Over the last several decades, consumer shopping patterns and preferences have been changing. In the 1980s, enclosed malls were a dominant part of the retail landscape, influencing everything from consumer behavior to pop culture. By the early 2000s, preferences had begun shifting to open air shopping centers, and consumers began relying more on neighborhood and community centers with big box anchors. Now, in the aftermath of the COVID-19 pandemic and with strong reliance on online shopping, brick-and-mortar retail continues to evolve. As we see an uptick in existing retail facilities becoming functionally obsolete in the face of these shifting consumer patterns, many investors are questioning the highest and best use of their properties and evaluating their real estate portfolios to identify opportunities that will maximize value now and into the future.One option investors may consider is converting or redeveloping outdated or underutilized commercial space to a multifamily use. With this repositioning, investors can help address the shortage of housing options available to the nation’s growing population, as well as potentially increase the value of their assets by replacing obsolescence or activating existing retail by adding a built-in consumer base. But residential conversions may not be possible for every property or in every situation. Here, we discuss the benefits and challenges investors may face when considering this option.When Might a Commercial-to-Residential Redevelopment Be Right?If commercial sites meet specific criteria, it may make sense for investors to explore a commercial-to-residential redevelopment or conversion. Some retail properties – including regional and enclosed shopping malls, as well as power centers – that were built years ago may be located in areas that have been impacted by unfavorable demographic shifts. If the surrounding consumer population no longer supports these sites as viable retail centers, the owner may wish to explore the possibility of redeveloping or adding a multifamily use.Similarly, many commercial properties that have become functionally obsolete may be ripe for redevelopment. Industrial properties in urban areas, for example, are served by streets too narrow for large semis and trailers to access, and they offer clear heights that no longer cater to the needs of modern warehouse users. Properties such as these, when converted to residential, can help address in-town housing shortages and allow investors to create substantial value for themselves.Benefits of Redeveloping Underutilized Commercial AssetsThe successful redevelopment of a commercial property or underutilized site can pay significant dividends for a real estate owner. Exploring what is the highest and best use of a particular property can mean the difference between an investment that cash flows and one that sits vacant. If an owner has an under-leased or underutilized retail property, for example, converting a portion of it to multifamily or mixed-use introduces an immediate and direct customer base for the remaining stores. In other scenarios, investors may have small-footprint properties on large parcels of land. By demolishing the existing improvements and building vertically, the increased density translates to increased value.Beyond the benefits afforded to the investor, many communities across urban, suburban, and rural areas are experiencing housing shortages or simply lack the desired walkability that mixed-use projects provide. Populations are growing and home ownership is becoming more difficult to attain for much of the lower and middle classes. Access to multifamily housing, as well as affordable housing options, is critical to the success of these growing communities. By redeveloping a dark shopping mall or reactivating an existing retail center, an investor can create affordable and accessible housing, walkable neighborhoods, and more stable communities.Factors That May Limit Redevelopment OptionsNot every underutilized commercial asset, however, is a good candidate for redevelopment. Several characteristics may limit – or even prevent – the possibility of repositioning a property. First is the size of the parcel. Some parcels may be too small to accommodate multifamily construction. Consider a one-acre outparcel to an anchored shopping center. It may be sitting vacant, undeveloped, and therefore underutilized, but a parcel this size in most locations would not be able to accommodate apartments in addition to all the required or expected amenities, such as covered parking or a swimming pool. Generally speaking, investors should refrain from considering a multifamily development if their parcel is less than one and half acres at a minimum, with exceptions for highly dense urban areas. On the flip side, some larger urban tracts can be ripe for large scale mixed-use redevelopment, which generally have a large multifamily component.Location is also a consideration. Proposed developments located further away from commercial corridors may meet resistance from established neighborhoods, be limited by zoning and use restrictions, or encounter other challenges that would prevent the project from going forward. It’s also possible that residential tenant demand could be lower if a property isn’t well located or easy to access.Economics present yet another challenge for investors. Rent comparables in the immediate area must be able to support a new development. Constructing a new multifamily community can be extremely expensive, and if a proper market analysis isn’t conducted in advance, an investor may not get the deal to pencil.Investing in the FutureAs investors seek to maximize value across their real estate portfolios, many will look for creative ways to reposition today’s underutilized assets. By converting an existing commercial property to multifamily or mixed-use, investors have the potential to increase their cash flow and position themselves for long-term gains. It’s important to acknowledge, however, that redeveloping every underperforming commercial site to multifamily simply isn’t possible. Size limitations and zoning restrictions, among other considerations, may pose a multitude of challenges. Nevertheless, with careful planning and thorough evaluation, investors can tap into the potential benefits offered by this repositioning strategy. Not only can investors increase the value of their own portfolios, but they can also contribute positively to the creation of vibrant and sustainable communities.Given the current market headwinds, Northmarq cautions owners to align redevelopment underwriting to institutional standards to ensure project viability. hbspt.cta.load(7279330, '69aba55c-2172-414b-8cb8-e094fe4328b2', {"useNewLoader":"true","region":"na1"});

Have you ever been on a retailer’s website and seen an amazing deal – only to find that it ships from overseas and won’t arrive for more than a month? Or have you had to wait several weeks for delivery even though the manufacturer is only a few hundred miles away? Have you ever wondered how Amazon is able to reliably deliver what seems like an endless list of items in less than 48 hours? Strategically positioned warehouses have proven to be an asset for companies of all sizes that allow them to solve a variety of sticky logistical problems. These increasingly mission critical facilities can improve operational and environmental efficiencies, providing a more positive customer experience and increasing development and investment opportunities for players within the commercial real estate industry.Growth in E-Commerce is Stimulating Warehouse DemandWith a warehouse or distribution facility in the right location, e-commerce companies can dramatically lessen their delivery timeframes from weeks or longer to just a day or two. In addition, delivery costs and carbon footprints can be reduced when you have warehousing facilities closer to the end consumer. Recent growth in both traditional and drop-shipping e-commerce has spurred the demand for warehouses and fulfillment centers of all sizes, and with drop-shipping expected to grow at a compound annual growth rate of more than 27 percent between 2022 and 2031, demand will be fueled further.Some estimates anticipate a nearly 20 percent rise in the number of warehouses worldwide by 2025, as global e-commerce sales are expected to report an 8.9 percent growth rate in 2023 and are forecasting a 9.4 percent growth rate in 2024. With U.S. consumers continuing to embrace both online and in-store shopping, domestic demand from retailers for well-located warehouse storage space and efficient distribution facilities is projected to continue growing.The Impact of the Amazon ModelAs an e-commerce industry leader, Amazon’s real estate model is being adopted by a number of growing and established retailers. Amazon has more than 2,000 locations – including 200 fulfillment centers – around the world ranging from massive bulk warehouses to comparatively small last-mile distribution facilities. Each building in Amazon’s portfolio serves a very specific purpose, and when working together, this network allows the e-commerce giant to deliver goods to their customers with what has become the new standard of quickness and efficiency.In an effort to streamline costs and deliver a better customer experience, other retailers and competitors, like Target, have begun to take notice. In the Northeast region, for example, Target operates fulfillment centers of their own in many of the same areas where Amazon has established operations, primarily in the Boston, North Shore, and Southeastern Massachusetts areas. By mirroring the Amazon model, Target is not only able to supply product to their regional stores effectively, but they are also able to meet the online shopping expectations of their loyal customer base across the local geographic region.Future Real Estate Opportunities As Target and other retailers continue prioritizing a commitment to fast shipping and low prices, having strategically located fulfillment centers will be a critical component to their success, translating directly to real estate opportunities. Industrial and logistical vacancy rates have continued to decline since 2020 with growing demand for warehouse space facilitating the development of new buildings across all U.S. markets – from the most dense urban cores to far reaching tertiary and rural markets – creating new work for industrial developers. The size ranges and specialty characteristics of these facilities will also differ, offering industrial investors a wide range of price point options, from a few million dollars to $100 million or more. Strategically positioned warehouses play a vital role in solving logistical challenges and enhancing the customer experience in the growing e-commerce sector. By having warehouses in the right locations, e-commerce retailers can significantly reduce delivery timeframes, as well as lower costs and carbon emissions, leading to increased customer satisfaction and loyalty, not to mention positively impacting the environment. With the projected rise in global e-commerce sales, the demand for warehouses and fulfillment centers is expected to continue, creating lucrative opportunities for real estate investors and developers now and into the future.Sources: Northmarq, CoStar Group, Statista, Allied Market Research hbspt.cta.load(7279330, '4d2a6a72-85fb-4937-ba18-4636eac5cfd6', {"useNewLoader":"true","region":"na1"});

Quarterly summary of future growth plans for the top 100 retailers, as selected by brand recognition, expansion rate and frequency of investment sale transactions Average cap rate and sale price information for the most commonly traded retailers Credit rating summary with parent company information Average square footage ranges and store counts for each tenant  

Northmarq’s Blaise Bennett, Associate Vice President in the Chicago investment sales office, has completed the sale of Clearwater Springs Shopping Center, a 132,156 sq. ft. multi-tenant retail property located at 5151 East 82nd Street in Indianapolis. The seller was represented by Wes Podell at Podell Partners. Bennett represented the buyer, a Cincinnati-based private equity firm, who acquired the asset for an undisclosed price. “In an environment where transactions of this size and nature can be difficult to get done, I want to thank everyone involved, especially the buyer’s team,” said Bennett. “Without their patience, resilience and longstanding relationships, this deal would never have happened. I am fortunate to have had the opportunity to work with such an outstanding acquisition team in adding yet another excellent retail asset to their portfolio.” The shopping center is situated on 34.49 acres and anchored by ALDI, Haverty’s Furniture and Michaels. Shadow-anchored by PetSmart, the Property is leased to an array of national retailers such as Starbucks, Athletico, David’s Bridal, AT&T and more. Clearwater Springs boasts an exceptional location and visibility along the Castleton neighborhood’s primary commercial road, 82nd Street. Additionally, the shopping center has a strong historical occupancy with many long-term tenants surpassing 15 years. Sun Tan City and AT&T have been at Clearwater Springs since the late 1990s. Grocery-anchored neighborhood centers such as Clearwater Springs remain among the top wish list items for investors, according to Northmarq’s Q1 2023 MarketSnapshot. Despite investor demand for multi-tenant retail assets slowing over the past several quarters, larger open-air lifestyle and power centers also continue to trade hands. To learn more about the multi-tenant retail market, view Northmarq’s MarketSnapshot.

Northmarq’s investment sales team has announced the addition of Michael Zimmerman as Vice President – Commercial Investment Sales. Zimmerman specializes in the disposition and acquisition of single tenant and triple net lease retail properties, further expanding Northmarq’s commercial investment sales. With over 20 years in the commercial real estate business, Zimmerman has been involved in over $1 billion of sales for shopping centers, single tenant, strip centers, office buildings and land deals. Prior to Northmarq, Zimmerman served as principal owner at Ground & Space. He has also served as a partner at Atlantic Retail Properties and a managing director at Calkain Companies. “I am thrilled to join Daniel Herrold’s team and Northmarq’s rapidly growing investment sales platform,” said Zimmerman. “Providing best in class data and the ability to leverage our debt and equity services are just some of the ways we can bring more value to our clients.” In his new role, Zimmerman joins the commercial investment sales team led by Daniel Herrold, Senior Vice President of Northmarq’s Tulsa office. Zimmerman will be based in Chapel Hill, North Carolina, and brings his expertise to support merchant builders, private owners and institutional clients with their retail investment needs. “I’m excited to have Michael join our team,” said Herrold. “Michael is a veteran in the net lease space having over 20 years of experience in the business. We needed to fill a void in our team of focusing on retail investors and developers throughout the Southeast, and Michael fits that void perfectly with his existing clients and business activity.” Zimmerman is a graduate of San Diego State University and holds a broker’s license in North Carolina and Florida. He is also a long-time member of the International Council of Shopping Centers.

Summary of future growth plans for the top 100 retailers, as selected by brand recognition, expansion rate and frequency of investment sale transactions Average cap rate and sale price information for the most commonly traded retailers Credit rating summary with parent company information Average square footage ranges and store counts for each tenant

Northmarq’s New York office has completed the sale of Parkway Village located at 170 Village Commons Drive in St. Augustine, Florida for $24.1 million. The 52,070-square-foot shopping center is anchored by Publix GreenWise Market, a specialty, natural, and organic grocery store. The seller was a developer based in Fort Lauderdale, Florida. Jason Maier, senior vice president at Northmarq, represented the 1031 exchange buyer, a New York-based private investor.   “I am very pleased to have represented and identified this asset on behalf of our client who was in a 1031 exchange. This particular asset stood amongst many other properties we reviewed, and the market in St. Augustine has experienced tremendous growth,” said Maier. “Playing off the success and high sales of the Publix-anchored center across the street, Publix wanted to expand its current operations and higher end food offerings, which its current location could not support. The rest of the supportive tenants gave way to a brilliant and vibrant mix of national credit tenants.”  The shopping center is newly built and is 100 percent occupied by 8 tenants, including Starbucks, Orange Theory Fitness, Supercuts, as well as local service providers and retails. Anchor-tenant GreenWise Market offers products that meet strict requirements such as USDA certified organic, made with at least 70 percent organic ingredients, and made without artificial preservatives, flavors, or color. The Parkway Village GreenWise Market is the twelfth location of the unique, health-conscious store.  Parkway Village is situated in a strong retail trade and residential area, with neighboring tenants such as a full-size Publix, CVS Pharmacy, AutoZone, and McDonalds and a short walk to Mill Creek Academy and Tocoi Creek High School. Located at the intersection of State Road 16 and International Golf Parkway, the property is convenient for residents of St. Johns County and neighbors the Shoppes at Murabella.  “When we looked around at the amount of new residential development, state of the art new schools, and this gorgeous new shopping center, my client and I both agreed this was a must addition to the portfolio,” added Maier. “We got really lucky with our lender, Principal Life, who provided a very competitive debt package in a touch lending environment.” 

Originally published by GlobeSt Nationally it appears that there is insufficient square footage available to accommodate the significant growth seen in the healthcare real estate sector, with the rate of absorption outpacing new product deliveries, according to Northmarq.  “This has put national occupancy rates for medical office at a historic high,” Colin Cornell, Northmarq vice president, healthcare investment sales, tells GlobeSt.com.  “We anticipate a steady stream of opportunities for investors in 2023, including newly developed facilities, new long-term leases on historically vacant MOBs, and retrofits of what were historically retail-oriented buildings.”  Cornell said that like most sectors, healthcare has been in the price discovery stage since interest rate increases began, but values seem to be settling somewhere between 2019 and 2021 levels.  “The investor demand is there, and the question is will owners be willing to meet that demand at the new return buyers requires,” he said.  These investors are best to focus on outpatient services, according to JLL’s most recent Healthcare and Medical Office Perspective, which shows that outpatient sites dominate healthcare services delivery compared to hospital admissions.  Additionally, according to Kaufman Hall National Hospital Flash Report, outpatient revenue rose 8% in 2022, while inpatient revenue was flat when compared to 2021.  JLL’s report said that up to a third of hospital revenue is activity shifting to ambulatory surgery centers, office-based labs, and other ambulatory sites.  “More sophisticated procedures can be done in outpatient settings than possible a decade ago.” Amber Schiada, head of Americas work dynamics and industry research, JLL, said in prepared remarks.  “Innovation in care combined with reimbursement pressures are driving a sustained shift to outpatient facilities, and consumer preferences for outpatient care have increased as well, as outpatient facilities are often more accessible or conveniently located,” she said.  “Furthermore, experience shows that outpatient locations are less expensive to build and operate, produce better-quality medical outcomes, and yield higher rates of patient satisfaction.  MOS and Health Care RE Producing Income  Allan Swaringen, President & CEO of JLL Income Property Trust, tells GlobeSt.com, “Medical office space, and healthcare-oriented real estate more generally, will continue to be a key piece of an income-producing, core fund such as JLL Income Property Trust.  “The extremely positive demographic trends driving tenant demand for this sector, combined with the often-long-term leases of tenants who look to serve their local population and often invest heavily in building improvements, create a scenario where owners can generate long-term, stable cashflow,” he said.  “That’s why we have continued to construct a geographically diversified healthcare-oriented portfolio that today is valued at nearly $635 million and totals approximately 1.4 million square feet.  The Continuum of Care  Andrew Salmon, chief future officer at SALMON Health & Retirement, tells GlobeSt.com that given the aging demographics, “it’s no surprise that we are seeing an explosion in need for outpatient facilities.  “What’s pivotal is the consideration for the continuum of care, as the 80+ population is forecasted to balloon nearly 50% in the next 10 years, and they will require both inpatient and outpatient opportunities as they age.  “Our goal is to establish the continuum of care across the aging population, to ensure that independent and assisted living opportunities exist with convenient, local access to major medical providers, allowing our residents to maximize the outpatient system while maintaining independence.”  Outpatient Services Leads to Higher Satisfaction  Doug King, national healthcare sector lead for Project Management Advisors, tells GlobeSt.com that healthcare providers have been actively positioning outpatient services closer to where their patients reside for at least a generation.  Outpatient facilities typically result in higher patient satisfaction, King said, and the challenges to outpatient facilities presented by telehealth and home healthcare are minimal as many clinical limitations and regulatory challenges exist for these two off-site methods.  “Decentralized ‘brick-and-mortar’ outpatient facilities will continue to grow,” according to King. “A vast majority of care will be occurring in outpatient settings, including urgent care centers, free-standing emergency departments, medical office/doctor offices, and ambulatory care facilities – outfitted to accommodate same-day surgical activities.  “In healthcare, we say, ‘follow the money’ and The Center for Medicare and Medicaid services are reviewing how reimbursement strategies can promote this model. An example is the growth of OBL (office-based labs) to house sophisticated surgical and imaging services performed on an outpatient basis.”  Developing, Rehabbing, Modernizing Facilities  Mitch Creem, principal of GreenRock Capital, tells GlobeSt.com that investors have always viewed medical office buildings as safe investments during uncertain financial times, primarily due to their historically proven resiliency during market downturns.  “But now, 75 years after the Boomer generation was born, we are expecting a ‘gray tsunami,’ fueling the need for additional healthcare services and many more sites of care,” Creem said.  “Physicians, hospitals, real estate investment funds, and individual investors are all keen on developing new sites or rehabbing and modernizing existing buildings to provide state-of-the-art care and attract new patients.”  Deliver Care in Outpatient Settings More Economical  Brian Edgerton, senior vice president, healthcare services team – NAI Hiffman, tells GlobeSt.com that after historic growth in 2021-2022, the sector is not without headwinds.  “It saw rising cap rates and fewer starts and deliveries at the end of 2022,” he said. “In 2022, healthcare real estate developers kept busy delivering modern medical office buildings to accommodate health systems and large multi-specialty practices, including those seeking to consolidate multiple specialties under one roof in highly visible, patient-proximate locations.  “At the same time, developers are feeling the squeeze of construction cost increases, supply chain delays, and interest rate hikes, all of which are reflected in the higher rental rates that must be charged to make these deals pencil out.  “Yet, even if they’re paying more today than they would have a year ago, it is still more economical and efficient for providers to deliver care in outpatient settings, many of which are located in close proximity to where their patients live and work.”  Edgerton said that like retail, healthcare increasingly follows rooftops, “so services are moving closer to the patient thanks to technological advancements that can more easily be implemented in newly developed and repurposed buildings, rather than the medical office building of 30 years ago.”  When Choosing Project Sites, Demographics Matter  Craig Gambardella, vice president at TSCG MD, tells GlobeSt.com that clients understand that their property, and a potential fit for an outpatient healthcare facility within that particular property, is crucial in their decision-making.  “You must look at demographic, psychographic and prevalence of diseases in certain trade areas, and 5- to 10-year projected growth of not only disease prevalence, but how that translates to outpatient demands to help health systems forecast potential growth,” Gambardella said.  For example, the owner of a large mall that is looking to repurpose a portion of it into medical must accurately forecast the demand in that area for an outpatient facility, what types of clinical services may be needed, based on disease prevalence and 5- to 10-year projected growth, he said.  A Continued Extension of Outpatient Services  Rich Steimel, senior vice president and principal in charge, healthcare, New York, at Lendlease said that throughout the industry, more procedures are taking place away from the main clinical facilities as there is a continued extension of outpatient services across metro areas and into the suburbs.  “This shift allows hospital campus operations a greater opportunity to expand and connect with a growing base of patients who require critical care but desire the convenience of off-campus facilities.”  © 2022 ALM Global Properties, LLC. All rights reserved. 

Northmarq’s Cincinnati office has announced the addition of Vikaas Patni as senior associate – commercial investment sales. Patni specializes in the disposition and acquisition of both single-tenant net lease properties and multi-tenant shopping centers throughout the United States. Prior to Northmarq, Patni served as vice president of Brokerage Services at Lee & Associates and achieved top producer status in 2021. Before Lee & Associates, Patni held leadership positions at Phillips Edison & Co. and Meridian Realty Capital. “I am very excited to be a part of Northmarq and Daniel Herrold’s team. With Northmarq and Stan Johnson Company combining forces, the new platform is now second to none, and I look forward to leveraging this and bringing value to my clients,” said Patni. “Given the exciting growth in CRE happening in and around Cincinnati and Ohio in general, Northmarq is perfectly positioned to bring these opportunities to its clients nationally.” Patni joins a team of investment sales professionals led by Daniel Herrold, senior vice president. With over 15 years of experience, Patni brings a client-focused approach, consulting and guiding his clients throughout the transaction’s entire lifecycle. “I’m really excited to have Vikaas join my team,” said Herrold. “Vikaas has an extensive background in retail, working both on the development side of the business and investment sales. He will be a key ingredient for our team as we focus on retail investors and developers across the Midwest.”

Northmarq’s Jeff Enck, associate vice president, and Emery Shane, senior vice president, have completed the sale of a 73,847-square-foot shopping center located at 400 Commerce Drive in Peachtree City, Georgia. The center is 100 percent leased to 21 tenants. Enck and Shane represented the seller, an individual investor based in Washington, D.C. An Atlanta-based developer acquired the asset for approximately $15.2 million.   “The property is an excellent landmark shopping center at the busiest intersection in Peachtree City with a long history of high occupancy by local and national tenants,” said Enck. “Despite the rising interest rate environment, we were able to generate multiple offers from across the country and ultimately close with an investment group based in Atlanta. There was no lack of investor interest in this superb asset.”  Approximately 20 miles southwest of Atlanta and at the corner of Highways 54 and 74, Westpark Walk draws a combined 79,000 vehicles per day. The shopping center’s tenants include Tuesday Morning, Verizon Wireless, State Farm, Firehouse Subs, Hotworx, and local service providers and retailers. One tenant, Ranchero Mexican Grill, has been in Westpark Walk for over 33 years, and several tenants have been at the center for over 20 years.  The property is situated on 5.41 acres and surrounded by several super regional traffic generators such as The Avenue Peachtree City and The Shoppes at Peachtree City. Neighboring national retailers including Walmart, Home Depot, Best Buy, Aldi, TJ Maxx, HomeGoods, and more. Peachtree City is home to over 62,000 people with an average household income over $134,000 within 5 miles.  

Market data, charts & graphs: current and historical trends for single-tenant office, industrial and retail properties, as well as multi-tenant retail Overall market trends Market summary & analysis Economic data points The overall single-tenant net lease market posted its third strongest year in history, with approximately $77.6 billion in sales volume. A strong start to the year, as 2021’s momentum carried over to first quarter 2022, allowed the market to perform as well as it did annually, but recent quarterly activity tells a different story. Influencing factors, like inflation and rising interest rates, have seemingly caught up with investors and sales volume has slowed considerably. In fact, the single-tenant net lease market has now reported four consecutive quarters of declining activity and quarterly totals are down 66 percent year-over-year. The fourth quarter comparison is perhaps overly dramatic due to last year’s record-setting final quarter, but looking forward, it’s likely that we’ll continue to see lower levels of sales volume in the coming quarters rather than a return to near-record highs. There is currently enough uncertainty in the market that some investors may choose to observe from the sidelines, taking a more cautious approach. Alternatively, as pricing trends shake out, investors seeking higher yields may find new opportunities. There is no expectation that investment activity across the single-tenant net lease market will grind to a halt, but the market should be prepared to see conservative activity levels in at least the first half of 2023. Past the mid-year point, demand will be influenced by economic conditions – especially if we enter a recession – interest rate levels, supply/demand dynamics, and the willingness of sellers to correctly price new-to-market assets. An imbalance with any one of these influences could impact overall demand levels for 2023 and beyond.   The multi-tenant retail sector has also witnessed a reduction in activity levels, particularly during the second half of 2022. After a strong fourth quarter 2021, and a second quarter 2022 that was recorded as the third strongest period in history, the sector began seeing a pullback in transaction volume that mirrored the rest of the market. In fact, despite being on pace to have a record-setting year, fourth quarter activity slowed so significantly that we ended 2022 as only the fourth strongest year in history, instead of potentially the first. Multi-tenant retail cap rates jumped by 10 basis points in the final quarter of the year, sitting now at 6.78 percent. This is the highest average cap rate reported in a year, and while it’s likely the start of additional upward movement, cap rate increases are not expected to be dramatic in the next few quarters.    

Originally published by GlobeSt The past two years set the bar quite high for growth in the life sciences sector, according to Matt Gardner, CBRE’s Americas Life Sciences Leader.  “It’s natural for a red-hot market to cool a bit after such a strong run,” he said in prepared remarks.  A new CBRE report said metrics gauging the sector varied in the fourth quarter as the industry normalized after robust growth.  “Life sciences employment growth slowed from earlier rates but still progressed at a 4% year-over-year pace. Venture capital funding rebounded in the fourth quarter after three consecutive quarterly declines” it said, and “the market has normalized.”  CBRE puts Boston, Chicago, Denver, Houston, and Los Angeles as the top-performing life sciences markets in Q4, based on their combined market size, vacancy, square footage under development, and current tenant demand.  Life Science Relies on ‘Different’ Financing Sources  Kevin Kinigstein, partner, Cox Castle, tells GlobeSt.com that he anticipates 2023 to be slower, especially at the outset.  “External factors such as uncertain interest rates, the debt market generally, and inflation are already proving to have an undesirable impact on all commercial real estate, even in the hottest of asset classes,” according to Kinigstein.  That said, the life science sector is influenced by certain differentiating factors that are likely to make the industry experience less of a slow-down than many other asset classes, he tells GlobeSt.com.  “One primary differentiator is that the life science industry relies in large part on different financing sources than conventional commercial real estate,” Kinigstein said.  “Between increased government funds which are coming in 2023, and the continued industry reliance on venture capital, it is likely that life science will outperform other asset classes,” he said.  Additionally, the tie between life sciences and other external driving factors will also continue to differentiate this space.  “The often-cited aging population will continue to drive demand, but there are other outside factors such as the expected continued explosion of artificial intelligence in 2023, and the fact that executives have another year under their belt when it comes to navigating supply chain issues – both of which may prove to be more impactful for life sciences than for other conventional real estate classes.  “While it is fair to expect the market for life science transactions in 2023 to be significantly less hot than we saw in 2021-2022, we believe life science will be among the leading asset classes in terms of demand and growth, and that the slow-down may be less than expected.”  Pandemic-Caused Therapies Drove Growth  Jon Needham, vice president, investment management at BentallGreenOak (an investor in area life sciences real estate), tells GlobeSt.com, “The supply boom that took place in recent quarters certainly alters the calculus when making investments, but in general, a more balanced supply/demand dynamic is important for the health of the sector moving forward.  “While the US Life Science market was down in 2022 compared to the historic high of 2021, removing 2021 outlier data and comparing 2022 with previous years tells a story of health, sustainability, and growth.  “The pandemic fast forwarded approvals and implementation of novel therapies which will prove to be the foundation for growth over the next cycle. As the sector matures and adapts to the integration of new technologies, a continued emphasis will be placed on high quality, robust, and flexible real estate to assist in the advancement of the life science ecosystem.”  Leasing Activity Dropped 62%  Leasing activity across Boston, San Diego, Bay Area, Philadelphia, Greater D.C., Seattle, and Raleigh-Durham are normalizing, according to JLL data.  On an aggregated basis, it dropped 62% from an industry high in Q4 2021 to Q4 2022, and, currently, leasing activity is on par with pre-COVID averages.  Tenant demand activity has slowed, as companies take a more conservative approach regarding space needs. Demand today is just about half it was at its peak in Q4 2021 across markets Boston, San Diego, Bay Area, Philadelphia, Greater D.C., Seattle, and Raleigh-Durham.  Maddie Holmes, senior research analyst, Industry Insight & Advisory, JLL, tells GlobeSt.com that direct asking rents, which had been gradually increasing quarter-over-quarter since the onset of the pandemic, took a discount across those markets.  Kevin Wayer, President – Government, Education, Infrastructure and Life Sciences Industries, JLL, tells GlobeSt.com, “We are witnessing M&A and joint manufacturing activity continues to pick up, but an intense cost-reduction focus continues.”  Expect Slowdown Through Mid-Year  Craig Tomlinson, senior vice president at Northmarq, tells GlobeSt.com that after three high-profile sales (exceeding $250 million) of life science properties in 3Q 2022, RCM data reported none in the last quarter.  “These are very high basis properties, typically +$1,000 per foot,” Tomlinson said. “That, plus the lack of sale comps, explained lenders’ reluctance to fund such transactions.  “The slowdown is expected to continue through mid-year, with the exceptional sale-leaseback possible. Those are typically higher yield as compared to third-party transactions.”  After the Big Run, Normalization is ‘Healthy’  Nick Iselin, executive general manager of development for Lendlease, tells GlobeSt.com that few people presumed that the enormous trajectory in life sciences would continue unabated and ultimately, “this normalization is not only expected but healthy. We are happy to see that activity is still going strong in the top markets, such as Boston where we are co-developing FORUM, a 350,000-square-foot, best-in-class life science project.”  Boston is Still a Leader  Kristen O’Gorman, an associate principal at SCB’s Boston office leading its life science practice, tells GlobeSt.com that the Boston area continues to be a life sciences leader full of resounding innovation, with startups raising over $1.5 billion last year.  “Although tenants may have more options in today’s market, the evolutionary nature of young companies remains true,” she said.  “From a design and real estate perspective, this means a balance of prioritizing high-performing buildings that also offer maximum flexibility that can appeal both to startups and more established companies.  “Now that the marketplace has become more competitive after sustained growth, we see the life science market normalizing, with growing consideration of amenity programming as a way to differentiate.  “A few quarters ago, a potential tenant might have been less focused on this aspect, but now they have an opportunity to be more selective – we see tailoring this amenity programming as a key to adding value and a market edge.”  © 2022 ALM Global Properties, LLC. All rights reserved.