Here are the commercial real estate trends that favor Arizona

More than a year after the pandemic began, which saw vaccines launch and injections of $ 1.9 trillion to help the US economy, the outlook is showing signs of general stabilization, albeit slowly. Nuveen Real Estate, a TIAA company, has released its second edition of RealAccess, a study of the impact of the health crisis on real estate investments that examines various commercial property trends that are profoundly affecting the built environment.

“Megatrends in demographics, technology and sustainability will continue to drive demand as generations age and move, and growth in sectors such as e-commerce and healthcare continues,” Carly Tripp, Nuveen Real Estate’s global chief investment officer, told Commercial Property Executive.

ACCELERATED MIGRATION TO SUN BELT CITIES

While the trend is not new, COVID-19 has accelerated it significantly. High density cities are losing ground to those with more space available, and preferred destinations are Arizona, Texas, and Florida.

Similarly, suburbs are more appealing to the aging millennial generation who now have kids and are looking for housing options that include more bedrooms, privacy, and a garden. In addition, the report’s authors predict that this population group will grow more than twice that of the general US population over the next decade.

Population growth in 25 largest metropolitan areas. Diagram courtesy of Nuveen Real Estate RealAccess

Meanwhile, the baby boomer generation is also aging, which is likely to fuel demand for senior housing – more than 65 percent of current inventory is 17 years or older, which increases the chances of development.

These migration patterns go beyond housing construction as population growth is significant in certain cities and put pressure on the demand for industrial fulfillment centers, health offices, grocery anchored retail stores, and others.

Not surprisingly, major employers are moving their headquarters to these areas from higher-priced cities, including Oracle, Hewlett Packard, and CBRE. As more people and businesses become rooted in the Sun Belt metropolises, the softer factors in these cities will also become more prominent, and wellbeing, culture and leisure will play an essential role in the demand for real estate.

HEALTHCARE REAL ESTATE ANSWERS TO THE TRANSFORMATION OF THE HEALTHCARE SYSTEM

Another aspect the report addresses is the growth of health care. Even before the pandemic, the sector was the fastest growing in the US economy, accounting for almost a fifth of GDP in 2019, according to OECD health statistics.

The global health crisis has not only boosted their performance, but has also brought some sub-sectors such as medical offices and life science centers to the fore. While the latter are critical to drug development, medical offices will remain in high demand as the authors believe that more care is provided outside of hospitals and that these facilities offer inexpensive facilities.

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With slower economic growth expected after the pandemic, it is expected that the focus will shift to property types that can achieve superior growth despite a weaker economic environment.

“According to NCREIF, alternatives currently make up 12 percent of the average real estate portfolio. We expect a value of 50 percent for 2030, as the definition of real estate changes and megatrends continues to create opportunities for investors, ”Tripp told CPE. This change also leads to an increased demand for alternative housing such as single family homes and prefabricated houses.

The development of alternative real estate. Image courtesy Nuveen Real Estate RealAccess

Two sectors are emerging: alternative housing for aging millennials and baby boomers, as well as data centers, cell towers and the associated real estate components that support the continued growth of Internet traffic, connections from mobile devices to mobile devices, and next-generation technologies such as artificial intelligence and the Internet of Things .

THE RISE OF THE INDUSTRIAL SECTOR AND DIGITALIZATION

Coronavirus lockdowns have driven technological advancement. “Real estate plays an essential role in the advancing digitization of the global economy. The way we continue to use and depend on the built world is evolving, and technology has allowed investors to look beyond the traditional commercial and residential sectors and expand the definition of what real estate investment is today ” explained Tripp.

Ecommerce sales performed notably as consumers ordered goods and services online. “The e-commerce penetration rate rose from 11.2 percent in the third quarter of 2019 to 14.3 percent year-on-year in 2020 due to the pandemic, and we expect it to increase by a further 5 to 10 percent by 2025. This could lead to increased demand for storage space due to a greater variety of tenants, ”said Tripp.

Online sales. Diagram courtesy of Nuveen Real Estate RealAccess

Supply management strategies shifted from just-in-time to just-in-case after an unexpected surge in customer demand leading to supply chain failures over the past year. As a result, the new procurement management tactic requires larger inventories and therefore more warehouse space, which is expected to further increase the demand for industrial real estate in the future.

To manage risk and be prepared for changes in the global economy, large companies have diversified their supply chains. India, Malaysia, Pakistan and Vietnam in particular have become more attractive than China because of their affordable labor costs and large labor pools.

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Projected, this transition will likely increase demand on the east coast compared to ports on the west coast. In order to reduce the risks in the supply chain, companies are starting to relocate mission-critical activities in the supply chain to geographical regions that are closer to the end user. Because of this, some companies will place these activities in the United States, Mexico, and Canada.

Raleigh, NC, Austin, Texas, and Nashville, Tennessee are among the markets that are expected to see the greatest increases in inventory relative to their populations. Due to the strong migration to these cities, especially among workers with higher incomes, it is expected that e-commerce will increase disproportionately.

The report also found that single-family permit performance in late 2020 saw an exceptional increase from -0.6 percent in late 2019 to 14.4 percent. Typically, demand for single family homes has been a major driver of light industry and warehouse demand as construction companies and vendors need space to store building materials and equipment. Nuveen also expects demand from residential construction and related activities to support inventory growth as a complementary driver of demand to e-commerce.

Read the full report here.