Steady Job Growth and Federal Reserve's Tapering of Quantitative Easing Expected to Reduce Uncertainty
New Publication Outlines How Commercial Real Estate Owners and Tenants Should React
HOUSTON, May 27, 2014
HOUSTON, May 27, 2014 /PRNewswire/ -- Given that employment is the principal driver of demand for commercial real estate, its comparatively slow growth during this recovery cycle has been concerning. However, the steady pace of the economy and job growth combined with the Federal Reserve's decision to continue tapering its quantitative easing policy are expected to lift some of the uncertainty that has plagued business decision-making and capital investment, according to the second-quarter edition of the "Insights + Trends + Opportunities" publication by Transwestern and its research affiliate, Delta Associates. Each edition of "Insights + Trends + Opportunities" features a review of the economic impact on commercial real estate and valuable information for commercial property owners, investors, tenants and developers.
ACTION STEPS FOR COMMERCIAL REAL ESTATE This forecast suggests gradual improvement in economic growth and employment, though wage growth is likely to trail the rate of job creation. Owners of multifamily product need to carefully tailor marketing programs based on the fit of each property for certain wage segments. Developers of office product should assemble sites for the peak delivery period, which is likely to be in 2016-2017 as job growth reaches its cyclical apex. Office tenants continue to have leverage in many markets due to modest demand and the effects of densification. However, tenants' leverage is gradually eroding as economic growth accelerates. The process is likely to take longer than in prior cycles – tenants may have the upper hand in negotiations for two to three more years, on average – but office rents are likely to edge higher in many markets over the next few years.
DESIGNED TO PERFORM For years, corporate America has been busy infusing collaborative space into offices with the belief that greater collaboration is the ticket to increased creativity, productivity and worker satisfaction. Clearly, there are many cases where this has been the result, advancing the thinking that shared workspaces are better than isolated, quiet areas designed for one. However, a closer look shows that in some instances the opposite is true: an abundance of collaborative space aimed to encourage teaming and idea exchange has resulted in a diminished ability to focus, which translates into a decline in productivity.
LOCK-IN STRATEGY Steve Jobs created an enviable ecosystem powered by the connectivity among Apple computers, iTunes and iPhones. In a 2010 email recently released as part of litigation between Apple and Samsung Electronics, Jobs referred to Apple's so-called "lock-in" strategy to keep customers loyal, recognizing that the company's goal with its cloud services was to "tie all of our products together, so we further lock customers into our ecosystem." Institutional property owners can capitalize on that ecosystem concept by adapting it to the modern-day office building. How would this design strategy manifest itself in an office tower? Imagine knocking down the figurative walls that exist between tenants in order to build a sense of community and create avenues for synergistic business opportunities among unrelated companies. Tenants that are linked together, both as businesses and collections of individuals, are more likely to stay in a building longer, especially if they are increasingly profitable at the location.
DEVELOPMENT SPOTLIGHT Regional and national industrial developers typically don't concentrate on 50,000-square-foot to 150,000-square-foot projects because the inventory of that size of buildings is usually plentiful in active markets. However, increased positive absorption rates in this category are creating development opportunities in key markets throughout the country. Demand is outstripping available supply for the first time in a long time. Space requirements are emanating from food- and construction-related users, as well as small manufacturers, suppliers and distributors involved in consumer packaging, metal fabrication, medical supplies and plastics for consumer products. Positive absorption is attributable to a growing confidence among tenants and owner-occupiers that are leasing manufacturing, distribution and flex buildings at an accelerated rate. The trend of increasing absorption is expected to prompt more speculative and build-to-suit development of small-scale facilities, which has not happened in eight to 10 years.
ABOUT TRANSWESTERN Transwestern is a privately held real estate firm specializing in agency leasing, property and facilities management, tenant advisory, capital markets, research and sustainability. The fully integrated global enterprise leverages competencies in office, industrial, retail, multifamily and healthcare properties to add value for investors, owners and occupiers of real estate. As a member of the Transwestern family of companies, the firm capitalizes on market insights and operational expertise of independent affiliates specializing in development, real estate investment management and research. Transwestern has 34 U.S. offices and assists clients through more than 181 offices in 40 countries as part of a strategic alliance with Paris-based BNP Paribas Real Estate. For more information, please visit transwestern.com and follow us on Twitter: @Transwestern.