By Jon Wheeler, president of Wheeler Interests
Anyone keeping up with residential real estate knows that the market has slowed down significantly over the past year. Among other factors, this cool off can be attributed to the increase in subprime market lending practices. Banks and lenders decided to ease credit criteria, after the Federal Reserve Board lowered interest rates, by issuing loans to people who would not have previously been able to secure a home mortgage due to credit issues or income restrictions. Unfortunately, the instability of the residential market sometimes creates a perception of instability in the commercial arena in the minds of lenders. Lenders’ judgment may be impacted while underwriting loans by putting more consideration into how they underwrite the loan, to whom they write it and with what product.
Due to this cool down, the national percentage for construction of new homes has fallen 2.1 percent (US Commerce Department). Thankfully, the southeastern Virginia market (where Wheeler Interests is headquartered) is an extremely vibrant area and is a great example of how a market can survive while many parts of the nation are struggling with the ripple effect that the downturn in the housing industry has wrought. This residential market does not seem to be suffering as much as other parts of the state because of the wide variety of strong industries in the area, including banking, military and shipbuilding. In fact, according to the 2007 “State of the Region” study by Old Dominion University (ODU), private-sector shipbuilding and repair is big business in Hampton Roads and accounts, directly and indirectly, for about 15 percent of the total value of the region’s economic activity. More than 160 ship construction and repair firms in the area employ approximately 24,600 people, whose typical compensation is one-third above the regional average.
Residents of Hampton Roads tend to avoid becoming house-poor — meaning they have not spent more money than they can afford on a house — creating more income available to spend outside of house-related expenses. ODU’s study also revealed that the region’s citizens give a higher proportion of their incomes to charity than the national average. Overall, the region’s citizens give 8.2 percent of their annual incomes to charity, exceeding the national average of 6.4 percent. And when these citizens aren’t donating their money, where are they spending it? Retail markets.
Along with the need for retail markets, three main trends in the national commercial real estate market — as well as in southeastern Virginia — bolster the case that commercial real estate isn’t cooling off. The following trends allow markets to thrive and allow retailers to sustain business:
The Congress for New Urbanism (CNU) supports the restoration of existing urban centers and towns within coherent metropolitan regions. New urbanism has become increasingly popular and there are now groups, such as CNU, who advocate for the urban design movement. Downtown areas are being rejuvenated to make good use of the space and draw consumers back to the new urban environment. Town centers are the modern day version of the downtown environment and have become popular over the past several years. Additionally, while a geographic area can only support so many town centers, the combination of town centers and true downtown environments present almost never-ending development opportunities due to the cyclical nature of revitalizing, refurbishing and refitting these areas.
The convergence of daily goods and retail service providers seems to be a vital concept in the world of commercial real estate. Shopping centers that accommodate the average American’s need for convenience and their desire to multi-task are thriving in today’s market. For instance, the growth of grocery-anchored shopping centers with service and retail tenants allow consumers to combine multiple errands and are sensitive to their lack of time. Consumers will always need to buy groceries and will always require service-related retailers. It is clear daily goods and services are necessities in life, lending to the idea that the retail industry will continue to grow strong due to the use of convergence.
With new urbanism and convergence, many new materials are needed to meet the needs of the ever-changing real estate markets. With the rise of new materials comes a rise in the waste created from old materials and buildings. Green building — which is defined as creating a design and structure that promotes economic health and well being as well as increasing the efficiency of buildings and their use of energy, water and materials — is all the rage in the United States. According to national polls conducted by the Sierra Club, the public’s concern for environmental issues is increasing. So with buildings being revitalized through new urbanism, the materials, manpower and ideas behind green buildings are often taken into consideration because of this growing trend. With the convergence of many goods and services due to all inclusive shopping centers, retailers and architects are picking up on this trend and making these structures more eco-friendly.
So even if lenders became anxious due to subprime lending in the residential market creating a cool off, commercial real estate is less susceptible to cooling off because people are spending money in the commercial arena, new urbanism is revitalizing markets, convergence is making retail shopping a convenience and green construction has the public’s attention.
So will commercial real estate cool down in conjunction with residential real estate?
In my opinion, absolutely not.
Jon Wheeler, president of Wheeler Interests, has over 25 years of real estate experience in retail acquisitions, development, management and leasing.