Trends in Commercial Real Estate Asset Classes

☠️ Retail is DEAD….. 𝐫𝐢𝐠𝐡𝐭? ❌ Wrong. 🏢 I have been navigating the Retail CRE Landscape for 6 years now, here’s what I’ve learned: 1️⃣ In the dynamic world of Commercial Real Estate (CRE), retail shopping centers stand as a misunderstood product type, especially for investors new to this space. ▶️ Despite challenges like rising costs and changing consumer spending habits, the U.S. retail sector has shown remarkable resilience and growth in 2023. 📈Retail space occupancy has surged to historical highs. The third quarter of 2023 alone saw an increase in demand for retail space by nearly 15 million square feet, marking the 11th consecutive quarter of positive occupancy growth. 📉 Simultaneously, the amount of vacant retail space plummeted to the lowest since the pre-Great Recession era. 2️⃣ Key Drivers of Demand: A diverse range of sectors is fueling this demand. Food and beverage, fitness, experiential retail, discount stores, health and beauty, and medical services are all expanding rapidly. They benefit from a consumer pivot towards value, wellness, and experiences. ❗️However, more than a decade of limited construction, coupled with consistent demand growth, has led to a scarcity of high-quality retail spaces in prime and even secondary corridors in the U.S. 3️⃣ Trends in Demand and Property Types: Despite a slight deceleration, retail demand has increased by over 69 million square feet in the last four quarters. 👉🏽Retailers are showing a preference for efficient spaces in proximity to consumers, resulting in significant demand for freestanding or neighborhood retail properties. ‼️ These property types accounted for a staggering 95% of all retail demand growth over the past year. 4️⃣ The Divergence in the Mall Segment - The mall segment presents a more nuanced picture. Demand for space in lower-rated malls has declined significantly, with a 4 million square foot drop over the past year. There’s a clear division in the mall sector – lower-rated malls are losing tenants, while luxury and top-rated malls are gaining them. Since 2017, demand for space in lower-rated malls has decreased by over 45 million square feet and is expected to decline further in 2024. 💥For new investors in CRE, especially in the retail shopping center segment, these trends present unique opportunitie. 📝Investing in retail CRE requires a nuanced approach, considering both the macroeconomic landscape and localized market dynamics. It’s not just about the space but about predicting where and how consumers want to interact with physical retail. ❓ 𝐀𝐧𝐲 𝐦𝐲𝐭𝐡𝐬 𝐲𝐨𝐮’𝐝 𝐥𝐢𝐤𝐞 𝐦𝐞 𝐭𝐨 (𝐚𝐭𝐭𝐞𝐦𝐩𝐭) 𝐭𝐨 𝐛𝐮𝐬𝐭 𝐚𝐛𝐨𝐮𝐭 𝐫𝐞𝐭𝐚𝐢𝐥 𝐂𝐑𝐄? 𝐃𝐫𝐨𝐩 𝐭𝐡𝐞𝐦 𝐛𝐞𝐥𝐨𝐰 👇🏾 Tagging some of my retail friends! Kevin Fickle Benjamin Kogut Spencer Strong Dan Lewkowicz Barry Wolfe #retail #NNN #commercialrealestate #realestateinvesting

Generally speaking people love the industrial real estate asset class compared to the others because: - The buildings are bullet proof. They are concrete boxes that last for many, many decades with minimal maintenance. - Tenant improvement costs are VERY low, especially compared to office and retail. Not uncommon that TI’s for an industrial tenant are $0.50 - $3 psf. Compare that to office tenants who often need $50 - $150 per SF. Not a typo. - Very little CapEx exposure. Roof, HVAC and parking lot are the main ones. - Easy to manage. NNN leases are common with tenants maintaining HVAC, roof membrane, all doors and windows, landscaping, etc. Landlords typically commit to maintaining only the foundation and walls and structure of the roof. - Strong credit tenants. The e-commerce trend has pushed all major corporations into this space. E-commerce as a percentage of overall retail sales has increased about 1% a year for the last 20 years. Many believe we are only in the fourth or fifth inning of this game which bodes well for demand long term. - Supply is becoming increasingly limited. Older established markets have an aging supply. In Los Angeles close to 60% of the buildings are over 45 years old. The features of these buildings don’t work well for modern tenants. - Supply is further tightened because of NIMBY-ism and stricter local zoning regulations making it harder for developers to build new industrial. Everyone wants their package delivered in two hours but no one wants the warehouse in their town. Ironic. - When you own industrial you typically control a large chunk of land, especially compared to dense office or multi-family properties. For the same price of a 15 story office building on one acre of land you can have a 300k SF warehouse on 15 acres. Long term, you want to control the land. More options, more real estate, more wealth. Long live the mighty warehouse.

I know, most commercial real estate professionals rarely think about the relationship between Treasury yields and the dollar. But my podcast guests are repeatedly bringing it up because that relationship, once a reliable signal of market confidence, is now acting strangely, and the implications for CRE are real. Normally, rising yields mean a strong economy, attracting foreign capital and strengthening the dollar. But today, yields are rising while the dollar weakens. The shift follows a wave of bold policy moves out of Washington – tariffs among them – and has raised questions about fiscal discipline, Fed independence, institutional integrity, rule of law, and long-term U.S. credibility. Markets aren’t reacting to strength they’re reacting to uncertainty and for CRE, that uncertainty is beginning to reprice capital, risk, and investor behavior. 1. Yields are rising for the wrong reasons - Higher yields typically mean economic growth which is a positive for CRE. - Now they reflect political and fiscal risk. - For a debt-heavy asset class (CRE), that’s a problem. - Borrowing costs rise, but fundamentals don’t improve. 2. Dollar weakness without trust is a negative - A weaker dollar can draw foreign buyers if confidence holds. - But when the decline signals instability, foreign capital pulls back. - Less liquidity. - Fewer cross-border bids. - Lower pricing support. (I talked about this aspect yesterday, here: https://lnkd.in/d66QNDnb ) 3. Portfolio hedges are breaking down - Treasuries and the dollar have long been safe havens. - If both look shaky, allocators may reduce U.S. risk including in CRE. - When even these safest, most liquid assets stop acting safe, illiquid assets like CRE face sharper scrutiny and higher return demands (lower prices). 4. U.S. starts to look like an 'emerging' economy - The cost to insure against a U.S. government default is now similar to what it costs for countries like Italy - That’s a big deal. - Why? Because trust in the U.S. government is the foundation for how risk is priced, including in commercial real estate. - If that trust slips, even the safest, most stable CRE deals start to look riskier requiring repricing. Bottom Line: This isn’t a blip. It’s a shift in how global capital views the U.S. and by extension, CRE. Expect: * Higher financing costs * Lower valuations * Weaker foreign demand * Tighter underwriting assumptions Until policy clarity and institutional trust are restored, CRE will need to adapt to a more volatile funding environment. *** Tomorrow I discuss these factors - and many more impacting the commercial real estate industry - with John Chang, SVP, National Director, Marcus & Millichap, Research & Advisory Services. Get priority access to the conversation and detailed analysis via my newsletter - subscribe at the top of my profile here, Adam Gower Ph.D.

What’s Working in Retail & Restaurant Real Estate Today? Retail and restaurant demand hasn’t slowed, It’s just more intentional today. In Madison, tenants, landlords, and investors are shifting focus from "more" to "smarter." ✅ Location is layered. Foot traffic still counts, but savvy operators are also looking at daytime population, neighborhood demographics, and synergy with nearby businesses. ✅ Functionality over flash. Infrastructure readiness is a deal-maker. Looks are great, but operations pay the bills. ✅ Smaller footprints, smarter growth. We’re seeing fewer oversized flagship stores. Instead, successful concepts are choosing smaller, strategically placed storefronts that match their brand and build loyalty. ✅ Deal terms are part of the equation. Spaces that work financially and functionally create long-term success for everyone. The takeaway? A good location gets attention. But an aligned location gets results. Planning a retail move in Madison? What trends are you seeing on the ground? ABSTRACT Commercial Real Estate #CommercialRealEstate #BusinessGrowth #PropertyInvestment

📉 Retail is changing fast—are property owners and investors keeping up? Consumers are making more value-conscious decisions than ever, and big brands like PepsiCo, Estée Lauder, and The Clorox Company are responding by restructuring product sizes, pricing strategies, and brand positioning. 🔹 Retailers are downsizing footprints to match shifting demand. 🔹 Shopping centers need a tenant mix balancing discount + experience-based brands. 🔹 Grocery and discount retailers are gaining ground as spending shifts. 🔹 Experiential retail & food concepts are replacing traditional tenants. 🔹 Last-mile distribution & logistics space is in higher demand. 💡 What does this mean for commercial real estate? ✔️ Retail leasing strategies need to evolve. ✔️ Landlords must rethink space optimization. ✔️ Investors should focus on necessity-based retail and flexible leasing. 🚀 The retail real estate game is shifting. Are you ready? 💬 What trends are you seeing? Drop your insights below! 👇 #RetailTrends #CommercialRealEstate #ConsumerBehavior