are also an increased focus for landlords.
“Investors very much understand the value of mixed use,” said Matt Friedman, managing director at Rockwood Capital. “Investors are really warming back up to it, and they really like this idea of building something unique that differentiates their own portfolio.”
However, industry executives said it’s critical to consider the location of a mixed-use project.
“If you have mixed use without the fundamentals, it’s going to fail,” said Tom van Betten, vice president of Matter Real Estate Group. Understanding “adjacency is important” as well, he said, pointing to the example of a mixed-use project Matter has in Las Vegas with a food hall that’s seen demand hurt “a bit” by another nearby food hall in a casino.
Developers said they also are studying so-called placemaking to make a mixed-use property vibrant.
“You have to always consider what a community is after,” Friedman said, adding that his firm studies placemaking closely. “It’s become scientific. We hired consultants. If you don’t have powerful real estate, it’s going to become commodity.”
Deal anticipation grows
While the commercial real estate industry is breathing a sigh of relief that the U.S. central bank is finally reversing course after a string of rate hikes since 2022 raised borrowing costs and sapped financing and deal flow activity, some industry professionals said the impact of the recent half-a-percentage-point reduction and other future moves still take time to play out.
“It didn’t really change anything in that it was already priced into the market,” said Laura Hyde, managing director of investments with industrial real estate firm Link Logistics. “What it did impact was sentiment, and so we’re seeing it’s very competitive out there in the capital markets world today.”
Kevin Jones, director of Pacific Life Insurance, agreed.
“This entire period of uncertainty has finally come to an end,” he said.
Deal activity, currently going well in markets such as Texas, Louisville, Kentucky, and Chicago, is expected to be picking up even more next year, industry professionals said.
Industrial owners focus on energy
On the industrial real estate front, amid growing demand for data centers and other heavy energy-using property types, developers see proximity to essential resources like power, water and labor as key to industrial site growth nationwide.
“Our biggest risk that keeps me up at night is how we protect our power,” said Greg Pearson, a managing director at Fortress Investment Group. “In a high-interest rate environment, losing power will kill you.”
Industrial real estate’s location relative to the power grid is key.
“It’s power, power, power,” said Damon Austin, a managing director with logistics giant Prologis.
Availability of water in site selection, including for semiconductor manufacturing plants, is also on the mind of industrial developers.
Land across the country, from Phoenix to Oregon, won’t have value if it lacks that resource, said Reon Roski, chief executive of developer Majestic Realty.
Access to labor markets also is key.
“The labor story is still the conversation for traditional industrial logistics use,” Austin said, adding, however, there are also conversations being had on automation.