Focus on why a space exists and human experiences post-Covid
NAREIM Asset & Portfolio Management Meeting
June 2, 2021
Retail leasing volume year-to-date is stronger than ever, with valuations proving resilient - but the key to retail is to focus on the purpose of the space and that of human - and community - experiences.
During the annual NAREIM Asset & Portfolio Management meeting, members discussed their outlook on the future of retail and office - and where they are pivoting strategies or investing more time and energy.
Key takeaways included:
The future is increasingly mixed-use
No matter the asset type, there is an increased focus on mixed-use to create a sense of a community center and community purpose.
However, one participant said it was vital not to look at assets or deals with just a multifamily lens or office lens or retail lens. Think about the users, the purpose of the space in serving a community and provide neighborhoods "diversity of purposes" through building design.
For example, when adding ground floor retail to a multifamily unit, think of the retailers and their needs in your design. Consider parking, how deliveries are made, cost structures.
Other takeaways included:
Office leasing volume is increasing dramatically month-over-month but there is significant concessions on offer, with free rent and TIs. The question though isn’t about leasing volume, it’s about whether new demand for space is denting the inventory on offer. For example, some banks are considering turning unused space at bank branches (such as upstairs offices above retail branches) into local networks for their employees to work. It helps retain employees who don’t want to commute, but doesn’t deduct from new supply coming to the market.
Flexibility will be key for office landlords and owners will be expected to provide private label or branded flexible work solutions (such as co-working space, or WeWork/Industrious space) for tenants to help the growth and contraction of their businesses in the future.
While the impact of Covid was significant – during one case study, the manager revealed 52% of retail tenants closed during Covid – rent collection performance and leasing volume is now strong. A majority of deferred rent has been repaid – despite fears deferred rent would need to be abated in the longer-term – and there’s strong demand. Current leasing volume in the year-to-date is greater than anything done in past 10 years, the manager said, and valuations are not declining. But not all retail is equal.
Avoid large retail and mini-anchor boxes. If you don’t have a tenant ready to backfill the box you aren’t likely to get one down the road. The cost of demising or reconfiguring the space also don’t make economic sense with costs outpacing rent growth.
Mini-anchor spaces, around 20,000sf and typically taken by Office Depot, Staples, etc, are also one of the most over-supplied areas of retail real estate.
Ask: Why does this space exist? We really need to think about why retail exists and the purpose the asset and space serves in a community. People want to go to a retail space for a diversity of reasons but ultimately it’s about living, their lives and feeling good about themselves.
The big box innovation was the leading edge of the internet, bringing a large selection of things together in one place, at a cheaper price. The internet has replaced that and anything that can be sold efficiently and effectively on the internet should be assumed to be losing ground to e-commerce.
Service and human experiences. That trend reinforces the need for retail to become service-orientated. Food, restaurants, dental, medical, beauty. It’s about focusing on the human experience and the purpose the space serves a local community. Members also asked about co-location strategies, and the ability to group key services – such as medical, dental, senior living, together to create the sense of a community center.
The Asset & Portfolio Management meeting also dived into best practices on executing on net zero. The takeaway was to think of carbon neutrality as a transtion risk to mitigate. Without preparation, your business will be behind the curve, as the country moves increasingly towards a carbon tax future.
Members discussed how they were planning strategy around net zero, and how they were executing on greenhouse gas emissions. Ideas included:
The first step is tracking and monitoring your greenhouse gas emissions (GHG) but ultimately the greatest return comes from working and talking to tenants.
Solar panels. Not a solution for high-rises, but low-rise assets could benefit from the additional income stream that comes from solar panels, as well as the environmental credits you could achieve for them. However, when it comes to solar on multifamily assets it’s critical to educate leasing teams to be able to sell solar as a plus. It provides a competitive boost to the asset.
Think of the building envelope and insulation. Taking your windows from an R2 to R7.8 saves an immense amount of energy, but such a project doesn’t need to mean replacement – it can mean refurbishing existing windows. The building envelope is also often the key area to focus on emissions,
Lean on tenants. A key part of net zero is about active, high touch, asset management. One case study revealed tenants controlled between 53-65% of emissions from one NYC high rise. Post-Covid, ESG and net zero is an area of focus for tenants. And as you move from Scope 1 and 2 emissions, those GHG controlled by the landlord, to Scope 3, which relate to tenant controlled GHG, being proactive early with tenants about their use, how they can save on energy costs, and provide a better ESG experience for their employees will help.
Invest in your energy audits. Use a calibrated energy model/audit because it’s something you’ll rely on every day and will help build future business cases for other work and projects reducing GHG and achieving net zero. The ULI energy audit tool – tenantenergy.uli.org – is one resource.
Carbon taxes will come in the future. For one member, implementing Net Zero measures was to offset the transition risk of a carbon tax in the US at some point in the near future. With NYC, DC and other cities introducing net zero regulations, there was a high chance of carbon taxes becoming legislation across the country. But it takes time to make big changes to GHG in commercial real estate, so it was critical to start now, they said.
RECs and offsets. The need for carbon credits and offsets will always be needed, particularly for high rise buildings in CBD areas. But costs have jumped in the past six months alone and are expected to increase further into 2022.