What does 2023 hold for industrial, office, retail property owners?
Yes. I’m feeling the pressure – as last week proved I was quite prescient in my prognostications for 2022. My crystal ball was in fact clear. Good thing it dropped before 9:30 p.m. this year as I was snug in bed by then. But I digress.
So, akin to those holiday goodies you gorged on and now have resolved to avoid, here is yet another prediction column for commercial real estate.
Industrial real estate
Third-party logistics providers will give back space.
If you’re unfamiliar with the term, 3PL or third-party logistics providers are outsourced warehousing services.
Let me explain further: Say you’re a company that needs to get your product distributed to Walmart but don’t have the space or inclination to do so yourself. Enter the 3PL, which will charge you by the pallet to receive, store, re-package and ship your goods for you.
For the past three years – in order to keep up with the demand of online shopping – 3PLs thrived and leased millions of square feet of logistics boxes. With the “de-inventorying” currently occurring, these providers need fewer square feet.
But there’s an issue at hand. Many signed leases that still have time to go. Therefore look for much of this excess to enter the market as sublease space.
Pesky recession talk
Will we experience a recession? I vote no. How’s that for contrarian thinking?!
Here’s how I read the tea leaves. The Fed came out with guns blazing last year with three 0.75% and one 0.5% rate bumps. As we’ve discussed, this increase affects the rate at which banks borrow. The theory is more expensive money will cool a white-hot economy as businesses re-think borrowing for expansion.
If you look at the gross domestic product for the third quarter of 2022, it actually increased over the second quarter. By the time you read this, we’ll have a glimpse as to how the fourth quarter fared. Now, couple that with core inflation which has declined for several months.
Finally, retailers are shedding inventory as mentioned above. In fact, this is deflationary as things are on sale. Some might counter by saying that we’ve not felt the full impact of the Fed rate increases. People are still spending all that idle cash left over from the pandemic, and massive layoffs await. We’ll see.
I choose to believe in the resiliency of the US economy. Plus, have you been to a mall, or restaurant or tried to book an airline flight during the holidays? Bedlam!
Return to the office
Much has been written on this subject. We’re starting the third year since all of us were forced to return to our spare bedrooms.
Remember that fateful day in March of 2020? Like it was yesterday!
Fortunately, our team had spent months figuring out how to duplicate our desktop into a mobile system. Did we have some kind of insider scoop? No. We just wanted the flexibility to do stuff in a client’s lobby, our dining room or the front seat of our car without losing productivity.
We were lucky. When the order came to lockdown, we simply unplugged, drove 20 minutes to our homes and plugged back in. Many were not so lucky and found themselves grappling with how to remain viable. Others simply ordered lots of stuff bunch online and ate a lot. (I heard this from a friend.)
I predict workforces will return to the office this year. Sure, a hybrid model will be employed. Think, for example, of workign Tuesday-Thursday at the office and Mondays and Fridays will be optional work from home.
Retail conundrum
Continuation of the experiences that brought us back to brick-and-mortar stores in 2022 will continue.
Some examples: On a recent visit to Main Place in Santa Ana, we were serenaded by era-dressed carolers, and our grandsons were thrust into a cube of stuffed animals as human claw machines. I’ve never seen the place so packed!
My wife and I both commented, ‘What recession?’
Sans these experiences, however, I’m afraid online shopping is easier. What’s avoided are out-of-stocks, surly clerks, crowds and no parking.
Speaking of Main Place, our favorite parking spaces are now consumed with an apartment complex under construction. Providing your own customer base and foot traffic – once the units are fully occupied – is always a great idea. But how cities choose to eliminate tax basis while at the same time increasing police and fire service remains the tug-of-war.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.
