Reading Tea Leaves
November 15, 2017 • As a strong 2017 accelerates to a close, we’ve picked our heads up for a moment to look ahead. Here’s what we see in two of the real estate sectors that we’re active in, based on our own book of business, industry forecasts, and the collective expertise of our clients and colleagues.
Retail
Despite what seems to be the prevailing wisdom, brick-and-mortar retail is not dead. Our retail leasing practice continues from coast to coast, with fast-casual restaurants, fitness concepts, and off-price stores consuming most of our leasing time.
Cushman & Wakefield’s third quarter Retail MarketBeat reports that sales were up $121.6B through July 2017, with projections of 2017 sales growth of 3.9%. Notwithstanding these positive data points, retail is undergoing a fundamental transformation in response to evolving shopping habits and preferences, and the increasing importance of e-commerce.
For 2018, we project continued disruption and opportunity in the retail sector. Strong locations and retailers that figure out how to remain relevant will remain buoyant. Secondary and tertiary locations will eventually have to consider adaptive reuse options. Retailers who can't keep up will have to reinvent themselves. Flexibility on everyone's part is going to be the name of the game.
Office
The recent $850M purchase by WeWork of the iconic Fifth Avenue Lord & Taylor building is a great example of value creation through adaptive reuse, as well as a testament to the ongoing strength of the sharing economy in the office sector. As a result of the co-working trend, we’re seeing new office concepts that combine varying elements of traditional and collective workspaces.
One of our clients recently chose to lease an office in a particular midtown Manhattan building because the short-term (three vs five to ten years), build-to-suit lease included the right to shared amenities on a separately dedicated floor, including a kitchen fully stocked with snacks and beverages, a fitness center, conference rooms, and mail room.
We agree with the 2018 Emerging Trends Report by ULI and Price Waterhouse, that owners of office space will be rewarded for providing offices that are tailored to satisfy the latest iterations of workplace trends, combining, as fashion dictates, different elements of co-working spaces, traditional offices, hospitality concepts, and green design features.
Our Outlook
Overall for 2018, we anticipate continued positive leasing velocity in the office sector and pockets of leasing velocity in the retail sector. Mark Zandi, Chief Economist of Moody's, in a recent presentation to the NY real estate industry, shared our optimism. Based on strong fundamentals, he predicts continued economic growth for the next two to three years.