Is the Economy Headed in the Right Direction?
by Neil A. Dolgin
I’ve always been of the mindset that for any business, an economic downturn is an opportunity for innovation and transformation rather than a barrier to progress. While it’s hard to be certain where we’re headed in today’s economy, there is some good news in commercial real estate nationally and locally.
The Commercial Observer reported that the total dollar amount of investment in commercial properties nationwide actually rose 10 percent from 2021 to 2022. Investors spent $167 billion in the commercial market in the second quarter of 2022, a 10 percent increase from the second quarter of 2021. Unsurprisingly, New York City saw some $67 billion in property trading in the second quarter, ahead of Los Angeles with $65 billion. The volume of of investment in the five boroughs rose 104 percent over the past year.+
Inflation also seems to be leveling. It’s not been as drastic as we all thought it was going to be right now. According to Trading Economics, “the annual inflation rate in the US slowed more than expected to 8.5% in July of 2022 from an over 40-year high of 9.1% hit in June, and below market forecasts of 8.7%.”
In my post, How Inflation is Affecting Commercial Real Estate, I noted that as inflation rises, property values and rental prices follow. With inflation leveling off, that’s a good sign for investors, owners and lessors.
Following moderating job growth over the past few months, the U.S. economy scored the largest monthly jobs increase since February and roughly double the pace of new hiring that economists had expected, according to MorningStar. Total employment rose by 528,000 and the unemployment rate declined to 3.5% – which are pre pandemic levels.
In this economic climate, are investors jumping back into the commercial real estate marketplace? Many never left; we see them still sitting on the sidelines. Both Funds and individual investors are still out there. The twists being the Funds are interested in industrial, retail and mixed-use and less interested in office buildings right now because there’s not a great return, or potentially there may not be a great return. For individual investors and small groups of investors who are thinking that the world is not going to come to an end, the New York metropolitan area, especially, has always rebounded, and there are solid opportunities available.
For owners, it’s all about transforming old buildings. Some office buildings are in the process of being converted into residential buildings. Doing a gut rehab on a building is cheaper than new construction and that is what’s happening with some of these older buildings. Owners of older industrial loft buildings from the 1980s and 1990s are beginning to reimagine them as well. They are typically renovating larger units into smaller ones that are better suited to multiple tenants. Some are even converting a building to mixed-use artist /creative studios and residences. We have been advising owners on several of these conversions.
Retail is showing signs of life. A lot of retail space is being revamped or recreated for new and creative businesses that are reflective of neighborhoods and trends, versus the typical tenants – clothing boutiques, food stores, and salons. We are seeing new dance studios, urgent care clinics and other businesses that may otherwise have been located in an office building now opening up in shopping centers and retail store fronts. New fast food brands are also opening up in these newly renovated retail spaces. As these businesses start to thrive and generate more pedestrian traffic, investors will be again looking at opportunities in retail.
Industrial locations are still in high demand. While some companies can service the NYC metropolitan area while operating from an industrial building in Long Island, Westchester, upstate New York, New Jersey and as far away as Pennsylvania, others need the advantage of a last mile-type of warehouse in the NYC metro area so they can reach and serve their clientele faster.
Kalmon Dolgin also continues to grow. With five million square feet currently under management across 10 states, KND Management, our building management group, added about 100 residential apartments in addition to retail stores and office buildings that we’re managing for a new client.
While we’re unsure where the economy is headed, it’s definitely a time of transformation in commercial real estate. If you’re a building owner or investor looking for guidance on opportunities and ways to benefit in this economy, feel free to drop me a line.
Neil A. Dolgin is co-president of Kalmon Dolgin Affiliates. Founded in 1904, Kalmon Dolgin Affiliates (KDA) has grown into one of the New York metropolitan region’s leading commercial and industrial real estate firms. Kalmon Dolgin Affiliates specialize in all aspects of real estate services for developing, managing, selling, leasing and marketing commercial and industrial property. KDA’s highly-trained professional brokers offer clients a practical, street-wise approach to commercial and industrial real estate brokerage, leasing and sales, supported by the latest in real estate marketing, management and research technology.
+Source: CBRE Report