Trends & Insights

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that will maximize value now and into the future.One option investors may consider is converting or redeveloping outdated or underutilized commercial space to a multifamily use.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"});

Mike Sladich, regional managing director based in Northmarq’s Atlanta office, has completed the $13.85 million sale of a brand-new Tesla service center in the North Druid Hills community of Atlanta. The 27,800-sq.-ft. property is a turn-key building remodel of a former Whole Foods grocery store. Sladich represented the seller, Blanchard Real Estate Capital.“We were very pleased to transact on a larger net lease asset in the current environment that also required a debt component for the buyer,” said Sladich. “This is a great example of the market still being strong for blue chip tenants in major metros; there isn’t a treasury yield or CD account that can compare to the long-term appreciation of trophy assets.”Located at 2121 Briarcliff Road NE, the single-tenant property is ideally located in a premier submarket. The North Druid Hills corridor is poised to become a world-class medical and bioresearch district as Emory Healthcare continues expanding in the area. The property is situated on 3.35 acres with excellent access and visibility at the signalized intersection of Briarcliff Road NE and Lavista Road and just seven miles from downtown Atlanta.Tesla is one of the fastest growing and market-moving companies in the U.S. and continues to lead the competitive electric vehicle market. Remodeled in 2022, the property serves as Tesla’s first metro Atlanta location. The tenant operates on a new double net lease.

The world of commercial real estate has long regarded net lease bank properties as stable and reliable investments. However, as we stand on the cusp of 2024, the traditional dependability of these properties is being challenged. The culprit? A sweeping and industry-wide decline in bank deposits mixed with a regional banking crisis have left a distinct mark on the landscape of these single-tenant properties.Deposits: The Economic Bedrock For decades, net lease bank properties were celebrated for their stability. National banks, with their deep pockets, strong credit profiles, and extensive networks, stood as the gold standard of tenants, exuding unwavering financial strength. However, the consequences from the failures of Silicon Valley Bank and First Republic Bank are being felt industry-wide, as consumers recalibrate their trust in financial intuitions. Investors in retail bank properties look at branch deposit levels to gauge the health and necessity of a particular banking location, and those deposit levels have taken a hit in 2023 across the board.Deposits form the bedrock of a bank’s economic operation. Lending and investment activities, the lifeblood of these financial institutions, are intricately linked to the deposits they hold. If a bank’s branch consistently fails to attract and retain deposits, it becomes less attractive, and the equation of lease renewal takes on a new dimension. We are seeing this dynamic play out in real time – as the largest players in the industry, including Bank of America, Wells Fargo, and JPMorgan Chase, have all recently announced their intention to close dozens of branches amidst volatility in the industry. Property owners with retail banking assets that are either: A) low deposit level branches, B) subpar real estate, C) short lease term remaining, or D) high rental rate locations, need to take a hard look at their investments.Industry-wide Challenges & the Balance of Bank Profitability The year 2023 is bringing forth an array of challenges for the banking industry, and a recent report from the Federal Deposit Insurance Corporation (FDIC) underscores the shifting dynamics. It reveals that U.S. banks encountered a staggering loss of $472 billion in deposits during the first quarter, marking the most significant deposit decline since the FDIC began collecting quarterly industry data in 1984. This decline, the fourth consecutive quarter of industry outflows, had a cascading effect across the sector.Furthermore, the FDIC’s report underlines the impact on a core measure of profitability during the first quarter. As interest rates surged and depositors sought alternative destinations for their funds, many banks found themselves compelled to raise the cost of retaining depositors. This, in turn, eroded the industry’s net interest margins, which represent the gap between what banks earn on their loans and what they pay for their deposits. Put simply, bank deposits are becoming more expensive for banking institutions as they battle higher interest rates. In turn, the banking industry is facing a pullback in profitability that is directly impacting their decision making when it comes time to evaluate extending the lease or shutting down a branch at a particular location.Navigating the Future in a Shifting Landscape  Evaluating the strength of deposits at a particular bank branch can be difficult, especially with the rise in online banking and how those deposits are allocated across physical bank properties. That being said, banks still use deposit counts, among other important factors, to determine the performance and need for individual banking branches. A savvy property owner must look not only at deposit counts to evaluate their tenant’s performance but must also take into account industry-wide trends along with sub-market analysis. Outside of deposit counts, banks look to maintain and operate from quality real estate with excellent visibility in markets that are growing. An owner must continuously evaluate the big picture around their real estate investment to ensure that they are taking the right action today to set themselves up to succeed in a market that is undergoing real time change. hbspt.cta.load(7279330, 'f8592f08-0b14-4318-90ac-cebbe0858935', {"useNewLoader":"true","region":"na1"});

The initial reading of third quarter 2023 GDP showed that economic activity during the summer held up better than expected given the ongoing tightening of credit conditions. Nevertheless, the impact of the Fed’s 19-month effort to slow inflation is becoming increasingly visible. More recent data indicate that the fourth quarter is starting off with little momentum, suggesting that a renewed slowdown is likely. The Fed is probably finished hiking interest rates, but the timing of the first cut in rates is an open question.CPI, GDP & Consumer SpendingThe September CPI report showed that headline inflation increased 0.4% during the month, with the year-over-year change remaining at 3.7%. Core inflation increased 0.3% – the same as the prior month – bringing the year-over-year figure to 4.1%. The largest component of the CPI is shelter (34% of CPI and 43% of core CPI). The methodology used for the shelter component calculation results in a lag of the impact of changes in shelter prices. When shelter prices are moving down in real time, as they are now, the shelter calculation is slow to reflect these changes and consequently provides an elevated component to the overall CPI calculations. Stripping out the shelter component from the core CPI results in a 1.9% year-over-year increase.The initial reading of third quarter GDP was +4.9% (annualized rate) – much stronger than was expected. The primary driver of strength in third quarter was consumer spending, which grew at a 4.0% annualized rate compared to a 0.8% rate in second quarter.As has been the case for most of the past year, elevated consumer spending has come at the expense of a drawdown in savings and increased credit card debt. According to a Fed study, consumers outside of the wealthiest 20% have run out of extra savings and now have less cash on hand than when the pandemic began. The savings rate is now at a year-to-date low of 3.4%, compared to a long-term average savings rate of 8.0%. Credit card balances are at historic highs, having just passed the $1.0 trillion level.For the government’s fiscal year ending on September 30, treasury tax receipts were down $457 billion, causing the fiscal deficit to increase 23% from 2022 to $1.7 trillion. The decline in tax receipts is mainly due to lower receipts from individual income taxes. The resulting deficit is 6.3% of GDP – a level never seen in a fully employed economy.Manufacturing & Leading Economic IndicatorsThe ISM manufacturing index for October showed contraction in manufacturing for the twelfth consecutive month. The composition of the report was weak, with declines in the production, new orders, and employment components. Only two out of 18 industries reported growth.The Leading Economic Indicators index has been down for 18 consecutive months and is now at the lowest level since June 2020. For the month of September, the biggest drags came from consumer expectations, housing permits, and manufacturing new orders.The Labor MarketEmployment gains in October were weaker than expected, coming in at an increase of 150,000, and the prior two months were revised down by 101,000. Employment gains were narrowly based primarily in healthcare, government, and social assistance. 52% of 250 private industries added jobs in October – the lowest since April 2020 and down from 61.4% in September. Average weekly hours worked fell to 34.3, which was tied for the lowest reading this year.The unemployment rate increased to 3.9% – the highest since January 2022 – as the household survey employment measure fell by 348,000. Wages grew only 0.2% during October, bringing the year-over-year growth rate to 4.1% – the slowest since June 2021. Additionally, the Challenger Job Cuts report showed that layoff announcements rose 8.0% year-over-year in October and have been increasing on an annual basis in each of the past three months.Inflationary pressures from the labor market are easing with unit labor costs declining by 0.8% annualized in third quarter and rising only 1.9% year-over-year. The same report showed that non-farm productivity in third quarter was a strong 4.7% annualized, bringing year-over-year productivity to 2.2% – the strongest in two and a half years.Interest Rates & InflationAs expected, the Fed held the Federal Funds target range unchanged (5.25% to 5.50%) at their November 1 meeting, while leaving open the possibility of another rate increase before year end. There is little indication that the recent strength of economic growth has caused officials to revise their rate projections upwards. Powell stated that stronger growth “could” warrant further hikes, but that officials are “proceeding carefully.” He also acknowledged that “tighter financial and credit conditions are likely to weigh on economic activity, hiring, and inflation.”Markets are pricing in a lengthy pause in interest rate actions and now expect the timing of the first interest rate cut to occur in June 2024.The real (inflation adjusted) Fed Funds rate is now at the highest and most restrictive level since 2009. Even if the Fed does not increase rates any further, declining inflation pressures will effectively cause the real Fed Funds rate to increase – a form of passive tightening. In addition to their interest rate policy, the Fed continues to reduce their balance sheet by about $95 billion per month – another policy tool that tightens liquidity.Financial conditions are restrictive, and liquidity constraints are emerging across a broad front. The credit cycle is turning with negative implications for default rates, credit spreads, and corporate profitability. There is a decline in the supply of credit and a decline in the demand for credit at the same time, and this is causing a contractionary credit cycle that will slow economic activity.  hbspt.cta.load(7279330, '9979eeb8-b15e-4341-a1ca-fbff3115e466', {"useNewLoader":"true","region":"na1"});

At Northmarq, we are committed to offering our clients the latest trends and expert analysis to power their decision making. Our MarketSnapshot suite of reports contains critical market data covering a variety of commercial real estate property sectors. In each report, you will find:Investment sales volume dataAverage cap rate informationBuyer distribution analysis... and more!Single-Tenant Overall Market  Single-Tenant Office  Single-Tenant Industrial  Single- Tenant Retail  Multi-Tenant Retail     

Daniel Herrold, senior vice president, Matt Spangenberg, senior associate, and Jim Gibson, managing director, of Northmarq’s Houston office have completed the sale of a 15,120 sq. ft. Walgreens located at 13155 West Center Road in Omaha, Nebraska. The property was built in 2003 and is ranked the 4th most actively trafficked Walgreens in the Omaha MSA and 12th in the state, according to Placer.ai. Herrold and Spangenberg represented the seller, an Ohio-based shopping center investor. The buyer was a Midwest-based private equity fund.“When we launched this listing, there were nearly 100 Walgreens on-market with three to eight years of lease term remaining. Just nine months earlier there were less, approximately 30,” said Spangenberg. “Using that data, we priced the property to out-position competing properties, secure multiple all-cash offers and drive pricing that was more aggressive than where the rest of the market eventually landed.”The property is located near the $1.2 billion, 500-acre planned development, The Heartwood Preserve. The development will include 2,000 new homes and 2.3 million square feet of commercial space. Located on an outparcel to Montclair on Center, the property is positioned in a robust retail corridor with adjacent retailers such as Marshalls, HomeGoods, JOANN, Party City and Aldi.Walgreens featured a 25-year base term on its triple net lease with options extending through 2078.For more information on the current investment real estate market, subscribe to our State of Market Report HERE.

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"});

Declining inflation pressures this year have allowed the Federal Reserve to respond with a more gradual pace of interest rate increases since May as they assess the impact of their most aggressive monetary tightening of the last 40 years. The effects of monetary changes exhibit themselves with variable lags over a long period. The Fed’s job to discern the appropriate amount of tightening to achieve their goal of 2.0 percent inflation is not only complicated by the variable lags, but also by current events such as the potential government shutdown in November. The resulting economic uncertainty is impacting business decisions, effectively slowing economic activity.Headline inflation increased 0.6 percent during August – the most in more than a year according to the latest CPI report. The year-over-year reading rebounded to 3.7 percent, up from 3.2 percent, primarily due to the 10.6 percent month-over-month surge in gasoline prices. There was some evidence that higher energy prices have fed through to the core index (excludes food and energy), which rose by 0.3 percent month-over-month, although base effects helped push year-over-year core inflation down to 4.3 percent from 4.7 percent. However, the downward pressure on core inflation elsewhere still looks intact, as core goods prices fell again, by 0.1 percent month-over-month. Nevertheless, inflation is still running above the Fed’s 2.0 percent target.GDP & Consumer SpendingThe final reading of second quarter 2023 real GDP was reported at a 2.1 percent annualized rate. Consumer spending in second quarter was revised down to a +0.8 percent annual rate from +3.8 percent in first quarter, reflecting a push back from consumers on higher prices. Real (inflation adjusted) retail sales are down 1.2 percent year-over-year through August and have been flat or negative in nine out of the last 10 months on a year-over-year basis, indicating that transaction volumes are declining as prices increase.Real disposable incomes – the fuel for consumer spending – have been down for three consecutive months at a -1.7 percent annual rate, and consumers continue to tap their savings or credit cards for their spending. The personal savings rate is now at a year-to-date low of 3.9 percent. Credit card debt has grown at a 13.9 percent annual rate since mid-2021, compared to the 6.0 percent annual rate in the four years prior to the pandemic. At the same time, delinquency rates on credit card loans are at 11-year highs with the cost of credit card loans at 22.0 percent.Tax Receipts, Manufacturing & Leading Economic IndicatorsFederal tax receipts are declining, which is an indication of the slowing economy. Treasury receipts are down $437 billion this fiscal year through August compared to the same period in 2022, while outlays are up $142 billion – including $130 billion due to higher interest payments. The decline in tax receipts is mainly due to lower receipts from individual income taxes.The ISM manufacturing index for September came in at 49.0 for the eleventh consecutive month below 50, indicating contraction in the manufacturing sector. Only five of 18 industries reported expansion. The New Orders index has been in contractionary mode for 13 consecutive months indicating weak demand.The Leading Economic Indicators Index continues to trend lower – now for the seventeenth consecutive month through August. Since the inception of this index in 1958, such a string of declining readings has only happened when the economy is in or nearing a recession.The Labor MarketEmployment gains in September were surprisingly strong with an increase of 336,000 in non-farm payrolls – nearly double market expectations – and the prior two months were revised upward by 119,000. Employment gains were broad-based. The unemployment rate remained at a 19-month high of 3.8 percent. Wages grew only 0.2 percent during September, bringing the year-over-year growth rate to a two-year low of 4.2 percent. The labor market remains the strongest pillar of the economy providing more income to more people. Although wage growth has been cooling, the resiliency of the labor market is one of the Fed’s concerns as it tries to cool down the overall economy. Until the labor market shows weakness, it is unlikely that the Fed will consider lowering interest rates.Interest Rates & The FedAs expected, the Fed held the Federal Funds target range unchanged (5.25 percent to 5.50 percent) at their September 20 meeting, while leaving open the possibility of another rate increase before year end. The most surprising and hawkish element of the meeting was the median expectation for year-end 2024 moving from 100 basis points of rate cuts to only 50 basis points in the Fed Funds rate. Markets are pricing in a lengthy pause in interest rate actions and have pushed back the timing of the first rate cut from the spring of 2024 to late summer.The real (inflation adjusted) Fed Funds rate is now at the highest and most restrictive level since 2009. Based on Fed projections given after the September meeting, the real Fed Funds rate is forecast to increase by another 100 basis points over the next year, bringing it to levels last seen in late 2007. Even if the Fed does not increase headline rates any further, declining inflation pressures will effectively cause the real Fed Funds rate to increase and further tighten monetary conditions. In addition to their interest rate policy, the Fed continues to reduce their balance sheet by about $95 billion per month – another policy tool that tightens liquidity.With the Fed intent on keeping rates higher for longer, and commercial bank lending standards remaining tight, the increased cost of credit and its reduced availability are significant headwinds for refinancing existing debt as well as for ongoing economic growth, especially for smaller companies. hbspt.cta.load(7279330, 'ebfb6105-4a58-474f-b671-f75dff84f749', {"useNewLoader":"true","region":"na1"});