The New Year is a time of reflection and reassessment. That holds true in commercial real estate, especially regarding reallocation of capital and realignment of investment strategies. There’s no shortage of white papers and research on capital markets by all industry sectors of commercial real estate — ranging from banking and brokerage to debt and equity sources — but today’s CRE practitioner is searching for a reconciliation of the plethora of data and conflicting views into a forward-looking outlook that puts events and trends in perspective and paints a clear picture of what lies ahead in 2020.
It’s no secret within the commercial lending and investment community that retail is often the property type more institutional capital sources underweight for allocation of investment capital. While retail is notorious for tipping the scales regarding undesirable metrics like loan delinquency (the highest among core property types at 4.29 percent versus 2.98 percent for office) and value decline.1
Many vacated malls, shopping centers, and big-box stores have desirable location attributes – frontage along primary commercial arterials and public transit routes, proximity to employment centers, and site configuration or building design that’s well-suited for adaptive reuse. Conversion of these buildings is ideal in meeting the ongoing demand for affordable housing, industrial warehouse utilization, off-hospital campus medical use, and even coworking office space. The central question now, however, for legacy storefronts is one of highest and best use to unlock the market value of the real estate for retail use. Both retailers and communities have a vested interest in putting these real estate assets back to productive use to recapture lost property value and return vacant buildings to new uses accretive to property and local tax revenues.
Some songs manage to withstand the test of time. The iconic title track on the 1976 Stills-Young Band album “Long May You Run” is one such example. A tribute to Neil Young’s 1948 Buick Roadmaster hearse, which he named Mort, the song has come to symbolize endurance. I heard this song several times during my research for this report, and its message and backstory made me think about our industry. How long will commercial real estate professionals continue to run if they don’t take time to tune up their skills?
The question of the next commercial real estate finance (CREF) disruption is not a matter of when, but how. It will not be caused by a subprime mortgage crisis or overleverage in commercial mortgage-backed securitization market (CMBS). The likely suspects this time around will be a combination of rising interest rates and a disruption in liquidity for commercial real estate lending as a result of accounting, regulatory, and financial product shake-ups. How did we get here? More importantly, where do we go from here? And how can you prepare yourself for the imminent disruption? Let’s start at the beginning.
This report represents ACRE’s effort to redefine and quantify adaptive reuse, elevating it as a distinct product category within commercial real estate, resulting in increased adaptive reuse investment and development activity, and ultimately a stronger, more resilient commercial real estate industry.
This year, CCIM Institute is thrilled to announce a new partnership with the Alabama Center for Real Estate to bring you our new Commercial Real Estate Insights series. Since its founding more than 50 years ago, CCIM Institute has been a force and a champion of careful financial, market, and investment analysis, and fiduciary-level professionalism in all phases of the commercial real estate transaction. With this inaugural report, the Institute renews its commitment to providing thought leadership at the highest level to the industry during a time of historic change.