Over the past decade the commercial real estate landscape has experienced expediential change. Translation: E-commerce has been in full swing, we experienced a moderate recession that started in December of 2007 and concluded in 2009, the Covid outbreak bashed businesses in 2020 and the icing on the cake is interest rates doubled and are currently around 7.5 percent. Hopefully by mid-summer, we will receive a reduction from the Fed. But through sheer cost cutting, marketing tactics, a sharp eye on employment and determination, most businesses came back, and in some cases, came back stronger. Thankfully, we have a solid military/government base which helps insulate our region.
So, what effect did all of that have on the current commercial real estate market?
Big box retail, large corporate office spaces and new development had to redefine themselves. This resulted in a move to smaller footprints of space, or sadly even having to leave the market. Yet during this same timeline, industrial, small office and service-based retail centers have done relatively well.
On current office space, according to the Hampton Roads Real Estate Market Review, 86 percent of both new and renewed office leases fall under 5,000 square feet. This reflects the dominant core of the office market and embraces some employees working remotely. Please note, there has been a growing trend for employees to return to office buildings both locally and nationally.
Simply amazing, in the industrial sector, Hampton Roads has one of the lowest vacancy rates in the United States, with about a 1.8 percent vacancy rate. There continues to be a severe shortage in this inventory, and again, there is still a high demand. This can easily be charted back to WWII. The presence of shipyards and military-related industrial uses have always fueled this market. Subsequently, the industrial shortage has escalated sale and lease values.
More than ever on the retail front, shopping centers are competing with e-commerce. To be competitive, brick and mortar stores must offer something that online stores can’t. There is still value to hands-on product. The limelight of retail is now placed on service-based retail centers that simply can’t be found online from hardware stores to getting a haircut. Consumers are more comfortable than ever purchasing products online, especially with free/low-cost shipping and easy-return policies. This online purchasing trend will continue to force physical retail locations to adapt to remain competitive.
On development, new construction cost has created a sticker shock amongst all in the commercial real estate market. Site work costs have soared to more than $250,000-350,000/acre, existing industrial properties in good shape are selling for about 30 percent more than they did pre-Covid and new construction costs across the board — believe it or not — have doubled. Let’s not forget the time involved in development once you factor in the permitting process by municipalities, engineering and public involvement taking users a minimum of a year to have doors open for business.
Whatever commercial endeavor you pursue, the operative word is preparation. There is no substitute for diligent homework, be it a lease, sale or ground-up development — knowledge of the mechanics of the market is key. Through well forged relationships in the industry, much of these noted needs can be gained by a handful of skilled commercial real estate brokers.
