Ingram's May 2023

Thought Leader Insights: Commercial Real Estate Trends

Q&A ... W ith A aron M esmer Office and retail space in Kansas City has weathered some long-term and recent storms, but the executive vice president for Block Real Estate Services sees reasons for optimism across the commercial-realty market here.

Q. In the current commercial real estate (CRE) landscape, Kansas City’s success with industrial and multi family has been well-documented; what is near- and mid-term expec tations for other markets, such as office and retail? A: They’re all related, but CRE covers four different primary property types, and each impacts the other. If your retail purchase is from an Amazon warehouse, for example, there is another a real-estate effect on industrial. There are a couple of factors that have played roles in retail and office that kind of make those less scary than everyone has been predicting. Certainly, I think the Class B and C office will struggle. The world has just changed in the way people use office space. I also think there’s a growing consensus among folks I talk to that there’s some benefit to having flexible working arrangements, but there are also times when you do need to get teams together in person to really communicate and do higher-level tasks that require more input. Q: What have you seen occur ring in the office market that makes Kansas City somewhat unique in the commercial realty space? A: Even before the pandemic, I think the new construction in the Kansas City office market was restricted to a certain degree by the “Sprint over hang.” A huge amount of space was coming available that scared most developers away from building specu lative office space. Now, you see the Cerner effect with the same result. I think that really slowed down our supply side more than if that had not been out there.

related travel restrictions last month, but the after-effects will be felt for years in commercial real estate, especially office. What are your expectations there? A: I think companies are still trying to figure things out; nobody is out there with a magic formula. It’s going to be dif ferent for each company as to what their culture and their work product requires. To use our company as an example, we can probably do monthly property accounting from anywhere. Collect the income, pay the bills and do the money monthly report on a property at home. Where you are matters less. However, to process a cost-segregation study, or to upgrade your tech on the back end, like integrating a new tool on your account ing software, for example, that’s hard to do remote. And it’s more difficult to train people remotely, for example. A: Well, there’s a lot of trial and error still going on. The world today looks different than it did in 2021. Some segments are growing rapidly, some are shrinking, some are stagnant with how they use space. Some are culture heavy, some not. The one thing I think I do know is that construction costs related to making big changes within office space, how you use it and map out dif ferent work stations, etc., has become very expensive. Q: The consequence of that being … A: People are trying to be very intentional about space planning. If they’re looking at a lease for five, seven or 10 years, they don’t want to spend $85 a square foot to redo a space and be stuck with something that doesn’t work for the next 10 years. That’s a bad bet. Q: What does that dynamic look like across the broader market?

If you miss on the short side and don’t have enough room, and they do want people to be back in the office, that’s as much of an issue as overbuilding and people not using that space the way you’d planned. Q: Any noticeable trends in office space usage? A: Some. We saw one group in a 20,000 square foot space downsize to 9,000, but when you look at what came they out of and what they moved into, the new space was much nicer, much more functional, and they had the ability to do what they needed to. We expect there will be more changes, with a disproportionate impact on the B and C office space, partly because the costs of tenant improvements are so high. If you can’t get Class A rent, it’s difficult to justify the costs of retrofitting the space. Q: Retail, of course, was in a trans- formation even before the pandemic, but has that all played out? A: There has been so much pub lished about its decline, and not many new stores or centers have been built, but if you look at the landscape, a lot of retail out there on 100 percent corners is actually pretty healthy. We’ve seen some retailers traditionally online start ing to study sticks-and-bricks locations. Q: That seems to be a signifi cant shift from the moves we’ve witnessed in favor of on-line retailer dominance. A: An article in The Wall Street Journal recently talked about Warby Parker, traditionally online, hoping to open up to 900 stores to go omnichan nel with delivery. Warby’s 200 stores today have already grown to make up about 60% of the company’s revenue,

Q: The U.S. lifted its pandemic-

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May 2023

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