Five Commercial Real Estate Trends to Keep an Eye On
- Commercial property prices are on the rise a bit, thanks, in part to out-of-area investors. "There's so much demand coming in from outside the market … it's been pushing prices up quite a bit," said Senior Vice President and Illinois Market Manager. "It's the coastal buyers, New York coming in and New York investors feeling like things are a relative bargain."
Now, however, some other factors are at work.
"And we expected that trend to continue, but now with potential increases in interest rates, that might have some impact on prices going forward, more specifically since the election, 10-year treasuries have gone up, so some of the investors put in offers on properties that (were) based on a certain debt, cost of debt, long-term 10-year money, and I know that there's been some deals in Chicago that have been re-traded, the prices have been lowered as a result of the 10-year treasury going up. So, there's one of the negative impacts that could impact prices going forward and could create some pressure on cap rates going up in some of the asset classes."
- Foreign investors like the stability of the United States "It's been going on for a while," Warsek said. "For the last couple of years, there's been a real foreign impact, there's a lot of foreign money coming in … (from) especially Europe and other locations where it's negative interest rates. Where are you going to put the money? So they're coming over to the U.S.; they like the economy here, they like the stability of commercial real estate. And it's a relative value even at lower cap rates that we're seeing."
Warsek reiterated value is dependent on where you're looking.
"So it's all relative," he said. "New York buyers are coming in. (With the Tribune Tower, it's) a buyer coming in from out of market. They're used to seeing say five caps on the west coast, they come here and they're looking at real estate in Chicago and it again it's all relative, to them they're like, 'geez, this looks terrific.'"
- Right now, the focus of purchases is on existing development, versus new. "It's predominantly buyers of existing assets," Warsek said. "It's redevelopment plans where they see some real value-add opportunities or core plus opportunities, and what that means is that there are existing assets and there's some level of improvements they're going to make to the asset to drive income and drive the value up. Most out-of-town buyers aren't coming in – or out-of-town developers aren't coming in – to develop. It's mostly to acquire."
That focus on existing buildings comes down to dollars.
"When I'm talking to my clients and others in the business in Chicago and in the Midwest, one of the things you would expect them to say is to talk about demand. And it's not demand; it's construction costs," Warsek said. "That has now become front and center. It's increasing material costs, labor costs and now with short term interest rates going up, that's an added element of cost to construction lending that could dampen construction loan appetite."
- Tech trend to pay attention to: a company called Truss. "I've been following the news on this group specifically, but there's a lot of interesting things coming in terms of new technology that's impacting commercial real estate," Warsek said. "Some of my clients are talking about Truss, because it's a new platform that's been created that allows smaller users of office space – generally under 10,000 square feet – to effectively go on onto this website – and it's buildtruss.com – and you go onto the website and you look for space as a user or small business owner the way you would look for a car or a home. It's a very robust site; it shows all of the properties that are available, all of the space that's available in Chicago. You plug in what your needs are, and it spits out what the options are."
This site is helping solve the problem of connect would-be tenants to the right space.
"This is a terrific tool in terms of creating a more efficient commercial real estate office leasing market because generally speaking, brokers .. are less interested in doing the smaller leasing of smaller spaces, because frankly there's just not as much money to be made leasing 10,000 square feet versus doing 100,000-square-foot tenant, so this new platform is just one more example of some cool innovation that's making the commercial real estate space even more efficient."
- The look and feel of the modern office space is evolving. As more people work remotely and from different offices throughout the week, that flexibility has translated to a different type of work space in many settings.
"I think one of the biggest trends that we're seeing from a technology standpoint (is) the fact that people can effectively, a lot of their work is portable, a lot of companies now have remote access," Warsek said. "We're still trying to determine the ripple effect of that, we're definitely seeing it in the office sector where some of the new buildings that we're involved with financing in the West Loop."
"All the tenants that are moving in are moving from space that's generally much larger. They're moving into smaller more efficient space, a lot of shared offices where people might be in the office part time and work from home or another location the other time. So to me that's been the big one from a technology standpoint, is companies becoming more proactive in providing remote access, allowing their employees to work from anywhere."
Equal Housing Lender. Associated Bank, N.A. Member FDIC