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Another new year is upon us and, as we do every year, we will look back at the past twelve months and marvel at the swiftness with which they raced by. However, rather than being taken aback by this perpetual occurrence, perhaps it is vital to accept that a year is actually not that long a span of time to begin with.

Through this lens, the upward statistical trends that commercial real estate experienced in 2013 may just be the beginning of strong momentum in 2014 and beyond. This idea is supported through research in a recent article from the Wall Street Journal.

Investment & Leasing Markets

The expectation is that investment sales in the commercial real estate sector will continue to grow in volume through 2014. In 2013, lending actually began to accelerate once again after having stalled in recent years. This along with an increased volume of money flowing to the asset class attributed to the recovery of investment sales. The ball is expected to keep rolling in the coming months and the expectation for 2014 is 10 percent year-over-year growth.

For the most part, the leasing market in the past year has been flat. This has certainly led to some worries of a gap between investment and leasing. However, there are a few indicators that leasing will soon be tipping in the right direction, none the least of which is the strong improvements in occupier sentiment. Corporate profitability is also soaring, specifically in the retail sector where large retailers are having their best year since 2010.

Office Market

We recently discussed the snail-like pace of the office market, but this is a sector that is tied heavily to the tech and energy industries. As those sectors continue their economic growth, we can also expect the office market to make a marked improvement in the coming year. Forecasters expect office rents to grow at about 5.5 percent. Despite this increase, trends in construction are expected to be below average until around 2015. However, in tech and energy heavy geographies, progress is clearly on the horizon for the office market.

Other Factors

Once again, the millennial generation will play a critical role in the improvement that we do or do not see in the coming year. As we know, this demographic holds a special place in their heart for urban environments. Most would project activity to continue to increase in these areas, but this does not spell doom and gloom for the suburbs, though we do expect them to adjust accordingly.

Most importantly, 2014 should see a genuine increase in demand, which is the most important factor for generating sales. The labor market has seen a long and steady pace of moderate monthly job growth. As a result, most industries have recouped job losses from the recession and demand is ready to be stimulated once again.

Lastly, a key contributing factor to the growth in commercial real estate is the accelerated growth in housing. Though the housing market has steadied in the past couple of months, experts had been waiting for a recovery like we saw in 2013 for several years. Continued growth in housing during 2014 will lead to more development, lending, retail and jobs growth.


Over the summer statistics pointed to South Americans as the heroes in the South Florida real estate market. However, recently it seems that cash-buyers from down south may have some competition in the northeast. That’s right, the new boon to the Miami market is coming from the Big Apple.

Brokers in the area have reported a 25 percent uptick in purchases from New Yorkers. Our northeast neighbors are now competing with foreign investors for prime Miami real estate and, in many cases, are willing to pay more. The main reason? Their lack of sensitivity to rising prices in the area. New York is widely known as one of the most expensive markets in the country, giving residents of the state a thick skin for the prices in Miami’s luxury markets.

New York is now the largest feeder market for South Florida. As a matter of fact, New Yorkers have accounted for approximately 15 percent of sales in the luxury real estate market this year. Luxurious condos in Brickell are seen as a bargain in comparison to Manhattan prices.

Purchasing real estate in Miami has tremendous benefits for New Yorkers, as well. The main bonus for these buyers is the opportunity to escape their rising state taxes and head on down to Florida, where there is no state income tax . Setting up shop in South Florida has become a great way for high earners from New York to save a ton of extra cash, making it so that these luxury condos practically pay for themselves.

Of course, New Yorkers do not have to sacrifice much culturally when making the move to Miami, either. Like New York, Miami has no lack of places to visit or events to take part in. Specifically, the rising Wynwood art scene and multiple cultural festivals make for an easy sell to prospective buyers looking for the New York lifestyle.

With their low sensitivity to Miami’s beachfront prices and their desire to escape burdensome income tax, New Yorkers are making the transition without missing a beat. With buyers coming from both foreign and domestic regions, the Miami-Dade market is on the rise.

“Let our advance worrying become advance thinking and planning.”

-Winston Churchill

The rise of e-commerce should not give those in the commercial real estate sector any cause for worry. It should, however, give them plenty of cause for planning. The progress of online sales is real and it is rapid, but with a bit of help from data and common sense, it is clear that future strategies are beginning to take shape. After all, a cosmic shift in the business we do will only naturally affect the way we do business.

The Rise of E-Commerce

After averaging annual gains of around 10 percent during the previous decade, e-commerce soared out of the gates once the ‘Great Recession’ came to a close. In 2010, as overall retail sales grew by 5.6 percent, online sales saw an increase of 15.3 percent.

Last year, online sales experienced more rapid upward movement, increasing by 16.3 percent while overall retail saw a 5.1 percent increase. Even with these figures calculated in, e-commerce only accounts for roughly 6 percent of all retail sales. However, a study performed by Deloitte predicts that number reaching 30 percent by 2030.

The commercial real estate sector is still seeing sustainable growth despite these facts, with new retail units expecting to increase by 9 percent this year. This number, however, is bolstered by the restaurant sector, which will account for 43 percent of the planned growth. Some areas such as apparel, bookstores and other mid-priced hard goods are seeing large declines in their planned units due to competition with e-commerce.

The Future of Commercial Real Estate

The first thing that commercial real estate professionals should do is make sure to understand that the sky is not falling. The brick and mortar shopping experience is not at any risk of extinction and the e-commerce share of retail sales is not expected to go much further past 30 percent. Understanding this, the e-commerce shift in retail should be seen as an opportunity.

Industrial investors should prepare to handle a tidal wave of demand for distribution centers. The size of bulk warehouses are ever-increasing due to retailers like Amazon, which are in need of many distribution centers due to their exclusively online presence. These bulk warehouses will likely provide a boost by way of new industrial demand.

On the retail front, focus will shift away from mid-priced hard goods and towards sectors that do not need to compete with e-commerce. This means that restaurants, grocers, and service-based retailers will drive the future of commercial real estate. Instead of counting on large flagship apparel stores, successful shopping centers will be anchored by entertainment and dining establishments.

The future of the industry is still as bright as ever, but there is plenty of work to be done. Those who fail to plan are indeed planning to fail, but there is certainly a great amount to be gained from engaging in sound strategic thinking. In the end, those who display the dedication to adjusting with the times may have their best days ahead of them.

In the United States, office occupancy growth and rental rates saw some progress in the 2nd quarter. Office rents experienced a 2 percent increase in the first half of the year. While still not ideal, it is more momentum than was seen in the first half of 2012 when rents increased by 1.7 percent. The increase in rent should lead to stronger net operating income for investors in office properties as leases expire and are renegotiated at the current higher rates.

National office vacancy also inched closer to 12 percent in the previous quarter. On a more local level, 61 percent of U.S. submarkets have seen a decline in vacancy rates. Over the past year, national vacancy has moved from 12.7 percent to it’s current state at 12.1 percent. The positive news is that it is heading in the right direction, closer to the 11 percent mark needed for a healthy office vacancy rate. However, at the current pace, most forecasters do not expect that mark to be reached until around 2016.

On the downside, there are also several negative indicators for the office market. For example, the historically low rates of new office construction, which most believe are assisting in the decline of the national vacancy rates. Once the demolition of obsolete office space is factored in, net office completion only grew by 5 million square feet or 0.06 percent of nationwide office inventory. Demolition of office space is also playing a role in the decline. The country has seen a decrease of 80 million square feet in office inventory.

If the office market does see a pick up in activity any time soon, the key factor will end up being the jobs recovery. While corporate profits have seen all-time highs, companies have been adding more workers, which means that they will soon need to start leasing more space. An initial worry we had when discussing the challenges of the office market was that the modern worker would not commute to an office, but instead work from home as an independent contractor. For now, however, office-using employment growth has been outperforming the results of the broader job market.

For more on the current office market, take a look at this piece by Mark Heschmey in which he discusses some road blocks to closing deals on office investment properties.

We’ve been discussing it for months, if not years, and now it seems to all be coming to fruition. The Miami-Dade real estate market is well on it’s way to soaring past pre-recession peaks and setting it’s eyes on historic highs. It is certainly a very exciting time to be living this city, and an incredibly opportunistic time to be working in the development, construction, or real-estate sectors.

Leading the way in this boom is the downtown area, as we have discussed previously. The Real Deal South Florida reports that out of the 23,000 condos built in the area from 2003 to 2012, 93 percent have been sold. This has led to a dramatic increase in assessed property values (6.4 percent) and asking prices, but also an inventory crunch. Not to worry, developers have gracefully accepted the challenge. There are currently 5,500 condo units planned for development in downtown Miami.

However, other areas have assisted in making Miami-Dade one of the most attractive counties for real-estate investment in the country. Jade Signature in Sunny Isles, from our very own Fortune International, is one of the most breathtaking developments in South Florida. Designed by the famed architecture team, Herzog & de Meuron, the latest Jade project has already surpassed $300 million in sales. Miami Today also recently sang praises for the Coconut Grove area, where condos and single-family residences are primed to reach new peaks. The luxurious Grove at Grand Bay is the most appealing of many new preconstruction projects in the area.

This has all, of course, led to an increase in economic activity and tax revenue for the city of Miami. The Miami Herald recently reported that property-tax rolls have increased by 3.39 percent in 2013, marking the second consecutive year of growth. With a higher tax base, the city can expect government downsizing to slow down and taxpayers will in-turn see more bang for their buck.

However, one must always account for negative indicators, as well. This boom is not being felt, for example, in Florida City, where taxable value has decreased by 5.58 percent. Hialeah has also seen their rolls decrease by 3.5 percent, though that could be attributed to a new homestead exemption for low-income seniors. Even areas such as downtown, where values are skyrocketing, run the risk of growing too quickly and pricing too many people out of the market.

Overall, the news is too optimistic to end on a negative note. So, in that case, let’s enjoy this awe-inspiring preview video of Fortune International’s Jade Signature:

Jade Signature Sneak Peek Video from Jade Signature on Vimeo.

Legislation was recently proposed to phase out the Florida commercial lease sales tax by 2019, but died in committee without ever seeing a vote. The tax generates $1.2 billion a year for the state and opponents of the legislation argue that the loss of these revenues would be a tremendous hit that would result in the cutback of public services.

However, there is a steep argument to be made in favor of phasing out the commercial lease sales tax, beginning with the fact that Florida is the only state to impose a statewide sales tax on these transactions. While many states have local or county taxes on commercial leases, Florida has made the tax a state law. Phasing out the statewide tax would make it easier for Florida to compete with other states for commercial tenants.


The Florida Capitol, legislation to phase out the statewide commercial lease sales tax recently died in committee

The statewide tax is six percent on commercial rents, though the law gives counties the option to increase the tax by one percent. Miami-Dade is one of the counties that chooses to enact the tax hike, increasing rent prices as a result. Tax relief for the commercial markets would create opportunities to add to the development boom currently taking place in Dade County, attracting more tenants from across the country.

If the tax were to be phased out, one of two things would happen. Landlords would be able to collect a higher rent, boosting commission for commercial agents and brokers. The other possibility is that landlords would lower the cost of rent, attracting new tenants that would be left with extra money in their pockets to hire workers. Either scenario would be a big win for the Florida real estate market and economy as a whole.

Were the current recovery of the Florida real estate market to slow down due to the affects of the commercial lease sales tax, state budgets would see less revenue and be forced to make cutbacks to public services in the long run. Therefore, the argument that the Florida state budget would suffer from the tax relief is rather short-sighted given the many positive effects that the new flow of commercial tenants would have for the state economy.

It would be wise for the state legislature to actually have a serious discussion about the commercial lease sales tax during the next legislative session.


As U.S. chain retailers absorb the lessons of the Great Recession, many big-box chains have started to shrink average store footprints to reflect the growing importance of multi-channel shopping, adapt to urban settings and recognize the need to optimize portfolios.

Wal-Mart Stores Inc., Target Corp., Best Buy Co. Inc. and Gap Inc., among others, all have small concepts in the works or are adapting existing ones. These smaller store formats should allow the retailers to maximize profitability and open more stores in closer proximity to each other, say three retail consultants and a retail real estate broker Retail Traffic spoke to.

Wal-Mart Stores and Target have been the most high-profile examples of this trend.

To view a gallery of eight chains emphasizing smaller concepts, click here.

In 2011, Wal-Mart Stores plans to open between 30 and 40 smaller format stores, representing a combination of its Walmart Market and Walmart Express units, according to a company spokesman. Walmart Express stores will measure up to 30,000 square feet and will focus on grocery products and a limited selection of general merchandise. The company is already working on two Walmart Express stores in Chicago and three in Northwest Arkansas.

Walmart Market stores, a rebranded version of Walmart Neighborhood Markets, average 40,000 square feet in size and concentrate on grocery products.

Meanwhile, on Feb. 15, Target Corp. unveiled its CityTarget concept, with stores ranging from 60,000 square feet to 100,000 square feet. Full-line Target stores range from 128,000 square feet to 135,000 square feet.

The CityTarget stores will carry a reduced, optimized product selection and will be located in densely populated urban markets—the company is looking at a minimum of 50,000 people living within two miles of the stores, according to a Target spokesperson. Target plans to open four CityTarget stores in 2012, in Chicago, Los Angeles, Seattle and San Francisco, and is exploring opportunities in additional areas of the country.

“Based on extensive research, we knew that our brand was very appealing to an urban demographic,” says Target’s spokesperson. “So we had a goal to better reach those urban areas and what’s really great is the flexibility of this format.”

The turn towards smaller, urban stores also comes at a time when the outlook for power centers remains clouded, providing further impetus for big-box chains to diversify real estate strategies.

On March 24, during its fourth quarter 2010 earnings call with analysts, executives with the electronics chain Best Buy talked about how at the same time that the company is slowing growth in the big-box segment, it will step up expansion of its smaller Best Buy Mobile stores. In 2011, the retailer plans to open 150 mobile stores, giving it a total of 325 by the end of the year. Best Buy Mobile stores range from 1,300 square feet to 3,000 square feet, a fraction of full-line Best Buy stores, which range from 20,000 square feet to 45,000 square feet in size.

Meanwhile, Gap Inc. is shrinking the average size of its Old Navy stores from about 25,000 square feet to approximately 10,000 square feet, according to Ivan L. Friedman, president and CEO of RCS Real Estate Advisors, a New York City-based retail real estate consulting firm. In addition, many supermarket chains, including Giant Eagle, Trader Joe’s, Publix and Fresh Market, have been pursuing smaller formats for several years now.

And last year, the Sports Authority launched a smaller, more upscale concept called S.A. Elite. S.A. Elite stores will range from 12,000 square feet to 15,000 square feet and will focus on higher-end products from many of the same brands found at full-line Sports Authority stores. The company plans to pursue locations on urban streets and in high-end malls for this new concept. Full-line Sports Authority stores are about 40,000 square feet.

“Retailers looking for smaller footprints has been a trend since the recession started,” says Cynthia Groves, senior managing director of global corporate services with Newmark Knight Frank, a real estate services firm. “From a real estate perspective, what’s important to a retailer is they have to make their sales per square foot. The recession made them realize that they can get by with smaller square footage and have strong sales as a result.”

Bang for your buck

Many chain store operators have taken a cue from Apple Inc.’s successful retail operation, says Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York City-based retail consulting and investment banking firm. Even in the midst of the worst retailing year in recent history in 2009, Apple’s stores, which average 6,000 square feet and are located primarily in high-end malls and on high traffic urban thoroughfares, reported average sales of several thousand dollars per square foot.

What’s more, Apple’s strategy of stocking only a limited number of products in its physical stores has helped reduce its real estate costs and created synergy between its brick-and-mortar and online sales channels, Davidowitz notes. Customers come to Apple’s physical locations to test-drive new gadgets, but they then have the option to get items shipped to them directly from Apple’s warehouses. This helps drive business both in-store and on the web, a critical goal for many retailers today, according to Groves.

In addition, the discounters Wal-Mart and Target face increasing competition from the dollar store chains, many of which already operate smaller stores in urban markets and are able to beat the giants on productivity, he adds.

“What these big retailers realized is that these smaller stores are more convenient and the economics of running them are better,” Davidowitz says. “With a scaled-down selection, you can get a huge return on investment, mainly because of lower expenses and lower investment in each store.”

Part of the rationale for expanding through smaller units has been logistics—it would be virtually impossible to find 200,000 contiguous square feet of retail space in the middle of Manhattan, so big-box chains have no choice but to downsize to enter certain markets.

But another benefit of operating smaller stores is that the strategy allows a retailer to potentially open more stores within the same trade area, promoting its brand, according to Matt Winn, managing director of retail consulting with Cushman & Wakefield, a commercial real estate services firm. Since the smaller units can carry only a limited selection of merchandise, retailers can cut down on cannibalization by stocking up on different products in stores that are located in close proximity.

“Depending on the concept, that could be a very smart strategy because it allows people, as they think of your brand, to see that you are on the next corner,” Winn notes.

Cost vs. return

Smaller stores might not necessarily translate into lower real estate costs, however. In many of the urban markets the retailers are targeting, including New York, Chicago and Los Angeles, the sky-high rents per square foot will likely minimize any savings on overall real estate costs, Friedman says. A smaller specialty retailer might be able to save on common area maintenance (CAM) charges by opening smaller stores, but big box anchor tenants like Target and Wal-Mart normally pay rents based on percentage of sales and would not realize significant savings by pursuing smaller units in large cities.

Instead, the name of the game will be sales productivity. Locations in high density urban markets draw tremendous foot traffic, Friedman notes. The combination of smaller footprint and higher traffic should help drive average sales per square foot.

“If you have that much traffic, you can afford those astronomical rents,” Friedman says.

The challenge is that many of the big-box operators have limited experience opening stores in urban markets. Their strategy up till now has been cookie-cutter, notes Davidowitz—most are used to operating stores in formats with very clearly defined square footage and layout criteria. In cities like New York, that will no longer be possible. The retailers will have to adjust to working with a multitude of different layouts and size configurations, to devote more time to securing zoning permits and to coexist with non-retail co-tenants. What’s more, site selection will have to be much more precise than it has been for multi-tenant suburban shopping centers.

“Urban real estate requires a whole different mindset,” Davidowitz says. “The whole idea of ‘I am going to get an exact prototype,’ which is the way chain stores have always grown, is out the window. Your position on the block can make or break you in New York and which corner you are on can make a difference of 25 percent in your sales. Urban real estate is a whole new world, which they are going to have to learn.”