by James Hyde – CRA and Lead, D.S. Murphy Commercial
Over the past two years we have seen a dramatic increase in transition properties. These properties can vary from location to location. Examples include residences on busy corridors or on commercially zoned sites, former retail banks converted to medical/dental offices, and noncommercially zoned tracts with freeway/expressway access redeveloped for an industrial use, to name a few. So why are we seeing this influx of transition properties? The primary reason is twofold, changing dynamics and growth.
The markets are certainly more dynamic since the beginning of the Covid-19 pandemic. More employees are now working from home with the ever-increasing availability of high-speed internet in exurban and rural locations thus flattening the traditional falloff of many aspects between urban and rural markets. This phenomenon is not internalized to local markets and is exhibited on a national basis. One can be employed in one state, let’s say California, while residing in another state, Georgia for instance. In this case, the employee can have his cake and eat it too, with the cost-of-living benefits of Georgia and the salary expectations of California. Markets that were once considered closed to outside influences are now becoming open markets. The Atlanta Market, for example is seeing an influx of buyers from the higher priced New York and California Markets driving values in Georgia. Additionally, these outside market participants are less concerned about external obsolescence as they perceive properties in their new market as discounted when compared to their prior market. As the U.S. continues its evolution as a service-oriented economy, most expect this trend of flattening to continue into the foreseeable future, with more growing pains expected to come.
In every market there are always so called “winners” and “losers”. While the work-from-home revolution is increasing residential values, the same unfortunately cannot be said for the office market. As less employees report to traditional brick-and-mortar locations, the demand for this office space is diminishing. Speculative office construction is at a low and is primarily located in traditional office nodes. Tremendous appreciation has occurred in other sectors, however, the vacancy and capitalization rates for the Atlanta Office market are essentially unchanged over the prior year implying that values in this sector are stagnate. This feature along with an approximate inflation rate of nine percent indicates trouble for the office market. As such, real estate practitioners are getting inventive with their office properties with more and more undergoing adaptive reuses, for instance, to multi-family.
As more people enter a market, increased supporting infrastructure is necessitated. Roadway systems are expanded, retail space is created, and distribution centers are constructed. One of the more frequent transition property types we encounter is a residence on an expanding highway corridor. The highest and best use of these properties is historically residential; however, the question is whether they will remain residential. Depending on the location of the property, along with many factors including local future land use designations and roadway design, the highest and best use can range from residential, to an interim residential use with commercial development in the foreseeable future, to immediate redevelopment. A detailed highest and best use analysis is typically warranted due to the dynamic nature of these properties.
Another property type we encounter frequently is a commercially zoned residence. These properties are typically found in growing cities where the commercial core is expanding into historically residential neighborhoods. Depending on economic conditions, location, and site area, the highest and best use can vary from adaptive reuse to office or retail, to complete redevelopment of the site.
The growing availability of high-speed internet service has not only impacted the residential and office markets, but also the retail and industrial markets. And while the retail market is not experiencing the same impact as the office market, more people are shifting to shopping online as opposed to more tradition brick-and-mortar locations. As the overall population continues to increase along with the prevalence of online shopping, more distribution centers will be required, especially along the interstate highway system in suburban and exurban locations. This growth, along with industrial zonings being historically limited in these areas, has substantially inflated industrial values, and has increased pressure for industrial development of properties with interstate access.
In conclusion, the United States is currently undergoing what some pundits have termed a “third industrial revolution”. During each industrial revolution, growing pains were exhibited. The first industrial revolution occurred between 1760 and 1830 in Britain and ushered in the advent of mass production due to mechanized manufacturing. The second industrial revolution followed occurring from the late nineteenth century into the early twenty century in the United States and saw the advent of the material sciences and electronics that ushered in the modern computer. The current termed “third industrial revolution” is the spread of automated and digital devices that are connected via the internet, “the internet of things”. As the U.S. economy continues to evolve, the real estate market will continue to be highly dynamic, which in turn will increase the prevalence of transitional properties going into the foreseeable future.