Last week, we had Liz Berthelette come on our weekly webinar series to talk about the last decade of commercial real estate. Liz is a Commercial Real Estate Research Director at Newmark Knight Frank in Boston. Check out her insights into the most significant trends in the CRE industry in the last 10 years.
The New Year also ushered in a new decade. As we stand on the cusp of another 10 years in the commercial real estate industry, I think it’s important that we reflect on the previous decade. This is especially true for younger professionals who weren’t in the business during the early part of the last decade. So, let’s take a look at 10 of the biggest trends that followed the Great Recession.
1. Shifting Demographics: This theme is one of the most important drivers of many key trends that occurred during the last 10 years. The aging Baby Boomer population is the “demographic cliff” that will impact the working-age population base and ultimately demand for commercial real estate. On the other end of the spectrum, Millennials are the generation we can’t stop talking about. They now comprise the largest generation in the U.S. labor force and are influencing housing, work-life balance, workplace trends, etc. It’s safe to say that the rise of the Millennials has been one of the most impactful events of the last decade.
2. Longest Post-War US Economic Expansion: In the summer of 2019, the U.S. economy officially entered the longest post-war economic expansion; surpassing the previous record of 120 months experienced from 1991-2001. While economic growth is well past 121 consecutive months, cumulative GDP and job growth has been slower compared to previous expansion cycles.
3. Tech-Driven Recovery: Looking back at the recovery of the last 10 years, tech-related growth was a key driver of economic expansion in the U.S. The acronym TAMI, which stands for technology, advertising, media and information, came on the scene earlier in the decade and is now commonly used to describe the tech sector. TAMI tenants are also driving leasing in the office market and now account for a larger share of activity than traditional FIRE tenants.
4. Workplace Trends: Staying within the office markets, it’s apparent that the who, what, where, when and how of working has evolved over the last 10 years. Open floor plans became all the rage as employers wanted space efficiencies and employees wanted more flexibility in their workspaces. Shared offices and short-term leasing became community-focused and collaboration-driven. Hoteling has also become popular as flexible work schedules and work-from-home opportunities have reduced the need for permanent work spaces. As a result, the average SF per worker dropped 8.3% from 2009-2018 – reaching 194 square feet. Demand for this type of space also resulted in the growth of amenity offerings from landlords.
5. Coworking Then & Now: The reinvention of office space also led way to explosive growth in the coworking sector, which is closing in on 100 million square feet of inventory in the U.S. In some markets like Miami, New York and San Francisco, coworking users account for more than 3% of current office inventory. Globally, the number of coworking spaces has grown exponentially in the last 10+ years and the major players have all shifted over time, with WeWork, Industrious, Space and Knotel as major operators today.
6. The Retail Revolution: The word “apocalypse” has been used to describe the seismic changes taking place in the retail market. Brick-and-mortar retailers have faced many uncertainties in the last decade. The number of store closures that occurred from 2017-19, totaling more than 23,000, far outpaced the number of store closures that took place during the Great Recession. For comparison, closings from 2007-09 only topped 13,000. However, many experts point to an evolution as opposed to a total destruction. E-commerce, which now accounts for 11.2% of total retail sales, continues to drive many of these shifts in the marketplace.
7. The Advent of Last-Mile Logistics: The ever-evolving retail market has had a lasting impact on the U.S. industrial market. Demand from e-commerce tenants and the way in which people receive goods in the U.S. has allowed the industrial asset class to go from ugly ducking to darling within the last 10 years. As e-commerce exploded and consumers sought faster delivery times, demand for in-fill industrial assets continued to grow. Vacancies reached decade’s low levels and rents grew at rates likely never seen before. Amazon is synonymous with this trend and in 2018, accounted for 40% of e-commerce sales. In 2010, there were far fewer Amazon fulfillment centers than the 175 operations (110 of which are located in North America) across 150 million square feet.
8. Thriving Multifamily Market: Several factors have led to one of the strongest multifamily markets in recent history. Demand for rental housing grew out of necessity post-Great Recession, as many were locked out of the housing market. This inability to afford ownership, shifting housing preferences among Millennials and urbanization trends have pushed the U.S. homeownership rate down to levels not seen since the mid-1960s. While rates have recovered since bottoming in 2016, the market is nowhere near its 2005 peak of 69%. Developers have responded to this surge in rental demand with development as well. While the oldest Millennials are beginning to purchase homes, a large contingent are still renters. Similar to the office market, this age cohort has categorically changed apartment living.
9. The Biotech Boom: While a major driver in select markets, the biotech industry’s recent growth has been unprecedented. Once considered to be a niche asset type, life science properties are now considered core — garnering very high $/SF and attracting institutional capital and new players to the market. Advances in technology, huge investments in R&D, major IPO activity, VC funding, etc. have all helped drive this growth and the subsequent expansion in this sector and demand for lab space. Core markets like Boston, San Francisco, San Diego, Raleigh (RTP) and Seattle continue to enjoy outsized rent growth, peak sale pricing and large development pipelines. That said, life science clusters are also beginning to emerge in markets like Philadelphia and New York.
10. The Changing Proptech Landscape: Traditionally, commercial real estate has been slow to adapt to change and technology. However, the industry has noticeably shifted in recent years and now the market has more proptech companies than ever looking to improve, advance and move the commercial real estate industry into a new era – focusing on data, listings, financing, the built world, etc. As the proptech world continues to evolve, we will likely see some consolidation in the marketplace. But overall, technology is here to stay.
The last 10 years in commercial real estate have proved to be among the most transformative the industry has ever seen. Look for the market to continue to evolve as we move through the next decade as we will likely see another recession (or two), several political leadership changes and continued advancements in technology.