In 10 years, we can expect to again be at a strong point in the CRE cycle, and we’ll definitely have witnessed some fundamental changes.
Two distinct types of changes are occurring in the net lease market, cyclical and fundamental. Cyclical change, as the name suggests, comes in cycles, is repeated and predictable, while fundamental change constantly progresses and alters the industry forever.
Currently, we believe we are near the zenith in the current real estate cycle due to the rising Fed funds rate, record high stock market, and strong US dollar. We can expect valuations to slowly start falling, new construction to slow, which in turn will impact vacancies. We will reach a low point and prices will rebound, construction will begin again, and very little commercial square footage will sit vacant. In 10 years, we can expect to have been enjoying an upswing in the market for a few years.
Fundamental changes evolve from changes to the broad economic climate, whether it is a revised labor law or change in consumer preferences. Due to the wide variety of root causes it can be hard to predict but we see some of these changes emerging now.
QSR: Fast food restaurants are here to stay, but the staff and menus are likely to change. Over the past few years we have seen restaurants attempt to appeal to the health conscious consumer by offering salads and other low calorie options, this health trend is likely to continue. We are on the cusp of a shift in the workforce of QSRs. Labor costs are rising and will continue to rise. Some chains have already begun implementing their solution, touchscreen ordering pads.
Banks: The entire banking industry scaled back their physical operations with the rise of online banking. Banks have been more selective in the branches they maintain, looking for prime locations. The branches that will be for sale in the future will likely trade at a substantial premium to the rest of the STNL market.
Big-Box: This sector will remain alive. Many worry that online competition will drive the big stores out of business, but they have already begun adapting. Chains such as Best Buy have adapted by cutting down on inventory and matching online prices. Best Buy uses their physical stores as showrooms to display their products and pick up locations for online orders. They also offer services, such as the Geek Squad, that online retailers can’t match. Other tenants in the big-box sector will need to adapt but they can thrive.
So in 10 years, we can expect to again be at a strong point in the CRE cycle, and we’ll definitely have witnessed some fundamental changes. QSR, bank and big-box sectors are most likely going to experience the most change over the next decade because of the changes occurring today. Undoubtedly more change will happen and the net lease sector will continue to adapt and we believe it will remain a sought after asset class.