Defining The Decade In Commercial Real Estate: Part 1
For commercial real estate, a decade is an eon, and that is plenty of time for change in the industry. But with their beginnings in the Great Recession and their consistent, slow growth trajectory, the 2010s have brought some fundamental, lasting changes to commercial real estate.
Some sectors have felt it more than others. The multifamily sector has evolved from an also-ran to single-family housing in the minds of Americans to the darling property type of the decade — in demand, but also a market bifurcated like never before into Class-A and everything else.
At the beginning of the 2010s, industrial real estate was an ugly duckling. At the end of the decade, last-mile logistics became the booming handmaiden of the nation's vast online retail market, which has done nothing but expand since the end of the recession, punching a hole in retail real estate in the process.
Undergirding CRE changes during the decade has been the growth in the U.S. economy, which has been the longest period of growth in history, beginning in June 2009 and not over even at the end of 2019.
Yet it hasn't been the most robust recovery in history. Since 2009, the U.S. gross domestic product has grown 25%. That is relatively modest compared to other post-recession periods, such as the GDP growth that began in 1991, which ultimately totaled 42.6%, or the growth after 1982, which totaled 38.1%.
"All real estate sectors have benefited from the growth this decade," CBRE Global Chief Economist Richard Barkham said. "Because growth has been slow, development has been relatively restrained compared to previous cycles.
"Rip-roaring growth accelerates animal spirits within the real estate development sector, so normally at this stage, we'd have too much inventory all around," Barkham said. "We don't see that. Growth has been at trend or below over that last 10 years, so level of supply is broadly in line with the level of demand."
The Shift To Renting
The main exception to the pattern of relatively modest growth has been in the multifamily sector. Multifamily represented only about 9% of the total number of residential units delivered before the recession, according to Marcus & Millichap National Director-National Multi Housing Group John Sebree. Currently, multifamily is closer to 27% of the total, he said. A spike in demand has driven that growth.
"In the early part of the decade, households were growing and caught up with multifamily supply," Sebree said. "Then household growth exceeded new supply coming online."
Despite increased construction, the supply of apartments hasn't kept up with demand, and occupancies are staying high. The national occupancy rate stood at 95.8% as of the second quarter of 2019, according to RealPage data, up from 95.4% in Q2 2018, and the highest occupancy since 2001.
Apartment rents have swelled alongside occupancy — famously (or infamously) so in some markets, but up vigorously in most places. Using 1960 as a base, median U.S. apartment rents were up 53.8% by 2010, adjusted for inflation, according to the Harvard Joint Center for Housing Studies. Only six years later, rents were up 61.2% compared with 1960, and they have continued to rise since then.
The Great Recession drove many into rental housing, but multifamily specialists say a more fundamental change during the 2010s has reshaped the sector.
"Renting has become mainstream during this decade," Draper and Kramer President and CEO Todd Bancroft said. "There's less of a stigma. Feeling at home is now possible in an apartment. Before the recession, that [was] less true. Apartments were where you lived before buying a home. The push for homeownership was more important then."
Draper and Kramer owns about 9,500 apartments, mostly in the Midwest but also in Texas, and is looking to expand its holdings in such growth markets as Phoenix and Denver.
The impact of the recession not only kicked people out of the for-sale housing market, it called into question the premise of homeownership as a savings vehicle, even for many of those who could still afford a house, Bancroft said.
"There are people who have made the decision that they don't want to be owners," Bancroft said. "The investment component of single-family houses has been challenged."
The change isn't necessarily a generational one, though it has been most widely attributed to millennials, who made their presence felt in housing and job markets in a big way as more of them entered the economy during the decade.
"The biggest change since the recession is the difference in perception about renting, from the baby boomers to the millennials and beyond," Cushman & Wakefield Managing Director Todd Stofflet said. "The idea of renting because you can't buy is gone, and not just among millennials."
If that change in attitude among Americans continues beyond this decade, its reverberations will be vast, especially for the continued robustness of the apartment market. The idea of homeownership as part of the natural progression of middle-class life has been a fixture of the U.S. economy since at least the 1920s, and certainly since the suburban expansion in the decades after World War II.
New attitudes toward renting have also reshaped urban cores in many parts of the country during the 2010s.
"Part of the reason for urban growth is that so much good-quality multifamily has been developed in those places, and the cities have fed on that," Barkham said.
New residential development has supported the growth of rich urban environments, making downtowns more livable places.
"It’s amazing to think that we're just 10 years removed from the global financial crisis," said Collete English Dixon, the executive director of the Bennett Institute of Real Estate of Roosevelt University. "I know I couldn’t have envisioned the strong and continual growth in the urban core of our cities."
English Dixon points out that multifamily housing has also been fueled by companies moving their offices into the urban core, creating demand for housing close by for their employees, many of whom have been younger people looking to live in cities to take advantage of the entertainment, restaurants and transportation, among other amenities found there, which in turn grow as the population seeking them grows.
The change in the apartment market during the decade established a dynamic that favors continued growth in those urban cores. That has been the case in coastal gateway markets, but also a number of secondary markets.
The downside of the apartment boom of the 2010s has been the residential affordability crisis, which is at least partly the outcome of strong demand and weak supply, especially in Class-B and Class-C apartment properties.
Among the households being formed every year — more than 2 million in recent years — many cannot afford the new Class-A product.
"If you can afford it, your needs are being met by the majority of the new apartments being built," Sebree said. "But there isn't enough workforce housing being developed. We don't have the ability to meet their housing need for people with more modest incomes."
Sebree attributes much of the problem to a change in attitude among municipalities that has favored more expensive apartment development.
"Municipalities have insisted on nicer apartments, through guidelines on density and setbacks and height and green space and other features — and have been increasing zoning and environmental and other fees," Sebree said, citing a recent National Multifamily Housing Council study that found that nearly a third of the cost of new apartments was because of regulation by all levels of government.
E-Commerce Giveth And Taketh Away
Another asset classed reshaped by the 2010s is industrial. The makeover has been driven by changes in retail — which itself has been permanently changed by the online buying habits of U.S. consumers.
A graph of the change in online sales during the 2010s, adjusted for the fact that all retail sales tend to spike at the end of each year, is one of continuous growth. Online sales in 2010 totaled just over 4% of all retail sales. By the middle of 2019, the total was over 11% of all retail sales.
Online buying has accelerated through the decade for a number of reasons, including the ubiquity of Amazon, but mainly because communications technology is so powerful. Smartphones, which were barely a factor in retail sales in 2010, accounted for about 40% of online retail sales by the end of the decade.
"We've seen robust demand for logistics properties for most of the decade because of e-commerce," Barkham said. "The demand has benefited the six main U.S. industrial hubs, but we've seen other hubs emerging."
Traditional industrial markets are handling much of the new demand for last-mile. but smaller structures are also being developed closer to urban cores. The drive for ever-faster delivery of retail goods has also reshaped the systems within industrial properties.
For instance, automated storage and retrieval systems, which use robotic technology to retrieve merchandise placed at any point from floor to ceiling, have come of age in warehouses. On the cutting edge is a 628K SF cold storage and warehouse facility under construction for Walmart in Shafter, California, that will incorporate a 73-foot ASRS that stores and retrieves items and loads pallets automatically.
The decade hasn't been particularly kind to the retail sector. After all, no other property type has had an "apocalypse" appended to its name in so many headlines.
Still, it is less clear whether physical retail has seen a permanent change during the 2010s because of online shopping — or merely a winnowing of the weaker brands, which has happened more or less constantly since the age of mass retailing began in the 19th century.
Retail has had the most challenges this decade, Barkham said, but he stresses that much U.S. retail is actually doing fairly well, and it has benefited from the economic growth of the 2010s.
"Certain categories, such as big-boxes and Class-B and C malls, have suffered from competition from the internet, and those properties have struggled," Barkham said. "But Class-A properties and malls in gateway cities and other major markets are thriving."
For upper-end retail, perhaps the most significant change of the decade has been the addition of experiential elements to the mix, the better to keep shoppers interested. Experiential takes many forms, including events and games and even restaurants being added to more conventional retail locations.
Discount retailers also did very well in the 2010s, with growth at first spurred by consumers looking for cheaper goods during the pit of the recession, but later coming around to the idea that dollar stores and other discounters are reasonably good places to buy everyday items. That change in attitude has come much to the benefit of chains like Dollar General, which has expanded greatly in recent years.
If anything, the decade has been good to both lower- and upper-end retail. The middle, not so much, which might mean that the 2010s marked the time when the bifurcation of retail got underway in earnest.
This is part 1 of a two-part series on the way commercial real estate changed in the 2010s. Check back next week for part 2, on technology, coworking and the sharing economy.