The Real Estate Demographics of Smaller Buildings
Tremendous changes in U.S. culture and demographics have taken place that began just before the onset of the Great Recession of 2008. What happened in 2007? The world’s first smartphone, the iPhone, appeared on the market – and nothing has ever been the same since. The millennial generation (whose symbol could well be the smartphone) has catalyzed significant changes in the way we live, work, eat and play. The influence of millennials has transformed the commercial real estate market to the point where the CRE environment of 2007 is nearly unrecognizable today. One part of that transformation is the renewed appeal of smaller, community-scaled buildings.
As part of a special series of sessions at CRE Converge 2019 on commercial real estate concerns regarding smaller buildings, Mark Stapp, the Fred E. Taylor Professor of Real Estate and executive director of real estate programs at the W.P. Carey School of Business at Arizona State University, as well as a NAIOP Distinguished Fellow, explained in-depth today’s real estate demographics and their impact on the market for smaller real estate deals.
“Investing in small buildings can be very profitable, a good addition to your portfolio, and a significant part of community building at the same time,” Stapp said. “Small” is a relative term, whether for a building or a real estate transaction, but we can think in terms of examples: a single-tenant Walgreens, a vacant 1920s gas station awaiting transformation, an adaptive reuse of an historic building, or a new building scaled to harmonize with its two- to three-story neighbors. Newer buildings today tend to be larger than older buildings, Stapp said, and developers are not creating small buildings. This means there are more opportunities to be found in the market for smaller buildings and smaller deals.
Now is the right time to turn to smaller buildings for a bigger field of opportunities for several reasons; one of the most important is that small buildings are essential for creating community.
Millennials came of age while facing the economic challenges of the Great Recession, many of them burdened with student loans and struggling in a shrunken job market with sharply lower wages, Stapp explained. New values emerged: Rather than striving for wealth and position, the new generation turned to social capital, prizing human interaction, “slow” food, and new trends established by online “influencers.” Social media links them in a network of globalization. Millennials tend to be very concerned about climate change, and want sustainability in all aspects of life, including the built environment and LEED standards for green buildings. They embrace wellness and healthier habits and environments. Now dominant, the new values have prompted changes in demand for differences in how and where we live, and what employees now expect from their employers.
Stapp quoted CRE Converge keynote speaker Steve Wozniak, who had addressed the idea that technology drives obsolescence, a trend that has accelerated so much in the past 10 years that many older buildings, physically obsolescent, no longer work for their users. With today’s increasing demand for tech-savvy talent, the focus is on creating spaces that will attract employees, where they will want to be. One example is the new Capital One Center in Washington, D.C., where workspaces, noted Stapp, “feel like a health club in a university environment.” This generation is not that attracted to sterile, steel-and-glass towers. They want to engage in meaningful work, in meaningful environments, where they can engage with a community and have food and shopping options nearby. Places matter more than ever. So does design. And so do smaller, life-scaled, more intimate buildings.
A good example, said Stapp, is The Newton, a mixed-use building in Phoenix with a bookstore, cafe, bar, event venue, restaurant and gardening shop. The building was a former Beefeaters steakhouse, vacant for years and unusual in size, but located on the edge of where development was starting to happen on Camelback Road. The redevelopers saw an opportunity for a deal that would mesh with community interests, and included a community meeting space and small co-working space. It was very challenging to find funding, because appraisers didn’t know how to value it. Ultimately the developers turned to LISC, the Local Initiatives Support Corporation, which offers flexible lending products designed to help local groups bring development projects to fruition.
Today, owners have an opportunity to use smaller buildings to differentiate their properties and attract customers. You can start small. Focus your mission and vision on creating small spaces that are attractive to today’s demands. Stick to your core competency: adaptive reuse and preservation requires different capabilities and understandings than building a new facility. Explore the competitive advantages. Think about your role in the CRE industry, said Stapp, and ask yourself, “What type of investor do I want to be?”