by Matt Mellott, CCIM
Skate to where the puck is going, not where it has been. Though perhaps the most overused cliche in all of business, this is the key to success in most predictive investment ventures. To do that, you as a commercial real estate investor, owner-occupant or tenant need to keep your eye on the horizon to see what external factors are influencing the cost and profitability of your space. Rental, vacancy and absorption rates, construction costs, interest rate changes, new design trends and tenant preferences, not to mention changes to accounting standards, all play a role in commercial real estate decision making.
Each year, the Urban Land Institute (ULI) and Price Waterhouse Cooper (PWC) produce an Emerging Trends report on the national (and international) real estate markets. Though it focuses on major metro markets, many of the trends identified impact smaller markets like those found in Missoula, Kalispell, Bozeman, Billings and other Montana cities.
The entire report is worth your time and can be found here. However, a few key takeaways for Montana investors and users of commercial space are below:
Where are we in the real estate market cycle?
Though few are brave enough to venture a guess on exactly where we are in the cycle, the overall consensus is that we are “late-cycle.” The big question is, will we have a soft landing or crash landing? Based on the feedback of the survey responses received back by ULI/pWc, it seems to indicate that a soft landing (a deceleration in growth vs. an outright decline) in most likely in the coming quarters. Much of that is due to self-imposed defensive measures by investors and lenders alike in the form of a longer term view of projects, higher equity requirements and more conservative pro formas on new projects. Key takeaway: expand your investment time horizon and decrease leverage to keep your investment portfolio sound in the coming quarters.
Employee Productivity and What that Means for tenants, owners, investors.
As the supply of labor tightens, economic growth is tied more closely to increased productivity per worker. As the Emerging Trends authors point out, “demand for commercial real estate is not simply a function of head count, but of what (and how much) is produced — whether goods or services—in the buildings. In the end, it is the revenue from production that pays the rent.” This has led to building owners and tenants rethinking space configurations in an effort to enhance space utilization and gain greater productivity per square foot of space, with a focus on improving time efficiency, workflow and capturing a workforce constantly on the move. That has also led to a re-thinking of the open-plan office, telecommuting and other recent phenomena as paltry productivity gains have led many tenants to conclude that trendy does not always equate to effective. Key takeaway: Flexibility of space configurations, sensor-driven “smart” buildings and wellness oriented facilities will likely recognize out-sized returns over competing properties that lack those characteristics.
Tax Changes, Capital Availability and What that Means for Smaller Real Estate Markets
Certain features of the 2017 Tax Cut and Jobs Act, along with on-going interest from overseas investors into major US metros have resulted in increased capital investment in those areas and, as a consequence, investors being crowded out of those larger markets. As a result, secondary and tertiary markets (which is every city in Montana) have seen a significant uptick in investors from those markets chasing yield in places like Missoula, Kalispell and Bozeman. Though smaller markets present a higher risk profile to investors due to the general lack of economic diversity in smaller towns, many have opted to accept the risk in exchange for slightly higher returns found in primary and secondary markets. Key takeaway: The commercial real estate market, even in Montana, attracts the attention of the national (and international) capital markets seeking yield.
Sterling Commercial Real Estate Advisors is a Missoula based commercial and investment real estate brokerage firm that serves the entire state of Montana. By aggressively collecting and analyzing market data, we provide insights into the Montana real estate market simply not offered anywhere else. You’re invited to contact one of our advisors today to aid you as you buy, sell, lease, invest, develop or manage commercial real estate.