July 15th, 2014, By Don Catalano
When you run a corporate real estate portfolio, it can be easy to get stuck in the nitty-gritty of managing each individual location and how they relate to your company’s needs. However, the broader tides of the commercial real estate industry also impact you. As the other side of the industry — the investor and owner side — goes through its ups and downs, it can affect how your spaces get managed, the availability of new space and what you may see as you manage existing spaces. Here is a quick overview of some of the factors that are and aren’t impacting the overall commercial real estate market in 2014, as your landlord sees it.
The low interest rates that have driven the commercial real estate market for around 10 years are starting to adjust upwards. Since your landlord’s returns are based on what he has left over after paying his mortgage, higher interest rates mean that he nets less from his portfolio. However, this doesn’t necessarily mean that the value of the buildings you occupy will go down. Historically, the correlation between interest rates and property values hasn’t been as tight as one might expect.
What this does mean, though, is that investors are likely to become more interested in properties with shorter term leases that allow them to more quickly make changes. This means that money could flow away from offices and retail centers and towards hotels and apartments. If there is less demand for offices, it could create buying opportunities for you.
If your business occupies single tenant properties with long-term net leases, you have benefited from the expansion of capital in that market, coming both from direct investors and from funds and REITs. However, the STNL market is likely to change. As capital markets return to normalcy and as inflationary pressures mount, investors are likely to begin looking for a more growth-oriented income stream than the flat or nearly-flat leases that many current STNL properties offer. This can help them pay for higher interest, compensate them for inflation and provide some upside to mitigate the increasing capitalization rates on properties with shorter-term leases.
The bifurcation of American economy is also coming into play in the commercial real estate arena. Low-end and high-end retailers do well while those in the middle languish. Restaurants and entire regional shopping centers also follow the same trend. This is also happening with global investment markets. The best markets are attracting more and more investor attention. As capital flows to leading markets, tenants will follow as the capital moves from owning existing spaces to funding the construction of new ones. In time, the increased concentration in these markets could lead to even higher occupancy costs in them.
The big picture of the real estate market in 2014 is that it is being impacted by a broader economic recovery. As the economy recovers, your business is likely to enjoy economic growth. At the same time, your commercial real estate occupancy costs are likely to also increase.