The first half of 2022 lived up to the promises made by many experts, despite the rise in interest rates that caused concerns and dampened the market. Anybody interested in how to invest in multi-unit properties is still seeing opportunities as the multifamily investing news continues to be positive.

Best Year Ever? 

Those who track trends in multifamily CRE predicted that 2022 could be the best year ever. In addition to rent growth, occupancy rates also went

The first half of 2022 lived up to the promises made by many experts, despite the rise in interest rates that caused concerns and dampened the market. Anybody interested in how to invest in multi-unit properties is still seeing opportunities as the multifamily investing news continues to be positive.

Best Year Ever? 

Those who track trends in multifamily CRE predicted that 2022 could be the best year ever. In addition to rent growth, occupancy rates also went through the roof.  An industry expert has gone so far as to call this the “golden age” of multifamily investment. 

President and Chairman, KBS, Charles J. Schreiber Jr.,said, “Reports are showing all of the major world economies will be in or near a recession during the next quarter, but the U.S. market should perform better than the others. The entrepreneur talent within U.S. companies continues to advance successful firms through challenging economic times.”

Business-Friendly Locations / Live-Work Play / Return to Office

Locations with a pro-business attitude continue to offer natural soft spots for increased development and mixed-use opportunities that emphasize a live-work-play lifestyle. In some locations, signs of a revival in downtown office space are still emerging.

“I see a major trend in office once again as it relates to what we would call the CBD office,” said CBRE’s Spencer Levy. “Our client at Heywood Properties calls it ‘BBD office’ or a Better Business District office. Multifamily is now in these BBD places that are live-work-play.”

The speed of the comeback has been somewhat unexpected.  “A lot of prognosticators were saying it’s going to take ten years for the urban core to rebound,” said Carl Whitaker for RealPage.

“Most major urban core apartment nodes have already gotten back to their pre-pandemic occupancy rates and rental rates. Some of that is being driven by the return to office, but I think there is a segment of renter by nature that’s going to want to live downtown. That demand never fully went away.”

Job Growth is the Key Multiplier in Multifamily CRE

Employment is still the main engine driving the rebound. “The statistic that I always use is job growth,” says Levy. “It’s the most important statistic in real estate because it has a multiplier effect. For every six office jobs, you have demand for one more multifamily unit. Then you have demand for two more retail jobs and eight more hotel nights.”

Vacancies Remain Low – More Good News 

The general expectations for the rest of the year include more rent growth and low vacancy rates. The trend of sky-high occupancy rates kicked off at the end of 2021. “Remarkably, we saw it increase from December to January,” says Whitaker. “The first time we’ve ever seen occupancy increase between those months.”

CRE Prices

Experts who were bullish early remain optimistic about the rest of the year. Blue Lake Capital CEO Ellie Perlman said, “I believe that prices will remain high throughout 2022. However, I think that cap rates might remain the same. I also expect vacancies to remain low and rents to keep growing. The reason why I think that this will happen is that I believe migration from core markets to secondary and tertiary markets, and migration from the cities to the suburbs, will continue.”

Multifamily CRE a Solid Investment 

According to We Lend, “average rents rose by 3.5% from Q1 to Q2 in 2021. Meanwhile, the average vacancy rate fell by 70 basis points to 4%. In total, investment volume increased by 34%, to $52.7 billion.” As the effects of the pandemic start to wane, a sense of normality is foreseeable.

“Rents are rising, occupancy is strong, and new construction is still prevalent in most markets,” said the Kiser Group’s Lee Kiser, who believes there’s a strong multifamily market ahead. “Both interest rates and cap rates will likely increase, but property values per unit should continue to grow as rent and economic growth increase net operating incomes as an offset.”

Going Vertical

The demand for vertical construction in the multifamily space will remain rooted in the cities. “Building vertical multifamily in suburban areas isn’t easy,” says Levy. “Many of these suburban areas have zoning rules that don’t allow you to go vertical. But at the same time, many of them have open air retail that’s underperforming.”

What’s Next for the CRE Multifamily Sector?

Even though retail took a major hit from the pandemic, it still flexes a large mixed-use muscle. “We know that retail, especially walkable retail, is absolutely an amenity from the perspective of the renter,” says Matt Vance, at CBRE.

KBS’ Park Central Apartments is just one multifamily property that exemplifies the benefits of having retail as an amenity. Considered one of the highest-end multifamily communities in Raleigh, North Carolina, Park Central offers an urban quality of life with walkable access to over 80 retailers and more than 40 restaurants — from casual to high-end — including a Capital Grille steakhouse and Yard House.

“If they can walk out their front door and access the bars, restaurants, and shopping, they’ll pay for that,” said Vance. “They are happy to pay for that. When we think about suburban, we’re not really talking about greenfield developments much. When we do, we’re really talking about developments that have some mixed-use component to them.”

While the balance of 2022 will decide how multifamily performs for the year, the coming months will likely be a continuation of sector’s upward trend. As the country continues to emerge from the pandemic and deal with a downturn in the economy, the upswing in multifamily has left investors with a window of opportunity.

To learn more about multifamily and other commercial real estate, visit KBS.com/Insights.

Historically, CRE has categorized office markets as either CBD or Suburban. How have these definitions changed as the office market continues its post-pandemic evolution?

Although office markets have been redefining themselves since before the pandemic, the crisis accelerated the pace at which the redefinition is taking place. KBS has a 30-year history of investing in the top 25 markets in the country, and this list is continually evolving.

The pandemic recovery

Historically, CRE has categorized office markets as either CBD or Suburban. How have these definitions changed as the office market continues its post-pandemic evolution?

Although office markets have been redefining themselves since before the pandemic, the crisis accelerated the pace at which the redefinition is taking place. KBS has a 30-year history of investing in the top 25 markets in the country, and this list is continually evolving.

The pandemic recovery has been marked by wide regional differences across the country. For example, many urban markets were hit especially hard by COVID and are now taking longer to recover. Due to this, a percentage of office users in these markets have moved to what has traditionally been thought of as secondary markets like Austin (which in many ways is becoming a primary market itself), Nashville, Charlotte, Raleigh, and Salt Lake City. KBS has several Class A properties in these markets, including:

These markets, which are positioned to grow and thrive, are attracting companies seeking walkable environments that are less dense than most primary-market CBDs post-COVID.

Whether a market is urban or suburban, top-quality amenities are equally important. The era of the “plain vanilla” office building without compelling amenities has long been over, which is why KBS focuses on office amenities that are state-of-the-art and customized to each property in our client portfolio. In markets with heavy bike traffic, for instance, we’ve provided cyclists with storage areas for their bikes, plus shower facilities to freshen up after their ride.

What distinguishes office markets that are “in between” CBD and suburban? What would you call these markets? Where are they located? What factors are driving their growth?

We’re seeing many first-ring suburbs just outside of the CBD growing in prominence. There are several commonly used terms for these markets; however, we think of them as suburban/urban nodes since they bridge the gap geographically and functionally between both submarkets. A distinguishing feature of an urban node is transportation options — typically with light rail stations and intersecting freeways that provide people with easy ingress and egress. The West End of Minneapolis, near downtown Minneapolis, where you’ll find 60 South Sixth, a property in our client portfolio, is a good example of this, as is Preston Center in Dallas, where both Preston Commons and Sterling Plaza, other KBS-owned properties are located.

While the dust hasn’t fully settled on how COVID will impact the office sector long term, companies are increasingly attracted to these first-ring suburbs because they are close to the CBD and residential areas, overall occupancy costs are often more affordable than the urban core, and they tend to offer public transportation as well as adequate parking options and a multitude of dining, shopping, and entertainment options attractive to employees of all ages. Also, properties in these submarkets increasingly feature high-end amenities that rival those of urban office properties.

What opportunities do these urban node markets present for office owners and tenants?

Many of these urban node markets offer owners and tenants the opportunity to appeal to the next generation of office workers who want the energy and vibrance that more dense environments often provide, as well as millennial workers who are no longer 25 and are interested in living in less dense areas to raise their children. These in-between markets, like the Pearl Brewery area adjacent to downtown San Antonio, Sugar House near downtown Salt Lake City, the Cherry Creek neighborhood of Denver, and the Knox/Henderson neighborhood of Dallas each offer the best of both urban and suburban worlds and cater to these demographic groups and will be in demand over the next 20 years.

Everyone is hoping to put the pandemic behind them and return to the workplace, and these urban nodes are providing this opportunity. KBS is constantly evaluating all markets for opportunities that align with our investment strategy and our portfolio of premier properties.

As CRE evolves, what might the industry expect to see in these redefined office markets? What short or long-term trends might emerge?

Move-in ready spec suites are becoming increasingly popular in these redefined office markets. As companies look to bring their teams back to the office — something that most office workers want as well — demand for spec suites is at an all-time high. Spec suites provide tenants with turnkey solutions for getting their businesses back up and running without the hassle of a long buildout that can often run into hiccups due to supply-chain difficulties, permitting process slowdowns, or otherwise. While there may still be uncertainty about some companies’ long-term plans, these suites provide answers and allow firms to move ahead quickly. Many companies are using spec suites as ancillary workspaces to prepare for more permanent space use in the future.

We expect continued demand for amenities like spacious collaboration/conference centers, and on-site fitness centers to continue. Additionally, environmentally conscious property features such as energy-efficient systems, WiredScore certifications and biophilia will elevate the user experience as companies move from fully remote schedules to hybrid or in-office. KBS recently announced that it has successfully completed the verification of more than 14 million square feet of Class A office space in its client portfolio to achieve the UL Verified Healthy Building Mark for Indoor Air. This verification is one of the many ways the firm shows its determination to offer tenants and visitors a top tier working environment while being mindful of the planet’s wellbeing.

Regardless of whether they are located in the CBD, the suburbs, or a submarket in between the two, well-located, well-managed and well-amenitized buildings will continue to attract office tenants in the post-pandemic era and beyond.

To learn more about multifamily and other commercial real estate, visit KBS.com/Insights.

The once-in-a-generation shift that’s taken place over the last three years will undoubtedly have a lasting effect on the dynamics and landscape of modern work, particularly for companies that once considered the office to be the nucleus of an organization. COVID-19, the catalyst for normalization of work from home, and the Great Resignation, have permanently affected workplace preferences. Office-space and design trends — such as the utilization of hybrid and flex space — are in constant

The once-in-a-generation shift that’s taken place over the last three years will undoubtedly have a lasting effect on the dynamics and landscape of modern work, particularly for companies that once considered the office to be the nucleus of an organization. COVID-19, the catalyst for normalization of work from home, and the Great Resignation, have permanently affected workplace preferences. Office-space and design trends — such as the utilization of hybrid and flex space — are in constant flux as we try to decipher what will be the most advantageous strategy for employees and companies going forward.

Demand for flex space saw a major rebound after it cratered during the height of COVID because it was primarily used by small companies or startups that needed temporary space for things like client meetings. Once the lockdown was declared, that use virtually disappeared. However, while coming out of lockdown, larger companies began to see flex space as part of their “spoke-and-hub” hybrid approach, using it as satellite office space to minimize commuting distance for employees who wanted an office atmosphere but didn’t want to spend hours a day trying to get there.

One of the interesting results of all this upheaval is that there is now a hot market for developing the most innovative CRE office concepts. In some instances, offices have been converted into spaces with couches and other comfortable furniture where workers can have privacy for work, phone conversations or web meetings without disturbing those around them. Offices have also been combined to create teamwork areas of varying sizes. Reimagining the work dynamic came first, but redesigning for the future will be an ongoing evolution.

In a CBRE podcast about Reimagining the Office, a professor at the University of Chicago, calls what we’re seeing “The Big Shift” or “an evolution from the idea of office as a defined workplace into dynamic forms of working arrangements.”

Companies that want more employees in the office need to reenergize their spaces and amenities, so employees will feel the commute is worth their time, expense and stress. Enter the purpose-led workplace. Many employees have reported they are battling feelings of isolation and disconnection, so there is a contingent that would welcome going back at least some days.

According to JLL, 36 percent of employees felt an energy drain while working and a quarter of them felt so exhausted by work and home life that they couldn’t take care of their health and wellbeing. It’s difficult to deny the value of positive energy in the workplace and how it can charge employee motivation, engagement, and contentment, which directly influences creativity and productivity. Companies that focus on providing these things are far more likely to be rewarded with high retention levels, which is crucial to the bottom line, especially in the current job market.

Employee turnover costs U.S. businesses in excess of $1 trillion a year, and with unemployment low, companies need to leverage strong leadership and the latest regenerative, purpose-led design strategies to retain their current employees and ensure they are engaged and productive.

To illustrate how significant a priority employee health and well-being has become, a JLL survey showed that professionals are now citing a positive workplace experience and enjoying life outside the office as a higher priority than salary, which has historically been the top of the employee “want” list.

When asked in another JLL survey to rank the top three amenities that could improve their well-being at work, employees most frequently said they wanted relaxation spaces (45%), healthy food services (44%) and outdoor spaces (41%). Ways companies can achieve this is through outdoor and green areas, relaxation pods, supplied food and beverages, and opportunities for socializing.

In addition to health and well-being, the focus on Environmental, Social and Governance (ESG) is helping drive the move to the purpose-led workplace.

So, what is the criteria for a purpose-led workplace? According to HDR, Inc., an engineering, design and architecture firm, the purpose-led approach need not be thought of as just doing “less harm” but doing good. New construction and building design must have the capacity to evolve and provide positive impact to the occupants as well as to the surrounding land and environment.

Regenerative, purpose-led design should center on these pillars:

Renovations can be minor — reconfiguring work areas as previously described — or major, such as KBS’ focus on environmentally responsible offices. Companies prioritizing the physical, mental and emotional wellness of their employees and using the tenets of ESG as a foundation, are far more likely to attract younger talent and retain their existing workforce — as people feel valued and respect the values of their employers.

Learn more about commercial real estate, visit KBS.com/Insights.

In simple terms, the metaverse is a virtual reality where users can create computer-generated environments to socialize or collaborate with other users (oftentimes as animated characters called avatars). Most notably, this type of interaction is common in the online industry with games like SimCity and Minecraft.

Since the start of the pandemic, however, the application of virtual reality in non-gaming sectors has surged, as businesses and investors had to get creative to keep up with

In simple terms, the metaverse is a virtual reality where users can create computer-generated environments to socialize or collaborate with other users (oftentimes as animated characters called avatars). Most notably, this type of interaction is common in the online industry with games like SimCity and Minecraft.

Since the start of the pandemic, however, the application of virtual reality in non-gaming sectors has surged, as businesses and investors had to get creative to keep up with digital demand and procure new revenue opportunities lost from absence of doing business in person.

The use of this type of computer-generated technology isn’t entirely new to CRE. In recent years, “PropTech” digital tours have become relatively common. But a metaverse strategy has even more to offer. It can dramatically influence how a prospective tenant perceives a building for their office needs. And, CRE developers and architects can utilize this technology to fine-tune designs before breaking ground on a project.

Metaverse real estate explainedMetaverse real estate refers to digital assets, which interestingly, operate similarly to traditional and commercial real estate. Parcels of virtual land can be bought, sold and developed into purpose-built space where users can engage in everyday activities, much like they would in real life, including shopping, events, sports and meetings.

Like its physical counterpart, the valuation of virtual real estate is impacted by supply and demand: the first metaverse parcel was sold for $20 in 2017. That figure now averages anywhere from $6,000 to well over $100,000, depending on the platform and lot availability.

Then, of course, there’s location, location, location. Even in a completely artificial world, location matters, evident by a plot of land that sold for $450,000 because it is next to metaverse property owned by rapper Snoop Dogg.

Besides land, investors can also buy and sell already-developed properties via metaverse real estate brokers just as they would in real life. So, this begs the question: how does the metaverse fit into CRE specifically?

Impact of metaverse to CRESome experts feel that real estate in the metaverse could greatly increase the value of CRE because of the revenue potential. A CRE investor, for example, can acquire virtual land and build — let’s say a retail hub — and set up ecommerce opportunities through paid-for advertising and promotions, or by leasing their virtual properties or land to retailers. This allows merchants to create a very targeted and engaging online shopping experience within a specific customer subsector while generating ancillary income for the virtual CRE investor.

Many consumer brands have already started experimenting with the metaverse strategy, including Nike. The lifestyle and shoe brand recently launched an online game zone complete with customizable avatars that can be outfitted in virtual Nike-sneakers and apparel.

With retail giants like Nike, Coca-Cola and Adidas taking the helm, don’t be surprised to see more merchants tapping virtual CRE space for similar endeavors.

In the same vein, an office operator could create a digital replica of its buildings in the metaverse and lease meeting space — or exact office suites — to its tenants to help facilitate robust collaboration among remote and on-site team members. Accounting firm KPMG recently announced a $30 million investment in future internet technologies, which includes a metaverse collaboration hub, “where employees, clients and communities will connect, engage and explore opportunities for growth across industries and sectors.”

Investing in metaverse real estateSo, how do we invest in metaverse real estate? There are several metaverse platforms to consider, including Somnium Space, Cryptovoxels, Decentraland and The Sandbox who make up the “Big Four.” Each platform offers different benefits and come with certain pitfalls, so it is important to assess each metaverse individually.

Payments in the metaverse also most commonly occur as non-fungible tokens (NFTs) and cryptocurrencies, and investors need to have appropriate accounts in place to facilitate transactions.

NFTs are essentially digital receipts — or digital real estate deeds — proving ownership of a virtual asset. NFTs can also be used to purchase products and services from metaverse retailers. To learn more about NFTs, read the KBS blog “NFTs: Innovation or Token Effort” here.

Risks of the metaverseBecause of the newness of real estate in the metaverse, there are some important risks to consider. Some of these include, but are not limited to:

What’s next?The metaverse still has a long way to go, and there may be as many risks as there are opportunities ahead for CRE players investing in this technology. Some feel the metaverse is here to stay, while others are more skeptical, waiting until the technology manages to gain some solid ground.

Learn more about commercial real estate, visit KBS.com/Insights.

In an interview with Commercial Property Executive, Giovanni Cordoves, regional president of Western U.S. at KBS, an office investor in the market, spoke about demand for move-in-ready spaces and increased tenant interest in health and wellness amenities.

The post What You Need to Know About the DFW Office Market appeared first on KBS.

Variety isn’t just the spice of life; it’s also the spice of retail life. That’s obvious for consumers of multi-tenant retail — those who want to shop, dine, and be entertained. But landlords of, and investors in, the multi-tenant retail segment are also seeing a difference in the differences.

Customers love options, which means convenience, and retail tenants and developers love being on the receiving end of the resulting staying power. It makes sense that a person will frequent

Variety isn’t just the spice of life; it’s also the spice of retail life. That’s obvious for consumers of multi-tenant retail — those who want to shop, dine, and be entertained. But landlords of, and investors in, the multi-tenant retail segment are also seeing a difference in the differences.

Customers love options, which means convenience, and retail tenants and developers love being on the receiving end of the resulting staying power. It makes sense that a person will frequent a location more often if it suits more than one need. A dry-cleaner or hair salon two doors down from one’s favorite grocery store can save time, effort and gas, for example. And there’s also the added, unplanned foot traffic during visits — say, a grocery shopper notices his or her favorite chain of sandwich shops is located in the same place.

Come to a multi-tenant retail center for one reason, stay for another — the convenience brings a person back again and again. In essence, a multi-store retail center with a complementary tenant roster can practically sustain itself.

Multi-tenant Retail Make-Up

Multi-tenant retail is a vast commercial real estate (CRE) category with broad appeal. It stretches from more modern open-air centers to traditional enclosed malls and includes neighborhood, community, lifestyle and power centers.

Daily-needs locations, especially grocery-anchored centers, have been quite successful due to their consistent customer traffic. LBX Investments’ Robert Levy explained that the main differences between neighborhood and community centers are where the property is positioned in the market and how far it draws from the overall community versus its immediate neighborhood. The usually larger community centers have larger, greater anchors and more of them, “but they also might have a bunch of those more ‘mom and pop’ and service-oriented centers,” he added.

Multi-tenant retail was integral in helping the industry bounce back from COVID-19. Open-air centers really had a leg up on other retail types in their ability to offer fresh, healthful air and proper social distancing, in addition to their variety of offerings. The sector, in general, had been forced to adapt to very challenging market conditions and both innovative and viral disruptions — from the Great Recession to the e-commerce revolution and through the pandemic.

The bright side is that retailers really had to develop their innovative muscles in that decade-plus span, learning that experiential elements attract and retain customers way more than the mere transactional side of business. Amenities and experiences have never been more important to consumers, and multi-tenant retail is leading the way.

Mixing It Up and Offering Experiences

As mentioned, retail centers with a mix of tenants offer people more. The more these shopping locations can do for consumers the more often they’ll visit and, in general, the more others like them will add to the overall site traffic.

Daily needs offerings are essential to a tenant mix. Forbes reported that multi-tenant retail centers that sell essential goods anchored by a national grocery credit tenant have seen cap rates continue to compress thanks in part to increased institutional investor interest with high-priced centers trading at 5.8 percent and mid- to lower-tier centers at around 7.1 percent.

“Give them what they want” was the fool-proof, tried and true approach for retailers, but that was turned on its head since e-commerce came on the scene with its nearly no-effort alternative. Now retailers are putting a new spin on the first rule of product marketing: You’re selling more than products; you’re selling experiences, too. By giving shoppers multiple reasons to visit a location, the more they’ll browse, impulse buy and drive higher sales.

Exemplifying this strategy in numerous ways is KBS’ iconic 40-story Accenture Tower, located in the rapidly gentrifying West Loop area of Chicago’s near West side. As the Windy City’s first and largest full-service office location, Accenture Tower not only includes Class-A office space, but also retail and entertainment amenities, plus access to transportation via the Ogilvie Transportation Center.

Nearly 60 percent of shoppers worldwide will expect more than half of retail space to be devoted to experience rather than product by 2025, according to a 2020 Westfield report. And more than four-fifths of global customers are willing to pay more for experience with the most requested in-store activities needing to be creative, health and games-oriented.

At 40 years old, Tanger Outlets made a major pivot to reimagine shopper engagement and aim to attract new and younger consumers as a “customer experience destination.” That huge effort is taking the form of micro-breweries, gourmet groceries, golf simulators, electric car recharging stations, selfie concepts and even robotic dinosaurs being introduced at Tanger’s 36 locations across North America. Stephen J. Yalof, the company’s president and CEO, said that ideally 15 to 20 percent of the REIT’s CRE would be transformed into alternative uses.

Urban Disturbance

Retail has certainly had challenges in recent years, and some still remain. Urban multi-tenant retail suffered the double whammy of a residential exodus in search of more wide-open domestic spaces during the social distancing of the pandemic and office workers not returning to central business districts due to remote work protocols. It got to the point that a Kidder Mathews broker in the Pacific Northwest described the situation as bleak.

Urban retail seems to be taking steps toward recovery, however. Citing more and more office workers returning on site, increased travel, including the traditional summer bump in volumes, and the return of casual sit-down dining, JLL reported that “rather than the ebbs and flows of the past two years, it feels that U.S. urban markets are on a steady upward trajectory toward normalcy.” With shoppers, employees, tourists and diners returning to urban multi-tenant retail locations, retailers’ interest and investor deal volume are rebounding.

What’s Next?

Multi-tenant retail boasts many advantages. While inflation concerns and supply chain kinks persist, retail will continue to follow rooftops and innovate to deliver the best customer experience. That innovation includes technological acceleration due to the pandemic and omnichannel approaches that co-opt rather than compete with e-commerce.

On the investment side, there’s another major advantage. “Retail is the only product type where there’s virtually no new supply,” said Chris Decouflé, CBRE managing director and head of capital markets for retail in the Americas. “We have more GDP, we have more people, more people spending money, but we don’t have new retail largely being built as a percentage. What that means is that the forces and the pressures as it relates to viability of retail as a product type are probably better than we’ve seen in a long time.”

CRE strategy, sector recovery and consumer habits are aligning to paint a positive picture of retail’s future, including multi-tenant properties. Citing the fact that 72 percent of U.S. retail transactions will occur in physical stores, 62 percent of online orders are fulfilled at physical locations and 64 percent of consumers have returned to pre-pandemic shopping habits, Michael Weil, The Necessity Retail REIT’s president and CEO, told GlobeSt. that the multi-tenant retail renaissance is now.

Learn more about commercial real estate, visit KBS.com/Insights.

In this lively and insightful conversation with CPE Executive Editor Paul Rosta, DeLuca discusses why the Orange County, Calif.-based firm remains upbeat on the office sector. He details the firm’s investment strategy at a challenging time and offers perspective on the intersection of institutional investors and rising interest rates.

The post Marc DeLuca on Navigating CRE’s Investment

In this lively and insightful conversation with CPE Executive Editor Paul Rosta, DeLuca discusses why the Orange County, Calif.-based firm remains upbeat on the office sector. He details the firm’s investment strategy at a challenging time and offers perspective on the intersection of institutional investors and rising interest rates.

The post Marc DeLuca on Navigating CRE’s Investment Currents appeared first on KBS.

What if $870 billion in annual e-commerce sales still only represents the “very early innings of digital disruption” for the retail industry? The implications for CRE’s e-commerce industrial sector, which serves that huge consumer demand, might be hard to imagine.

Those eye-opening words came from Jason Goldberg, a fourth-generation retailer and the chairman of the board of directors of shop.org, the digital retail arm of the National Retail Federation, who backs up his assertion

What if $870 billion in annual e-commerce sales still only represents the “very early innings of digital disruption” for the retail industry? The implications for CRE’s e-commerce industrial sector, which serves that huge consumer demand, might be hard to imagine.

Those eye-opening words came from Jason Goldberg, a fourth-generation retailer and the chairman of the board of directors of shop.org, the digital retail arm of the National Retail Federation, who backs up his assertion by pointing out that the growing e-business segment in the U.S. still only accounts for 13 percent of total retail sales versus more than 46 percent in China, according to eMarketer.

Comparisons aside, an ever-growing consumer appetite for e-commerce has stoked record demand for warehouses and other logistics infrastructure. What’s next for the e-commerce industry and how is this sector leading the demand for industrial real estate? Let’s take a look.

High Volume Means Big Opportunity

E-commerce sales reached nearly $900 billion nationwide in 2021, according to the U.S. Department of Commerce Retail Indicator Division. That amounted to a 14.2 percent increase over 2020 and a whopping 50.5 percent increase over pre-pandemic 2019. E-commerce represented 13.2 percent of all retail sales nationally in 2021.

Chain Reaction & The Last Mile

It wasn’t a shock to anyone that a global pandemic accelerated the adoption of e-commerce sales. People in quarantine were quite naturally going to rely on the safe, electronic way to shop.

The shock did impact the supply chain, however. Surges in demand for online goods during COVID-19, coupled with affected overseas sourcing, highlighted the need to rethink supply chain management.

To mitigate the risk of disruption, many e-commerce retailers are increasing diversification, i.e., relying less on any one country or company as a supply source, according to JLL’s U.S. Ports, Airports & Global Infrastructure Group. Regionalizing supply chains gets them closer to customers, including the all-important “last mile” of delivery. The JLL Group also recommends distribution centers closer to parcel hubs, increasing transportation options and expanding the number of automated facilities.

The Space Race

E-commerce growth and supply chain adjustments have driven demand for industrial CRE to nearly unseen levels. Producers of staple goods especially had to scramble for additional warehouse capacity and solutions to deliver orders faster by being closer to their customer base.

Such inventory concerns, in addition to increased e-commerce volume, spurred the need for even more warehouses and distribution centers, which make up about 70 percent of the sector, according to CBRE’s global head of industrial and logistics research, James Breeze. Breeze said that the pursuit of storage facilities for extra inventory or “safety stock” became a major trend as companies looked to avoid the supply chain disruptions of 2020.

After accounting for 28.2 percent of all industrial absorption from 2016 through 2019, e-commerce companies increased that proportion to approximately 40 percent from 2020 through 2021, according to Cushman & Wakefield. E-commerce supply chain operations require typically three times more warehouse and logistics space than a traditional brick-and-mortar supply chain.

Additionally, Breeze saw heightened demand from third-party logistics companies (3PLs) that manage distribution and fulfillment for other firms. A year into the pandemic, they were the most active occupier of large industrial space at 26 percent market share.

CBRE reported that the average asking rent for industrial space increased 11.8 percent year-over-year after first quarter to a record-high $8.94 per sq. ft. The report added: “Demand from occupiers needing safety stock to counter supply chain disruptions should result in further rental rate appreciation and a record-low vacancy rate despite a large amount of new development this year.”

What’s Next for E-Commerce and CRE?

In May 2022, Amazon began shedding warehouse space in response to a slowdown in its e-commerce operations. While some interpreted this as an indicator that the appetite for industrial space was waning, Wealth Management found that Amazon was divesting itself of older mid-market warehouses through subleasing in favor of modern, more strategically located facilities.

With demand for industrial space still outpacing supply, expect e-commerce to grow nearly 6 percent per year on average (adjusted for inflation) over the next decade, according to an April report by CBRE Econometric Advisors (CBRE EA). E-commerce occupiers are projected to continue to account for between 35 to 40 percent of industrial demand as consumer shopping habits aren’t projected to fall off from the current upward trend.

The key industrial CRE drivers, consumption, trade, supply-chain reconfiguration, and e-commerce are all on the rise, asserted ProLogis, the largest industrial CRE company in the world. Industrial/distribution space ranked first for both investment and development prospects, as it has for nine straight years dating back to 2014, according to PwC and Urban Land Institute’s Emerging Trends in Real Estate 2022.

Cushman & Wakefield forecasts that rent growth for warehouse and logistics space should rise by more than 15 percent over the next two years with Class A assets and new construction fetching even higher rates. Globally, CBRE forecasts that as much as 2.2 billion square feet of additional e-commerce-dedicated logistics space will be required to support the growth of internet sales over the next five years.

All of this is good news for CRE’s industrial sector, which has enjoyed strong demand, falling availability and above-average rent growth over the last decade. And the sector and U.S. trade as a whole will be even more improved after its struggles with supply chain management are enhanced with new investments in technology, automation, and strategic site selection — all of which are likely to support increased online sales in the future, as Cushman & Wakefield contends.

If the past two years have been an exercise in having to learn the hard way, then e-commerce and industrial real estate will be hard to stop. Learn more about e-commerce in commercial real estate, visit KBS.com/Insights.

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Employees are demanding more. Public health sectors are demanding more. Our environment is demanding more. And, as noted in May 2022, Environmental, Social and Governance (ESG) has become a paramount focus.

With Gen Z entering the workforce during record-low unemployment — and many still wary about returning to the office — it’s just not enough to have healthful environments; workers want them to be environmentally healthy. This is also true for Millennials, who now make up the largest

Employees are demanding more. Public health sectors are demanding more. Our environment is demanding more. And, as noted in May 2022, Environmental, Social and Governance (ESG) has become a paramount focus.

With Gen Z entering the workforce during record-low unemployment — and many still wary about returning to the office — it’s just not enough to have healthful environments; workers want them to be environmentally healthy. This is also true for Millennials, who now make up the largest generation in the labor force. Employees want to work for companies that walk the walk with ESG.

“As the world has grown more concerned with combatting widespread issues like climate change and social injustice,” says KBS CEO Marc DeLuca, “the environmental, social, and governance movement has gained momentum to ensure businesses are doing their part, by transparently reporting to investors and stakeholders their positive and negative impacts on the environment and society.”

KBS’ commitment to ESG includes the recent appointment of a new ESG manager, Apaulo Malloy, who directs and oversees KBS’ ESG efforts as a proactive strategy to drive the firm toward a sustainable future. Malloy heads their “Green Team,” working to identify and track key performance indicators for the company’s ESG goals.

But how can other CRE developers and building owners demonstrate true commitment and sustainability while proving they’re not just “green washing”?

Green washing — a term for companies that use environmentally conscious language in marketing, yet fail to make any real, substantive changes — is a concept familiar with most sustainability-concerned people, particularly younger workers.

Demonstrating ESG Through Verification and Certification

While the UL Verified Healthy Building Program verifies that a building’s internal functions have been evaluated and deemed safe for occupants, Green building certification systems are focused more on the design and construction of a building itself (including materials, water and waste management, etc.).

Here in the United States, the major building certification program is LEED, which is an acronym for Leadership in Energy and Environmental Design. LEED is the most widely used green building rating system, run by the United States Green Building Council (USGBC). Buildings can earn LEED certification with the accumulation of LEED Points. The higher the points, the higher the rating, with Platinum being the highest. Other levels are Gold, Silver and Certified.

LEED Points are broken into nine major categories:

LEED considers itself a holistic rating system; it factors in all elements of environmental and human health essential for a “green” building.

The Global ESG Benchmark for Real Assets (GRESB) is another prominent system for assessing and optimizing ESG efforts. GRESB is an organization that provides actionable and transparent ESG data to financial markets. One of its primary products is a GRESB Real Estate Assessment for ESG performance and sustainability best practices, which is available to CRE companies worldwide. The Assessment provides validated data and analytical tools to benchmark ESG performance, identifying areas for improvement and finding ways to engage with investors.

GRESB places focus on what investors and other industry stakeholders consider to be the key issues for sustainability performance for real estate investments. In 2021, the organization provided assessments to more than 1,500 property companies, REITs, funds and developers. Those assets — totaling almost 117,000 in 66 countries – represented $5.7 trillion in assets under management.

The Real Estate Assessment generates two benchmarks:

The focus on ESG is driving more and more companies to require the integration of environmental and sustainability elements into many aspects of their business.

“The desire to incorporate ESG factors in the industry has even trickled down into CRE leases. Leases, which include various provisions to promote energy-efficiency and environmental sustainability, are often referred to as ‘green leases.’ Green leases can be tailored to meet landlord and tenant requirements, as well as building specific needs,” according to JD Supra.

CBRE expanded on the green lease concept at its April 2022 client forum, stating that “… Green leases are a movement in which occupiers agree to share some of the energy use responsibilities and work with property owners to achieve energy reductions. This is a movement that occupiers can help drive. If occupiers are demanding more environmentally conscious spaces and efforts, complying is in property owners’ interests. According to CBRE’s most recent Occupier Sentiment Survey, more than 70% of respondents indicated that reducing greenhouse gas emissions is their top priority.”

The drive for all of this is creating an urgent shift to more superior building technologies and many investors are formally including carbon neutrality objectives in new investment strategies.

Conserve Energy Future lists the top Sustainable Tools and Technologies in Green Construction, which includes:

While these Sustainable Tools and Technologies focus on materials and elements, the look and feel of the buildings are left to the designer’s imagination. One major shift is an emphasis on outdoor spaces, which workers are demanding, particularly in the post-COVID world.

Fast Company did a deep dive on the subject in April 2021, finding that it’s about what employees want and the innovative ways in which companies are responding. Designs for new and renovated offices are including more green spaces where workers can get away from their desks to get outside for daylight, fresh air, proximity to plants and greenery, etc. If actual access to the outdoors isn’t possible — such as with an inner-city high rise — simulations may be doable, and architects and designers are getting creative with ways to bring the outdoors in. This trend is expected to be in high demand for years to come.

A shift has most definitely occurred and investors should be thinking Green when they want to see green. After all, sustainability is a solid investment. Developers who don’t have a solid plan for sustainability are likely to struggle to attract capital which was discussed at length in “The Role of Commercial Real Estate in Sustainability.”

It’s not just the best way to go for the planet, but employees want companies with a purpose, and they need to demonstrate that purpose “from the foundation up.” This concept can be applied both literally and figuratively.

Additionally, many states are instituting aggressive goals for reducing greenhouse gas emissions — particularly the largest employer states, California and New York. Regulatory pressure on the local, state and federal level will continue to build and get even more stringent. CRE developers who are ahead of health-and-sustainability-innovation game will be leading the charge — and not fighting to keep up.

Discover more on ESG and commercial real estate, visit KBS.com/Insights.

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