As private mortgage lenders, at AMI Lenders, we focus on helping our clients capture opportunities in the real estate market, whether it be through a mortgage for a house or through a commercial mortgage, assisting our clients invest in commercial real estate. Since we have been writing primarily about single-unit properties, we will devote this entry in our blog to discussing what we perceive as the forces and trends in commercial real estate as we enter the second semester of 2022.
What types of properties are included when we talk about commercial real estate? Commercial real estate, in our view, encompasses the following broad categories:
- Office properties
- Retail properties
- Industrial properties
- Multifamily properties
We will discuss some trends and forces affecting the first three of these four categories. In our next blog entry, we will discuss trends in Multifamily properties.
Interest rate hikes
It is widely accepted that the increase in the Federal Reserve interest rates will put upward pressure on lending rates, including rates for private commercial mortgage loans. While we are still far from their all-time high, interest rates have steadily increased. When evaluating a commercial real estate investment, you should definitely factor in higher interest rates for the next few years. It goes without saying that interest rate hikes bring uncertainty to investors' minds. Nonetheless, with the right investment plan and proper financing, you can still make it a profitable move.
Trends in Office Properties
As a consequence of the Covid-19 pandemic, it has materialized that organizations are rethinking how they utilize office space. It used to be that corporations and small businesses alike would estimate required space based on allocating several hundred square feet per employee to be assigned to an office space or a cubicle. With the new hybrid work schemes (work at home some days, from the office others), the number of people present at the office on any given day will be dramatically reduced in the future. This means that the surface allocated per employee (in square feet of rented space) will decrease significantly in the years to come.
Businesses are now actively thinking about the best use of office space. As Al Brooks of J.P. Morgan asks: "If employees are only in the office a few times a week, are cubicles, open offices, or a different setup the best way for them to collaborate in person?" Consequently, we will most likely see Office Spaces that will start to include amenities such as daycare centers, open spaces for getting together to collaborate as opposed to small cubicles, larger and more functional eating areas, and catering, among others. Al Brooks mentions in his article[1] that amenities will become highly relevant in the war for talent. Thus, if you currently own office space, or are considering investing in this type of commercial property, make sure you allocate space for employee amenities that will benefit your potential clients in their search for talent.
Trends in Retail Properties
Malls come in different shapes and sizes and are grouped, by the industry specialists, in classes labeled A, B, or C. It has long been known that malls can show drastically different results based on consumer behavior. Thus, trends will most likely be different among classes of malls and the communities surrounding them.
For example, Class B malls are the typical strip malls in or nearby middle to middle-upper class neighborhoods, with an anchor tenant (for example, a grocery store), which serves as the primary source of foot traffic for the strip mall. Class C properties are over 30 years old and usually located in less desirable areas, and have less attractive anchors, if they have an anchor at all.
Class B and C malls have been struggling for a while, with many plagued by empty spaces and desperate needs for renovations (mainly due to their age). The trend concerning these properties is what real estate investors term "adaptive reuse." Investors are getting creative in how they utilize these properties, and since some of these malls need many renovations desperately, a sound investment strategy for an experienced Real Estate investor would be to bargain a very affordable purchase price and then renovate the building for a repurposed use. AMI Lenders can offer guidance on how to do just that.
In fact, some real estate investors are seriously looking into transforming Class B and C malls from retail, commercial use and into:
- Affordable housing with ample parking in somewhat attractive locations; or
- Industrial uses include dark kitchens, warehouses, and distribution centers or data centers; or
- New types of office spaces (for example, co-working spaces and small independently operated health clinics).
Trends in Industrial Properties
Industrial properties are usually large spaces with little to no amenities but ample space and specialized design and infrastructure (i.e., power plants, high ceilings, cross-docking, and traveling cranes, among other characteristics). Demand appears to be strong for these types of properties across the country, and Texas is no exception. As the use for these types of buildings evolves to newer industries, many tenants will require them to have additional space for amenities such as:
Daycare centers, kitchen spaces for larger cafeterias or employee catering, gyms and locker rooms, and showroom space. Traditionally, these uses were reserved for either substantial office buildings or commercial retail buildings.
If you are looking into investing in industrial property, you might want to consider adding spaces for a new way of working and thinking about work-related areas.
Summary
At AMI Lenders, we are one of Houston's most reliable private commercial mortgage lenders and could become your financial ally. We fund our loans and can move as fast as the law allows. Borrowers in Houston will also have a hard time finding lower rates for hard money or private loans than we offer. We want our customers to succeed and take advantage of the financial opportunities provided in real estate investments. Visit our website today and fill out an application for a loan backed by a commercial property.
[1] https://www.jpmorgan.com/commercial-banking/insights/2022-midyear-commercial-real-estate-outlook
