Charles Hazen, President of Transwestern Investment Group; Tom Lawyer, President of Transwestern Real Estate Services; and Carleton Riser, President of Transwestern Development Company
Disruption drives innovation.
Ideally, disruption ebbs and flows, presenting challenges that can be anticipated and analyzed, followed by new solutions that can be delivered and measured for effectiveness. In 2020, disruption accelerated at an unprecedented pace, demanding that the commercial real estate industry – and all industries, for that matter – refocus on how to best meet the needs of clients and partners. And we did.
In 2020, rapid adoption of technological solutions provided a glimpse of how powerful the integration of digital and physical space can be.
Working together like no time in recent history, owners, investors, developers, occupiers and service providers prioritized, strategized and responded with agility, ensuring the commercial real estate sector will contribute to – and capitalize on – the economic recovery on the horizon.
The office sector was put to the ultimate test, yet innovation and flexibility has shown once again that real estate can and will adapt to meet changing needs.
With a spotlight on health and safety, public-private collaboration has guided responsible new protocols for office properties, and owners have worked with their service providers to ensure proper measures are in place to protect building occupants. In 2020, rapid adoption of technological solutions provided a glimpse of how powerful the integration of digital and physical space can be. We anticipate growing use of platforms that can deliver greater insights to owners, tenants and building management teams.
That said, we recognize that 2021 will continue to put the office sector’s ingenuity to the test. Trepp reported that of the $145 billion outstanding office CMBS loans, approximately one third have major tenants whose leases expire in 2022. Trends have and will continue to shift, making an understanding of immediate and long-term impacts vital to crafting a solid business strategy. For example, will tenants flock to suburban properties as CBD leases expire? Do property amenities hold as much weight in a location decision today – and if so, what types of amenities are most desirable? Can the level of attention attained by occupant wellness be sustained post-pandemic? How will lower occupant density and greater work-from-home acceptance ultimately affect absorption and vacancy rates?
We strongly believe that high-performing organizations recognize the value of bringing employees together and will double down on thoughtful, well-designed office space to achieve a competitive advantage. As a result, well-located, smartly amenitized properties that demonstrate a commitment to occupant wellness will be sought after by tenants and add value to investors’ portfolios.
COVID-19 cemented consumer behaviors that are fueling activity in the industrial sector and putting additional strain on retail.
With efficient buildings designed to modern specifications in high demand, we expect to see continued new construction in most major markets.
Site selection driven by sophisticated data analytics, supply chain optimization that has become increasingly granular, and warehouse and distribution space that continues to modernize have been important topics for some time. Yet 2020 underscored just how critical industrial real estate is to the social and economic stability of the United States. In November, Digital Commerce 360 predicted U.S. e-commerce sales would top $839 billion in 2020, up 40% year over year. The sector, already experiencing a healthy rate of growth, surged to approximately 21% of all retail spending in just a few months and has accelerated trend projections by roughly five years, according to IBM’s annual U.S. Retail Index. Amazon, Walmart and other users are leasing projects at breakneck speed, and investors are active in both core industrial markets and secondary markets like Austin, Phoenix and Denver. Transwestern Development Company has active and completed projects leased for e-commerce use in both regional distribution and last-mile delivery, including a number with Amazon for both purposes. With efficient buildings designed to modern specifications in high demand, we expect to see continued new construction in most major markets.
Retail has suffered the brunt of 2020’s dramatic swing in shopping habits and, as a result, the sector is showing significant distress. In December, Trepp x Compstak reported that delinquency and special servicing rates for retail CMBS loans in Manhattan reached an all-time high in August of 16.7% and 17.6%, respectively. In 2021, we’ll see more retail assets enter special servicing and more loans restructured. In some cases, underutilized or obsolete retail assets will be repurposed for other uses. This is not to say retail is dead: Agile retailers can successfully shift or enhance existing sales and distribution strategies to remain viable, recognizing that an omnichannel approach will endure long after COVID-19 is under control.
Also being discussed in boardrooms around the country is the feasibility of reshoring or nearshoring manufacturing operations to establish more control over supply chains. It’s yet to be seen how many companies will relocate facilities after a careful cost and benefit analysis, but these discussions underscore the pain last year’s disruption caused.
The critical role real estate plays in healthcare and life sciences has been amplified, and space that is flexible will best meet the needs of owners, providers and patients going forward.
A broad understanding of how healthcare is designed, tested, regulated and delivered is imperative to making smart real estate decisions
The pandemic highlighted how quickly space needs can change. In 2020, emergency rooms were at capacity while doctors’ offices and surgery centers stood vacant. A rise in telehealth put new demands on systems infrastructure. And more amenities were brought inside hospitals to prevent unnecessary exposure among workers. Our firm, for example, helped 7-Eleven deliver an elevated retail concept complete with extended hours and mobile ordering to Children’s Medical Center in Dallas in less than 30 days, solving an acute need for grocery items and healthy prepared foods and snacks for hospital employees.
A broad understanding of how healthcare is designed, tested, regulated and delivered is imperative to making smart real estate decisions – whether related to investment, development, leasing or management. Variables such as demographics that drive the location of a regional medical center, optimal tenant mix for a life sciences campus, or customized space design for a medical office building can significantly impact occupancy, patient satisfaction and return on investment. Ensuring the next generation of healthcare drives even greater value for its many constituents requires us all to learn from the strengths and weaknesses highlighted by recent events.
Success in commercial real estate requires an intricate combination of knowledge. Yes, it’s about the bricks and mortar that create spaces for us to live, work, play and serve our communities. But also important is how individuals and groups use these spaces to achieve great results, whatever their mission. All of this will come into play as we continue to refine and deploy value-add strategies for Transwestern and its clients in 2021. With the pace of change our industry is experiencing, we look forward to a year of compelling challenges and remarkable achievements. This is an exciting time for commercial real estate.