Research Directors Discuss Outlook and Observations

Winter 2014

National research directors from major commercial real estate brokerage, data provider and investment firms — described as “the brain trust of real estate research” by guest speaker Christopher Leinberger — gathered for their annual meeting sponsored by the NAIOP Research Foundation on September 11 to share their observations and outlook for the next 12 months. Where are we in the current real estate cycle? The general consensus, using a baseball analogy, was somewhere around the middle — the fourth to sixth inning — of a game with a very high pitch count.

Guest speaker Leinberger presented the results of his latest research on walkable urban places. (See “Walkable Urbanism and the End of Sprawl,” Development, fall 2014.) Leinberger, a George Washington University professor, Brookings Institution nonresident scholar and thought leader, has concluded that the traditional real estate divide between cities and suburbs is no longer valid. He divides the built environment into two types, walkable urban and driveable sub-urban, and argues that we are in the midst of a structural shift. The result will be almost no new drivable sub-urban development, due to a great deal of demand for new walkable urban places. “We’re in a new era,” Leinberger said in closing, “and the vast majority of new development is going to be walkable urban.”

“Changing Workplace Trends” was the focus of a presentation by Maria Sicola, head of Americas research at Cushman & Wakefield, who described the human capital challenges of a changing workforce, the impacts of an aging office inventory, key goals of the workplace and how office occupiers are reacting to new realities. Corporate office occupiers, she noted, are seeking to address the following five key goals through their work environments:

  1. Productivity.
  2. Flexibility.
  3. Cost control.
  4. Employee recruitment and retention.
  5. Social responsibility.

All of these goals, she stressed, “come together in the decision-making process.” 

“People want to be in cities,” Sicola added, while stressing that “it’s not one-size-fits-all,” and some firms will continue to prefer suburban locations. “To bring this back to Chris’s research,” she added, “there will be some reinvention of the suburban markets — if they have the right combination of characteristics to make it work.” (For more of Sicola’s insights,  see “Repositioning Yesterday’s Buildings for Today’s Changing Workforce.”) 

A free-ranging discussion of the issues that both excite and concern research directors today included the following:

Fringe CBD submarkets with older, often unique and transit-accessible buildings clearly are becoming more attractive to office tenants — particularly tech companies — throughout North America. In Canada’s four largest cities, for example, Ross Moore, director of research, Canada, for CBRE noted that these types of submarkets “are arguably the most robust submarkets we have in the country.” (For more on this topic, see “Edge Markets Go Mainstream.”)

The decline taking place in the amount of square footage/employee, predicted to drop to as little as 150 square feet or less, is creating “a major headwind” for office development, added Moore. “That’s about 25 percent less than what we’ve been used to, being conservative” he added, and “when you think that the market’s only growing by 2 percent, being optimistic, then 10 years plus worth of growth is just gone.” 

What impacts will upcoming demo-graphic shifts — including baby boomers aging and millennials dominating the workplace — have on commercial real estate? James Cook, national director of analytics for Xceligent, commented on how these shifts already are affecting the retail industry, since the people who spend the most time shopping at malls tend to be under the age of 17 or over 62. “Shopping centers are going to have to offer more services, more fast casual dining options,” to appeal to older shoppers, he said. “I’m excited about the opportunities for retailers to tap into this group,” he noted, “but what scares me is, with the aging baby boomer generation leaving the workforce, where are we going to get the people to do all these jobs?”

Sicola noted that she’s excited about how the combination of technology and demography is having an impact on real estate. “I think change is good,” she commented, “I think it’s a good time to have this reinvention of real estate, and the technology aspect of it is fascinating. Where it gets a bit scary for me is some of the fundamentals on the economy side. The leasing side hasn’t quite caught up yet.” 

“There’s an inevitable reset on assets coming,” declared Rob Hartley, director of research in the Washington, D.C., metro area for Colliers International, asking “how does Class B office space become competitive again?”

Dean Violagis, CoStar’s vice president for research, commented that he is concerned about the heated investment sales market; “Manhattan is becoming quite an expensive place to buy buildings,” he noted, and almost $25 billion worth of transaction volume occurred during the last four quarters, about 32 percent more than during the previous four quarters. Are high building prices in major city CBDs sustainable, and will they provide good returns on investment, he asked? He added that investors are moving beyond purchasing office buildings to buy other assets, like parking garages.

Building on Violagis’s comments, Jim Clayton, vice president of research for Cornerstone Real Estate Advisers, added that “in the institutional world, the definition of the “real estate bucket” is expanding beyond the traditional five sectors (office, industrial, retail, multifamily and hotel) to include a range of so-called nontraditional property types. NCREIF (the National Council of Real Estate Investment Fiduciaries), he noted, recently introduced a new index, NPI-Plus, which includes parking, medical office, student housing, self-storage and senior housing. “Growing acceptance of these sectors partly reflects strong capital flows into the traditional property sectors,” he added.

Alexandra Kosmides, sustainability/real estate market specialist for the U.S. General Services Administration (GSA), cited the “trend toward more transparency” regarding energy consumption as well as the products and processes used to construct and renovate buildings as both exciting and troubling. “I’m excited by the fact that there’s this movement toward more transparency, toward revealing what’s in those products, what went into those processes. But simultaneously it’s very troubling, because … it’s pretty scary to see what we’re all being exposed to.”

Wei Xie research manager in the Baltimore/Washington region for CBRE Global Research & Consulting, said she is excited about changing workplace strategy and the trend toward a more open, creative and collaborative work environment. Commenting on CBRE’s new office on Pratt Street in downtown Baltimore, she said that with the free-address, technology-empowered workspace (including an inviting kitchen area, which has become a popular hangout), the work environment has become more refreshing, interactive and efficient. “It makes coming to work … an experience,” she noted. Xie believes more firms will modernize their workplaces and leverage them to attract the young talent who value this type of work environment.   

Keith DeCoster, senior manager, national real estate analytics, with Savills Studley, indicated that he is concerned about the U.S. metro areas and submarkets that aren’t doing well, that will never be as successful as New York, Dallas or Austin. “If you’re Detroit or a further out suburban area,” he asked, “how do you compete, if you don’t have the infrastructure or the tax base?” 

On the retail/industrial side, Elizabeth Norton, managing research director for Transwestern, commented that while large-scale distribution and fulfillment centers typically have been built in exurban areas, some retailers might be looking for smaller, closer-in distribution sites close to large population bases in order to get online purchases to people faster. But with the rise in online shopping, “what will happen to the suburban strip mall,” she asked? Some of those vacant big box stores, including some J.C. Penneys, noted DeCoster, are being turned into call centers; others are being reused as libraries. 

Aaron Ahlburn, senior vice president and director of industrial research, Americas region, for JLL, predicted another wave of leasing activity for e-commerce related industrial space that may involve leasing smaller spaces in infill markets. The big question regarding industrial development, he added, is “when does the music stop … and who might be left sitting with a vacant building at the wrong point in time?”

“What I find surprising,” commented Rene Circ, director of research for CoStar Portfolio Strategy, “is how effective a slow-growth economy can be for the industrial market.” Vacancies are low and there has been nearly no new development. As a result, he noted, development is coming back, but only a handful of markets are getting overbuilt. Models predict that we will need about twice as much industrial construction as is actually happening, which has been the case for quite a while.

Rebecca Rockey, an economist with Cassidy Turley, noted that she’s concerned about the fact that “wages aren’t growing as quickly as we might expect because there may not have been enough wage deflation during the Great Recession,” citing a working paper released earlier this year by the Federal Reserve Bank of San Francisco that discussed this phenomenon.

Researchers also commented on the ongoing retail evolution, discussing the many formerly pure e-commerce retailers that are opening brick-and-mortar stores, albeit in much smaller spaces than most traditional stores. As clothing is becoming easier to buy online — and easier to return — traditional clothing retailers also are having to adapt, to provide more interesting experiences and services to attract shoppers. One day soon, Ahlburn noted, you may be able to get fitted at the airport for a new suit and pick it up when you return from your trip (or perhaps even when you land at the other end of a long flight).  


Aaron Ahlburn
Senior Vice President and Director of Industrial Research, Americas
El Segundo, California

Rene Circ
Director of Research
CoStar Portfolio Strategy
Boston, Massachusetts

Jim Clayton
Vice President, Research
Cornerstone Real Estate Advisers
Hartford, Connecticut 

James Cook
National Director of Analytics
Independence, Missouri

Keith DeCoster
Senior Manager, National Real Estate Analytics
Savills Studley
New York, New York 

Robert Hartley
Director of Research, Washington, D.C., Metro Area
Colliers International
Vienna, Virginia

Alexandra Kosmides
Sustainability/Real Estate Market Specialist
U.S. General Services Administration (GSA) Public Buildings Service
Washington, D.C.

Christopher Leinberger
President, Locus; Charles Bendit Distinguished Scholar and Research Professor, George Washington
University School of Business; and Nonresident Senior Fellow, Brookings Institution
Washington, D.C.

Ross Moore
Director of Research, Canada
Vancouver, British Columbia, Canada

Elizabeth Norton
Managing Research Director
Washington, D.C.

Rebecca Rockey
Cassidy Turley
Washington, D.C.

Maria Sicola
Head of Americas Research
Cushman & Wakefield
San Francisco, California

Dean Violagis
Vice President, Research
Washington, D.C.

Wei Xie
Research Manager, Baltimore/Washington Region
CBRE Global Research & Consulting
Washington, D.C.