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TABLE OF CONTENTS F E AT U R E D
22 The Multifamily Market Report
34 The Future of Casual Dining
114 Painting the
104 Private Capital Multifamily
What to Expect From Multifamily In 2021
Multifamily Landscape Apartment Trends in a Post-COVID-19 World
46 Triple-Net Tenants That
Remain Profitable in All Economic Climates TRENDS
8
The Top 10 Trends in Commercial Real Estate
64 Going Digital
The Explosive Growth in Data Centers
70 The Expansion of Boutique Fitness
138 The Repositioning of Retail
The Growing Impact of Adaptive Reuse
147 Ghost Kitchens
A New Era of Restaurants
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The Good. The Bad. The Ugly.
What Small to Midsized Owners Can Do to Improve Their Property
121 Reimagining the Office Space The Impact of COVID-19
INSIGHTS
80 The Gold Rush
Investor Interest in the Austin MSA
89 Location, Location, Location How Los Angeles Became a Hotspot for Multifamily
98 Why is Your Veterinary Real Estate Worth So Much?
54 What’s Next for Drugstores? 128 Shopping Centers
How the COVID-19 Consumer is Changing the Sector
CON T RI BU TORS KYLE MATTHEWS Chairman & CEO
RADDIE ZLATKOV
DUERK BREWER
PAUL MUDRICH
Chief Operating Officer
Chief Financial & Strategy Officer
DAVID HARRINGTON
EVP & Chief Legal Officer
CHAD KURZ
DAVID ROTH
EVP & Managing Director
EVP & Managing Director, STNL
EVP & National Director, Multifamily
BEN SNYDER
MICHAEL PAKRAVAN
MATT FITZGERALD
BILL PEDERSEN
MAXX BAUMAN
ANDREW GROSS
EVP & National Director, Shopping Centers
EVP & Market Leader
SVP & National Director, Retail Leasing
Market Leader
Market Leader
Market Leader
Aditya Ramnath
Andrew Ivankovich
Charles Borges
Michael Chislock
Rahul Chhajed
Andy Evans
Brandon Kosek
J.A. Charles Wright
Michael Moreno
Robert Starrett
Austin Graham
Cameron Nikroo
Drew Boroughs
Mitchell Glasson
Taylor Avakian
Austin Halloran
Fred Mobley
Will Collier
EDITORI A L & D ES I G N Leanne Jenkins Alfonso Lomeli
Erica Ragland
Victoria Harkrider Caldrian David
Marina Rubio
Lori Valencia
This information has been produced by Matthews™ solely for information purposes and the information contained has been obtained from public sources believed to be reliable. While we do not doubt their accuracy, we have not verified such information. No guarantee, warranty or representation, expressed or implied, is made as to the accuracy or completeness of any information contained and Matthews™ shall not be liable to any reader or third party in any way. This information is not intended to be a complete description of the markets or developments to which it refers. All rights to the material are reserved and cannot be reproduced without prior written consent of Matthews™. MATTHEWS™
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TRIPLE-NET TENANTS t h at r e m a i n p r o f i ta b l e i n
all Economic Climates - BY CHAD KURZ -
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Single-Tenant Net-Lease Finds Stability Through THE Pandemic 2020 saw continued growth of e-commerce and technology, thanks largely to COVID-19, which continues to change consumers’ day-to-day lives. Here’s an inside peek at the product types and net-lease tenants that are recession and pandemic-resilient to guide investors towards their ideal tenant. Investors look for investment-grade tenants with a history of longevity and a proven track record of staying profitable in all economic climates. Investment-grade net-lease tenants should produce higher returns for investors over the next several years. These properties are finding stability through the pandemic, which in turn makes them stand out in the retail market. As the fastest-growing commercial real estate segment before COVID-19, these assets are now generating more interest. They also remain incredibly popular for 1031 Exchanges and have a lower risk profile post-coronavirus compared to other CRE assets.
CRE professionals predict cap rate compression in the market, although it will depend on the sector, location, and tenant quality.
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DOLLAR STORES Dollar stores not only thrive in a strong economy, but they also realize stable growth in times of recession. The target customer of dollar stores is a low-income shopper located in rural counties with few retail options. In these rural areas, dollar stores see an easier revenue stream because they lack competing grocery stores and are located where no other retailers will venture. They have more locations combined than Walmart, Kroger, Costco, Home Depot, CVS, and Walgreens – the country’s six biggest brick-and-mortar retailers. The unique real estate footprint for dollar stores, combined with their value and convenience, remains a competitive advantage in the current COVID-19 environment. Many customers only have access to
dollar stores to gather essentials or are forced to shop at dollar stores due to strained finances. The market for dollar stores is only getting stronger as other retailers struggle to keep up. Dollar stores boast a small-box model, which provides convenience and ease-of-access to customers. Most tenants are accompanied by a strong corporate guaranteed lease with zero management responsibility and have a prominent, branded location. The retail locations are strategically placed in areas with solid demographics and phenomenal visibility. If they aren’t located near banks, pharmacies, and gas stations, they are situated on strong retail corridors. Growth, stability, location, longevity, and strong lease guarantees all add to the ideal NNN investment.
QUICK-SERVICE RESTAURANTS Efficiency is key to stay relevant in today’s market, something that quick-service restaurants (QSR) are skillfully able to provide to their customers. QSRs prove to be recession and pandemic-resilient because they address their customers’ needs in the most convenient way possible and with minimal contact. This on-the-go concept has altered in the last year to include curbside pick-up and additional drivethru capabilities to address COVID-19’s impact on consumer behavior. For example, Taco Bell recently introduced a new restaurant design that entails dual drive-thru lanes, pick-up shelves, curbside pick-up, and modern kitchen technology. Many QSRs had evolved critical aspects of the customer experience 48 | FALL/WINTER 2020
before the pandemic, including partnering with online platforms for delivery. Many franchisees improved their delivery offering and mobile ordering experience to serve customers where it was safe and convenient for them. If QSR brands can keep up with food trends, such as adding healthy options to the menu, there should be no major reasons why the product type would have problems in the COVID-19 era. QSRs like McDonald’s, KFC, Wendy’s, and Starbucks are stable, long-term net-lease investments with reliable, creditworthy tenants, consistent monthly income, periodic rent increased for 10-15 years, and few or no maintenance responsibilities.
FAST CASUAL Fast casual concepts offer higher-quality food, with a focus on healthy ingredients and convenience. The pandemic has had myriad impacts on how consumers eat. While the challenges facing the fast casual sector will have long-lasting ramifications, the restaurant industry will survive, just as it has survived every previous crisis, economic or otherwise. Several vital tailwinds provide a bullish outlook on the fast casual segment in years to come, including rationalized competitive dynamics for better concepts. Over the last two decades, the proliferation of restaurant concepts has created an intensely competitive environment that caused returns on invested capital within the industry to narrow for all but the top brands. While the pandemic will
lead to the unfortunate demise of many restaurant units and concepts, the silver lining is that brands with name-recognition will likely have improved competitive dynamics. As a result of industry-wide consolidation, there will also be more favorable real estate opportunities. In a recent update provided by Shake Shack, the brand stated, “The company has an identified pipeline of leases in negotiation for continued growth in 2021 and beyond and believes additional and improved development opportunities may be available over time due to the impact of COVID-19 on the overall retail and real estate environment.” It is expected that fast casual brands will take market share from other restaurant segments, including casual dining.
HEALTHCARE With an aging population, a pandemic, and demand for safe and prudent healthcare services, healthcare real estate demand is at an all-time high. The sector’s performance is incredibly strong, despite the pause in activity during the peak of the pandemic. Elective surgeries are still on hold for some patients, but accelerating trends such as telehealth, drive-thru testing, and teleworking administrative staff, serve as great supplements and demonstrate patient’s growing acceptance in new operations. As traditional retail tenants are losing ground, medical tenants are gaining. A growing trend is physicians expanding their reach into retail, where healthcare tenants are securing their space in shopping centers.
Aging demographics and changing consumer preferences take credit for shifting healthcare to retail settings and into more investment portfolios. In recent years, out-patient healthcare facilities have met the needs of an increasing patient base. More patients have access to care due to expanded healthcare coverage, and as of recent, patients will be more attentive to their health due to habits created from the COVID-19 pandemic. Further, having a qualified physician in shopping centers provides patients with accessibility and convenience. For these reasons alone, medical can be considered one of the most recession and pandemic-resilient tenants.
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AUTO SERVICE Despite a decrease in wear and tear on vehicles, due to a large portion of the nation teleworking, car owners have dedicated their new found free time to improve their vehicle’s performance or look. It is also fair to assume more people will prefer to use a car instead of public transportation for fear of being in close proximity to others during a pandemic. Secondly, and paradoxically, fewer people will want to purchase a new car, given the uncertain environment. They will either pay for services and repairs on existing older cars or continue to use rideshare. While auto parts can be purchased online at a discounted rate, auto repair and service is resilient and should continue to prevail through
this siege on retailers. The main reason for this is that even if Amazon or other companies can ship parts, people will have a tough time replicating the expertise required to perform these services. Auto service retailers are located in out-parceled malls or dense retail corridors, which provide convenience for customers. They also capitalize on fleet services, an organization that needs commercial vehicles to function, which generates a higher volume of business to business sales. While customer preferences may be changing rapidly within retail, wholesale, fleet service customers are less likely to be affected by these trends, and convenience will always prevail.
CONVENIENCE STORES Convenience stores (c-stores) play an essential role in communities, especially those located in rural areas. Fortunately, they remained active and open throughout the pandemic, providing a lifeline for many of these communities. C-stores tend to be less crowded than a grocery store and offer grab-andgo products. During recessionary times, people have limited disposable income and only spend on essential goods which make c-stores a prime option for many. Given the small square footage of many c-stores, they only offer limited products, further providing convenience to consumers. Many were also quick to pivot to COVID-19 safety measures and consumer demands. Whether it was enhanced cleaning protocols or removing self-service 50 | FALL/WINTER 2020
stations, c-store operators were quick to address COVID-19. In effect, this has expanded their loyal customer base, with many operators seeing new customers rediscovering their local c-store. In fact, large c-store chains saw more revenue generated during the pandemic than the year prior. The key strategies that will help c-stores remain relevant during changing economic times are increasing the speed of service, improving consumer experience, and implementing personalization of product offerings. C-store chains, such as 7-Eleven, are adding fresh food to their product offerings specifically to cater to millennials. It is unlikely that c-stores will become obsolete in the near future if they continue to adapt to modern consumer preferences.
DRUGSTORES/PHARMACY Drugstores have very little competition amongst established players in the market as two companies dominate the drugstore sector – CVS Health and Walgreens, which recently acquired Rite Aid. This makes the threat of a new competitor or concept slim; Pair this with health being at the forefront of consumer minds, drugstores will continue to fare well. Recently, Amazon announced its online pharmacy, where customers can place online orders for medication and prescription refills to be delivered to their homes. However, CVS Pharmacy and Walgreens both have a loyal customer base and already have delivery services in place. CVS Pharmacy and Walgreens also utilize local pharmacists which provide onthe-spot medical information, as well as COVID-19 drive-thru testing. Before the pandemic, drugstores were already making strides to improve customer
experience through partnerships and technology investments. CVS has remodeled locations to focus on health services through HealthHUBs and have expanded and stepped up protocols through MinuteClinic. Walgreens recently partnered with VillageMD, a national provider of primary care, and PWNHealth, a national clinician network that provides safe and easy access to diagnostic testing. Further, both brands have incorporated free prescription delivery as part of their services. Recently, federal health officials have reached an agreement with pharmacies across the U.S. to distribute free coronavirus vaccines after they are approved and become available to the public. With these continued improvements, it is evident that drugstores will remain recession and pandemic-resilient.
GROCERY STORES With the retail landscape being at its most pivotal point, service-based retailers are at the forefront of sustainability, including grocery stores. Although e-commerce poses a threat to traditional grocery stores, the threat is minimal, and the industry is still resilient for various reasons. As seen at the beginning of the pandemic, grocery stores vastly benefited from being among the few tenants to remain open. For shopping centers with a grocery store as its anchor tenant, it served as a lifeline as surrounding retailers shuttered. For example, Sprouts Farmers Market paid their rent on time during the height of the pandemic, 100 percent in June, and 99.7 percent in July. The grocer also recently announced 20 new locations by the end of 2020. Discount grocers, such as Aldi and Walmart Neighborhood Market,
will also stand to thrive. These budget retailers benefit as consumers cut back on discretionary spending but continue to buy food and household essentials. Aldi has also increased the number of stores they have in the U.S. in recent years, as consumers prefer the proximity and small-size stores make them desirable to shoppers seeking convenient options. With stay-at-home orders directing consumers to cook at home, more groceries were purchased as dining rooms continue to see the effects of COVID-19. This has forced consumers who wouldn’t otherwise cook at home, pick up a new habit of preparing home-cooked meals. It is expected that grocery stores will remain resilient for years to come, even with e-commerce delivery lurking.
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SUPERSTORES Target, Walmart, and Costco have all seen sales jump in-store and online amid the COVID-19 outbreak. Along with the effects of the pandemic, these superstores are changing the retail landscape. With many consumers skipping mall shopping trips, many have found their nearest superstore instead. Leaders of Walmart, Target, and Costco attribute their success to a diverse mix of merchandise. Target CEO Brian Cornell has touted the retailer’s role as a one-stopshop. In the early weeks of the pandemic, consumers flocked to stores to stock up on pantry staples, toilet paper, and hand sanitizer. But as the pandemic has
stretched on, they shopped for bikes, puzzles, hair dye, home décor, and other items to help entertain themselves or adjust to more time at home. While other retailers see apparel revenue drop industrywide, mass retailers such as Target and Walmart, on the other hand, are expected to see apparel revenue grow by 10 to 20 percent in 2020 compared with last year. In Q3 2020, the COVID-19 pandemic fueled a surge in Costco shopping, lifting its annual profit to about $4 billion for the first time. Even as consumer tastes change, these stores are prepared to address the demands of the extensive product mix.
HOME IMPROVEMENT At the beginning of the pandemic, when stores across the nation followed state mandates to close, home improvement stores saw the initial increase in foot traffic. Houzz, a home renovation website, reported that requests from homeowners increased by 58 percent in June compared to last year. Lowe’s online sales reported a 135 percent surge from the coronavirus do-it-yourself boom. Named one of the digital transformation winners during the pandemic, Home Depot also saw incredible traffic and sales spikes. Home Depot has been on a journey in recent years to move to a One Home Depot architecture that connects logistics, delivery,
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supply chain, customers, digital channels, and associates. One key effort revolved around curbside pick-up, which the company was able to move in a very agile manner and build a solution. For Home Depot, cloud architecture was critical to managing a 300 percent spike in traffic and an 80 percent order volume increase. The company has now become one of the top five e-commerce platforms in North America. Home Depot is a prime example of a company that could pivot to consumer changing demands, and not only prove to be e-commerce resilient but also recession and pandemic-resilient.
CHAD KURZ chad.kurz@matthews.com (949) 662-2252
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MAJOR DEVELOPMENTS IN AUSTIN METRO
TESLA GIGAFACTORY $1 .1 BILLION 4 - 5 MILLION SF
AMAZON FULFILLMENT CENTER
PROJECT CHARM $350 MILLION 3.8 MILLION SF
APPLE CAMPUS $1 BILLION 3 MILLION SF
P L A Z A S A LT I L L O MULTI-USE $22.9 MILLION 250,000 SF
AU S T I N F C S O C C E R C LU B STADIUM $242 MILLION 83, 293 SF
GOOGLE EXPANSION UNDISCLOSED 790,000 SF
RECENT
ACTIVITY IN AUSTIN
Austin leads in the number of apartment deliveries as a percentage of total stock, with 6,072 new units delivered within the first eight months of 2020, accounting for 2.5 percent of total stock. There are currently 28,053 multifamily units under construction, and the metro is expected to reach 9,342 new completions, which will increase the percentage of existing stock by 3.9 percent. Due to the impressive number of new units and the disruption brought on by COVID-19, occupancy has dropped from a historical average of over 95 percent to 94 percent, according to Yardi Matrix.
Since the start of 2019, 48 percent of Austin multifamily investment buyers are from outside of Texas. This statistic is consistent throughout the metro, with activity east of I-35 coming from outof-state buyers by 46 percent and 48 percent west of I-35. Properties with five to 100 units were once dominated by local private clients but have since been penetrated by out-of-state buyers, accounting for 26 percent of buyers in the last 18 months. It is evident that outside investors are aggressively competing for the market share of Austin multifamily.
T O P A S S E T S U N D E R WA Y Units Under Construction | SOU RC E: YA R D I M ATR I X
500 UNITS
KORINA AT THE GROVE M I DTOW N AUS TI N
468 UNITS
THE OAKS AT TECHRIDGE PFLUG E RV I LLE
433 UNITS
PARKSIDE AT ROUND ROCK ROU N D ROC K
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REIMAGINING THE OFFICE SPACE THE IMPACT OF COVID-19 BY CAMERON NIKROO & DREW BOROUGHS
Businesses, schools, and society came to a sudden halt following the unprecedented arrival of COVID-19. To subdue the health crisis, corporations pushed their employees to work remotely, emptying offices across the country. With the obstacles of COVID-19 still apparent, many offices have yet to reopen, and some businesses are to remain a remote workforce permanently. In this article, Matthews™ reviews the impact of COVID-19 on office space and the future of the sector.
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OFFICE DEVELOPMENT Currently, there is about 155 million square feet of office space under construction throughout the U.S., according to CoStar. That is roughly less than two percent of existing stock, and only 40 percent of the office space in the pipeline is available for lease. Almost 120 million square feet is expected to be delivered over the next few years, helping keep vacancies from rising any higher in the near-term. The markets seeing the bulk of office development are tech hubs in Austin, Nashville, San Francisco, and Seattle. Tech companies, like Twitter, Google, and Facebook, have embraced the work-from-home arrangements and have decided to keep their employees’ home,
either until the end of 2021 or permanently. Offices located in the heart of a city have grown expensive and unattractive, as they require employees to rely on public transit systems and enclosed elevator spaces to reach their high-rise offices. In response, tech tenants, such as Pinterest, have scaled back growth plans. As tenants look to decrease their office footprints following the devastation by COVID-19, office sublease availability has increased. According to CoStar, the incredible amount of sublease space coming to the market since the beginning of the year, for a total of over three million square feet, is a reflection of the spikes in unemployment tied to COVID-19.
Source: CoreNet Global
CoreNet Global found in a survey that 75% of respondents expected their corporate real estate footprint to shrink over the next year.
SPACE UNDER CONSTRUCTION BY MARKET Source: CoStar
Source: Nareit
At the end of 2018, the office sector was valued at $2.5 trillion.
Nashville Austin San Jose Charlotte San Francisco Salt Lake City Boston Raleigh Miami Fort Lauderdale Seattle New York Sacramento San Antonio Palm Beach Atlanta Los Angeles Saint Louis Minneapolis Dallas-Fort Worth
0%
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1%
2% 3% 4% 5% 6% % of Supply Under Construction
7%
8%
THE CURRENT CONDITION OF THE OFFICE SECTOR In April and May, 96 percent of office rents were collected, compared to the 61 percent collected for shopping centers during that same time, according to CoStar. With the average lease term for office around 6.5 years, the long-term effects of COVID-19 will unfold over the next several years. Yet experts remain optimistic. “I don’t see a situation where offices completely die off,” CoStar managing consultant Paul Leonard said. CoStar anticipates occupancies and rents to recover and grow in 2021. Growth companies, like Google, still see the importance of offices and have continued signing leases. Google spokesman, Michael Appel,
Source: CoStar
Other growth companies, like Microsoft and Facebook and mid-level or smaller companies, need collaboration and production space.
shared that the tech giant views office space as a necessary element for collaboration and company culture as they bring the workforce together in a physical space. Despite San Francisco’s office vacancy rising to nine percent in Q3 2020, Google recently closed on new expansion plans in Silicon Valley, bringing the company’s footprint up to 208,480 square feet in Two Rincon Center, making it the largest tenant in the tower. After seeing the effects of COVID-19 on the economy and offices, Google plans to adopt more flexible work models. While meetings are now held in a Zoom chat room, rather than in a traditional conference room, offices are still necessary for recruitment, building company culture, and collaborating with coworkers. As one of the nation’s largest office tenants, JP Morgan is experimenting with their hybrid work model, cycling between working remotely and in the office. The process will include teleworking and assigning temporary workspaces while in office. The company anticipates having 25 to 30 percent of the workforce working remotely at any given time.
U.S. OFFICES SUBLEASE SPACE Includes U.S. office properties of at least 25,000 SF.
Source: CoStar
200M 180M 160M Square Feet
140M 120M 100M 80M 60M 40M 20M 0M 07
08
09
10
11
12
13
14
15
16
17
18
19
20
Year
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Another popular office model is hub-and-spoke, where the headquarters is located in an urban area with smaller offices in the suburbs. This model provides employees with decreased commute times as offices are located near homes in suburban areas. Each corporation will approach and tailor their new work experience depending on their priorities and what works best for their employees. For example, the outdoor recreation retailer REI recently sold their new and unused 400,000 square foot headquarters in Bellevue (a suburb of Seattle) to social media giant Facebook. This places Facebook alongside Google in plans to buy office locations in the suburbs around major metros. Finding and creating the perfect office for clients, employees, and customers can get very costly, especially in markets, like New York City, where the location and architecture bolster the price tag. According to SquareFoot, an office locating firm, companies in New York spend an average of $17,020 annually per employee on office space. Historically, it takes about a year after an economic downturn for rents to reflect market conditions. With the amount of office supply being offloaded and subleased, landlords are forced to be flexible and drop rents to retain tenants.
Source: Regus
54% of employees worldwide now spend half the week working somewhere other than their company’s main office locations.
Source: CoStar
In a recent survey of 250 tech companies nationwide, 82% expect to need less space than they planned in the next 12 to 18 months.
Source: Gensler
Only 12% of U.S. workers want to work from home full-time, with 70% of workers wanting to work in an office environment the majority of the week.
IMPACT ON THE MARKET Just like renters are migrating from dense urban markets to roomy, affordable suburban neighborhoods, corporations are following suit. In some cases, local businesses have turned to downsizing their staff and physical space to save on expenses, while others are moving to cheaper markets, a trend that emerged well before the current economic downturn. Businesses are eyeing attractive suburban markets near central business districts (CBD) that share similar features to urban offices, like the clustering of businesses, service establishments, and cultural centers. Markets taking the biggest hit include Atlanta, Chicago, San Francisco, and Los Angeles. The San Francisco office market is seeing the country’s biggest occupancy decline and decreasing rents, closely mirroring what occurred during the Global Financial Crisis. Chicago, the third-biggest U.S. city, is seeing pressure from both 124 | FALL/WINTER 2020
office demand and supply, indicating a large decline in rents is to come. Atlanta leasing activity has slowed, despite tenants smaller than 15,000 square feet consuming most of the activity, hindering landlords’ ability to raise rents. Los Angeles has increased office square footage on the market by 70 percent, while tech companies look to offload their office footprints in the short-term temporarily. Markets performing well during the pandemic have attractive market fundamentals that bring in corporations, like low-costs of doing business and healthy population growth. Experts predict that transit-dependent office markets will have a more challenging time recovering as commuters fear the higher probability of transmitting the virus, where office markets that don’t rely heavily on public transportation will return to a normal faster rate.
THE MARKETS TAKING THE BIGGEST HIT Source: CoStar
SAN FRANCISCO OFFICE LEASING ACTIVITY 2.5M
1.0M 0.8M 0.6M 0.4M 0.2M 0.0M
Rentable Building Area Leased
Square Feet
September
August
July
June
May
April
March
February
2.0M
January
Square Feet
ATLANTA OFFICE LEASING TENANTS 15K - 50K SF
1.5M 1.0M 0.5M 0.0M
2017
5-Year Monthly Average
2018
2019 Year Entered Before Month End
2020 After Month End
10M 9M 8M 7M 6M 5M 4M 3M 2M 1M 0
100M 90M 80M 70M 60M 50M 40M 30M 20M 10M 0 06
07
08
09
10
11
12
13
14 Year Sublet Available SF
15
16
17
18
19
Total Available SF
Sublet Available SF
CHICAGO OFFICE SPACE AVAILABLE SUBLEASE & TOTAL
20
Total Available SF
14%
3M
13%
2M
12%
1M
11%
0M
10%
(1M)
9%
(2M)
8%
(3M)
7%
(4M)
6%
Quarterly Change in Supply & Demand
Vacancy Rate
LOS ANGELES OFFICE SUPPLY, DEMAND, & VACANCY
(5M) 06
07
08
09
10
11
12
13
Quarterly Change in Demand
14 15 16 17 Year Quarterly Change in Supply
18
19
20
Vacancy
NEW STRUCTURES Offices are likely to remain a primary workplace in the future, but they will look much different. In the short-term, businesses are looking to offload office space as a means to save costs. To continue attracting tenants, existing offices will need to shift focus to postpandemic safety measures and prioritizing tenants’ health and wellness. This will include incorporating
touchless access points, social distancing, improved air quality that filters out bacteria and viruses, rearranging the office layout to be more open, and connecting indoor and outdoor environments. These new additions, leasing structures, and financing could destabilize the once stable office asset class.
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Medium, an online publishing platform, speculates the new working model could end the concept of skyscrapers, a 150-year-old trend that developers utilized to make the most money per square foot. The amenities arms race that offices have been involved in since the 20th century to recruit and retain tenants could transform, as fancy lunchrooms, golf simulators, and luxury bathrooms no longer appeal to health-conscious office employees. As buildings enforce capacity limits in enclosed spaces, such as elevators, lower floor offices could command higher rents in the immediate-term. Leasing across the board has slowed as tenants put off renewing long-term commitments, shed office space, and explore teleworking. This gives landlords the prime opportunity to visit the standard lease provisions that are now outdated or inapplicable. The force majeure clause will be the focal point of most revisions; however, it’s also important to revisit operating expenses, base-year calculations, and rules and regulations to minimize any unforeseen damage from COVID-19.
TOP OFFICE AMENITIES POST-COVID-19 Rooftop Deck High-Quality Air Ventilation Digital Experiences Touchless Technology Smart Cleaning Technology
OUTLOOK FOR OFFICE The office market once saw intense competition among prime office spaces that emphasized collaboration. Now that the arrival of COVID-19 has the majority of employees working remotely, companies have started to reconstruct their office space’s purpose and function. In the near-term, landlords will be met with increased operational costs related to COVID-19, such as spacing protocols, sanitizing, cleaning, and decreased rents and tenant renewals. Experts believe the low point of economic activity has come and gone, and the office market could see growth as companies transition overseas operations back to the U.S. as a result of the pandemic.
According to NAIOP, landlords have adapted and become flexible in providing tenants what they need by offering rent deferment periods, lease concessions and revisions, and implementing standard health safety protocols. With both the incredible job loss and the workforce moving to remote work, the office market has seen the coronavirus’s short-term impact. However, the pandemic has allowed the office industry to reevaluate what is essential for tenants and sped up the flexible working trends. While the outlook is still undecided, offices will prevail, looking and functioning differently, putting the human experience at the forefront.
FOR MORE INFORMATION ON THE OFFICE MARKET, PLEASE CONTACT A SPECIALIZED MATTHEWS™ AGENT. CAMERON NIKROO cameron.nikroo@matthews.com (214) 295-8463
DREW BOROUGHS drew.boroughs@matthews.com (214) 295-2790
ANDREW GROSS andrew.gross@matthews.com (214) 295-4511
ANDREW IVANKOVICH andrew.ivankovich@matthews.com (214) 692-2037
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