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Urban Land Institute annual report: Too many offices, not enough housing and other emerging trends

Millenia Plaza sold again this week for $74.1 million — making it the largest shopping center trade in the Orlando-Kissimmee-Sanford Metro Statistical Area thus far in 2022.
Provided by JLL Capital Markets
Millenia Plaza sold again this week for $74.1 million — making it the largest shopping center trade in the Orlando-Kissimmee-Sanford Metro Statistical Area thus far in 2022.
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The U.S. has too much retail space, too many offices, and not enough housing units — particularly affordable ones, according to an annual report by the Urban Land Institute.

That dynamic is driving a trend of shopping malls across the country being redeveloped into mixed-use destinations and prompts suggestions from some experts that under-utilized office high-rises in metro areas should be converted into “all flavors of residential, including homeless shelters,” the report says.

The Washington D.C. – based nonprofit research and education organization hosted its fall conference in Dallas last week where it released its 103-page report, titled “Emerging Trends in Real Estate,” and led a panel discussion on its findings, which are based on interviews and surveys from hundreds of industry experts.

“We’ve talked for years about the fact that we may have too much retail, now we are talking about (how) we may need less office, ” Andrew Warren, director of real estate research with PriceWaterhouseCoopers, said at the conference “Class B and C offices aren’t as attractive. Maybe it’s time for adaptive reuse. There are opportunities out there and we have needs; we need affordable and attainable housing.”

From the end of 2019 through the middle of 2022, single-family housing affordability has declined by 37% while the average rent rate on the multifamily side has risen by 15%, according to the report.

Furthermore, the country needs 4.3 million newly built apartments between now and 2035 — or 331,000 new multifamily rental units annually — to meet demand.

Meanwhile, office replaced retail as the lowest-ranked property sector this year. Retail had registered the lowest ranking of any property type for over a decade but seems to have at least stabilized, while the future for the office sector is uncertain at best.

Office vacancy rates are slowly rising as firms downsize or choose not to renew leases once they expire. Tenants are dumping unused offices by trying to sublet the space until their leases expire and brokers report that a record level of office space is available for sublease, and more is hitting the market every quarter, the report reads.

In addition, tenants are increasingly choosing newer, more modern buildings and abandoning everything else, especially ones built before 1990, the report says.

“Unfortunately, the office sector experienced its greatest construction boom in the 1980’s,” the report reads. “Now many of these assets are becoming functionally obsolete, unwanted by tenants or investors.”

One anonymous expert interviewed for the report stated that office assets have “become toxic.”

While some of these abandoned office buildings will be demolished and replaced with new development, “demolition won’t be as likely of an outcome,” Mary Lugdin, the head of global Investment Research at Heitman, said during a panel discussion at the ULI conference in Dallas.

She added that adaptive reuse will become more common, when possible.

“I believe that will be an increasing focus, ” she said. “I do think as we all get serious about climate change and the role of carbon, we are going to be thinking about how to reuse buildings.”

Another anonymous expert quoted in the report suggested that city leaders transform unused office space into homeless shelters.

“Anybody who’s sitting in city hall with a homelessness problem, which is pretty much everybody, needs to start thinking about how to take some of these office buildings and repurpose them into all flavors of residential, including some homeless shelters,” the report says.

Offices aren’t the only buildings seeing new life.

Malls remain deeply challenged and the pandemic has vastly accelerated a shift toward them being redevelopment and densified.

Of the roughly 1,300 malls in existence prior to the pandemic, over 500 are undergoing some level of mixed-use redevelopment, the report reads. This ranges from full-scale reenvisioning of projects to replacing vacant department store space with multifamily, hospitality, office. or medical office. Since 2018, developers have demolished over 130 million square feet of space to make way for redevelopment. The lion’s share of this stock consisted of vacant department stores and mall space, according to the report.

That mirrors efforts underway at several malls in the Orlando area.

Bancorp and M & M Realty are looking to add a 120-room hotel and 1,400 residential units to the Fashion Square Mall in Orlando.

California-based developer Legacy Partners is under contract to purchase a section of the Volusia Mall in Daytona Beach in order to build a 350-unit apartment community at the site of the shuttered Macy’s.

Site plans filed to the city of Daytona Beach on July 22 call for the construction of a four-story, 350-unit gated apartment community in place of the former Macy's and a section of parking lot at the backside of the Volusia mall on International Speedway Boulevard.
Site plans filed to the city of Daytona Beach on July 22 call for the construction of a four-story, 350-unit gated apartment community in place of the former Macy’s and a section of parking lot at the backside of the Volusia mall on International Speedway Boulevard.

The Seminole Towne Center Mall in Sanford is also targeted for redevelopment, with plans to add a 350-unit apartment community to the property.

Yet some retail assets are fairing well. Earlier this year, Millenia Plaza —a fully leased, open-air retail center that includes big-box stores such as Home Depot, BJ’s Warehouse, Ashley Furniture Homestore, and Dick’s Sporting Goods — sold for $74.1 million, marking the largest shopping center trade in the Orlando-Kissimmee-Sanford MSA thus far in 2022, according to national brokerage firm JLL Capital Markets.

Millenia Plaza sold again this week for $74.1 million — making it the largest shopping center trade in the Orlando-Kissimmee-Sanford Metro Statistical Area thus far in 2022.

The Urban Land Institute report says demand for well-positioned retail space is as strong as ever.

“If you really cut through retail, not all retail is equal,” Michael Levy, the chief Executive officer of Crow Holdings said during the ULI panel discussion, “and there are these food and service retail centers — tens of thousands across the United States — whether they are backed by a gas station or whether there are standalone Jersey Mike’s or Starbucks or a cupcake store —that because of broader fund flows have terrific fundamentals but have more limited interest in that space. That’s one capital markets opportunity.”

Other takeaways from the report and panel discussion include:

The industrial sector remains hot: The industrial sector still enjoys record-low vacancy rates, as demand for high-quality, well-located logistics facilities has been running ahead of the market’s ability to supply them.

The housing market continues to cool down: Home sales—both new and existing—had an extraordinary 12-year run since bottoming out in the summer of 2010 until the federal government started hiking interest rates in the spring of 2022.

New home prices peaked in April 2022, while prices of existing homes likely peaked in June after appreciation started to slow with the rise in mortgage rates. Meanwhile, apartment rents have continued to push ever higher, but the pace has been moderating in recent months. The National Association of Home Builders housing market index has fallen for eight straight months through August 2022 to its lowest level since May 2020, the report says.

Recession forecast: With interest rates headed “higher for longer,” the risk of a deeper, full-fledged recession is rising, according to a growing consensus of economists.

“We are not in a recession, but you should expect one soon,” Lugdin said during the panel discussion. “In order to get inflation under control we need unemployment in the six-percent range and we are at three-and-a-half. We are not seeing (the recession) yet by any means, but the layoffs are beginning, corporate profits are under pressure so I expect that to change ahead.”

Have a tip about Central Florida development? Contact me at (407)-800-1161 or dwyatt@GrowthSpotter.com, or tweet me at @DustinWyattGS. Follow GrowthSpotter on Facebook, Twitter and LinkedIn