Jim Pederson, former Arizona gubernatorial candidate and successful Phoenix shopping center developer, began the four-hour commercial real estate forecast I attended today by talking about the “beginner’s mind,” Zen Buddhism, and Steve Jobs. The current real estate market, he continued, requires practitioners to go outside their own professional community and gain insights from people on the “outside,” including children.
I’ll say. A bit later in the forecast, the moderator of a panel on retail asked the audience (hundred of brokers, agents, and developers) whether they had bought anything online this past year, and very few hands went up. No wonder Pederson said the real estate profession should look outside; the audience acted as though they thought Amazon was going to go away once buyers had to pay sales tax. There was little mention of show rooming, same-day delivery, free shipping with Prime, or superior online customer experience.
Pederson, among the oldest guys in the room, seemed to be the only person who had been to an Apple store, too. He marveled at the crowds and the energy, contrasting it with Best Buy, where even the few salespeople on the floor did not know the answers to most consumer questions. To be fair, Best Buy has many more SKUs than Apple, but at least long lines at the checkout stations could be replaced by an app like the one Apple uses to allow customers to grab their merchandise and check themselves out using their iTunes passwords and credit card information.
There’s still not enough appreciation that the digital experience has changed real estate altogether, although the people on the panels seemed to get this. There were three panels: one on retail, one on land and transportation, and one on commercial, industrial, and finance. To a person, they noted that while the market appeared to be “settling” or “improving,” they couldn’t predict where it was going, and few generalizations could be made. Some markets (the East Valley) were good, while others (downtown) still appeared stalled. But although there were many theories as to why some areas are better and some not, the general sense of the profession is that there’s little transparency in the market. Is there an overhang of several hundred million square feet in buildings that have been foreclosed on? What will happen to all the empty big box stores in older retail centers?
Although money is coming in to the market for construction projects, it’s mostly public money. Corporate financing sources and banks are still not lending. Thus, mom and pop stores can’t start or grow, though large franchises can. And the new anchor for shopping centers appears to be…Starbucks. Office buildings also appear to be permanently changed, because older buildings have real offices, and the younger generation of workers likes open collaborative space and cubicles. Many older buildings, like many older shopping centers with large expanses of asphalt will have to be redeveloped (probably torn down and rebuilt for another use). Shopping centers have totally changed: rather than lots of parking for a mall, we get green space and free-standing pads with parking right in front.
I find most of this amusing, because when I was active in the real estate market (up to 1996, when I sold Hardaway Marketing Services to Intel) I tried to tell everybody that structural changes were coming. I was met with disbelief and amusement.
Now it has come to pass. There’s less need for office. Retail has become experiential. Only industrial space seems to be plugging along in more familiar patterns.
No wonder bankers aren’t lending. There’s no way they can assess the risk in this turbulent market, a market that has always been saved by growth. Now, even if people do move here, and the housing market does show signs of growth (although that’s unclear because so many homes are owned by investors who bought hundreds of properties sight unseen during the recession), it will still take years to sort out where the jobs will come from and what retail is needed to augment online shopping. The one industry that think it will have jobs soon is construction, and we lost all of our subcontractors and construction workers during the recession as well. After what just happened, construction doesn’t seem like a safe place to be anymore, although in Arizona it traditionally absorbed young people without college educations. They’re learned their lessons.
One “bright” note. Guess where real estate is strongest? In Hispanic and low income communities, where people can’t buy online because they don’t have credit cards.