Uncertainty or Opportunity?

Amazon, Seattle, Portland, San Francisco, Oakland, San Jose, Los Angeles, Newport Beach, San Diego, Wal-Mart, Kroger, Albertsons
Photo by Gabriel Mihalcea on Unsplash

By John Cumbelich

As the sun begins to set on the withered stalk of another eventful year in commercial real estate, uncertainty prevails in Q4 of 2022 as forecasters ponder the direction that markets will take in 2023.

Throughout 2021 and the first half of 2022, the same industry voices which had grown dormant through a trying pandemic, rent the air with cheers when a post-Covid recovery brought users off the sidelines. The recovery that began to blossom in early-2021 produced an exceptional 18-month run, fueled in part by historically low interest rates, PPP and other government largesse.

Yet a more sobering sentiment has taken hold in late 2022 due to a once-in-a-generation escalation of inflation rates, completely alien to half of today’s market participants. Commercial real estate markets today find themselves caught in a negative loop of rising inflation, rising interest rates, rising construction costs and an ever-shrinking pool of large format retail tenants with strong credit that are seeking to grow. Several of the key catalysts to new retail growth appear to be missing.

Amazon appeared, briefly, to be stepping into this void. But headwinds encountered by the e-commerce giant in the brutally competitive world of grocery retailing have hastened a re-thinking, or perhaps a retreat, from this proposed store roll-out. Largely due to Amazon’s emergence in the grocery space, and much more importantly from a CRE perspective, the news of the announced consolidation of the Kroger and Albertsons real estate fleets represents a gigantic shift in the national retail real estate landscape. If approved, the merged behemoth will be far better positioned to compete with both the largest bricks and mortar grocer/retailer in the world, Wal Mart, and the largest E-commerce retailer in the world, Amazon.

The inevitable shedding of real estate that the Federal Trade Commission will stipulate for the Kroger merger/acquisition will present an unscripted and welcome boost to retail commercial real estate markets. The opportunity for users, investors and developers to acquire proven real estate in core markets will generate interest from all quarters, especially since the disposition of redundant real estate will be a condition of FTC approval, at whatever price the market will bear. Investors of every stripe – parsimonious, acrimonious and sanctimonious will each have a shot at what will be, at least in part, a lot of great retail real estate. All by itself, a national Kroger/Albertsons disposition program would represent a boomlet of development, leasing and job creation in numerous markets. Man proposes and the FTC disposes.

Mid-term elections have the chance to swing both houses of the federal government into Republican control, which historically speaking would suggest a business-friendly climate and the de-emphasis of utopian progressive spending, such as the threat to saddle the US taxpayer with billions in expunged student debt obligations. More importantly, with an economy at near full employment, the consumer today is in a strong cash position. Strong employment and cash are proxies for economic expansion, both of which will work to counter inflation’s impacts. And any decision by the Federal Reserve to stop, or ultimately reverse interest rate increases will encourage growth to find its footing again. With America at a very high level of employment, consumers in a strong cash position, a shift to a more pro-business Congress appearing realistic and tapering interest rate increases, a 2023 recession is no foregone conclusion.

Our current outlook suggests that the US voter, as well as governmental agencies including the Federal Reserve and Federal Trade Commission, will each play an outsized role in determining how real estate markets will take shape in 2023. And a US economy that is still finding its post-COVID footing will present numerous, if not widespread, opportunities for growth.

John Cumbelich & Associates is a San Francisco Bay Area-based firm that provides commercial real estate services to Fortune 500 retailers and select owners and developers of retail commercial properties. The firm’s expertise is in developing store networks for retailers seeking to penetrate the Northern California marketplace and the representation of premier Power Center and Lifestyle developments.

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