Smaller office and retail space, new restaurants biting, post-pandemic commercial scene still shaking out

Businesses may prefer medium to small office environments in favor of large space in a post-pandemic commercial real estate market. (Daily photo / file from Port City)

SOUTHEASTERN NC – The pandemic accelerated interest in home buying in the Cape Fear area, while sales in the most populous metropolitan markets declined slightly as people fled dense cities in favor of suburban centers.

There is general consensus that the hot phase of the residential real estate market will remain strong in the near future. However, there is less consensus on how commercial real estate will perform in a post-pandemic market.

CONNECTED: The stock of residential real estate reached a record low in a raging sellers’ market

“I think a lot of trends haven’t really established themselves,” said Paul Loukas, partner and agent in charge at Cape Fear Commercial. “I don’t think anyone really understands how retail is going to shake off the post pandemic.”

Retail and restaurant

Retail is perhaps the most insecure sector. Many big box stores have closed shutters, and the pandemic has been a proverbial nail in the coffin for proverbial businesses. Many national tenants stopped paying for their leases at the height of the pandemic. Mayfaire Town Center filed for bankruptcy in November 2020, losing Pier 1, Justice, New York & Company, Men’s Wearhouse, The STEM Labs, and more.

Still, new stores are opening in Mayfaire and elsewhere. With the lifting of the collection and mask restrictions, shopping behavior is not yet set in stone. The pandemic exacerbated the already disruptive rise of e-commerce. That won’t go away, but the question arises as to how relevant personal retailing will remain.

Occupancy in shopping centers across the country started the year at 90%, its lowest level since the second quarter of 2012, according to the International Council of Shopping Centers. When rental collection rates fell in April 2020, the crime rate for commercial mortgage-backed securities rose, peaking at 18% in June 2020. It has now fallen to around 11% – still higher than the pre-pandemic rate of 4%.

Last month, sales agents rented six retail spaces and sold nine spaces in Eastern NC, four more than in April 2020, according to Cape Fear Realtors.

“Retailers have figured out how to do more with less,” said Hill Rogers, agent responsible for Cameron Management. “There aren’t a lot of big retail spaces in town – there are some – but it’s harder to find retailers who are in an expansive mode. But they’re out there. “

Rogers noted that he was out of luck with a large retail offering, 24,000 square feet in Ogden Plaza. “It was a bit of a head scratch,” he said.

Rising construction costs have led the company, which develops and leases commercial projects, to hold back some plans that are otherwise ready. “We have a few things just before the start so we can pause,” he said. The hope, explained Rogers, is that costs will normalize over time. The risk is that costs will remain high.

Aside from contractor-initiated breaks, there are actually slowdowns due to issues with supply chains, labor availability and material costs, Loukas explained. “What is happening now is that construction prices have just skyrocketed, the cost of wood, the availability of steel and other building materials have almost led to this unnatural delay anyway. So the market is correcting itself, or at least there are some checks and balances in the market that are forcing us to slow down. “

Commercial rents have not kept pace with the rapid rise in residential real estate. Wilmington rental rates typically only increase 3% per year, said Terry Espy, owner of MoMentum Companies. In the last four business quarters, the base rent in the south was 9% lower than in the previous four quarters, according to the ICSC.

According to Rogers, small, independent businesses have largely proven their worth in retail. Small to medium-sized rooms could have a longer lifespan, he said.

“Small business owners will fight to the death to stay open,” Espy said.

Espy admitted having been bombarded with calls from companies lately trying to open downtown. “There is pent-up demand,” she said. “We don’t have enough inventory in the downtown market.”

At this point, Espy believes that any local recovery grants available are more necessary for retailers than restaurants. “Small retailers need it more,” she said.

Restaurants, which may have suffered the worst blows at the height of closings, are rebounding strongly as domestic customers exempt from state restrictions and vaccinations flock to local restaurants. Espy said her company receives two to three legitimate requests a day – most of them are looking for restaurant space.

“It’s a frenzy,” she said. ‘I tell them,’ We don’t have any empty restaurant space. They are very, very rare and far apart. “

Over the past weekends, Espy said a US Foods representative said her deliveries to downtown restaurants were the highest the company has ever seen.

A US Foods spokeswoman said she couldn’t share regional data for proprietary reasons, but referred to statements made by the CEO in a May 10 call for earnings. On the conference call, the company reported the highest delivery to independent restaurants on Mother’s Day weekend in the past five years.

Office & Industry

The rise in remote working caused by the pandemic is likely to change the dynamics of the workplace forever.

While some employees and companies vie for a distant revolution, others want to get back to what things were. The reality will likely be somewhere in between. “I think a hybrid is here to stay,” said Rogers.

Rogers said there’s some kind of pendulum swing in the office space too: companies built open bull pits to improve communication, but now many employees want the privacy that a single office offers.

“I don’t know what the right balance is,” said Rogers. “I think people are trying to figure out, ‘Do we need more space per employee? Or is it the same amount of physical space per employee, but the employees come two to three days a week and it is more of a ‘hotel concept’. “

Some companies, including Wilmington’s PPD, have already billed their office space using a remote basis. The hotel concept could gain in importance and prompt companies to look for smaller spaces after the pandemic.

“People don’t have to be on a desk in a room to be effective,” Espy said. “We hear that.”

Two-thirds of the Bank of America building is still empty, Espy said. The company closed its downtown branch in 2019, citing the rise of mobile banking as the reason for consolidation.

The Verizon call center on Shipyard Boulevard, which was heralded as an economic development asset for the area when it opened in 2004, is no longer serving its original purpose. The company committed to employing 1,200 people within the first year on an area of ​​160,000 square meters. According to the Wilmington Business Journal, around 730 people were employed last year.

Now, all of the company’s telesales employees will be working remotely from home – part of a company-wide decision made last year to remotely relocate all telesales and wireless customer service functions.

“There are currently no building closings planned,” a Verizon spokesman said of the shipyard building and other call center facilities. “Many of these buildings are home to a number of Verizon groups who have no plans to permanently work from home.”

In the downtown area of ​​the cotton exchange, Espy had a call center with little interest in the market for several months. Recently, the customer removed the remains of cubicles so that the space can be divided into smaller office spaces if necessary.

“If you are willing to cut it up, you will spend a little money on it, but you will get it back faster because you can keep a higher rental price from the start,” she explained. “You have to be creative.”

Office space is generally viewed as an overhead expense. You don’t make money with companies. Compared to retail chains who carefully choose rooms and locations, office space isn’t that important. “When companies find a way to save money on office space, they do it nine times out of ten,” said Rogers.

Lease extensions offer tenants the opportunity to redesign office space if necessary. In general, Loukas said, while office trends are still uncertain, “there has definitely been more contractions than expansions without a doubt.”

While some companies, including Wilmingtons nCino – in the process of 90,000 square feet. Expanding to 600 new employees – still big office space, Rogers said it would be too risky to start building a large office building with no tenants.

“I don’t know that I want to go out and speculate and build an office without a main tenant thinking I’ll go out and fill it up. It’s probably too risky, ”he said. “I would have said that before the pandemic and the volatile rise in construction prices we’ve all seen over the past six months.”

Speculative building on the industrial side – a trend that has emerged more locally over the past year – is likely to pay off, however. There is a growing interest in industrial spaces, say sales representatives. There is a demand for “last mile” industrial warehouses where service companies want to store products before they reach online consumers where they are.

The sales and leasing numbers provided by Cape Fear Realtors show that this segment is exactly at last year’s level, but agents say big deals are in the works right now.

“Industrial is just booming,” said Loukas. “This is a segment that we see has a big runway ahead of it.”

Send tips and comments to Johanna Ferebee Still at [email protected]