Are 2023 predictions for real estate accurate, so far?

We’ve now eclipsed six and one-half months of 2023. Wow! That was speedy.

As temperatures in SoCal have heated, so has the national economy. At the same time and similar to this spring’s weather, inflation has cooled as the Federal Reserve’s tightening policies seem to be working. We’re still above the 2% target sought, but core inflation is now running around 3% on an annualized basis.

Meanwhile, interest rates as pegged by a spread over the 10-year duration of Treasuries are still historically low but significantly higher than the pandemically plagued years of 2020-2022.

I generally wait until a full year passes before I dissect the previous year’s predictions. But for last year and this year so far, things have moved so quickly, I felt it was worth doing a mid-year recap.

After all, we are in earnings season as our big employers report progress. So I’ll pretend to be a big employer and report mine.

Industrial spaces

In January of this year, I wrote about industrial real estate, predicting third-party logistics providers would give back space.

If you’re unfamiliar with the term 3PL or third-party logistics provider, allow me to explain. Simply, a 3PL is an outsourced warehousing service.

Say you’re a company that needs to get your product distributed to Walmart but don’t have the space or inclination to do so yourself. Enter the 3PL, which will charge you by the pallet to receive, store, re-package and ship your goods for you.

During the supply-crazed days of the pandemic and into today, 3PLs thrived and leased hundreds of thousands of square feet of logistics boxes. With the “de-inventorying” now ongoing, these providers need fewer square feet.

But there’s a bigger issue at hand as many 3PLs signed term leases that still have time to go. Therefore, look for much of this excess to enter the market as sublease space.

Here’s my July 2023 update: We’ve seen a fair amount of giveback as Amazon started whittling its space in late 2022. The push for space seems to be a lot less rabid than it was in 2021 and 2022.

I frankly thought we would see more space returning to the market from 3PLs. Although we’ve seen a bit of this, it’s not happened on a wholesale basis the way I anticipated. So this one falls into the category of “let’s wait and see what happens for the balance of the year.”

Recession?

I voted no. How’s that for contrarian thinking?!

Here’s how I read the tea leaves: The Fed came out with guns blazing last year with three .75% and one .5% rate bumps. As we’ve discussed, this increase affects the rate at which banks borrow. The theory is more expensive money will cool a white-hot economy as businesses re-think borrowing for expansion.

If you look at the gross domestic product or GDP for the third quarter of 2022, it actually increased over Q2. By the time you read this, we’ll have a glimpse into the fourth quarter.

Now, couple that with core inflation, which has declined for several months. Finally, retailers are shedding inventory as mentioned above. In fact, this is deflationary as things are on sale. Now some might counter by saying we’ve not felt the full impact of the Fed rate increases, folks are spending that idle cash left over from the pandemic, and massive layoffs await. We’ll see.

I choose to believe in the resiliency of the U.S. economy. Plus, have you been to a mall or restaurant or tried to book a flight during the holidays? Bedlam!

Here’s my July 2023 update: I nailed this prediction as our economy has not fallen into recession. Some would say the full impact of the Fed’s rate increases has not been felt throughout. I still believe in the resiliency of the U.S. economy, our ability to innovate and the seemingly unstoppable consumer.

We will see what the next six months hold, but I, for one, believe that we have “stuck the landing” and will avoid a recession.

Return to the office

Much has been written about whether or not we’re going back to the office.

We’re starting the third year since all of us were forced to return to our spare bedrooms. Remember that fateful day in March 2020? Like yesterday!

Fortunately, our team spent the previous few months figuring out how to duplicate our desktop mobility. Did we have some insider scoop? No. We just wanted the flexibility to do stuff in a client’s lobby, our dining room or the front seat of our car without losing productivity.

We were lucky. When the order came – we simply unplugged, drove 20 minutes home and plugged back in. Many were not so lucky and found themselves grappling with how to remain viable. Others simply ordered a bunch of stuff online and ate a lot. (I heard this from a friend.)

I predicted the workforce would return to the office this year. Sure, a hybrid model will be employed. For example, Tuesday through Thursday would be office days and Mondays and Fridays would be optional as work-from-home days.

My July 2023 update: I read with great interest stories by Jeff Collins and Jonathan Lansner which appeared in Southern California News Group newspapers Sunday, July 16. Vacancy throughout office space has doubled since the pandemic in 2020. The new normal is a hybrid workspace with the exception of a few industries.

As an example, the wealth advisory businesses are back in the office full-time whereas flexible industries such as real estate, healthcare and insurance are still working remotely. I would count this prediction as a miss, thus far, but we’ll see what the next six months bring.

What about retail?

Continuation of the experiences that brought us back to brick-and-mortar stores in 2022 will continue.

As an example: On a recent visit to Main Place mall in Santa Ana, we were serenaded by era-dressed carolers and our grandsons were thrust into a cube of stuffed animals as human claw machines. I’ve never seen the place so packed! My wife and I commented, “what recession?”

Sans these entertainment experiences, however, I’m afraid the online shopping is easier. What’s avoided are out-of-stocks, surly clerks, crowds, and no parking. Speaking of Main Place. Our favorite parking spaces are now consumed with a multi family building which is under construction. Providing your own customer base and foot traffic – once the units are fully occupied – is always a great idea. But how cities choose to eliminate tax basis while at the same time increasing police and fire service remains the tug-of-war. July 2023 update. Brick and mortar retail continues to it astonish me. I recently purchased some items online and chose to return them at the store versus dealing with reboxing and shipping them through UPS. I was greeted with lines in the return lanes that would rival 405 traffic on a busy weekend. One of these was a lower end big box retailer and the other was a higher end specialty seller. Expected would be the lower end store to be busy but I was surprised to see the higher end specialty retailer just as busy. People are traveling! I recently heard a report that the July 4 weekend was the busiest in Los Angeles international airport’s history. It appears the pent-up demand for wander lusters is quickly unfolding.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected] or 714.564.7104. His website is allencbuchanan.blogspot.com.