Over the years the real estate market has been a reliable indicator of the overall economy as it captures activity in everything from investment to fundamental business activity and consumer behavior. Dozens of industries depend on the pace of the real estate market. Therefore, the real estate market is often a leading indicator of what is happening or coming for the overall economy.
The implications arising from the threat of the coronavirus have certainly caused strains in the real estate market as was obvious in March and April, but the rebound is showing positive signs. That said, there are still pockets that are struggling and several that may have been altered on a permanent basis. Construction and real estate activity is intensely local. The situation from neighborhood to neighborhood is different and what’s happening from city to city or state to state can drastically differ. However, even with the local variability, there are emerging trends.
On the commercial side there has been a profound change in attitude toward the development of office space. Many people are working from home as opposed to grouping together in an office. Suddenly there is an inventory of unused office space and businesses are busy redesigning the spaces they have in order to support social distancing requirements. New challenges have begun. How does a high-rise office building deal with the need to travel by elevator? Restricting the number of passengers in a given car only invites crowds of people assembling as they wait their turn. Does that mean staggering the workday? What about visitors and service people who want to gain access? How can the needs of the organization be met while providing a safe environment for employees, vendors, and clients?
Another area of change is being seen in retail. The shopping mall and the Big Box store were under threat from the online retailer even before the pandemic created a surge in shopping from home. There are currently thousands, if not millions, of people unwilling to visit a brick and mortar operation – especially retailers selling items that can be easily procured through online sites, such as Amazon. Today the mall has been further slammed by the pandemic restrictions and many have been forced into bankruptcy. The future of malls and strip centers is murky at best.
The reactions to the pandemic and lockdown have created opportunities as well. Supply chains have been profoundly impacted. The Just-in-Time system is cracking up as it has become nearly impossible to maintain reliability in a global supply chain. The response has been to return to old patterns of warehousing and storage. The decision to bring larger amounts of inventory under direct control has stimulated the construction of warehouse space, adding to the already growing demand for this space by a variety of new industries. The expansion of the online system has created an insatiable need for distribution centers. These facilities also have to take pandemic protocols into consideration which has meant heavy reliance on technology and robotics to handle work once done manually. This creates demand for warehousing compatible with technology and limits the conversion of old spaces to new standards.
Before the pandemic, there was a trend toward urbanization. The mandate for distancing is driving people toward the exurbs and rural areas as they seek to escape crowds. Those working at home no longer need to be concerned about commutes and can locate at a distance from their jobs. As a result, commercial development is being drawn to these more spread out populations – everything from medical facilities to service businesses, schools, churches, community centers, as well as the additional infrastructure necessary, such as grocery stores and gas stations. We’re likely to see small office buildings spring up as satellites to primary office locations.
These rapidly changing demands have provided opportunity and growth, but they have also made other commercial offerings obsolete. The old warehouse in the wrong place with the wrong design will sit idle. The shopping district in an aging neighborhood loses its value. Based on data from Real Capital Analytics (RCA), the commercial real estate sector is a $996 billion market dominated by institutional investors ($461 billion) and private investment ($333 billion). The breakdown of that investment shows that the events of this year will have a profound impact on the future. Apartments accounted for $122 billion and offices accounted for another $85 billion. Both of these sectors are expected to decline in the next few years.
When it comes to residential real estate, the Kansas City area continues to hold a reputation as a “hot market”. In the overall national housing sector, the latest figures have been solid. Home sales have been up by over 20% in both June and July and only slightly less in August. The price of homes has increased by around 3.5% nationally with a mildly lower increase in the KC area. The national shortage of housing is real and Kansas City is no exception although the shortage is connected closely to the different parts of the city. The suburbs that continue to boom are the ones experiencing the most acute shortages (Overland Park, Leawood, Olathe, Blue Springs, Lees Summit). The fastest growing parts of the city are—as they have been the last several years – western parts of Johnson and Wyandotte county, eastern parts of Jackson county and north into Clay and Platte counties. The new development is starting to show up in even more distant counties such as Miami, Leavenworth, Atchison, Cass, Lafayette, and Buchanan.
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