This is just one of the answers I was looking for when I attended NAIOP’s Capital Stack on Tuesday. Spencer Levy, Chairman of Americas Research and Senior Economic Advisor for CBRE, presented an economic forecast that provided actionable ideas for growth in the upcoming year. His information was so powerful that in a room of 200+ real estate professionals, not one was caught checking their email on otherwise using their phone during his two-hour presentation. Information like this is too important not to share, so I’ve summarized the key take-aways in this blog.
Most economists are predicting slower economic growth in 2019. If you are looking for larger gains in real estate in the upcoming years here are three actionable tips Levy provided.
Embrace Live·Work·Play
If you are a developer looking to attract new tenants, it is imperative that you make Live·Work·Play a top theme in your planning. The trend of mixed-use construction is here to stay, and the days of a work and life separation are long behind us. While maintaining a work life balance will always be important, most professionals will agree that their work and personal lives have melded. Technology has advanced to the point where you can help a client by answering your cell phone on a Saturday, or work from the local coffee shop if you need to run an errand. Your tenants are looking for locations where they can live close to their place of employment and also enjoy community amenities such as grocery shopping and entertainment. This is why projects like Bozzuto’s Harbor East in Baltimore are so successful. Employees of firms such as Legg Mason, T. Rowe Price, Morgan Stanley, and Johns Hopkins can live near their office, enjoy lunch at a local restaurant, and shop at the nearby Whole Foods Market on their way home. On the weekend, the same employee can walk to the movie theater, enjoy one of the many local pubs, or visit a local museum. Live·Work·Play is the experience people are looking for.
Invest in smaller markets
Cities such as Washington DC and Los Angeles regularly top lists of Booming Real Estate Markets. In 2018, however, some smaller markets have made their debut or are rising in popularity. These cities include Austin, Texas, Tampa, Florida, and Nashville, Tennessee among others. To compete in a slower growth world Levy recommends focusing on smaller markets where people want to Live·Work·Play. For 2019, up and coming markets such as Kansas City, Kansas, Columbus, Ohio, and Pittsburgh, Pennsylvania hold strong promise for the largest real estate gains.
One key features these cities have in common is their access to healthcare research and university facilities. A great example is Pittsburgh, which has been experiencing a renaissance in the past few years thanks in part to research universities like Carnegie Mellon and University of Pittsburgh in addition to the influx of technology giants such as Google and Facebook. The city is unique because it does a great job of attracting and retaining good talent. Students move to the area to attend one of the prestigious universities and stay to begin their careers at one of the many leading-edge tech companies. And they stay and raise families because Pittsburgh offers not only great employment opportunities, but also cultural opportunities such as theater and world class museums with staples such as grocery stores and shops all integrated into the smaller Pittsburgh communities where people live and work.
People are finding value in these smaller emerging real estate markets, and they are more likely to provide a larger return on your real estate investment.
Master the Business of Retaining Labor and Tenants
The US unemployment rate fell to a meager 3.7% in October. This means that all the people who want to work are working. As someone who grew up in the construction industry, I always thought that steel prices affect commercial real estate more than any other factor. However, as Levy states, “labor matters more.” For example, Levy shared that tenant improvement allowances jumped from $40/sqft in 2007 to $93/sqft in 2018. Tenants and workers are willing now, more than ever, to move. Lack of qualified labor, an increase in wage rates, and less durability of tenants is driving labor costs up.
Labor shortage problems are not likely to solved in the short term, so how can you compete? Levy suggests, your company’s ability to attract and retain your workforce has never been more important.
Changing companies and careers is the norm now, and people have more options for employment via brick and mortar outlets or internet venues than ever. Employers need to work to give their labor force reasons to stay and work. The number one way to retain is to value and respect your workforce. As in every relationship in life, the more valued you make someone feel, the more loyal they will be.
Another way to beat the labor shortage is to invest in areas with high unemployment. For example, the unemployment rate in Baltimore City is currently 5.3%, almost 2 points higher than the national average. Yet, Baltimore ranks #11in the Tech Talent Scoreboard according to CBRE’s research. This combination makes the area ripe for real estate investment that could earn higher than average yields in the upcoming years.
Lastly, retaining existing tenants is critical to success. Modern tenants are willing to move to have their needs met. Consider offering wellness amenities, being proactive about maintenance and improvements, and take time to understand tenant’s needs to keep your tenants in tomorrow’s challenging market.
In summary, while 2018 is wrapping up quite nicely for most of us in the United States real estate market, 2019 may not see as much growth. This is supported by overall economics as Levy expressed through GDP statistics: The increase in US 3Q 2018 GDP was 3.5%. However, the average annual increase in US GDP since 2009 is only 2%. To compete in a slow growth economy, Levy recommends taking advantage of Live·Work·Play real estate opportunities, focusing on smaller markets, and honing your labor recruitment and retention skills.
