Five commercial real estate trends to watch in 2011

1. Green is here to stay. Being able to advertise your office building is “green” is a major attraction to tenants now. Besides energy and water conservation, other mainstays of the green movement include buying local and in moderation. Waste is discouraged. Building components are preserved and recycled, rather than discarded. Buildings should be built with long lasting materials and those that require low maintenance. Energy conscious materials (such as recycled components) and those with low toxicity to the environment are chosen in the green building trend.

While these choices may be more expensive to incorporate into buildings, landlords are reaping the benefit over the longterm in cost savings and efficiencies in maintaining the property. Besides being politically correct, landlords who build or retrofit buildings that can market with the label are attractive for multiple reasons. Buildings carrying the green label are often easier to rent to tenants, as workers log in less sick days and fewer complaints of “toxic building syndrome” that lead to asthma and sickness. Tenants are drawn to green buildings for energy and water conservation, cost savings, and the “because it just feels good to do the right thing” benefit.

2. Temporary tenants take hold. Short term lease storefronts and “pop up” retail operations are not a new idea. Frequently malls would use the concept to fill vacant holes in their properties when a tenant vacated. Seasonal stores have always been around, especially in the last few months leading up to Christmas. But in the past year we’ve seen more “pop up” stores prospering from high vacancy rates and lower rents. Some are testing new retail concepts, while others are simply taking advantage of the cheaper prices.

Whatever the rationale, landlords win in that they get to fill vacant storefronts and collect rents, even if it’s at a reduced rate. They’re hoping the new tenants do well enough to convert to longer term leases and higher rents eventually. But until we get through this economic downturn, it’s better to have some cash flow than zero, and better to make your property look like it’s bustling than a filled with a bunch of vacant spaces.

3. An upswing in the market. Many analysts think we have hit the bottom of the commercial market and that we have better days ahead. The incredibly low interest rates and moderate growth last year seem to have spurred investor confidence at the end of 2010. Many areas of the country saw an uptick in commercial deals closing in the last quarter of 2010. Perhaps this aggressiveness at the end of the year was due to analysts predicting we have bottomed out and are headed into a recovery, kind of a chicken-and-egg phenomenon. Did the positive market reports create the uptick or did the uptick drive the market reports?

Whatever the root cause several sectors seem be leading the charge: hotels and apartments. It is no coincidence that both are driven by short term data. Both hotel stays and vacancy reports and apartment numbers turn around quickly, as opposed to retail and office leasing, which takes more time to reflect changes in the market. Positive news in the sector reflects quicker in hotels and apartments than the rest of the commercial sector.

4. Banks still uptight and anxious. Despite the much publicized QE1 and QE2, quantitive “easing” is not “easing” the commercial lending department. Underwriters are still uptight and difficult to deal with, especially if you’re a small business. While we have record low interest rates, only the very best seem to be able to score a decent loan. The irony is that those who need money the most desperately are probably not the ones who will be able to get it right now. But if you are a business with solid cash flow and stellar credit, now is the time to lock in extremely favorable financing rates and terms. All indications are that underwriters won’t be loosening their standards any time soon, so we might as well learn to deal with this “new reality” of lending.

5. Smaller deals pay the bills. Probably the biggest trend we saw in 2009 and 2010 in my commercial deals is that the big ones are great to close — but even fewer and farther between. The bulk of my deals, the bread and butter of my commercial practice, is the “small stuff.” I am listing and leasing more and more properties than three years ago. The deals are smaller in transaction dollar but more numerous. I close more $1000/month rentals than half a million dollar sales. I am handling more property management functions for out of area landlords and less big time scores. In summary,

I’m doing a lot more work for less money, but that’s what is paying the bills. And we all have to either adapt to the new reality, or choose another career path. Commercial real estate is more difficult than ever. Let’s hope that we truly have hit bottom and that 2011 brings continued low interest rates, a loosing up of credit, and increased consumer confidence.