Commercial Real Estate is . . . People

When seeking out the best commercial real estate opportunities, investors examine many factors. These include pro formas, supply, market and economic conditions and the condition of the property. A recent video released by Marcus & Millichap also said that examining people and their behaviors is important when making the right investment decisions.

In “How Changing Behavior is Reshaping CRE,” Marcus & Millichap Senior Vice President, National Director Research and Advisory Services John Chang explained that, for example, when analyzing office properties, it’s essential to examine how many office-using jobs are being created, as well as “what’s happening with remote work.”

In the Recent Past

Then Chang analyzed “people behavior” during and after the pandemic. On the one hand, urban areas shut down as most office workers worked from home. On the other hand “this requirement actually created an opportunity where many households chose where to live based on personal preference, rather than where their job is,” Chang noted.

This, in turn, led to significant out-migrations from places like Chicago, Los Angeles, New York and San Francisco, during which the combined average of people moving from these urban areas was 120,000 per month during 2020 and 2021. At the same time, the Sunbelt cities received much of this population. “Real estate investors and developers quickly went to work in Sunbelt markets across Florida, Texas and Arizona,” Chang said. He added that the total housing stock in Austin grew by 14% between 2020 and 2023, while Nashville reported growth of 12.8% and Charlotte, NC and Salt Lake City’s stock increased by 6.6%.

This prompted growth in other property types, including retail centers, warehouses and office space. The result?

Change is Coming

“In 2024, cities like Austin, Las Vegas, Nashville, Phoenix and Charlotte will lead the nation in total commercial real estate completions as a percentage of existing inventory,” Chang said. “Meanwhile, metros including Los Angeles, the Bay Area, Chicago, Cleveland, and Portland experienced limited construction.”

Things are in the process of shifting. Change explained that migration to the Sunbelt is slowing while move-outs from the major urban cores are dwindling. “This could create some significant opportunities for commercial real estate investors,” Chang pointed out. “The performance of commercial real estate is driven by both supply and demand.”

While Sunbelt markets increased development to meet the surging population base, northern cities slowed things down. Due to timing lags and time-to-complete from planning to occupancy, “some of the Sunbelt markets will likely overshoot short-term demand,” Chang observed. As such, it could take some time to absorb that excess space. But it could be good news for investors eyeing those cities that had been losing population and cutting back on development during and in the immediate aftermath of the pandemic.

In addition to analyzing property conditions, economics and markets, Chang advised viewers to consider timing lags and the overall disconnect between population migration and development when considering investments.

“When we, as investors, evaluate real estate, it reaches far beyond the property itself,” he added. “We have to take a more holistic perspective that considers who will use the real estate and why.”