The US real estate market is exceptionally complex. Home building and commercial construction are linchpins of the US economy, but rising prices, demand and supply disparities, significantly lower Commercial Real Estate (CRE) investment (which is down 57% over the last 12 months), and a somewhat bleak commercial property outlook have created numerous challenges for individuals and property firms alike. Despite these headwinds, however, there may be significant new opportunities as well, if the expansion of real estate firms such as Hughes Marino and others into new markets is anything to go by.
Hughes Marino is a San Diego-based real estate company that specializes in representing commercial tenants in lease and purchase agreements. The firm is expanding into Texas – specifically, the Dallas area – this year. The new office is to be helmed by Executive Vice Presidents Mike McElwee and Art Green. This cross-country push into a new Southern market comes after the opening of new Hughes Marino offices in Boston and Raleigh-Durham last year. With locations already in Colorado, Washington, and New York, Hughes Marino now operates in half a dozen states across the country.
According to recent data, approximately 50% of almost $3 trillion in commercial mortgages will be up for renegotiation over the coming 24 months. Lending rates are expected to be up as much as 3-4% during that time, potentially setting up a perfect storm for tenants, suppliers, construction companies, and others.
How are commercial real estate companies rationalizing expansion in an increasingly downgraded marketplace? How did things get to where they are, and what can we expect in the commercial real estate space in the future?
The Long-Term Impacts of COVID-19
The COVID-19 pandemic created – and in some cases, uncovered – a wide range of anomalies in US real estate, many of which linger to this day. This applies to both commercial as well as private property. Before the pandemic, the US commercial and private home construction industries experienced relatively stable growth and recovery in the aftermath of the 2008 housing and financial crises. Home prices rose steadily, and demand was high, fueled primarily by low mortgage rates, a resilient job market, and a growing population. The Center on Budget and Policy Priorities found that it took employers up to 2010 to start adding jobs, but by mid-2014, the economy had recovered almost nine million jobs that were lost since the start of the recession.
In the post-recession pre-COVID era, most of these jobs required on-premises work. This created a growing and thriving commercial real estate market. In early 2020, however, once the pandemic began to quickly spread, there was a temporary slowdown in real estate growth. This was due to uncertainty and restrictions on many real estate activities. As the year progressed, though the housing market saw an unexpected surge in demand, the demand for commercial properties noticeably lagged. Remote work arrangements and the desire for more space while spending more time at home prompted many people to reconsider their housing needs and significantly dampened the demand for office space.
Affordability issues also became more pronounced in certain regions, particularly in cities with rapidly rising home prices and a constrained supply of housing. This prevented many buyers from entering the market, causing many to migrate to cheaper areas. This migration away from traditional economic hubs and large metropolises has still not been undone.
Several additional factors also played and continue to play important roles in the constantly evolving US real estate market. Take, for example, interest rates. Lower interest rates make borrowing more affordable and can stimulate demand for homes and business property. The US Federal Reserve kept interest rates historically low during the pandemic to support the economy. In 2023, however, the country has undergone a historic slew of rate hikes, with the Federal Reserve raising rates yet again in May for its 10th increase this year.
Population growth and demographic trends also influence the demand for property, as do business regulations and the overall health of the economy. Migration patterns and lifestyle choices were the primary drivers of housing prices over the last few years. However, when it comes to commercial property, it seems the economy is still trying to recover from the pandemic-driven exodus of workers from workplaces.
Some of these effects have been offset by rapid urban expansion, particularly in the South and in markets such as Texas – markets that the Census Bureau found have grown the most over the last 12 months. Nine of the country’s 15 fastest-growing cities over the last year were in the South. Of those nine, six were in Texas. High-population growth areas faced increased housing demand, putting additional pressure on housing supply and contributing to rising prices. In contrast, some regions saw declining populations, which affected the demand for housing in those areas. However, better access to a talented workforce can make a city or locality more attractive from a business and/or investment perspective, somewhat offsetting the dampened demand for commercial real estate, especially as businesses return to regular, in-office work.
For Hughes Marino, Why California? Why Texas?
California, with a population of about 40 million, and Texas, with a population of about 30 million, are America’s two most populous states. They account for over 20% of the country’s population even though, combined, they represent just a little over 10% of the country’s land area.
California has long been known for its high-cost housing market, particularly in major metropolitan areas such as Los Angeles, San Francisco, and San Diego. The state’s strong job market, desirable climate, and lifestyle attract a significant number of people, leading to high demand for housing. While this demand has traditionally outpaced the housing supply, resulting in a persistent affordability crisis for homes, strong economic performance and a favorable business climate make California a top choice for business investment and expansion. While Texas generally has a more affordable housing market compared to California, the overall cost of living and housing expenses are relatively lower compared to California, making Texas a cheaper state to work and live in, bumping up its prospects as a destination for expansion and new business.
Opportunities For Growth in New Markets
Available land and lenient zoning regulations can support new home and commercial property construction and related developments in states such as California and Texas. There are also many opportunities for expansion in inner cities, where many property firms such as Hughes Marino can focus on redeveloping existing commercial properties or repurposing underutilized spaces.
Reducing the time that a property stays on the market – or by reducing barriers to access, improving customer journeys, and effectively representing clients so that deals can be struck and progress can be made – can have a huge impact on outcomes. Hughes Marino’s expansion into Dallas looks to be indicative of such aspirations.
To this point, Shay Hughes, the President and Chief Operating Officer of Hughes Marino, said in a statement on the company’s expansion into Texas that “Dallas holds immense significance in the commercial real estate landscape as a vibrant community, economic powerhouse, and strategically located city. When we find best-in-class advisors who share our same values and have the ability to bring the exceptional service and results that we have become known for as a company, we jump at the opportunity to welcome those new team members.”
Other areas in which companies such as Hughes Marino can potentially have an impact in their markets of operation are by:
• Streamlining processes,
• Lowering transaction costs,
• Navigating stringent mortgage lending requirements,
• Handling evictions (since they can lead to business instability)
• Overcoming corporate relocation challenges, especially when housing costs are high in the destination city and relocating employees and attracting new talent to high-cost areas are concerns,
• Assisting with decision-making and financial planning in a volatile market,
• Managing maintenance and repairs
The Future of the Commercial Real Estate Market
The pandemic significantly lowered the demand for office space as companies adopted remote or hybrid work models. This led to a decrease in the demand for traditional office spaces and higher vacancies in commercial office buildings in many areas. However, some of this has been offset by the growth of e-commerce and the need for distribution centers and warehouses to accommodate online shopping – a trend further fueled by the growth of last-mile delivery services.
In addition, Environmental, Social, and Governance (ESG) factors are becoming more important to corporations, including businesses such as Hughes Marino that operate in the real estate space. Companies are increasingly considering sustainability and green building practices, which influences their decisions regarding office locations and leases. The growth of flexible and coworking spaces will also impact the corporate real estate landscape for years to come since shared spaces can offer companies the option to have a more agile and adaptable approach to office leasing.
The overall health of the economy, the popularity of REITs (Real Estate Investment Trusts) that offer investment opportunities in diversified portfolios of commercial properties, the e-commerce boom, the need for data centers and last-mile delivery infrastructure, changing interest rates, and potential market cycles are all macro trends that can also impact the future of the commercial real estate industry.
As Hughes Marino continues its nationwide expansion, however, the Dallas project is a great example of how smart companies can overcome challenges and leverage opportunities to the benefit of clients, suppliers, and shareholders alike. While specific market developments are anyone’s guess, improved services and offerings across the board in the real estate space like those provided by Hughes Marino and others will be welcome changes for everyone.