Is It Too Early In The 4th Quarter To Call The Game?
Memories of the 2007 recession still linger in the minds of those who lived, and worked, through it. Commercial real estate leaders say they are optimistic about the current economic climate, yet realistic in their business strategies, knowing the cycle cannot last forever.
“Right now our strategy isn’t changing a whole lot, even though we are very mindful of where we are in the cycle,” SunCap Property Group CEO and founding partner Flint McNaughton said at Bisnow’s Charlotte Construction and Development event in Uptown last week. “It’s an interesting and challenging time.”
Although speculation about the cycle draws attention, and industry experts say they are trying to pinpoint the looming signs that will determine a recession, commercial real estate business is moving forward in Charlotte and around the country.
“It’s such a different cycle,” The Spectrum Cos. President of Asset Management and Chief Client Officer John Boylan said. “Interest rates aren’t crazy, inflation isn’t really crazy, unemployment is strong.”
Past cycles have changed how CRE does business. There is more equity in deals and conservative underwriting.
“There’s discipline in our markets,” Boylan said. “To use development and discipline in the same sentence was a foreign concept.”
Spectrum Cos. recently delivered 300 South Tryon, a 689K SF mixed-use development, a project put on hold when the recession hit Charlotte in 2007.
What Is The Defense Strategy?
Companies are giving consumers what they want in new construction. The national shift in housing preferences is changing how developers move forward.
“Mixed-use developments are the wave of the future,” Crescent Communities Managing Director of Multifamily Development Michael Tubridy said. “They are more complicated but create a lot more value. It’s where people are flocking to."
Zoning and entitlement, working with multiple partners and getting agreements from neighbors, makes building mixed-use more complicated, Tubridy said.
Charlotte-based Crescent Communities has 17 developments under construction or in lease-up and 18 projects in the pre-development process in its 13 different markets in eight U.S. regions.
“We’ve been extraordinarily bullish over the last eight years, and thankfully things have kept up in Charlotte in particular,” Tubridy said.
Is Holding Back On Suburban Office A Mistake?
The consumer’s cry for walkability has influenced where office buildings are being built. Trinity Capital Advisors founding partner Gary Chesson noticed a change in 2015 when he could not get support from institutional investors for an office building in the suburbs. Blue-chip capital from companies such as Prudential and JPMorgan Chase has moved away from suburban office.
“[Institutional investors] started saying that suburban office is a really bad thing,” Chesson said. “There has been an overcorrection in this space, in my opinion.”
Suburban office did poorly in the last recession and the trend for walkability has scared away the investors. It could be short-sighted, he said; millennials will get older and want to move out to the suburbs.
“They want a house, a yard, a dog and kids,” Chesson said. “The suburban office is going to come back.”
Does Benching Class-B Make Sense?
Class-A office in Uptown Charlotte is doing well: They are leasing up quickly and there is not an oversupply, Chesson said. Class-B is going to suffer.
“There’s going to be a lot of availability, a lot of holes to backfill,” he said. “Bank of America is going to leave about a half million SF, we think, when they take their new tower in a couple of years.”
When tenants are promised renovations and developers do not deliver, companies leave for greener pastures.
“The buildings that go forward and do the renovations, and this is in Class-B buildings, end up attracting the tenants,” Chesson said. “They really have to renovate, whether it's Class-A or B, every seven to 10 years.”
There are going to be a lot more older buildings in need of renovations, Insite Properties principal Jay Blanton said. These are spaces that made it through the downturn but are now in need of renovations.
“We think there is a big opportunity to take older product and reconfigure it, redesign it, refurbish it and bring it back to the standard that’s not A property, but B to B-plus,” Blanton said. “There’s value-add opportunity there.”
Class-B buildings can be in an A location with added amenities like an upgraded lobby, fitness center and retail.
“You have to be ahead of the curve to keep these buildings relevant, otherwise they slowly empty out and become functionally obsolete and unappealing to these tenants,” Blanton said.
Is It Too Early To Call The Game?
Moore Van Allen attorney Jeff Brown moderated a panel discussion at the Bisnow event. He asked the panelists, “How deep are we in the fourth quarter?”
It is still hard to tell, most panelists said, and they are proceeding with cautious optimism.
“The market currently rewards those who are creating the opportunities,” McNaughton said. "The developers and brokers who are instigating and building new products is where the money will continue to be made."