For the commercial real estate industry, 2016 was a banner year. The question on the minds of our panel of real estate executives is whether that growth can continue at the same pace into 2017--and beyond. With construction costs and interest rates on the rise, tenants and owners are becoming more conservative with their real estate footprint.
Cushman & Wakefield Commerce
The Boyer Company
Stack Real Estate
MARY ANN CALLISTER-DAY
Commercial Real Estate
St. John Properties
Wadsworth Development Group
Woodley Real Estate
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A special thank you to Brandon Duke, vice President, KeyBank Real Estate Capital, for Moderating the discussion.
Generally speaking, was 2016 a positive year for local commercial real estate market?
FIFE: We design and furnish commercial spaces and commercial businesses, and for us, 2016 was a fantastic year. We broke every record that we've had before. And 2017 is slated to be just as good. We've been lucky enough to start and work on the CHG corporate campus and several other large projects over the past two years. It's been a great thing for us to learn about the changing market, changing workspaces, and attracting and retaining the millennials and the workforce that's needed today.
FUGAL: I think 2016 was a historic year for all sectors of the market, perhaps the best year we've seen on record. Record new construction in Salt Lake and Utah County. And the absorption has never been more dynamic. But as we look to the future, I think all of us in this room are looking forward with a degree of caution based on changing velocity.
WADSWORTH: I'm out of the construction business and have been for a few years, but based on what I do know, construction was brisk last year. The biggest issue contractors have is finding people to manage the work. TIs and new building costs seem to increase. Price is going up. It's going to be a challenge for the owners going forward. And the pro forma, with the cost rising, it's a challenge to contractors to bring the people and the resources they need to meet the demand. So construction is on its way up and kind of hitting the top.
SHIELDS: I think 2016 was not necessarily the best year to be repping a lot of retail tenants. In certain categories we're fine, but it's very difficult to find a spot for your restaurant or for your retail shop because it's been tight. Toward the end of the year, as some new developments started to come online, it's loosened somewhat, but it continues to be a little bit of an issue. I've got a national restaurant group I'm bringing in from Dallas and they're a little particular and they want their first site to be a great site, and I think we finally have their first site landed after about a year and three months of looking.
Let's dovetail that in with the articles we're reading every day about retailers shuttering stores across the country.
SHIELDS: Most of the retail shuttering is concepts just going out of sync, such as department stores that have been around for a long time. We saw that in the early '80s, when the concept of the local department store disappeared. Castleton's, Auerbachs, the Paris Company, MaycofFs--they were institutions when I was growing up in this town and they all got swept away because they became functionally obsolete. Retail sales are actually very high; it's just that we're going through a concept change where people no longer shop at the places they used to shop at 20 years ago. And department store sales have gone down I think from $90 billion a year to $60 billion--and yet T.J. Maxx and Marshalls and those guys are doing great. So it's just different concepts.
MACK AY: We have an example of that. At Home in Sandy has a concept that's very different. It's still a big box but they use it completely differently. If you compare an At Home to a Home Goods--Home Goods tends to have a much smaller footprint. You go in and there is, like, one table, and if someone buys that table, then they have the warehouse ship out another table. At Home actually uses it's space partially in a warehouse configuration. So if you go into At Home, instead of having one table, they'll have five or six of them right at the space. So we are seeing that shift of how the space is used. Even though we have a tenant that's, in theory, a big-box tenant, they are using it in part as a warehouse facility, as kind of that last connection, instead of having a large warehouse.
SHIELDS: E-commerce is only about 10 percent of all retail sales right now, although it's expected to grow to 20 percent by 2030. That affects certain businesses--really, really hits them. Like the office supply business, paper and products, it's really hurt because of technology. But most of it is because the businesses are just functionally obsolete.
BALDERSON: Looking ahead 10 years, how things are going to change in retail is pretty substantial. Amazon is going to be rolling out grocery stores and virtual reality shopping, where you put on a headset and you are able to try on all the different outfits with just your eyes. That's going to change how people shop and how customers interact with Nordstrom and these other soft goods retailers; it's probably going to trigger a pretty big change.
How was 2016 for the industrial sector?
MACKAY: There are a couple of large projects that are under construction right now: the Post Cereal building that's being built on 56th West, and UPS is constructing a very large building that is going to be doing essentially last-mile distribution. So you really do start to see that fulfillment, that e-commerce driven demand.
In 2015 and the first part of 2016 there were several large buildings developed by five industrial developers in the community that were multitenant buildings. They were 300,000 or 400,000 square feet, but they were made for two, three, four different tenants. But we didn't see that space lease up as fast, so we ended up with a little bit of an overhang condition in 2016. And we didn't see the price support in 2016 that we thought we would see. We actually had some reversals on some of our pricing in rents on the industrial side if you weren't doing that big-box, single-tenant, build-to-suit.
We got some support on the really small-end, multitenant buildings where the tenants are about 10,000 square feet, but even that kind of got overbuilt. So even though we had really good numbers in 2016, the rents didn't reflect what we had hoped they would be. In 2017, as that space gets leased up, we may start to see some rent support in that big industrial stuff.
WILMART : CBRE...