I normally wouldn’t do this in May. Typically, I’d wait until next year to do a look back on my 2022 predictions.
However, things are moving so fast these days it feels like a year is eclipsed in 90 days. And by that I mean the stodgy, slow-moving old business of commercial real estate is progressing at warp speed and is vastly different than it was in January 2022.
With inflation at a 40-year high, a Russian invasion of Ukraine, wild stock market gyrations, political unrest and folks back to work, we are witnessing life-altering changes in our world.
So, I believed this springtime checkup was important. So, here we go …
My 2022 prediction on industrial rents went like this: They’ll increase. Next bullet point.
I’ve got a few more words, so bear with me. We tracked Class A inventory for an upcoming assignment. What’s that, you may ask? We describe Class A inventory as buildings constructed since 2000. Doing so enables us to weed out functionally obsolete structures that still exist in the market.
In Orange County, there are eight new developments proposed or under construction for a combined 2.7 million square feet. That’s a staggering number until you factor in what’s available today. That would be one. That’s correct! One available building.
Demand is still strong so there’s nowhere for rents to go but up.
Update: I’m shocked to see industrial rents surpass $2 per square foot, triple net. Just to put this in context, industrial rents in 2010 were approximately 25% of this. Yes! That’s correct a quarter of what they are today.
Prediction: With industrial rents increasing and interest rates still low, expect developers’ appetite to change this year. There’s plentiful capital seeking a place to reside, and an acute shortage of land from which to produce concrete caverns. So, a conundrum continues.
An industrial development at your neighborhood Sears store? A campus built for industries who’ve left the area? All will be targets this year.
Update: Developers still have a voracious appetite for sites with which to add value. There are rumored to be several in play presently at absolutely eye-popping land values. More on this to come.
No, not the TV series, the market.
Recently, I read this with interest: “A new report from Ladders, a career site for high-paying jobs, predicts that 25% of all professional jobs that pay $80,000 or more will be remote by the end of 2022.”
Wow! My suspicion is it will be greater than that. Anecdotally, take our office as an example. We own a 21,700-square-foot, two-story location. We occupy the upstairs and a portion of the down for about 13,000 square feet. When locked and loaded, 49-52 folks commuted to work each day. Now, it’s probably half who regularly attend.
My team works remotely as do others. Adjusting to this change means smaller footprints and more multi-use spaces.
Update: There is some talk among the big players that a return to the office is imminent. Mentioned frequently is the difficulty in maintaining a culture with a remote workforce. We haven’t experienced this so much in Orange County. I believe we are headed for a hybrid workplace that flexes between remote and in-person office occupancy.
We all know that, big fella. How’s that prescient?
Actually, what slowed during our two-year pandemic-fueled sabbatical were trips to the store. Retail sales actually increased as we bought tons of stuff from our smartphones, laptops and the like.
But, one of our clients, corporately based in NYC, is a tremendous gauge of the brick and mortar retail business. By that I mean, destinations such as Walmart, Costco, Burlington, etc. He’s sensed a REAL dip and predicts more to come. So we’ll see.
Update: As you may have read, Amazon, the largest e-commerce retailer, recently put the kibosh on 200 projects in process. Their earnings are predicted to decline by 3% and they admitted they have overbuilt their storage capacity. Consequently, any Amazon deal on the margin was postponed. What this foretells about brick and mortar retail will be interesting to observe.
What on Earth is stagflation?
Courtesy of our friends at Wikipedia: “In economics, stagflation or recession-inflation is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actions intended to lower inflation may exacerbate unemployment.”
Hmmm. Inflation rates, high – check. Economic growth slowing – check. Unemployment high – check.
By the way, you may be thinking, I thought unemployment was low. Actually, the percentage of the workforce NOT working is high. The statistics reported are only those who’ve filed claims, which is a different story.
Update: Wow! That didn’t take long. With inflation running at 8% annually and a decline in gross domestic product for the first quarter, we already are in a stagflationary period. Not since the Jimmy Carter administration has this been a thing.
Things I didn’t foresee: The invasion of Ukraine, the dramatic Amazon slow down, $2-per-square-foot industrial rents. None of these- were all not on my radar in January 2022. Now, you understand why a first-quarter update was important.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected] or 714.564.7104.