Real Estate Experts Share 2021 Commercial Trend PredictionsJanuary 11, 2021
2020 was a tale of two cities for commercial real estate as retail, hospitality and office properties became ghost towns overnight, while industrial, healthcare and life sciences assets proved more resilient to the COVID-19 crisis, thanks in part to a tenant base consisting primarily of essential businesses. Commercial real estate experts predict the growth and contraction patterns experienced this year will continue in 2021, with some sectors expected to rebound faster than others as vaccines become more widely available.
“The most obvious change of the year has been robust development of warehouse and distribution facilities to meet the sudden rise in e-commerce,” said Robert Smietana, vice chairman and CEO of HSA Commercial Real Estate. “At the same time, office, retail and hospitality development hit a near standstill as office workers, shoppers and travelers stayed mostly at home because of the pandemic. Developers in these sectors will need to get creative to reinvent these spaces to match how we work, shop and travel going forward.”
As firms tailor developments to meet the opportunities and challenges of a post-COVID-19 world, here are five trends that will impact commercial real estate in 2021, according to some of the industry’s leading Midwest experts.
- Warehouses Are Where It’s At
- Building Buildings Like Never Before
- Return to the Office?
- “The Doctor Will Zoom You Now”
- Shopping for Retail Opportunities
Warehouses Are Where It’s At
One of many trends accelerated by the COVID-19 pandemic was the widespread adoption of e-commerce. U.S. consumers spent an estimated $209.5 billion online in the third quarter, accounting for 14.3% of total sales, according to seasonally adjusted data from the U.S. Department of Commerce. That total is up 36.7% from third-quarter 2019, when e-commerce sales made up 11.2% of total sales. Not only are retailers and third-party logistics companies increasing their distribution center footprints, but many are also shifting from a just-in-time inventory model to a just-in-case strategy as they seek to avoid the product shortages experienced throughout 2020.
“We estimate the pandemic accelerated e-commerce adoption and direct-to-consumer sales by five years,” said Adam Roth, executive vice president of NAI Hiffman. “And once people have experienced the convenience and value of it, many won’t go back. In a post-pandemic world, you will see a higher percentage of online shoppers than in the past, which bodes well for industrial real estate long term.”
This has proven true in the Chicago area, the country’s largest industrial market and a key distribution hub, where third-quarter industrial vacancy was 5.46%, tightening from 5.63% a year earlier, according to NAI Hiffman. The company’s research director, Michael Morrone, agrees industrial will continue to perform better than most sectors, but notes the overall vacancy rate could increase in 2021.
“Industrial construction ticked up in 2020, with 8.3 million more square feet under construction at the end of the third quarter as compared to 2019,” said Morrone. “While only about 40% of that space was speculative, any sustained dip in leasing activity would affect the market in the short run. Long term, though, e-commerce demand is poised to increase, and once key players figure out the logistics for cold storage, that will spur even more industrial demand.”
To facilitate same-day deliveries and fulfill increasing online grocery demand – e-commerce grocery sales are expected to jump 53% in 2020, to $89.22 billion, and further grow to $129.72 billion by 2023, according to eMarketer – industrial users are also looking to multiple smaller warehouses and temperature-controlled facilities closer to urban cores. Bloomberg reported in September that Amazon alone is planning to open 1,000 smaller warehouses in urban and suburban neighborhoods, some of which may backfill vacant retail.
CRG, the real estate development and investment arm of Chicago-based Clayco, plans to identify industrial development and acquisition opportunities in cities such as Atlanta, Chicago, Philadelphia, St. Louis and Columbus, Ohio. Delivering more than 10 million square feet of Class A industrial product annually, CRG currently has 50 million square feet of industrial buildings in its development pipeline, ranging in size from 200,000 to over 1 million square feet. The firm’s next-generation industrial brand, The Cubes, emphasizes sustainability and state-of-the-art building specifications to meet the needs of today’s leading logistics users.
“It’s no secret that e-commerce has been a tailwind to industrial real estate over the last cycle,” said Kevin Scott, vice president of investments and developments for CRG. “But e-commerce users still represent just a fragment of the overall industrial user base. Specialized uses such as cold storage and data centers continue to grow, and we are excited about opportunities there. We also see opportunity from companies adapting or overhauling their supply chains to meet changing consumer behavior and demand with modernizations such as automation, robotics, complex material handling and, in certain cases, co-locating office workers with the distribution real estate. CRG has the capability to deliver buildings that meet the requirements for all these varying users.”
Sharing a bullish outlook on the sector is CA Ventures, a global real estate investment management company that launched its industrial division in 2018. The firm, whose industrial portfolio includes investments in Denver, Atlanta, Dallas, Phoenix and Chicago, is pursuing speculative developments and acquisitions across the U.S., harnessing big data and analytics to pinpoint the best opportunities.
“We are aggressively growing our team in target markets, including major Sun Belt and coastal cities that will see increased demand for industrial real estate as companies look to respond to rising e-commerce demand and the need to diversify their supply chains,” said Michael Podboy, president of CA’s industrial division. “Our ‘bigger and deeper’ strategy is a barbell approach that encompasses larger warehouses and distribution centers on the fringe of major metros, as well as smaller facilities – most between 150,000 and 200,000 square feet – closer to the urban core, which helps to lower transportation costs while reducing delivery times.”
HSA Commercial Real Estate, a national full-service commercial real estate firm, says e-commerce is accounting for a significantly greater share of industrial leasing activity. Highlighting the rising demand for well-located warehouses, the firm recently executed a lease with Kenco Logistics Services to fill its 757,880-square-foot Heartland Corporate Center development in Shorewood, Ill., adjacent to the interchange of Interstates 80 and 55. HSA is also close to completing the first phase of the Bristol Highlands Commerce Center, a 68-acre business park in Bristol, Wis., near the Wisconsin-Illinois border and Interstate 94, a major industrial corridor linking Chicago and Milwaukee.
“Consumers aren’t the only ones fueling the e-commerce trend; corporate decisionmakers who have grown accustomed to short delivery times in their personal lives are also making more of their business purchases online, and we expect B2B traffic to be a growing demand driver in 2021 and beyond,” said Robert Smietana, vice chairman and CEO of HSA Commercial Real Estate. “Warehousing needs will also increase next year as companies look to increase their reserve stock as a hedge against future supply chain disruption.”
Building Buildings Like Never Before
2020 saw an increase in the use of non-traditional building materials, including timber, modular steel and precast concrete systems, as commercial developers placed a greater emphasis on sustainability and cost savings. Architects and contractors have been increasingly customizing these materials for higher-end developments, which is expected to continue in 2021. Also look for technologies that streamline tasks, from creating estimates to reducing construction material waste, to be adopted at a faster rate.
While concrete and steel have traditionally been used to construct commercial buildings, cross-laminated timber (CLT) and heavy timber are gaining traction as alternative framing materials in urban environments for cost savings and sustainability, respectively. At Southall, a 325-acre farm-based resort in Franklin, Tenn., James McHugh Construction Co. is using sustainable wood materials from managed forests, including heavy timber and CLT, to construct four buildings, including one that is four stories tall. And wood’s use is no longer limited to low-rise residential structures. Mid- and high-rise timber buildings, including multifamily, office and hospitality projects, are climbing higher than the treetops in cities across the country as municipalities look for ways to adjust their codes to allow for taller wood construction.
“Despite rising timber prices this year, traditional wood framing can still be a more affordable building product than concrete and steel, especially as structural components are prefabricated for erection at site,” said John Sheridan, executive vice president of McHugh Construction. “Further, the code adjustments to allow expanded use of cross-laminated and heavy timber technology will allow buildings to achieve a new level of sustainability. As a highly renewable resource, wood supports the AEC industry’s goal of reaching net-zero carbon emissions by 2050.”
The 2021 International Building Code (IBC), which will be widely available in March, serves as the foundation for local building codes and will contain even more provisions to allow for mass timber construction of taller buildings in the future.
For architects, the use of alternative building materials and construction methods presents unique aesthetic considerations as well. In recent years, KTGY Architecture + Planning has incorporated not only mass timber, but also modular steel and precast concrete systems into the design of pioneering transitional living communities like Hope on Alvarado in Los Angeles. The international architecture firm has since applied those technologies to new hospitality, retail and mixed-used projects.
“When modular was first introduced, no one believed it could be used for high-end commercial projects without sacrificing quality or the ability to customize,” said David Senden, principal at KTGY Architecture + Planning. “A common misconception is that modular means recycled shipping containers. While those are used, purpose-built modular structures are much more common because they’re higher quality, can be tailored to the project and, unlike used shipping containers, don’t run the risk of contamination. Usually we are designing modular structures that don’t look modular at all once cladding is installed. Such is the case with the upcoming redevelopment of the historic Morrison Hotel in downtown LA, where we’re adding a high-rise modular hotel tower that connects to the historic hotel structure.”
Using innovative new technology has also helped subcontractors offer their clients cost-saving solutions without sacrificing aesthetics. For GI Stone, a Chicago-based commercial stone provider, all-natural stone materials are mapped digitally, allowing its clients, which include luxury hotel and high-end condominium developers, to maximize material usage and utilize remnants in other areas.
“Our clients often want the high-end look of stone without the high-end price tag, so we use technology to explore how those same materials can be used in a way that aligns with the project budget,” said Sandya Dandamudi, president of GI Stone. “We start by taking the time to understand exactly how the material will be used and how much will be needed. Then, we use software that was pioneered in the woodworking industry to minimize material waste by ‘reading’ a remnant size before cutting it and tailoring designs accordingly, ultimately saving money.”
Return to the Office?
With the pandemic upending where and how we work, developers are preparing for the eventual return to the office with designs that cater to the new demands and expectations of tenants and their employees. Look for boutique buildings, hospital-grade air- and surface-sanitization systems, touchless tech and biophilic elements to be in high demand as companies large and small consider how their space will be used, and perceived, by current and prospective employees.
At the recently completed Fulton East in Chicago’s Fulton Market District, developer Parkside Realty, Inc. pivoted at the beginning of the pandemic to reposition the 12-story, 90,000-square-foot building as the nation’s first office property designed for the post-COVID-19 era, with hands-free elevators and a state-of-the-art air- and surface-cleaning system. Biophilic design elements intended to promote health and wellness include floor-to-ceiling windows that allow light to filter into open floor plates, private terraces on every floor and an 8,000-square-foot rooftop garden and meeting space for shared tenant use.
“We know people will want to get back to the office for in-person, face-to-face connection and collaboration, so our development team quickly reinvented Fulton East to be a first-class model of the health-and-wellness environment tenants now desire so their employees feel safe and comfortable,” said Bob Wislow, chairman and CEO of Parkside Realty, Inc. “Fulton East combines biophilic design elements with high-tech health features and private parking – all in a small-building footprint that is easy for employees to access and has significantly less foot traffic than a high-rise.”
In Chicago’s Loop, developer Moceri + Roszak retrofitted 145 S. Wells, a 20-story, 210,000-square-foot office building completed in 2019, with a state-of-the-art HVAC system to help prevent the transmission of COVID-19 in individual office suites and common areas. Prospective tenants also appreciate their ability to customize each floor of the building, which was built on a speculative basis.
“We have been working with employers looking to build out a space with proper social distancing, extra meeting rooms and multiple café areas, which they may not have previously considered,” said Tom Roszak, FAIA, principal of Moceri + Roszak and founder and principal of Thomas Roszak Architecture, which designed the building. “145 S. Wells also offers touchless entry from the lobby to tenant floors, as well as private balconies on select floors and outdoor amenity spaces like the Terrace Lounge, which features numerous tables and seating areas.”
Technologies and amenities that were nice-to-haves before the pandemic have quickly become must-haves in the eyes of today’s office users. As such, they’re featured prominently in marketing materials for developments like 2017 N. Mendell, a 62,000-square-foot loft office redevelopment near the 55-acre Lincoln Yards development on Chicago’s North Side. “While 2017 N. Mendell offers an outdoor art gallery and rooftop deck overlooking the Chicago River, tenants care just as much, if not more, about features they can’t see, such as the plasma and blue light technology we are using to sanitize the spaces of airborne and surface pathogens, whether bacterial or viral,” said Dan Slack, principal at Baker Development Corp., which developed 2017 N. Mendell in 2018. “The building’s boutique size and location outside of the downtown core, with ample parking and proximity to The 606 trail, were always selling points but resonate especially now as companies look to de-densify their work environments.”
“The Doctor Will Zoom You Now”
One sector that has proven largely immune to COVID-19 is healthcare real estate. With U.S. health expenditures projected to increase at an average annual rate of 5.4% through 2028 – when they will reach $6.2 trillion and account for 19.7% of GDP, according to the Centers for Medicare and Medicaid Services – modern medical facilities remain in high demand, even if care is delivered differently in a post-pandemic world. One of the biggest changes? More virtual appointments.
John Wilson, president of HSA PrimeCare, a leading developer and manager of healthcare facilities across the U.S., notes COVID-19 fast-tracked the adoption of telemedicine and estimates 20% of future medical visits will be virtual. But that doesn’t mean healthcare facilities will disappear or even decrease in size.“Millions of people turned to virtual doctor visits during the pandemic out of necessity, but even the best technology has limitations and most follow-up appointments will take place in person,” Wilson said, adding that many providers will incorporate touchless technology and reconfigure or eliminate waiting areas altogether so patients feel comfortable making the trip. “Even if initial consultations are virtual, physicians will still need space where they can conduct them reliably and privately, in compliance with HIPAA regulations.”
CA Ventures, a global real estate investment management company, launched its medical office and life sciences division in early 2020 before the pandemic altered how many Americans access healthcare. Despite the transformation the industry has experienced, CA remains bullish on the market and has expanded its team over the past year to develop and acquire more than $500 million of medical real estate assets across the U.S. annually, leveraging the firm’s vast experience in dozens of markets.
“We anticipate telemedicine to supplement, not replace, traditional healthcare, especially if insurers don’t cover those services as extensively as they did in the early months of the pandemic,” said Russell Brenner, president of CA’s medical office and life sciences division. “Patients – particularly our aging population, which accesses healthcare at a rate that’s six times greater than millennials – will still want easy access to hospital-sponsored, multi-specialty outpatient facilities. Similarly, physicians understand the value of face-to-face, in-person interaction for developing trust and delivering the highest level of care.”
Shopping for Retail Opportunities
With mall vacancies soaring – a trend that was well underway before COVID-19 – reinvention and renovation are the key to putting a new twist on the old shopping mall concept.
“To navigate the continuously evolving retail landscape, centers must curate a mix of uses, such as residential, medical, corporate office or coworking, to remain viable and keep pace with changing consumer behavior,” said Tim Blum, managing director of the retail development group at HSA Commercial Real Estate. “There will always be a place for brick-and-mortar retail, especially as more e-commerce brands recognize the importance of physical storefronts and use them to fulfill orders and create meaningful interactions with customers. This increasingly popular approach enhances property values for owners while improving the experience for the end user.”
The rate at which deteriorating malls are being converted into new mixed-use centers, many of which include a residential component, is increasing, according to David Senden, principal at KTGY Architecture + Planning, which is working on several projects like this across the nation, the first of which was completed in 2017 in Orange, Calif. “Many of these malls are large structures with ample parking, so regardless of whether the building is being replaced or redeveloped, it’s essentially a blank canvas in a highly visible, highly accessible location,” said Senden. “Oftentimes the retail footprint is rightsized to make room for complementary uses. From a design perspective, we seek to establish continuity, connectivity and walkability so the center looks and feels like an urban neighborhood, even if it’s in the suburbs.”
Of course, malls aren’t the only retail properties struggling with high vacancy. Investors are also reimagining empty big-box storefronts that offer similar redevelopment potential. Mike Mallon, CCIM, CREX, senior vice president with Draper and Kramer, Incorporated, has worked to backfill obsolete big-box space with self-storage. “While there are challenges to this type of conversion, including working with municipalities to address concerns about how the new use impacts sales tax revenue, it’s a good match in terms of the physical space and available square footage – plus, the parking lot allows for exterior storage garages with direct access,” he said. “In some instances, we’ve also re-engaged the parking by creating outlot parcels that can accommodate smaller retailers or restaurants, which in turn creates a new source of sales tax revenue for the municipality.”
Other creative adaptations of big-box retail include leasing the space to an auto dealership or fulfillment center, or building out an interior mini mall that might include a grocery store, banquet facility, self-storage component or convenience-oriented retail, noted Mallon. “The challenge with a vacant big-box or department store isn’t so much the square footage but the depth,” he said. “To reactivate them, you have to be creative and make them functional.”