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Avison Young warns of big risks owners cannot ignore

With the commercial real estate industry already patting itself on the back for a job well-done in 2019, analysts at Avison Young believe those who want continued success will pay attention to politics along with changing tenant tastes.

In a forecast report, the company also highlighted global trends that include AI at workplaces, building resilience as a response to climate change as well as legislation, and employers prioritizing tenant wellness in office design.

Discussing the report at a market overview event at The Rainbow Room on Tuesday, Avison Young’s Joe Harbert, principal and director of operations for the northeast region, said steady employment growth’s implications for the real estate industry is already being seen. There are 113 million square feet of office space under construction in U.S. markets being tracked by the brokerage.

JOE HARBERT

Avison Young is not expecting a recession this year, instead believing the environment may even become more favorable to landlords.

“U.S. real estate is still seen as a safe haven for capital and we expect that will last through 2020,” said Harbert.

For 2020, Avison Young said the real estate industry should be aware of the following trends.

  • Retail is reinventing itself, incorporating technology and experiential themes and repurposing malls. Brick-and-mortar still accounts for 90 percent of all sales, and while it’s been a tough period for retailers as well as owners of retail space as they adjust to the rise in e-commerce, they are adjusting.

“The idea that it’s dead is just wrong,” said Dr. Nick Axford, principal and global head of research. “Shopping as a leisure activity is still very popular.”

  • There are opportunities in e-commerce returns.

“In e-commerce, 40 percent of merchandise gets returned. That needs to be reincorporated into the supply chain, which is very labor intensive,” said Axford.

  • There is still plenty of demand for flex space. He predicts that flex space will jump from five to 13 percent of investor portfolios.

“Occupiers need to be nimble and they pay a premium for that space,” said Axford.

  • Politics can’t be ignored. This is the case not just as laws are being formed but as the people are out with homemade signs, cautioned Axford. Protesters focused on climate change and affordable housing are just a couple of recent examples.

“New York is now the poster child for the rent control movement,” said Axford. “We have to keep an eye on local politics, because what the people are protesting today could be legislated tomorrow.”

  • Globalization is slowing. This is partly due to a “protectionist” movement seen in the U.S as well as the U.K. and other areas. Impacts of this could be seen in more of a demand for locally sourced products.
  • Climate change can’t be ignored. Though the regulations around efficiency and resilience are different in every municipality, there is already building and retrofitting being seen. These changes are especially imminent in cities next to rivers and ports. While how quickly owners and tenants will work to ensure full building resilience is uncertain, what is clear, said Axford, is that, “We will see an increase in climate related extreme events.”
  • AI is coming. Technology or augmented intelligence may also become more prevalent in workplaces for things like data collection and routine processing.
DR. NICK AXFORD

“Look forward to sitting next to your co-bot,” said Axford. “Not a shiny C3PO that does your job for you but software or an app. It will have an impact on back office and offshore (departments).”

  • Wellness will be key. Office design that prioritizes employee wellness is growing in popularity, from corridors that encourage walking over elevator to onsite showers to massages and fresh fruit.

“Employees want employers to care about them,” said Axford. “The idea that companies have a part to play in wellness is gaining traction.”

  • “Place making” is seen as smart investing. There is now greater emphasis on community building rather than just developing buildings.

“If you build good places, not just good buildings, they’re attractive to people who want to work there,” said Axford.

  • Conditions are currently favorable. Axford said investors should take note of low inflation and low interest rates as well as the low unemployment figures. That said, they should still spend cautiously, “being conscious that at some point things are going to change.

“Income is king. Investors need to go back to basics. Like Warren Buffett says, it’s only when the tide comes out that you see who doesn’t have any shorts on.”

  • Cannabis is coming. Axford also suggested that the real estate industry keep its eye on cannabis, which is now legal for medical use in 33 states, for opportunities. While New York’s standards for who can use it are pretty strict, in his recent State of the State Address, Governor Andrew Cuomo proposed creating an office to oversee regulation, including for an adult-use structure.

Manhattan market predictions

MARISHA CLINTON

As for predictions in the Manhattan market, Marisha Clinton, Avison Young’s tri-state director of research, noted how all types of office tenants, but in particular TAMI (technology, advertising, media and information), there was an appetite for amenity-rich development in 2019. She believes this will drive up pricing as well as pre-leasing in 2020.

James Nelson, principal and head of tri-state investment sales, discussed the rent regulations, the effect of which have been hard to determine on sales since the laws were only implemented in June.

“We’re just now seeing the effect on sales post reforms,” said Nelson, though he suspects in Manhattan, there will be more market rate properties selling, not regulated.

He also believes that because of land prices, there will be more sale residences, and fewer rentals coming onto the market.

“In Manhattan, land is priced for condo,” said Nelson. “You have a lot of landlords who want to build rentals, but a lot of land is not priced for that.”

For retail spaces, asking rents may soon go up.

JAMES NELSON

“This is a buying opportunity for investors, because there may be a sentiment that retail has over-corrected,” said Nelson.

In the office market, based on 28 office condo sales in 2019, Nelson believes that the trend of tenants committed to a long-term home wanting to own instead of rent will continue.

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