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The Giant Awakens

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As the residential real estate recovery rolls west to east and ultimately arrives on the shores of the Chesapeake Bay, it brings with it a recovery in the commercial markets — though not without a few caveats and some advice.

Office Owners

Be afraid of commodity office space — that which lacks style and amenities, and is configured in such a way that any meaningful transformation is too costly (think small floor plates, obstructionist windows, slow elevators). Office tenants are constantly reducing their need for square footage and designing appropriate space while increasing their need for special space that includes meeting nooks, bench spaces that can be shared, and lighting and finish packages that appeal to the millennials that will occupy the spaces.

The risk of incurable functional obsolesce has never been higher. While locations such as Columbia Town Center continue to evolve and present opportunities that attract firms, office space needs to keep pace. That means owners need vision and capital if they want to be competitive.

Office Tenants

The market for tenants is a barbell. For the credit-thin occupier who is willing to settle for paint and carpet, there will be choices — and that means some negotiating leverage. For the larger, credit-rich occupier that wants what it wants, rental rates are rising for well-located buildings owned by strong sponsors.

Industrial

If orange is the new black, industrial is the new multi-family. The growth in the multi-family asset class now has a competitor: industrial space in the middle of the mid-Atlantic, a distribution market that serves approximately 10 million-plus affluent households (soon to be the third largest Consolidated Metropolitan Statistical Area). Couple this dynamic with the growth in e-commerce and fulfillment, then with the lack of appropriately zoned land, and you have a new dynamic: strong upward pressure on rental rates and the vestiges of new construction (albeit exurban) in six or seven years.

Older buildings are being examined with an eye toward modernization and repurposing them to serve the distribution needs of a population that wants everything delivered today. Older logistical models are giving way and no building is immune from needing a tweak or two to achieve efficiency. On that note, previously unheard of rent levels are commonplace.

These days, it’s good to be in industrial. Especially if you’re a landlord.

Flex

The single-story omnipresent real estate of Howard County (and beyond) continues to poke along for a fundamental reason: It’s expensive to load a new tenant (space improvements and commissions consume cash flow) after one leaves a flex building. That said, there are all sorts of vintage spaces available for tenants (’60s, ’70s, ’80s, etc.) that present physical and locational differences that will be reflected in the rental rates.

As long as the economy continues an upward trajectory and creates small businesses that need new homes, established business that need to grow into the bay next door and mature businesses that grow up (and out) to be owners or occupiers in much larger spaces, the flex business should improve.

There are advantages to both owners and tenants via economies of scale. The more flex space a landlord can control, the better off everyone is.

Retail

E-commerce, last-mile delivery and fulfillment centers are the cocktail party buzzwords that stand behind the general retail big-box business. But there is a barbell here as well: The neighborhood center that has pizza/hair/nails/liquor alongside a grocer continues to do well. Services that cannot be bought over the Internet still need a home and a good sponsor to tend the property. Brands become more important for these tenants.

For the larger retailers, the effect of the Internet is growing and in its relative infancy. Stores have grown beyond the need for showrooming (looking at a product in-store prior to buying from the Internet), and brands really matter at this level. Look for more consolidation.

The Wrap

So what does the above mean for the commercial real estate market?

Know that some of the sins of the market are masked by the market: the hyper-affluency, the strong transportation network, an airport that is the envy of the business and a well-educated workforce.

The commercial real estate business that is in the vapor trail of residential recovery continues to strengthen, with few obstacles in its way, save for the effect that is yet to be felt from the recent elections.

Owen Rouse is senior vice president, director, capital markets, for Manekin LLC in Columbia. He can be contacted at 410-290-1472 and orouse@manekin.com.