Change is in the Air, but Not on the Ground
Change has been the driving force for the last six months, including change in how we work, how we shop and dine out, and in what we wear. But, change is not everywhere. Long-term fundamentals that drive real estate development and investment remain unchanged.
Contrary to popular headlines, office space will remain in demand. Yes, employees will want more flexibility, and yes, employers will need to rethink how they use their space. But, office developers and owners were adjusting to flexible work environments after the Great Recession and will continue to do so successfully.
Why will office space remain in demand? Employees prefer an office environment because it provides the structure, culture, comradery and mentorship they seek. It is where they can feel a part of a team, know what is expected of them and feel like they have made a difference. This is especially true for millennials and Gen Z, who are perceived to be the most productive on a flexible basis but expected to demand the benefits of the office environment as they chart a career path.
Similarly, the evolution in retail has not changed, just accelerated. Successful retail will continue to be uses that cannot be replicated online, primarily auto-centric uses and experimental uses. While experimental uses are impacted now, they will thrive again once we can return to our natural social selves, both at home and at work. In addition, the market shake-up in traditional retail brands will create space for new ingenuity, creativity and brands that will occupy retail spaces in ways we cannot anticipate today.
The dynamics driving (or inhibiting) residential construction remain unchanged. For-sale housing prices remain difficult to attain for millennials and Gen Zers, who will dominate the housing market for years to come. Both generations must contend with larger educational debts than prior generations, and both will have entered the workforce during a major economic recession, with millennials set back by two major recessions. A recent Washington Post analysis found that millennials will experience the lowest economic growth of any generation, ever; the Post referred to millennials as the unluckiest generation in U.S. history.
Building middle-market housing at attainable pricing remains challenging. The cost of new housing is dictated by the cost of land, labor (including materials) and laws, while the market sets the cost of land and labor (including materials). The cost that can be controlled comes from the laws and regulations. Our housing developers will continue to need the cooperation of local government to find more efficient ways to regulate the use of land and help nurses, police officers, teachers and young professionals to buy and begin generating wealth.
As a result, the demand for multifamily living properties will not change. Every time a local official asks our office whether we have enough multifamily units, we direct them to this economic fact about the future consumers of housing and the barriers created by land use regulation to middle-market housing.
Greater density remains the solution since greater density drives down the cost that a user must absorb. This provides greater flexibility to meet and supply the changing needs in the office and retail sector. This provides the ability to deliver housing units priced for the middle market in compact neighborhoods where additional daily expenses can be minimized through pedestrian activity or by bringing middle market housing supply closer to employment centers. These underlying fundamentals will continue to drive real estate developers and investors to mixed use projects. By continuing to pursue mixed-use projects, real estate developers and investors will continue to provide the living environment that the millennials and Gen Z will seek with the resources available to them. They will also capture demand from empty-nester boomers who want to downsize. Change may be in the air today, but density and mixing of uses will be part of our commercial real estate industry for years to come.
Jeffrey P. Geiger is an attorney with Hirschler Law in Richmond. He counsels developers, businesses, institutions and landowners in zoning and land use approvals, as well as deal structure, contract negotiations, development and redevelopment, financing and dispositions through sales or leasing. He may be reached at jgeiger@hirschlerlaw.com.
