Cushman & Wakefield: Global Real Estate

Along with the passage of a Federal budget at year-end 2013 came cautious optimism for increased GSA leasing in 2014. Typically representing about a third of new leases in the District, GSA leasing soared to nearly half of all square footage leased in 2009 and 2010 as the impacts of the Federal Stimulus Package took hold. After two government shutdowns, numerous budget impasses between Congress and the Administration, and sequestration, GSA leasing dropped dramatically in 2013, representing just 6% of new deals – a root cause of the record-low leasing activity in the District.

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Once a predominantly commercial and marine district that fell into a period of steep decline, Boston’s Seaport has, for the past fifteen years, been enjoying a sweeping transformation and resurgence, and today epitomizes the “live, work, play” concept.

Crucial to the Seaport’s rebirth was the construction and eventual completion of the Big Dig, a decades-long engineering project that resulted in the relocation of Interstate 93, which bisected the city, to an underground tunnel system. With an extension of the public transportation system, the Seaport was effectively and efficiently reconnected with Boston.

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Downtown Toronto astonished market watchers around the world when demand spiked in the wake of the devastating 2008 recession. At the time, 4.5 msf of office supply was under development, demand was expected to tank and vacancy was heading for the mid-teens. Instead, absorption reached an average of 330,000 sq. ft. per quarter between late 2009 and 2012, driven by surprisingly insatiable financial sector demand. By midway through 2013, vacancy had plummeted to 4.1 percent.

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U.S. employment growth remained weak in January 2014 as the economy added only 113,000 jobs, the second-smallest increase in the past 18 months. Only December 2013 experienced slower employment growth when just 75,000 jobs were added.

This back-to-back weakness follows six months when the average gain was slightly more than 200,000 per month, suggesting that the slowdown has been caused by bad weather in December and January rather than by a fundamental economic slowdown. An important positive point in the report was the significant upward revision in employment growth in both October and November, which are now estimated to have added an additional 70,000 jobs.

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In a sure sign of a significant improvement in the outlook, the lexicon of the European market place has changed over the past year.

We still have “austerity” and “deleveraging” to cope with of course and “bad banks” are also still with us – albeit now more likely to be a specifically designated institution rather than a definition for the whole sector.

However in a sign of progress federal “deficit” gave way to federal “deadlock” and that now looks to be changing to federal “fudge”.  More notably, as the eurozone recession has ended and property values and activity have stabilized, “confidence” has clearly seeped back, and in some cases flooded back, into the system.

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Change is constant in New York and retail is no exception.  Perhaps there’s no better example of a changing retail landscape than Lower Manhattan.  Once considered a business address and little else, Lower Manhattan has become a desirable place to live, work and visit.  The residential population has exploded over the last 10 years, tourist volumes are way up, and the number of hotel rooms available and in the development pipeline has grown dramatically.  Add to these changes an ever-diversifying employment base and you have all of the ingredients for a vibrant, growing 24/7 environment ripe for a retail renaissance.

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Trying to follow a trend that isn’t clearly defined is challenging. We’ve read about the tech boom for a couple of years now and all the catchy names that have cropped up to delineate tech areas in numerous cities; however, the questions remain: Who is the creative user? What is the creative office? How do we predict the future of creative space?

First, we must look at the user. Traditional office users in industries such as finance, insurance, real estate and legal, with a few exceptions, are unlikely to move out of the high rise to a vintage low rise with exposed brick or an industrial building with 14 foot ceilings. These industries are steeped in history and generally have stricter dress codes and prefer to be located in structured, traditional office space.

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The U.S. industrial market continued to show momentum with strong leasing velocity and absorption, as well as construction levels that have already surpassed last year’s total. The overall vacancy rate fell to 8.2% in the third quarter, 300 bps below its recessionary peak in the first quarter of 2010. The U.S. industrial sector has now absorbed 279.3 million square feet of space since year-end 2011 and the last three years from 2011-2013 will go down as the strongest period on record for net absorption.

While location has long been the most prominent driving force in real estate, e-commerce is redefining the meaning of “ideal location” for a fulfillment center. As retailers attack the “last mile” issue, the trend in technology is affecting the demand for warehouse space – not only in the amount of space, but also the location of the facilities. To meet demands being driven by e-commerce, technology and transportation costs, companies are actively streamlining their fulfillment processes – maximizing efficiencies in inventory, service time and delivery – which is driving demand for high-quality space. With next-day delivery required and same-day delivery becoming more popular, e-commerce fulfillment centers must be close to population centers.

In response to this new demand driver, we are seeing a significant amount of new development projects that are either exclusively or significantly catering to e-fulfillment—both e-commerce-only retailers like Amazon and multi-channel retailers such as Walmart, Target and others seeking to expand their e-commerce business. This year, Walmart signed a 1.2-msf deal in Lehigh Valley and another 788,000 square feet in Dallas. Nordstrom previously said its Iowa Distribution Center had abundant capacity – but now the chain is in the market looking for a new fulfillment center to support its e-commerce operations.

New industrial construction levels continue to rise, including a significant amount of speculative product. This trend is expected to remain , especially in port and intermodal markets. Construction completions totaled 60.0 msf through the third quarter, already surpassing 2012’s year-end total of 58.0 msf.  An additional 21.7 msf of speculative development is scheduled to be completed by year-end. The Inland Empire leads the nation in construction activity at the end of the third quarter, with 16.4 msf currently in development, followed by the Pennsylvania I-81/I-78 Corridor, with 8.3 msf.

The global economy is also having a profound effect on the location of distribution centers. The cities that are especially well-positioned to attract new distribution projects are those that link to the global economy through ports and airports.  Additionally, the expansion of the Panama Canal, set for completion in 2015, is already affecting distribution warehouse site selection. Container shipments are projected to increase tremendously at U.S. East Coast ports and  expansion of the Panama Canal could be a game changer for South Florida industrial real estate. Miami, which handles more traffic from Asia than any other Florida port, still gets 54% of its trade from Latin America and the Caribbean compared to 18% from China. Florida’s location is unique in the U.S. because of its position for east-west and north-south trade.