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January 2017:

The Commercial Market: What’s In Store?

By Owen Rouse

January 3, 2017

Posted in: Salute to Economic Development & The Cyber Community

There are myths, rumors, gossip, suggestions, etc., that buoy the perception vs. reality argument when it comes to various aspects of the commercial real estate market. Let’s dispel the myths, focus on the reality and look forward into 2017.

Office

Myth: Suburban office is dead.

Reality: Downtowns are not for everyone, and configurations inside office spaces are changing.

Add to this discussion the accelerated morphing of office parks into their own enclaves, with town center and/or amenity elements, and you’ll have a vision of the office of the future. It’s not going away, but changing. Touch down spaces, community elements, new materials and open space design allow for particular older buildings to be repurposed to match the needs of the millennial-driven employers of today. Often, older buildings will better lend themselves to this transformation.

Industrial

Myth: The industrial run-up is nearing the end of its cycle.

Reality: Gross Domestic Product-based growth in industrial continues to occur.

The logistics part is becoming more complicated and/or nuanced with developers remaining disciplined and supply trailing demand. Coastal and inland logistics markets remain strong. Look for refinements in product specifications (32-foot clear ceiling height) and “last mile logistics,” which is the new challenge. Redevelopment of existing buildings in key locations will flourish.

The Baltimore-Washington Corridor sits atop an affluent, dense population that will soon become the third largest Consolidated Metropolitan Statistical Area (CMSA) in the country. It’s 40 miles from the capital of the free world, and a truck can reach 20 million people within two hours. This is a “holy grail” location for distributors, and they’re adjusting their e-commerce and store replenishment distribution models to reflect this dynamic.

Flex

Myth: Boring and outdated.

Reality: Perfect for Small Business America.

Individual entry doors and control over one’s space and zoning that allows for retail elements, when combined with decent parking ratios and dock door features, make flex space the perennial hybrid favorite of small companies. Layer in metro area-wide locations and you have a recipe for continued success of flex product.

Look for stray retail uses to continue popping up in older (less expansive) flex buildings. Low impact uses such as boutique gyms (trampoline, CrossFit, etc.), consignment shops, rental car agencies and churches are just some of the types of users that will continue to drift into flex buildings.

Retail

Myth: E-commerce will replace bricks and sticks retailers.

Reality: E-commerce represents less than 10% of retail sales.

For consumer goods companies, it’s just another distribution channel. And there are Internet-born retailers that are now opening stores: Birchbox, The Duluth Trading Co., Trunk Club and Warby Parker, to name a few. The Internet is a rationalizer, and some merchants will not make it. Bankruptcies happen every year, and 2016 was no exception (Golfsmith, Pacific Sun, Aeropostale, Sports Authority); and 2017 will have some casualties as well.

Good malls will continue to perform and reload older/tired concepts with more current offerings. Older malls will either be de-malled completely (i.e., Owings Mills Mall) or reloaded with other uses, such as entertainment or education. Their locations are generally strong, their footprints large and they have the ability to attract transformational capital.

Also, grocery wars are coming, though long-time Baltimore company Mars is gone. Lidl is en route to join Giant, Safeway, Weis, Wegmans, Harris Teeter, Whole Foods, Food Market, Trader Joe’s, My Organic Market (MOM’s), Shoppers Food Warehouse, Food Lion and ShopRite. And Publix is now in Virginia.

And that list doesn’t include Wal-Mart, Target, Costco, Sam’s Club, etc., or the ethnic/specialty markets that dot the landscape. There are too many stores for the population served, and something has to give.

Owen Rouse is senior vice president, director, capital markets, with Manekin LLC, in Columbia. He can be contacted at 410-290-1400 and orouse@manekin.com.

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