The Bisnow Weekender: Shop Till You Drop … Interest Rates
Thanks for reading the Bisnow Weekender, my personally curated roundup of the most impactful news, notable quotes, binge-worthy show recommendations and other colorful highlights from the Bisnow world of commercial real estate and beyond.
Though it may seem like e-commerce has taken over your doorstep with a litany of boxes, online retail only represents about 20% of all retail sales worldwide.
In the early days of the pandemic, one of the biggest questions facing the retail sector was how large a slice e-commerce would take once the Covid-19 emergency was done and dusted.
Never to let a good crisis go to waste, CRE saw an opportunity and breathlessly turbocharged industrial to achieve record growth, namely by building millions of square feet of e-commerce fulfillment centers to service the needs of America's stuck-at-home consumers. But while online shopping swelled — and is expected to grow to about 23% by 2027 — it didn’t deliver a much-fretted death blow to traditional brick-and-mortar retail.
Guess what? We're shopping again, and we’re doing it in person, cruising the aisles of the suburban big-boxes and luxury boutiques. It isn’t perfect — we’re even a little annoyed by it, considering the staffing shortages — but this week, The Financial Times reported that UK shoppers have “fallen back in love with in-store shopping” while online retailers struggle with a litany of logistical and competitive challenges.
America is no different. To the tune of $966B, the 2023 holiday shopping bonanza showed that despite inflation, people want to spend money, and for the most part they want to spend money at brick-and-mortar stores. That’s double the foot traffic year-over-year.
And further to the point that retailers are reembracing physical storefronts, at the end of 2023, retail availability in the U.S. fell to an 18-year low. That can partially be attributed to construction costs and financing difficulties limiting new supply, but it also is a signal that regular folks want to go places to shop — even to the beleaguered mall, which has been resurging across the U.S.
The prospect of e-commerce taking over brick-and-mortar as the premier retail vehicle in America seems to have been a fever dream.
But there is no going back to a world without shopping from your couch, and e-commerce will continue to test physical retail. While the holiday shopping season was strong for in-person retail, it was also powerful for online shopping as well: Americans spent a record $222B shopping online.
Retail is facing some other challenges that could slow its recovery. Earlier this week, the National Retail Federation issued the following: “2023’s consumer spending growth is ‘not necessarily sustainable’ in 2024.”
And a key question for retail’s continued success in 2024 pivots on the same question every other sector of real estate faces: What will the Federal Reserve do with interest rates?
Join the club.
— Mark F. Bonner, Bisnow Editor-in-Chief
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The Best Of Bisnow News: Jan. 8-12
The Green Building Certification System Is Worth Billions — But It Isn’t Helping To Cut Carbon — UK Editor Mike Phillips and UK+Ireland Reporter Mark Faithfull
Before the subprime crisis of 2007-'08, no one paid much attention to ratings agencies. They were an important but complicated and dull part of the financial ecosystem. Then they went wrong, and the world realized just how important they are.
Today, the same is true of the organizations that issue green building certifications or sustainability ratings for companies. What they measure is highly technical and pretty dry, but they have become an incredibly important part of the real estate world. With green buildings selling at 20% premiums to less sustainable peers, these certifications can create billions of dollars in value.
But for years, investors and developers have quietly been telling Bisnow the same thing: The certification system is broken, and although well-intentioned, it can often do as much harm as good when it comes to the most important metric of all, cutting carbon.
As Bisnow reported, that is particularly significant as the real estate industry is facing greater scrutiny as regulators look more closely at potential “greenwashing.”
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SURVEY: Bisnow Readers Split On How To Navigate CRE’s ‘Once In A Lifetime Reset’ In 2024 — Dallas-Fort Worth Reporter Olivia Lueckemeyer
No one knows for sure what 2024 holds, but past downturns have looked favorably on those willing to take risks, and this “once in a lifetime reset,” as one Atlanta office investor described it, could dictate what the next era of CRE looks like.
“Like Warren Buffet said, ‘Be greedy when others are fearful,’” a Denver-based office investor said. “I think deals will start to really pick up in H2 2024, but a lot of that will depend on what the Federal Reserve does with interest rates.”
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A 'Tidal Wave' Is Coming To CRE C-Suites, Bringing A New Generation Of Leadership — National Reporter Patrick Sisson
Several factors have made this moment crucial for firms seeking to manage change and provide stability at the helm. Demographically, the nation has hit what’s being called “Peak 65,” when the largest number of baby boomers, relatively overrepresented in real estate leadership roles, hit retirement age. CEO retirement at large public companies in the U.S. slowed considerably in 2020 but ramped up in 2022 and 2023.
Current CRE leadership may be motivated to move due to both burnout from weathering the last few years and a desire to cash out before asset values and transaction volume sink further.
“I think there's clearly a changing of the guard taking place,” said Michael Cohen, managing principal of Williams Equities, a multigenerational family office that manages commercial property in New York City. “And it does raise the question, what does the future hold and how will this be executed?”
More Big News From The Week …
— U.S. Office Vacancy Breaks All-Time Record
— Amazon Dealt Setback In Plan For $6B Virginia Data Center Campus
— Tight Labor Pool Means CRE Employers Will Need To Pay Up This Year
— Lab Leaks: How Biotech Buildings Face Flood Risks From Climate Change
— Real Estate’s Finance Class Sees Hope And Distress For 2024 At CREFC Conference
— Atlanta Developer Sentenced To 25 Years In Prison For Land Conservation Tax Fraud
My Slightly On/Off-Topic Media Diet
This Inflation Measure Is Running Hot. It’s Probably Wrong (WSJ): “From the perspective of Federal Reserve policymakers, the news on inflation has been even better than these figures suggest. Their favored measure of inflation, from the Commerce Department, has been running a lot cooler than the Labor Department’s, in large part because it puts less weight on housing cost measures, which have been elevated. Indeed, for the six months that ended in November, the Commerce Department’s reading on core prices rose at just a 1.9% annual rate. The central bank is aiming for 2% inflation.”
Leading Index For Commercial Real Estate Increased In December, Down 11% From Peak (Calculated Risk Blog): “The Momentum Index ended the year 11% below the November 2022 peak, ultimately stabilizing as the year progressed. Regardless, the DMI averaged a reading of 184.3 in 2023, hitting levels of activity that haven’t been recorded since 2008. While ongoing labor and construction cost issues will persist in 2024, a substantive amount of projects are sitting in the planning queue and will support construction spending going into 2025.”
CBRE’s 2024 U.S. Real Estate Outlook (CBRE): “There is a bit more real estate pain ahead, but stabilization and the early stages of recovery aren’t far behind that. Investment volumes will be down overall for 2024 but will start an upturn in the second half. And leasing activity will pick up a bit from a sluggish 2023.”
2024 Trends To Watch In Real Assets (MSCI): “Distress starts to bite as loans mature … The wave of loans facing maturity, and the timing of when these loans come due, could lead to additional forced selling. The most problematic loans are those originated at record-high property prices and record-low mortgage rates, which is the case for many of the loans originated in 2021 and 2022.”
DBI Chief Inspectors OK’d Their Own Family’s Jobs, Properties (Mission Local): “George Birmingham said, ‘I wouldn’t know,’ regarding how his family members ended up signing off on his work. ‘I’ve been in the building department almost five fucking years, waiting to get a permit,’ he continued. ‘You say someone’s helping me? Bullshit. I’m gonna sue the fucking city. You write that in your fucking paper.’”
The Truth About Airplane Safety (NYT): “The Boeing 737 Max line holds other lessons. After two eerily similar back-to-back crashes in 2018 and 2019, killing 346 people total, the planes were grounded. At first, some rushed to blame inexperienced pilots or software gone awry. But the world soon learned that the real problem had been corporate greed that had taken too many shortcuts while the regulators hadn’t managed to resist the onslaught.”
A New Kind of AI Copy Can Fully Replicate Famous People. The Law Is Powerless (Politico): “New AI-generated digital replicas of real experts expose an unnerving policy gray zone. Washington wants to fix it, but it’s not clear how.”
Pat McAfee’s On-Air Slams Of ESPN Executive Show A Network Power Shift (NYT): “This is a guy who has got all his own power and is renting to them. He will be bigger the moment that he leaves there, because he was too hot for Disney to handle, than he was at any point before that. He has nothing to fear here, and that has to scare the hell out of them.”
Bisnow Weekend Interview Preview
In this week's Weekend Interview, Bisnow Denver Reporter Robert Davis spoke with Brock Wright, the newly minted chief investment officer at The Connor Group, a multifamily investment firm based in Ohio. Wright is responsible for overseeing all of the company's property acquisitions and dispositions across the country, a job that is expected to become increasingly difficult if the multifamily market softens in 2024, as some analysts anticipate.
Bisnow: Everyone is talking about the so-called flight to quality. What does that mean or look like in the multifamily space? Can you give a couple of examples?
Wright: If you ask three people this question, you’ll probably get three different answers. In a broad sense, what it means is that investors who have been sitting on the sidelines because of the market volatility are going to come back and buy what’s perceived as a “safer” asset. That typically means a property is in an A or A+ location. Historically, investors have paid premiums for properties in these locations. Now, they’re going to become the norm. I think the Broadstone Olivine in Littleton, [Colorado], is a good example of what we’re talking about here. The property is in an A location and has great amenities, even though the cap rate is trading well north of the 3% or 3.25% that it would have seen in 2021 when the market was red-hot and debt was dirt cheap.
The Weekend Interview goes live every Friday evening — head to www.bisnow.com over the weekend to check it out!
Jobs! Jobs! Jobs!
Here are this week’s top jobs over at Bisnow's careers platform, SelectLeaders. Reach out to SelectLeaders Managing Director Ryan Neale to learn more. You can email him at ryan.neale@bisnow.com.
VP of Acquisitions and Development — Lead the evaluation and assessment of real estate acquisitions, divestitures and development for a prominent West Coast affordable housing firm.
CFO — Lead financial operations for a 100-year-old Long Island real estate company.
COO — Lead Governors Island’s annual operating budget and staff.
VP of Acquisitions and Asset Management — Lead acquisitions and asset management for a premier Southeast owner-operator.
Hey, Julia, What Are You Going To Binge This Weekend?
I am a huge fan of pretty much any British mystery show, so I will be bingeing Fool Me Once on Netflix, which is about a woman whose husband was murdered … or was he? I will hopefully find out this weekend. I also plan to start a rewatch of The Americans soon because it is amazing and everyone should watch it. To quote the Unbreakable Kimmy Schmidt, “You know we’re living in the golden age of television when you can take a show like The Americans for granted.” True in 2015, still true today.
— Julia Troy, Bisnow Studio B Editor
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How did I do? You can send all love letters and dissents directly to me at mark.bonner@bisnow.com.
