Volatility is the Name of the Game: Part 1

October 25, 2022 • As we continue to get our collective bearings in this post-Covid new normal, my overall impression of where the retail, office, and industrial leasing markets stand can be summed up in one word: volatility. My perspective is based on the deal flow that I’ve seen over the past year, as well as conversations with owners, developers, tenants, and brokers.

This week I’m attending two national real estate conferences: ULI’s fall meeting in Dallas and ICSC’s Law Conference in Orlando. Stay tuned for Part 2 of Volatility is the Name of the Game which will be published upon my return in early November.

Retail

From a national perspective, retail leasing markets have improved considerably over the past year, but remain uneven. There are pockets of positive activity, especially in suburban lifestyle and power centers in the sunbelt states, which have enjoyed significant population growth over the past few years. On the other hand, high street retail locations in many major metropolitan areas are suffering as office occupancy and tourism remain stubbornly below pre-Covid 2019 levels. Chillingly, the director of real estate for a national chain recently observed that retailers are shuttering urban retail locations from Vancouver to San Diego as a result of the disappearance of foot traffic due to crime and increased visibility of local homeless populations.

Office

Bringing the focus to New York City, the office leasing market has been like a ping pong ball since March 2020. Activity came to a grinding halt in the second quarter of 2020 and gradually improved through 2021, especially in Class A buildings. Shiny new trophy buildings and older buildings that were repositioned after capital-intense renovations were the happy recipients of significant tenant interest. More recently, these Class A office buildings experienced a decline in leasing velocity, as inflation, increasing interest rates, and worries about an impending recession took hold. Class B and C office buildings were challenged before Covid and never really recovered from the downturn in office leasing that characterized the early days of the pandemic. They remain on life-support.

Industrial

Industrial leasing markets throughout the country continue to exhibit strength, with consistently increasing rental rates and low vacancy rates. During the dark days of Covid through the second quarter of 2022, industrial markets were on fire — landlords had what seemed like a once-in-a-lifetime opportunity to increase rents by staggering amounts and tenants were grateful for the opportunity to pay. While the industrial market has calmed down over the past 6 months, it remains robust. If current economic realities result in a recession, it’s possible that the industrial sector will experience a marked slowdown, but that remains to be seen.

Stay Tuned

I’ll be speaking with owners, developers, brokers, and retailers from across the country next week and look forward to sharing their perspectives, outlook, and concerns with you in Part 2 of Volatility is the Name of the Game. Keep an eye out for our next post in November.