CRE Adapting to Supply Chain Disruptions
Even with the economy’s continued resilience, supply chain disruptions have upended a wide array of economic sectors – and the commercial real estate space has been no exception.
From well-documented staff shortages to a lack of office furniture, the concept of disruption has defined the economic picture these last few years – but landlords, developers and financiers are adapting to a new normal where delays are now just part of doing business and flexibility is rewarded.
“Everyone has an understanding of the supply chain being broken, but there is some educating that has to happen continually with these tenant expectations,” Keith Bandoni, a senior vice president and principal at Colliers International in Albuquerque, told the CCIM Institute. Colliers went on to describe how tenants are now moving into office spaces that are incomplete due to supply issues.
Still, builders are facing material shortages for ductwork, wiring, and sheetrock, all of which compound already elevated construction costs. After years of such conditions, builders are now starting to pivot projects to more in-demand uses in both emerging and established markets.
City Hall has been mulling the best ways to approach the eventual transformation of Midtown Manhattan’s storied office towers. The latest efforts seem to be focusing less on office usage and more toward mixed-use development. These “24/7” destinations remain in demand thanks to worker shifts to hybrid and remote work. It’s also a matter of market necessity due to the fact that there is less demand for offices in cities nationwide.
If anything, a silver lining to the challenges faced within the disruptive years from 2022 to the present is that pandemic-driven delays have allowed property owners and financiers to stop and reassess in real-time the long-term impacts that their projects will have on an area.
Now, shifts to both residential and industrial uses are becoming more pronounced, with industry groups like the CCIM Institute finding that the shortage of materials is driving greater interest in redeveloping buildings that are functionally obsolete.
As companies recognized their supply chain vulnerability, demand for domestic manufacturing space has increased year-over-year. They are getting support from generous manufacturing incentives being offered by the federal government, viewing supply chain disruptions as a national security issue.
With sweeping federal legislation unseen since the days of the New Deal, Congress’s passage of the Inflation Reduction Act, the CHIPs act, and more has resulted in each piece of legislation containing multiple provisions for government incentives to nurture domestic manufacturing activity. Property owners, investors, and builders all took notice.
As a result, manufacturing demand doubled in 2021 alone – even before the government acted. And now, existing industrial inventory cannot keep up across the U.S.
For example, Southern California had warehouse vacancy rates of less than 1 percent in late 2021, according to CBRE Group. The picture wasn’t much better in northern New Jersey, which had vacancy rates near a mere 2.4 percent.
“The basic physics of land scarcity matters quite a bit,” Chris Caton, managing director of global strategy and analytics at Prologis, a real estate investment trust that focuses on warehouses, told the New York Times. “If you look at Southern California, you look at the greater New York-New Jersey area, there’s just no more land in the most sought-after locations.”
On the residential side, supply-chain disruption has further fueled existing dynamics found within already aggressive housing markets. While the latest rate volatility has cooled the housing markets somewhat, older suburban enclaves with traditionally high housing demand have seen pricing resilience. For sellers, pricing has been a boom but new home buyers are struggling to find materials for renovations and appliance upgrades.
Due to the challenges, homebuyers are still shying away from the market, despite signs of financial thawing.
“…Consumer sentiment toward the housing market remains subdued by historical standards,” Doug Duncan, Fannie Mae senior vice president and chief economist, told National Mortgage Professional after their latest sentiment survey was released last week.
“For consumers, the same affordability issues are persisting, as they continue to indicate that high home prices and high mortgage rates make it a ‘bad time to buy’ a home.”