Safe Shopping – What Does It Mean for Retail Landlords?

As summer beckons and COVID vaccines roll out, hopes of returning to our pre-pandemic lifestyles are budding. And after being cooped up for a year, the idea of physically shopping for a new summer wardrobe may seem like a well-deserved indulgence. While many will still need to watch their pennies, in-person retail recovery is in the cards.

But the change is not going to happen overnight, and shopping is unlikely to look the same as it did in 2019. The pandemic accelerated the switch to online shopping, and 79 percent of Americans say they will continue to shop online. Meanwhile, those willing to return to the malls will have a heightened awareness of personal space and health and safety measures.

So how will returning shoppers react to their favorite malls being filled with empty store-fronts? Can cash-strapped landlords and tenants rise to the occasion one last time to welcome shoppers back?

Flexibility Is Core to Future Retail Design

Retail, design, and construction experts agree that flexibility must be built into any retail space changes. Shoppers will be looking for new experiences, and nobody knows what those are yet. And the coronavirus (or something similar) could rear its head again; we can’t be sure the current vaccines will serve as protection against future variants. If nothing else, shoppers will need to feel psychologically safe for a while to come.

Places of Purpose

The National Retail Federation (NRF) predicts that retailers may need to adapt themselves to become “places of purpose.” Contrary to pre-pandemic efforts that encourage shoppers to come and browse, shoppers may demand a quick in and quick out.

The year 2020 initiated a phenomenon being tagged Online Merging with Offline (OMO), which sees shoppers blending online activity with in-person acquisition. They may look at options online, check for stock of their size, go in-store to fit items, and take them home that day. As opposed to the multiple online transactions spread over days required to get the “right fit.”

A More Personal Experience

The other thing people miss from the online shopping experience is engaging with helpful and knowledgeable store assistants. The NRF suggests retailers encourage shopping appointments. Shoppers could time with an assistant who attends to their wishes and presents options to them in the safety of a private, reserved space.

Even without appointment scheduling, it makes sense to free up floor space (for social distancing) by putting just a single item on display. Shoppers could then request their choice of color and size. Clothing can be appropriately wrapped and sanitized after each fitting. 

Store layout designers will need to rethink the ratios of storage to display area and allow for private viewing and fitting areas.

Smaller Shops May Receive Preference

Some shoppers may prefer to exchange variety for safety (or perceived safety). Small stores that allow shoppers to quickly assess the controls in place and speedily make their choices from a limited selection have received preference. It could be the final nail in the coffin for department stores that were already on the decline pre-pandemic.

The trend could suit landlords, too, as they can spread their risk across multiple niche tenants rather than a few large anchor tenants. It also opens opportunities for start-up local businesses that might not usually bid on premier class mall space. And gives small online businesses a chance to put their goods in front of passersby.

One-Way Aisles, Transition Spaces, and Outdoor Space

Many stores are introducing one-way aisles as a way to control social distancing. At the same time, store entrances are becoming transition spaces that provide shoppers the psychological safety of conspicuous health and safety measures. As such, they offer opportunities for branding and the creation of unique experiences—for example, consumers may watch a video while their cart is being sanitized.

In climates that allow for it, shopping is extending into outdoor spaces previously reserved for eateries. Making such areas pet and child-friendly could see families safely viewing malls as destinations once again.

Curbside Pickups Remain

With most consumers expressing contentment with online shopping, the hastily erected curbside pick-up areas constructed last year can be upgraded and extended. Again, look to underutilized parking that provides cover and branding opportunities.

Turnover Rent Can Increase Collaboration between Landlords and Tenants

Finally, turnover rents, usually calculated as an agreed percentage of the tenant’s turnover and other receivables, are gaining popularity in the retail space. The concept isn’t new, but now more than ever, landlords need to be flexible. Insisting on fixed rents in uncertain times may put off prospective tenants. Or could force existing ones to shut up shop if retail recovery doesn’t go according to plan.

Turnover rent arrangements create a symbiotic relationship between landlords and tenants. When times are good, everyone does well, and when times are bad, there’s an incentive to work together on improvements.

Will Self-Driving Cars and COVID Revive Street-Level Lots?

self driving car

Technology and globalization are impacting urban design in unanticipated ways. How we will travel in the future has changed—not just at a macro, international level, but locally, between home and office. For instance, self-driving ride-sharing vehicles could make parking lots defunct, while electric cars could do the same for gas stations.

At the same time, the COVID-19 pandemic has opened our eyes to the need for safe community spaces. It has also changed the way we work, thanks to empowering technology. The workplaces of the future will need to rise to new challenges.

For commercial real estate (CRE) investors, these are changes to consider sooner rather than later.

What Do Self-Driving Vehicles Mean for City Real Estate?

When Google started its self-driving project in 2009, it was expected to significantly change how we move from point A to point B. Robotic vehicles were meant to be a safer journey where all occupants are free to get on with other things: napping, working, or simply watching the scenery pass by.

But what also quickly became apparent was that technology-driven changes in transport, such as self-driving vehicles, share-riding, and drone deliveries, were set to impact urban landscapes. Consider the following:

  • Curbside parking

With more rides taken in shared vehicles that don’t need to park, much of the space reserved for curbside parking is potentially freed up. Even where people retain a personal vehicle, it can be sent to park itself remotely and called when needed.

  • Street-level lots

For decades, office and retail developers have built their plans around supplying adequate parking for their clients. Now vast parking lots at street level could become superfluous.

  • Pick-up and drop-off zones

What we will need more of are spacious pick-up and drop-off zones. For many buildings in cities like Los Angeles, this will mean designating larger zones in front of lobbies for pick-ups and drop-offs rather than building on top of underground parking garages.

  • Gas stations

Not all self-driving cars are electric, but self-driving taxis will likely “refuel” at depots outside of premium business hubs either way. And with an increasing shift to electric cars in privately owned vehicles, prime urban spots currently occupied by gas stations may be up for redevelopment.

The Pandemic Has Us Thinking Differently about Buildings

We have not yet seen the full effects of self-driving vehicles, but the COVID-19 pandemic is making us rethink urban developments. While some initially predicted the end of traditional office space, studies show that workplaces are crucial for companies. Offices provide things that remote work doesn’t and never will. They facilitate the exchange of ideas between colleagues and help develop the culture many organizations rely on for staff retention.

A more likely outcome of the coronavirus pandemic is increasingly flexible schedules mixing in-person and online remote work. The work that employees come into the office for in the future will have different workspace requirements. Spaces will need to provide what workers miss at home: access to restaurants, retailers, gyms, and services like laundries. At the same time, they want these amenities in areas that aren’t overcrowded and have access to fresh air. These are best provided by spaces on the ground floor, open to streets and squares—the very same spaces that changes in transport make available.

What’s the Value of Street Level Activity?

For most metropolises, the myriad commercial activities that fill the streets are what give them character. Think of Paris without the Champs-Élysées or Beverley Hills without Rodeo Drive. Unfortunately, high-street retail chains and local eateries were the first to suffer in the pandemic. So now, large strips of prime urban real estate still lie deserted.

The World Economic Forum (WEF) has identified street-level lots as having the potential to invigorate post-COVID cities. It sees local authorities as having a vital role to play in relaxing and updating the regulatory frameworks that govern the use of such assets. Further, the WEF suggests using post-pandemic recovery plans to grant public-private partnerships extra agility in revitalizing the streets.

What Should CRE Investors Be Doing?

Given all of the above, investors looking at extending their urban portfolios would do well to consider the following:

  • Plan new construction around flexibility, such as spaces that can be used for multiple purposes or quickly converted. This includes parking garages that many developers are now making standard heights, intending to convert them to office space if they become defunct.
  • Be on the lookout for stimulus packages aimed at revitalizing urban streets.
  • Think innovatively about how space may be used differently in the future, especially when assessing distressed assets.

Featured Image courtesy zombieite | Flickr

How Achievable Is “Livable, Sustainable, Resilient, and Affordable”?

The World Economic Forum (WEF) recently released its Framework for the Future of Real Estate. In the wake of the coronavirus, the report emphasizes the need for cities and buildings to reinvent themselves, to become more “livable, sustainable, resilient and affordable.”

The year 2020 brought the world what the WEF has called a “convergence of multiple crises” –environmental, political, social, and economic. Amid these crises, real estate failed in its primary tasks: to provide adequate refuge and shelter; to facilitate commerce; and to cater to inclusion. The WEF believes the world has changed, and so must real estate.

The Four Pillars of the WEF Framework

Here is a look at the four pillars the WEF identified as key to its vision for cities and buildings that are fit for purpose in the future:

1. Livability

People in cities typically spend as much as 90 percent of their day inside buildings. Under stay-at-home orders, that number rose to 100 percent, widening livability cracks into gaping chasms. Office spaces, condensed over time to save costs, became unsafe, as did gyms, theaters, and schools.

Some people experienced total isolation. Living on their own, in buildings designed for absolute privacy, they could go days without even seeing another human being. At the other end of the spectrum, multigenerational families sharing homes struggled to keep at-risk members safe. Adults trying to work experienced constant distraction by children who had neither the space nor the attention they needed.

The real estate of the future should be livable, providing high-quality, human-centered spaces that enhance well-being as well as productivity.

2. Sustainability

Buildings have been instrumental in the creation of the current climate crisis. They consume half the world’s energy and 40 percent of raw materials and emit 40 percent of all greenhouse gas. Turning this situation around will require the optimization of buildings for carbon output at every stage of the life cycle, with renovation and repurposing replacing demolition.

Sustainability entails decarbonized, efficient spaces that take a life-cycle approach to deliver environmental, economic, and social benefits.

3. Resilience

Whole neighborhoods can be destroyed by freak weather conditions, as we saw with Hurricane Katrina. Malls lie deserted, abandoned due to financial crises or health emergencies like the coronavirus, unable to adapt.

The reality is our real estate is not resilient in the face of unforeseen natural or manmade disasters. And the uniformity of construction based on economics is making it difficult to distinguish one city from another.

Resilience translates to preparedness, such that cities and buildings are designed to mitigate risks while preserving cultural identity.

4. Affordability

America has a dire shortage of affordable housing. In many places, wages have stayed static while rents have increased. The arts are being priced out of city centers, and nonprofits are spending donor funds on escalating rentals. Where housing is accessible, infrastructure such as transport and essential services is often lacking. And crime makes residents fear for their safety.

Affordability encompasses inclusive, accessible spaces that minimize the effects of inequality.

The Five Enablers of the WEF Framework

How achievable are these four pillars? The WEF report identifies five enablers that government, business, and citizens need to focus on:

1. Digitalization and Innovation

Design and construction innovations such as digital twin technology can improve construction time, quality, adaptability, and affordability. Smart buildings learn and adapt to the needs of occupants and the environment.

2. Robust Regulatory Frameworks

Governments can drive change by endorsing sensible, flexible zoning and development regulations. Mandatory standards around carbon emissions, unified building codes, and progressive subsidies can be aligned with, and incentivize, corporate responsibility targets.

3. Talent and Knowledge

Ensuring fit-for-purpose real estate will require a competent and knowledgeable talent pool. Workers will need to be upskilled, and the key pillars should have representation at the C-suite level with the creation of positions such as chief technology officer, chief data officer, chief sustainability officer, or chief resilience officer. Real estate businesses should also build resilience by diversifying their workforces for age, gender, race, etc.

4. Proof of Value

Innovation must be applied at the business planning and design level to ensure all stakeholders benefit from the industry’s change. Metrics should be consistently applied and transparent, with access to high-quality data available to all stakeholders.

5. Stakeholder Engagement

Genuine and lasting transformation will require the real estate community to cooperate–this includes policy makers, lenders, investors, tenants, contractors, and so on. Academia and civil society must also be consulted for insight into technological innovation and citizen needs, respectively.

How Are CRE Investors Affected?

For commercial real estate investors (CREs), the WEF’s framework indicates more significant regulatory pressure in the future. Furthermore, tenants will experience increasing investor pressure, which will be passed on to their landlords. If the CRE industry wants to resume pre-COVID growth trajectories, investors will need to evolve.

Real Estate Investment Trusts – Are They Safe for the Beginner Investor?

real estate

Commercial real estate (CRE) can be a challenging field to break into as a new investor. Commercial properties often require more substantial financing and a greater degree of involvement from landlords than residential property. One alternative is to invest in CRE real estate investment trusts (REITs). 

REITs have an excellent track record of delivering solid returns. By their nature, they should also reduce risk through diversification. Before diving in, however, beginner investors should understand the different types of REITs, and they should be sure the underlying investments and structure of the trust will suit their needs.

What Are REITs?

All REITs invest in commercial properties, either directly or in the mortgages on the properties. Where they invest directly, they might also provide management services to their investment properties. Many REITs restrict themselves to a particular sector of the CRE market, such as residential (multi-family apartments), office space, retail, or data centers.

How Have REITs Performed Historically?

REITs are legally obligated to pay out 90 percent of their taxable income to shareholders. This makes them a high dividend-yielding option that will suit investors looking for immediate and regular cash flow. Over the long term, shareholders should also realize capital gains due to commercial real estate’s steady historical performance.

The FTSE NAREIT Equity REIT Index, which is what most investors use to follow the real estate market, has beaten the S&P 500 in 15 of the past 25 years. However, individual REIT performance can differ significantly depending on their sector.

This has been particularly evident recently, as sectors such as retail and office space have taken significant hits due to the COVID-19 pandemic. While the S&P 500 has delivered total returns of 13 percent since the beginning of the year, the S&P 1500 Retail REITs Index remains down more than 30 percent.

Tax Considerations of REIT Investments

REITs yield higher-than-average dividends compared to other stocks. However, most REIT dividends don’t meet the IRS definition of “qualified dividends.” Investors can end up paying more tax than on other dividends. Fortunately, REITs can qualify for the 20 percent pass-through deduction.

What Should Investors Look for in REITs?

REITs are sometimes presented as a “simple” option for beginner investors. This might hold when investing in REITs via exchange-traded (ETFs) or mutual funds. But if anything, investing directly in REIT companies is a more complex undertaking than directly investing in property. This is because investors must take a call both on the underlying CRE and the REIT company itself. Before investing, investors should be sure to consider the following:

  • Industry – This is the most prominent consideration of investing in REITs. By buying into a retail REIT, you’re investing in retail real estate, just as buying into office space REITs means investing in office space. Even if you’re considering a REIT with a mixed portfolio, understanding the spread of funds between sectors is essential to predicting potential returns.
  • Locations – Like all real estate, CRE can be very location-sensitive. This is especially true for residential CRE. Markets for this sector are generally better in urban areas where high costs of single homes drive up demand for rental accommodations. This, however, is provided the city is thriving. If jobs are declining and people are moving away, the residential CRE will suffer.
  • Government incentives and initiatives – Sectors that stand to benefit from federal, state, and local incentives like tax abatements may perform comparatively well. Many centers encourage “knowledge industries” that aren’t reliant on natural resources. President Biden’s new infrastructure policy offers revitalization in specific sectors, as well.
  • Underlying property and tenants – Regardless of the sector or location, look for REITs with quality properties and solid anchor tenants.
  • Interest rates – REITs that invest in CRE mortgages are sensitive to increases in interest rates, decreasing book values, and driving down stock prices. But if interest rates increase, future financing will be more expensive, reducing the value of a portfolio of loans.
  • Historical performance – Has the REIT performed well historically compared to other REITs with similar portfolios?
  • Balance sheet position – What is the REIT’s cash and debt position? Does it have the cash to take advantage of distressed sales post-COVID? Can it cover its short-term debt?
  • Management – Is the leadership team stable? Do the individuals have good reputations for solid decision-making and high integrity?

In conclusion, REITs can be an excellent way to diversify a portfolio of stocks and bonds. They present a low entry point to CRE investing, and investing in REITs via ETFs can simplify decision-making. For investors looking for passive income, REITs can provide high dividend yields, but some of this benefit can be eroded if the dividends are taxed as income.

Data Center-Ready Real Estate – The Gem You Didn’t Know You Owned?

computer server room

It should come as no surprise that data center real estate fared well throughout the pandemic. COVID-19 drove a sharp increase in cloud computing and sent global data usage skyrocketing.

But as with anything real estate-related, the numbers tell the true story. JLL reports that US data center sector deals reached US $31 billion in 2020, compared to US $16 billion in 2019. In addition, publicly traded data center REITs rose 19.2% compared to global REIT performance of -16.7%.

With no reason to think the demand for data will drop anytime soon, data center real estate can make a profitable addition to any CRE portfolio. In fact, you might already have data center-ready property without even realizing it.  

Types of Data Centers

If the idea of technology real estate scares you, know that landlords have several options in terms of how they present their holdings for data center use. Rental yields are often dependent on the investment made by the landlord, but preparing data center space is a highly specialized field. Many data center operators prefer to handle everything themselves.

Base building

Data center operators will often look to lease industrial or office buildings that meet the base requirements listed below and undertake the necessary capital improvements themselves. Rents for a base building data center are typically lower because the tenant directly bears the largest portion of costs.

These leases usually protect the tenant with long terms or guaranteed renewal options. They will either provide for the improvements to revert to the landlord on termination or be removed at the tenant’s cost.

Powered base building

A powered base building is one where the landlord has installed the necessary primary power upgrades as part of its investment. The building’s power capacity is described in terms of kW (kilowatts) or MW (megawatts); typical data centers range from 2 MW to 15 MW in capacity, though Google, Amazon, and other tech giants operate 100 MW+ data centers. Note that the square footage of the average data center ranges from around 50,000 to 100,000 square feet—not incredibly large.

Turnkey

Turnkey leases are where the landlord bears the cost of all improvements, which can be extensive. According to the Counselors of Real Estate, 2018 construction costs of powered base buildings often range from $200 to $450 per square foot. In contrast, turnkey data centers cost anything from $800 to $1,200 per square foot. Turnkey data centers also present a higher level of risk to investors, due to the risk of technical obsolescence.

Internet gateways

“Internet gateways” or “carrier hotels” are single buildings served by multiple fiber providers. They are generally used for retail colocation providers.

Data Center Real Estate Requirements

Location is critical for data centers, as the wrong location can drive up operating costs substantially. For investors new to technology real estate, the requirements for data centers need to be understood. Many don’t realize the potential value of real estate that meets these criteria:

Proximity to fiber points of presence (POPs)

For obvious reasons, data centers need to be situated within easy reach of fiber optic connectivity. Fiber is generally run along preexisting rights-of-way; for example, along railroad tracks. Landlords with properties adjacent to these paths may not even realize their potential for data center development.

Floor loading and stable weather conditions

Data centers must safely house heavy, sensitive electronic equipment. Existing industrial buildings may be fit-for-purpose; for example, printing warehouses were built to handle heavy presses and weighty stocks of paper and often have higher load-bearing floors. However, locations that are subject to disruptive, extreme weather conditions like earthquakes, hurricanes, and floods are not suitable.

Proximity to essential services

Locations near essential service providers like hospitals often receive priority attention in emergencies. Proximity to these essential services could mean minimal power disruptions for a data center.

Availability of robust, affordable power supply

Power is one of the highest ongoing costs for data centers. In 2017, US data centers consumed more than 90 billion kilowatt-hours of electricity. Corporate social responsibility initiatives are causing developers to seek renewable energy sources such as solar, wind, and biomass.

Government incentives

Look out for local, state, and federal government incentives for data center construction. These can include expedited access to rights-of-way, power, and support for fiber access, in addition to tax reductions.

Accessibility to clients and employees

Client accessibility is necessary for colocation spaces but may be less important for data centers occupied by one operator. However, data centers require highly skilled workers who are typically able to dictate their working conditions. Sites need to be conveniently located for easy commutes and include adequate parking.

Yard space

Yard or roof space is usually sought for placement of Uninterruptable Power Supply (UPS), fuel tanks, generators, and chillers.

What Else Should Investors Know?

JLL confirms that data center real estate has transitioned from a niche market to one openly recognized as a resilient investment opportunity. As such, it is increasingly attracting the attention of institutional investors such as pension funds. Globally, prices are rising in the more established markets, so investors are looking at areas where there is less competition and evidence of growth potential.

In the U.S., Cushman & Wakefield’s latest Data Center Update Report says Illinois’ data center incentives make Chicago attractive for US investors. At the same time, absorption in North Virginia exceeded global figures for the first half of 2020.

Blended Retail Real Estate – Is It a Visionary Investment or a Knee-Jerk Reaction?

real estate

The COVID-19 pandemic pushed even the most die-hard technophobes to do their shopping online, while seasoned online shoppers extended their purchases to include goods they had traditionally bought in-store, such as groceries. If even just some of these shoppers elect to stick to their new shopping patterns, the impact on commercial real estate (CRE) will be significant.

Last year, the Wall Street Journal reported that US warehouse demand might increase by 400 million square feet over the coming two to three years. E-commerce typically requires as much as three times the distribution space of the distribution operations that serve traditional retail outlets. You can add to that the fact that many businesses look set to increase inventories by 5 percent to 10 percent in the long term to avoid repeats of the shortages experienced at the onset of the pandemic.

The Suez Canal’s accidental blocking in late March 2021 further heightened the vulnerability of global supply chains. According to Lloyd’s List shipping news, the Ever Given mega-container ship held up an estimated $400 million in trade every hour she remained stranded.

Industrial Real Estate Bucked COVID Trends

Overall, CRE deals were down 36 percent year on year, according to the Deloitte 2021 CRE Outlook Report. However, some sectors were positively affected—industrial real estate being one of them.

The report attributes this to:

  • Higher volumes of e-commerce and the need for “last-mile distribution” centers
  • Increased orders for takeout food, which led to the advent of “ghost kitchens”
  • More data centers to support the data usage required by work-from-home initiatives

Retail to Industrial Conversions

Retail real estate was one of the CRE sectors most negatively affected by the pandemic. Stay-at-home orders and subsequent social distancing regulations meant many tenants were forced to default on rent. With no clear end in sight, transactions in the sector have been slow.

But retail-to-industrial property conversions accelerated, according to a CBRE Research survey that looked at projects completed, proposed, or underway from 2017. At the start of 2019, there were 24, and by mid-2020, the number had grown to 59. Approximately 13.8 million square feet of retail space is expected to be converted to 15.5 million square feet of industrial space.

The cost of real estate is negligible compared to transport costs to get goods to customers. Retail sites located within population centers are ideally situated and equipped for last-mile warehousing concerning utility connections, parking, and accessibility. Big-box stores even have existing dock doors and clear heights compatible with industrial use.

The top five market cities for conversions are Milwaukee, Cleveland, Chicago, Omaha, and Dallas/Ft. Worth, all of which account for more than a third of the projects surveyed. If e-commerce trends continue, and thus the need for industrial space grows, this development strategy could extend to higher growth markets in the Southeast and West regions.

Blended Retail Real Estate

To think of brick-and-mortar retail and e-commerce as competitors, however, is erroneous. Increasing numbers of brands have moved to “blended” or “omnichannel” retail models, which are a combination of physical stores and online sales. In the pandemic, e-commerce kept many of these afloat while their non-blended competitors crumbled.

This convergence of retail and industrial presents a challenge to investors accustomed to single-use real estate. Multi-use environments complicate both valuations and management. Existing tenants may object to non-retail elements being introduced into traditional retail environments. Plus, there are zoning restrictions to consider.

Investors at the forefront of this new movement will need to develop collaborative relationships with municipal decision-makers and give careful thought to the right tenant mix. In some cases, developers are addressing concerns by creating facilities with retail façades backed by distribution infrastructure.

Converted multi-use spaces will likely have a longer return on investment due to the time it may take to reshape the tenant mix, but the investment could pay off if it accurately predicts the future needs of retail tenants.

Don’t Forget Hospitality and Office Space

Consumers aren’t buying less—they’re buying differently. Blended retail tenants are also willing to pay market rates for the right spaces to give them what they want. Traditional retail spaces are not the only ones with the desired attributes.

Hospitality, office, and even residential real estate can present opportunities for reconfiguration. Remember, it’s about being able to get goods to the customers, not necessarily about getting the customers to you. Distressed asset sales may be ripe for the picking in 2021 and 2022.

Concluding Thoughts

Far from being a knee-jerk reaction, the convergence of traditional retail and e-commerce was an established trend before COVID. Investors wishing to ride the wave should be sure to partner with developers who have experience in multi-use spaces and the potential to form the necessary relationships with municipal decision-makers.

Life Sciences Sector Offers Opportunities for CRE Investors

The pandemic has shaken up the commercial real estate landscape. With some of the old rules no longer holding, investors are trying to decide where to put their money. For the risk-averse, the growth of the life sciences sector may be as close to a sure thing as there can be. Already a trend before the pandemic, the race for COVID vaccines and treatments has only reinforced it.

What is the industry looking for in the real estate market? And what do investors need to know before they join the rush for state-of-the-art lab space?

What Is Life Science Real Estate?

The term “life sciences” covers a broad range of medical-related areas, encompassing pharmaceuticals, biomedical devices, nutraceuticals, and biomedical technologies. Life science real estate includes the laboratories, manufacturing, and warehouse space associated with these activities. In addition, it encompasses the associated office space and medical suites.

What Is Driving the Growth of the Life Sciences Sector?

A large and aging baby boomer generation combined with the convergence of information technology and medical technology are the primary drivers of today’s life sciences industry.

In its 2020 Global Life Sciences Outlook, Deloitte talked about how patient-centered models now direct business, operations, and research.

AI-powered drug discovery and development is transforming the research arena. Consumer wearables and telemedicine are changing how patients and medical professionals interact. And gene therapies are revolutionizing treatment.

The funding of the industry is occurring at an unprecedented rate. Traditional medtech companies now face competition from consumer technology companies such as Apple, Microsoft, Samsung, and Google. All of these corporations are working hard to expand their presence in the life sciences sector. Academic, federal, and philanthropic funding is also playing a large part.

The pandemic has raised greater awareness about the number of new startups in the field. Deloitte notes that a number of them are “unicorns,” privately held startups valued at over $1 billion.

The Life Sciences Ecosystem

The concept of ecosystems underpins real estate investment in the life sciences sector. Perhaps the most famous “life science ecosystem” is the Cambridge-Oxford-London “golden triangle” in the UK, which combines the universities of Oxford and Cambridge with the metropole of London.

The life sciences sector is characterized by exceptionally well-qualified workers, even more so than technology companies. It has the highest concentration of PhDs, who want to be close to the prestigious academic institutions with which they’re associated. Scientists also want the convenience of city locations. After all, they cannot work remotely the way that other professionals are doing.

And with the venture capital activity and anticipated merger and acquisitions as the startups mature, access to legal and financial professionals makes sense from a business perspective. In North America, the Boston and Cambridge areas form a life science hub, with San Francisco and San Diego not far behind. In Canada, Toronto is the epicenter of the “Ontario Life Sciences Corridor,” and Vancouver is home to some of the country’s largest life science companies.

Life Sciences Industry Provides Investors with a Range of Opportunities

Buying into or developing new life science ecosystems requires a substantial investment. However, Gregory Theyel, Ph.D., the director for the East Bay Biomedical Manufacturing Network, points out that there are significant variations across the industry, presenting investors with a range of opportunities outside of the pharma and biotech sector.

Theyel points out that while assembling medical devices requires clean rooms, it does not necessitate many more of the areas that are typically associated with life science real estate, such as laboratories. On the other hand, digital healthcare companies need desk space and computing power. Geoff Sears of Wareham Development in San Rafael, California, highlighted the growth of personalized medications and self-therapies, which are handled on a much smaller scale than “big pharma.”

Steven Lang of Savills says that when it comes to converting space, retail locations have suitable ceiling heights and floor loadings. Moreover, they would be well-placed in terms of accessibility and amenities. And the shortage of supply on the San Francisco Peninsula has led to the conversion of many industrial areas. Where industrial zones border life science ecosystems, properties have recently increased in value between 20% and 30%.

Considerations When Investing in the Life Sciences Sector

Investors who want to enter the life sciences sector should be aware that life science buildings are not like your typical office space. They can be complex. A 2018 JLL report says that lab construction costs at that time ranged from between $350 to $1,350 per square foot. Labs require precise plumbing, airflow, and fire prevention systems to be in place.

Moreover, investors may want to consider investing in properties that can be leased to biotech and life sciences companies. As the life sciences sector continues to grow, there will continue to be many investment opportunities.

What You Need to Know about Investing in Commercial Real Estate Right Now

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2020 was a tumultuous year in every respect, not least for investors. The market volatility for 2020 was quite simply unprecedented. The S&P 500’s decline in February and March of last year rivaled the crash that preceded the Great Depression and 1987’s “Black Monday.”

Commercial real estate (CRE) can serve as a hedge against instable stock markets and as a source of income. Historically, CRE has offered average annual returns off purchase price of between 6% and 12%, depending on the location. The obvious question uppermost in every investor’s mind is the impact of the COVID-19 pandemic on these numbers.

How does CRE stack up in 2021? Will it retain its reputation for stability? Before investing in CRE, newbies should familiarize themselves with two things: the CRE market’s subtleties and the shifts triggered by the pandemic.  

What is commercial real estate (CRE)?

The real estate market is made up of residential real estate and CRE. CRE refers to property used for business purposes, as opposed to living space. However, it also includes multi-family living units, where the rental is the “business” of the landlord.

There are several subcategories of CRE, depending on the prevailing zoning and licensing authorities. The four basic ones usually include the following:

  • Retail real estate can be anything from single storefronts to strip malls and multi-acre shopping outlets.
  • Industrial real estate refers to properties that house industrial activities, ranging from production to warehousing and distribution.
  • Multi-family residences
  • Office space

What do investors need to know about CRE?

From an investment point of view, CRE differs from residential real estate in some fundamental ways:

  • CRE generally requires a much larger investment.
  • There can be capital gains from CRE, but investors usually look to rental income for their return.
  • This makes the valuation of CREs more objective, because the current owner can be asked to provide income statements.
  • CRE tends to have longer rental periods: typically five to 10 years. This is desirable for businesses because they don’t want operations disrupted by frequent moves.
  • Tenant turnover costs are higher for CRE because tenant activities can vary greatly. Landlords, therefore, also prefer longer leases to minimize the costs of accommodating new tenant requirements.
  • CRE is more regulated than residential property. Landlords must keep abreast of health and safety regulations. For industrial property, they must ensure their tenants’ activities don’t contravene zoning restrictions.
  • There are typically fewer consumer protection laws that govern CRE as opposed to residential real estate.
  • Maintenance of CRE can be very specialized, time-consuming, and expensive. Most CRE investors employ people to handle this or use the services of a professional managing agent.

What impact has COVID had on CRE?

The Deloitte 2021 CRE Outlook Report shows that global CRE deals are down 36% year on year. However, the report explains that some CRE sectors have been positively disrupted and others negatively. The joint PwC and Urban Land Institute 2021 report “Emerging Trends in Real Estate” sums up the situation with a section titled “COVID-19 Giveth and Taketh.”

It seems the reduction in deal volume is a result of uncertainty rather than an overtly negative outlook. Now, a year after the virus emerged, some trends are emerging:

  • Industrial real estate has been positively disrupted. The increase in online shopping has spurred the growth of “last-mile delivery” infrastructure. Similarly, the increase in take-out food orders and shuttering of in-person dining has led to the advent of so-called “ghost kitchens” with no need for traditional restaurant dining space. These restaurants only offer delivery or take-out meals.
  • The market for technology real estate like data centers continues to grow.
  • Micro-units continue to grow in popularity. These are small, efficient suites that provide residents with essentials. Their size makes them more affordable for tenants, and the landlord gets a premium per square foot.
  • Multi-family conversions also remain popular due to their affordability, shared amenities, and greater security, and due to the higher cost of new multi-family construction.

What is still unknown in CRE?

It’s now apparent that a widespread rollout of COVID-19 vaccines is the only way to bring the pandemic under control. Until the timing and efficacy of this process is understood, the future of the following categories of CRE remains uncertain:

  • Office space has suffered adverse effects under WFH trends. Debate still rages to what extent remote work will endure post-pandemic.
  • Hotels and hospitality have been hit hard by global travel bans. However, people are itching to travel again. When vaccines have been widely deployed, a compensating upswing in this sector could occur.
  • Retail real estate is the category most up in the air at this stage. Will people want to go back to brick-and-mortar stores? Even if shoppers don’t return en masse, it still might not spell the end of the sector. For innovative investors, retail mall conversions could offer an upside.

The COVID-19 pandemic has possibly been the most disruptive event in living memory. However, as with every disruptive event, change brings opportunity for those who recognize it. The landscape of CRE might have changed irrevocably, but that doesn’t mean the wise investor should dismiss it. In the words of Baron Rothschild, “Buy when there’s blood in the streets, even if the blood is your own.”

Advantages of Investing in Class-A Real Estate

Vancouver, Canada, resident Amandeep Khun-Khun serves as the managing partner of a Canadian holding company that specializes in real estate and business assets. Amandeep Khun-Khun oversees a portfolio of diverse assets that include business franchises and Class-A real estate.

Class-A properties are the most expensive and low-risk real estate assets. These properties are often in desirable areas and in new or renovated buildings with quality amenities. Commercial Class-A buildings are usually in high-traffic, accessible areas adjacent to other retail stores that attract high-end buyers. Residential properties categorized as Class A have low crime rates and amenities that attract families, such as high-quality schools and nearby parks.

Class-A properties are usually rented by tenants with a reliable cash flow, which reduces the likelihood of default. For this reason, Class-A properties can usually buffer all but extreme financial crises and retain their value over the long-term.

Class-A assets require large upfront investments because they are expensive. However, they need fewer major repairs and provide stable cash flow over time. Investors may recoup even bigger returns by renovating well-located Class-B properties and raising them to Class-A standards.