The continued evolution of brick-and-mortar retail and increased demand for industrial properties are among the areas of commercial real estate that lawyers will be watching in 2020.
As more business shifts from malls to the internet, retail owners are scrambling to figure out how to continue to draw foot traffic to their properties, and the shift to online shopping is also expected to continue to drive demand for more logistics properties close to cities.
And lawyers in 2020 will also be watching for signs of weakness in the market, given that the current upcycle is now a decade long.
Here, Law360 looks at three areas of real estate that lawyers will have their eyes on in 2020.
Evolution of Brick-and-Mortar Retail
Lawyers say owners of malls and other large retail properties will continue in 2020 to try to reposition those assets to convert some or most of the retail space to other uses.
“Retail has become a dirty word. It’s not that there’s no demand. The demand for the merchandise has really softened. There’s more opportunity for tenants,” said Mark Fawer, a partner at Greenspoon Marder LLP. Expect to see "restaurants, personal services, health care services, those things that cannot be bought on the internet,” he said.
“Make it more experiential. Maybe bring in a movie theater with stadium-style seating. Or a restaurant with a cabaret license for entertainment. More and more things to drive traffic. Not only to have tenants that will successfully drive traffic, but to give people a reason to come,” Fawer added.
Indeed, experiential is becoming the new norm for repurposing malls in an attempt to make the space more relevant in the digital age, according to experts — and that’s expected to continue in 2020.
Jesse Sharf, a partner at Gibson Dunn & Crutcher LLP, also noted that the continued repurposing of retail is one of the things to watch for in 2020.
And while some mall owners will be able to come up with creative solutions, some will not, and lawyers expect to also see more malls close in 2020.
“We’re hearing from clients that the effect is … severe. The whole sector. Investors are now very skittish, even if the particular property is populated by tenants that are more immune from internet competition,” Fawer said.
“It’s like a plane taking off with empty seats. There’s going to be a reckoning. How much pain are owners and their lenders going to go through?” Fawer added.
Real estate lawyers for the past several years have been increasingly focused on the question of when the current decadelong upcycle may end, and that question will be front and center in 2020, according to experts.
“Since we are in the midst of what is the longest-running economic expansion on record, the question is, ‘When is this going to change? When is the downturn coming?’ There’s less concern over a really deep recession … [and an expectation of] more minor adjustments,” said Al Stemp, a partner at Kirkland & Ellis LLP.
“There are periodic and relatively frequent indications that in fact things are going to slow down. We haven’t gotten there yet. … There’s still a ton of liquidity out there in the market chasing deals,” Stemp added.
Indeed, that liquidity, or dry powder as it’s also known, has for years helped to keep the upcycle going and has pushed prices in core markets higher. Foreign investment has also contributed.
But sensing that the cycle may be coming to an end, some investors are now taking some chips off the table and are selling in core markets to lock in their gains. Dustin Calkins, a partner at Orrick Herrington & Sutcliffe LLP, noted that he’s seen some pension funds decide now is the time to sell.
“Some Bay Area clients have been cashing in,” said Mike Liever of Orrick. “Companies are selling … now, in the Bay Area, the [San Francisco] peninsula, L.A., Seattle. They may have had this building for 10, 20 years … and been through two cycles now.”
And as it remains unclear whether 2020 will see any softening in the market, the nature of deals is changing.
More large firms like Blackstone Group LP are doing massive portfolio deals, and expect that also to continue in 2020, according to experts.
“There will be more and more consolidation in the commercial real estate industry on the investment side. Blackstone, among others, has raised record-sized funds in certain categories,” Stemp said. “That sort of consolidation, with bigger investments taking more and more of the market share, will dictate deal terms.”
More Demand for Industrial
The logical extension of consumers moving from brick-and-mortar malls to online shopping is more demand for industrial and warehouse space, which has been happening for several years. But lawyers expect the trend to accelerate in 2020 as more retailers are offering same-day or even two-hour shipping.
While Amazon for some time has been building out its same-day and two-hour shipping infrastructure by buying and building warehouses near urban cores, competitors are now also doing so, and all of that is putting more demand on such properties.
“Last-mile space and distribution centers for companies like Walmart, Target and Costco, there’s a tremendous demand now for that space,” Liever said. “The trend now is one-day delivery so there’s going to be more and more of that. … That’s where the retail market has evolved.”
Lawyers say from an investor point of view, such properties are attractive because they may be able to weather a downturn better than trophy office properties in core East Coast markets, since demand for e-commerce warehouses isn’t expected to dip.
“There’s going to be more and more investment and attention to industrial and last-mile warehousing and logistics,” Fawer said. “It’s a great sector that has already gotten more and more pricy, with increasing demand.”
And as the industrial warehouse becomes more integral to e-commerce delivery, look for owners and operators of those properties to also continue to push the boundaries in terms of how technology is used, lawyers say.
“Underlying all of this is artificial intelligence. … There’s tremendous automation in these new factories, warehouses and distribution centers,” Liever said. “Robots don’t need coffee, health insurance. Can work 24-7. Are not unionized.”