Twists & Turns Continue for Commercial Real Estate Market– May 06, 2014 by Kevin Carney

I recently attended the National Association of Industrial and Office Properties (NAIOP) Northern Ohio Commercial Real Estate Market Update, where local and national experts discussed some of the latest commercial real estate trends.

Thomas Waltermire, CEO of Team NEO, opened with his perspective on the economy, pointing to positive signs. According to Waltermire, Moody’s estimates the Gross Regional Product will hit an all-time high for this region in 2014. And while job growth numbers may still seem low, the region’s output is higher due to increased efficiency.

These are all good signs for Northeast Ohio. But the most promising news of the day for those in attendance was that the commercial real estate, manufacturing and service sectors continue to grow, albeit cautiously.

The panel, moderated by Fred Geis, Co-Owner of Geis Companies, was comprised of Rick Lechtman, Eastern Director of the National Office and Industrial Properties Group for Marcus & Millichap; J.C. Pelusi, Regional Director of Jones Lang LaSalle; and John Latessa, Jr., Senior Managing Director, Michigan & Ohio at CBRE, Inc.

In general, all agreed there are a multitude of buildings that will need to fill their vacancies before the market will see much growth in the area of new commercial construction. But the vacancies may not be where you might expect, and there are new opportunities out there for existing structures.

In particular, there are big changes in store for office space. Many vacancies remain, in part because the face of office design is changing. Compared to previous generations, the millennial workforce has different expectations for a work environment. (Read our Executive Focal Point discussion on changing workforce trends.) Accordingly, companies are looking to provide more collaborative and openly designed spaces, making traditional office spaces less attractive. The younger workforce also wants to both work and play in urban areas, making large company moves to the suburbs less desirable than in previous years.

Another trend in office properties is maximizing space. Companies are gravitating toward the practice of “hoteling,” in which employees essentially “time-share” their offices to be more efficient. Companies also seem to be cutting cubicle space, by approximately 100 sq. ft. per employee in some cases, and ultimately requiring less space to lease.

As a result of these trends, as well as slower-than-desired economic growth and low rents, owners will continue to be challenged in the near future to fully occupy and profit from traditional office properties.

Conversely, the panel agreed that things are looking up for industrial real estate properties. These properties were the first to rebound from the economic recession of 2008, and are experiencing relatively low vacancy and high absorption rates.

One factor leading to a stronger recovery in this area is an interesting trend related to internet sales. While internet sales traditionally hurt the revenue of brick-and-mortar plaza shops, the giant warehouses built to house inventory for internet sales is turning into a positive. Many of the warehouses are popping up in urban areas, occupying some of the available industrial properties.

One important point to mention, regardless of the state of the market or whether you are an owner of office or industrial properties, there are generally tax opportunities to be found. For example, on the industrial side, many properties in blighted urban areas may qualify for tax credits such as the New Market Tax Credit Program. Investors making capital investments into qualified low income and distressed communities can realize significant savings. For harder to repurpose office buildings, if the proposed Vacant Industrial Tax Credit, currently in committee, is passed, it could provide tax incentives to office property owners. And for any real estate enterprise, or other companies for that matter, there are always federal and state tax incentives for building your workforce or buying new assets. (Read more on current workforce incentives.)

The takeaway? The real estate market, while in flux, still provides opportunities for those looking closely.

Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.