4 min read April 2022 — In a conversation with Invest: Charlotte Graeme Keith, Development Partner of full-service commercial real estate firm The Keith Corporation, discussed the various issues that the commercial real estate industry is facing. He shared how the firm maneuvered and mitigated issues throughout the pandemic, how Charlotte is addressing upward mobility and his bullish outlook for the industry and region.
What challenges are you and the industry facing?
One of the primary challenges we’re seeing today is pricing. In several instances, it has made new construction development cost-prohibitive. For example, we received pricing back on a retail development in Colorado where vertical construction pricing exceeded $500psf. On that same project, labor shortages have also been a serious challenge, creating an extraordinarily captive market and driving prices as well. For our sitework package, we went out to bid with 16 different contractors from a 100+ mile radius and we only received one bid. The other main issue we’re seeing on our projects locally, as well as across the country, is supply-chain. It’s not uncommon today to have a nine month wait for delivery of certain items (i.e. roofing membrane). The combination of pricing increases, labor shortage and supply-chain issues have created a perfect storm for development, but it also creates an environment that’s ripe for innovation and disruption.
How has the demand for your services shifted?
At The Keith Corporation, we have five different asset classes in which we develop or acquire: Office, Industrial, Retail, Healthcare and Airplane Hangars. Historically, retail has been the most desirable and dynamic asset class, both from a commercial development and an investor standpoint, but that is changing. Industrial has become much more desirable because of the major shift to e-commerce and the associated fulfillment requirements, often times from high-credit tenants. While it was well on its way before the pandemic, Covid certainly expedited the process as more people were confined to their homes and ordering what they needed online.
From a retail standpoint, there is still a lot of new activity, but investors are looking more for “essential retail” than traditional retail. Fortunately, most of our retail development and credit exposure is with “essential retail” clients whose needs have continued and, in many cases, increased.
Our airplane hangar division has continued to be moderately active as most of those projects are completed for Department of Defense contractors whose needs have remained pretty steady.
In our medical office division, the pandemic caused everything to halt temporarily while our clients were hyper-focused on serving their patients. However, when they reengaged, the demand for next generation, well-located medical space was very real and the sales cycles, which historically are very long in the medical realm, compressed significantly.
While the demand for traditional, urban core and/or suburban office space has waned, the demand for well-located, thoughtfully-curated office space has increased. In order to attract high-quality talent into the office, it must be in an engaging area with nice amenities. There is no more powerful example of this than South End, which has become one of the hottest office markets in the United States. We are currently integrating this amenity-heavy approach to our newest office developments: The Thread in downtown Rock Hill, SC and Morrison Yard Office on the Charleston, SC peninsula.
How is Charlotte addressing upward mobility and what infrastructural needs must be addressed?
Unfortunately, Charlotte was ranked 50th out of the 50 largest U.S. cities in upward mobility in a 2014 study. This abysmal and embarrassing outcome has resulted in many of Charlotte’s brightest minds working to solve this issue – ensuring ALL Charlotteans have the ability to improve their standing in our community and a place they can call home. Pre-Covid, it seemed like we were making strides in the right direction. Now, Charlotte is somewhat a victim of its own success – the city has become a desirable place to live for many reasons (weather, cost of living, proximity to beach/mountains, professional opportunities, great schools and communities, local and regional entertainment, etc.). Many folks are moving from high-tax areas and the savings in their property taxes alone often equal a nice mortgage payment. This is putting pressure on the housing market (median sales price rose 20% from October 2020 – 2021 and average rents are up 10-15%). This is great if you own a home, but makes that dream unattainable for many who have lived in this community for years. New projects often have an affordable housing component, but we need more. And we need to plan for the future of hyper-local communities. Adequate consideration for the demands on infrastructure is often overlooked. It’s a delicate balance of ensuring sufficient thought is put on that, while not creating overly burdensome demands that make new development untenable.
What are the key differences and trends between pre- and post-pandemic?
I think the consumer’s attention span has shrunk even more. This means that the movement towards hyper-localism will continue to progress. In my opinion, the most effective and successful communities of the next decade will have even more of what the consumers desire from a working, shopping, dining and health standpoint. In addition, I believe we’ll see a movement to localized fulfillment centers to service the decreasing attention span. 24-hour delivery used to be sufficient. Now it’s often times a matter of hours before delivery of online purchases. I think that trend will continue and many places will follow the Amazon trend of using their Whole Foods locations as local distribution centers. Companies may even take it a step further and begin to hold inventory of their most common items at these local centers so that they can ship even faster.
What is your near-term outlook and priorities?
We have a huge pipeline of projects with 8.5 million square feet currently under construction. Our near-term focus is to get those projects delivered on-time and at or under budget for our clients.
Despite the changing dynamics of our world, good real estate will always be good real estate, it just may be utilized differently. Land control has become increasingly important so we have a heavy focus on ensuring that we can control strategic pieces of real estate moving forward.
From an outlook perspective, we are very bullish on North and South Carolina and their future. Our region has had some great EDC wins recently and we feel the best is yet to come.
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