SiteSeer knows market research, retail real estate, site selection and more, but we never purport to know more about an industry than those working in it day in, day out. That’s why when we wanted to dig deeper into the state of commercial real estate in the United States, we decided to turn to two experts in our network to get their insights.
Gary Hall is the vice president of community center leasing for California-based CenterCal Properties, a role he’s held since 2011. Gary oversees a portfolio of mixed-used and promotional power centers in California, Utah, Oregon, and Idaho. In prior positions, he helped Albertsons expand its real estate footprint and worked on the development side as a director of leasing for several development companies.
Dave McKinney is the managing partner of DMG Real Estate Partners and one of the developers of the 79-acre commercial and residential project Orchard Park in Meridian, ID, which is part of the Boise metropolitan area. He also serves as a real estate consultant for large retailers looking to expand. His background is in real estate site selection, negotiation and store development
We wanted to pick their brains about how COVID-19 has affected commercial real estate development and what they’re seeing “on the ground.”
Q: You’re both based in Boise and we’ve all seen the explosive population growth there. That’s a current example of how population growth impacts development. What are you seeing?
Dave: Boise is growing at a high percentage rate, but it’s not Los Angeles, so I always advise taking this into consideration when setting development goals. We are definitely seeing an increase in property values, low supply, high demand and a lot of people who want to move here because of the quality of life.
Gary: Boise has been on the map for a while, even during the housing crisis a decade ago. Everyone here talks about the quality of life drawing people here. What is also being validated in this market and across our portfolio is our belief that retail is evolving away from the traditional enclosed shopping mall and into the suburbs with open-air, mixed-use lifestyle projects that offer restaurants, entertainment, daily needs, health and wellness, etc.
Q: Are you noticing a shift in development from those downtown areas to suburban areas?
Gary: We’ve seen daytime population in downtown areas drop as much as 40-50%. COVID accelerated that because fewer people are working and living in the downtown cores. Shopping patterns have changed and people like staying closer to home, and an open-air lifestyle center close to them is appealing. I think we’re going to see downtowns hurting for some period of time before bouncing back because much of the workforce doesn’t want to commute and prefers to work from home with additional flexibility, and many businesses are responding to that. And a number of businesses—including corporate offices and restaurants—are seeking alternatives to downtowns.
Q: So, COVID slowed things down in development, but didn’t stop it completely?
Dave: From March to May 2020, things were on hold. Nobody knew what was happening, but toward the fall of 2020, we started seeing retailers signing leases and we saw some low-cost leaders who tend to succeed when the economy is down prepare themselves to expand.
Q: Now that we’ve seen lockdowns and business restrictions lifted, what retailers are bouncing back fastest?
Gary: Every decade, people are predicting the death of retail, but really, retail just continues to evolve with the times—and the retailers that don’t are the ones that die. COVID was really the great accelerator. Strong retailers are bouncing back fast, while those that were struggling already are doing even more poorly if they didn’t pivot. We’re seeing good retailers thriving now, leading with home category, discounters and restaurants. Athletic wear companies are on fire right now as well. Ladies fashion/work wear has been hit the hardest and will probably take the longest to return due to the fact that almost 3 million women have exited the work force as a result of COVID. That has caused a shift toward comfort and casual wear over suits and formal business/evening attire.
Q: What’s the biggest changes you’re seeing requested from tenants in your developments?
Dave: We’re definitely seeing the loss of the large and junior box stores, which isn’t new, but we’re seeing it even more. Quick-service food options are attractive to consumers, and all of those restaurants want a drive-through lane on some side of the building and/or curbside pickup spot in the Orchard Park development. I think so many retailers and restaurants are trying to cater to the way people are living now.
Gary: Virtually every lease that comes across my desk has a request for to-go pickup stalls or drive-through options, if they are restaurants. Tenants definitely figured out during COVID that the ability to do curbside and contactless pickup helped their business. We are also seeing specific pandemic-related requests trying to protect the tenant from government-mandated closures or operation restrictions. Of course, this doesn’t work to shift the risk to the landlord vs. address the baseline issue. I believe the market will respond with a type of business risk insurance, similar to terrorism insurance post 9/11.
Q: Are staffing challenges impacting where companies choose to locate?
Gary: The U.S. staffing shortage is certainly a problem that most businesses are struggling with, but I have yet to see a business say they’re not going to open a location that they can’t staff. I did have a tenant recently lose two of his key management team members when they were forced to shut down and he’s now struggling to hire retail staff too. The circumstances we’re in have led to a huge talent vacuum at that middle level as a result of early retirement, departure from the work force or a reprioritizing of priorities in people’s lives. I believe most tenants perceive this as a shorter-term issue that they’ll have to deal with by enticing the workforce to fill their open jobs.
Q: What’s your take on the supply chain issues out there because of the pandemic?
Gary: Many retailers are struggling with this right now. Anything from long lead items such as equipment manufactured for specific tenants to HVAC supply to keeping inventory stocked is a big challenge. Buying a laptop or anything with a computer chip in it or a mountain bike is difficult, and that’s not even mentioning the significant price increases. From a development standpoint, we’ve seen price increases in building construction costs in this area as much as 30%.
Dave: Most contractors are sharing that wood and steel are the two biggest cost and supply issues they’re challenged with right now. That, combined with the demand out there means contractors have to raise their prices. It’s a more expensive market to build in, that’s for sure.
Q: Has there been a time in recent memory that is similar to this one?
Dave: Well, in the early 2010s, companies came out of that recession very, very conservative. This time feels different in that every company out there that made it out of COVID alive seems eager to grow and has a five-year growth plan in place already. I think we are seeing retailers confronting pent-up demand for everything and so they’re eager to develop their businesses and capitalize on that demand. Things are picking up a lot and people seem excited to move forward.
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