The Pandemic and Real Estate Trends in Delaware

THE PANDEMIC AND REAL ESTATE TRENDS IN DELAWARE

Sean O’Neill, AICP Policy Scientist University of Delaware, IPA [email protected]

04/23/2021 Agenda

• Why Do Real Estate Trends Matter Now?

• Findings from Interviews and Delaware Data

• Findings from National Research

• What Does It Mean For Local Governments in Delaware?

2 Why Do Real Estate Trends Matter Now?

• Real Estate is the one of the largest employment sectors in the country and has a large impact on the economy, taxes, and how we live our lives • Fundamental changes in all sectors (pre-COVID) • Retail • Office • Industrial • Housing • The impact of the pandemic • A need to rethink land use management, and plan for changes moving forward

3 Approach to Research

• Interviewed 15 real estate and land use professionals in Delaware • 11 using a question and answer form • 4 as podcasts • Identified data related to development trends dating back to 2018 in Delaware • Looked at national research to see how it relates to what is happening in Delaware

4 Major Findings • Retail • Online delivery services are cutting into the market and demand for space is declining

• Office • Remote work is causing many office users to re-evaluate their leased space, and demand for space is declining

• Residential • The for-sale market has been booming, in part because of the pandemic and the ability to work remotely • Multifamily has also been strong and demand continues to grow

• Industrial • Warehouse distribution development is booming, and Delaware has become a more viable market for these sites

5 Interview Results - Retail

• As people were in lockdown some habits changed, potentially permanently. Consumers became more accustomed not only to Amazon delivery services, but also to services such as Door Dash, Uber Eats, Grub Hub, etc. • The two types of retail primarily hit hard were restaurants and “Mom & Pop” retail stores. • Grocery stores, liquor stores, pharmacies, and any retail that is more “needs-based” were not hit as hard. • Chain stores also seem to have had an ability to survive easier.

6 Interview Results - Retail

• Drive-through businesses have “The retail sector will need been in much higher demand, and chains like Starbucks and Wawa to start to adapt to service are expanding those concepts in industries within shopping the region now. centers, looking to services • Properties in shopping centers that are not anchor spaces and like dentists, offices, etc. not pre-leased for larger chain Development will be retailers may become less designed to accommodate common in the near future. • At the same time, the age of “big retailers that aren’t as box” stores have taken a big hit impacted by COVID or e- and it is unlikely that many of commerce, such as small these stores will be developed in the near future. drive-throughs, not demand for space over 5K sqft.”

7 Interview Results - Office

• Currently, the office market has not “There is going to be a been hit quite as hard as the retail huge divesture of office market, but experts say it is coming. space. Wilmington could • Office tenants typically lease properties over long periods of time get slammed, maybe over such as 5, 8 or 10 year leases. 50% of total office space • Office users have not been leaving. Example is JP particularly hard hit by the pandemic Morgan looking to divest comparatively. millions of sqft nationwide. • Most large office tenants are looking to reduce space. We now KNOW everyone • There are differing views regarding can work from home, so where this downsizing will hurt there is no question about it most, some think outside of the anymore and companies Wilmington CBD will struggle more can save money.” and some think less.

8 Interview Results - Office

• Expectation is that many companies will reduce space, but tenants are paying rent and taking a “wait and see” approach. • This sets up a delayed response scenario where once we return to the office, we could see many office users reacting to the “new normal” by reducing their leased square footage anywhere from 20%-50% in the 2-3 years that follow.

9 Interview Results - Residential

• By all accounts, new home sales have never been hotter, especially “Housing market has in Sussex County. increased two-fold, with • Assumption is that as people started working remotely, many decreasing mortgage rates decided to buy a home in Delaware and accelerated timelines either as a vacation home or a for those of retirement age primary residence. (55+). The amount of days • Interest rates have also been very houses stay on the market low and due to remote work and remote schooling families have has decreased along with seen this as a good time to move. the supply of resale • Additionally, many said residents in homes.” major cities were interested in moving out of smaller spaces to a suburban setting with more space.

10 Interview Results - Residential

• There is also a sense that these trends may not last very long and is more of a reflection of a short term flooding of the market. • Home ownership is declining and becoming more exclusive nationwide. • Multifamily is also very strong compared to past time periods in Delaware, however this trend also reflects what is happening across the country. • Local zoning restricts multifamily development, which is likely why more has not occurred.

11 Interview Results - Industrial

• Industrial warehouse and distribution space has never “Industrial has been a huge been in higher demand in beneficiary of the pandemic. Delaware. Retail demand is displaced by • Delaware’s location within the Amazon & Walmart, replacing region and access to I-95 appear the primary drivers for Mom & Pops. Industrial is this demand, perhaps along accelerating nationwide, but in with the State’s economic Delaware it has suddenly development efforts. become a much more • In many ways, Delaware has attractive market due to recently put itself on the map for Class A warehouse users, and location for regional more of this type of distribution. And this recent development can be expected trend could accelerate.” in the near future.

12 Interview Results - Industrial

• Eventually demand for this space will fade some, but there will continue to be demand for “last mile” deliveries. • Much of the development has been north of the Canal, but there is interest in the new 301 corridor and central Sussex as regional distribution centers. • As more of these jobs locate here, important to think about how those employees are travelling to these locations and where they are living.

13 • Statewide Trends • Based on PLUS reviews, development activity slowed considerably last year. • New Castle County remained somewhat strong while Sussex development activity dropped off significantly. • Residential activity in Sussex has been high over the last 10 years while commercial development has been more focused in New Castle County.

14 New Castle County Data

• Based on PLUS reviews over the past year, New Castle County commercial and residential development activity remained strong in 2020.

15 Kent County Data

• Kent County development continued to lag well behind NCC and Sussex. • Commercial development fell off dramatically while new residential development has remained very low for 3 years.

16 Sussex County Data

• Based on PLUS, development applications dropped off considerably in Sussex County in 2020. • Residential reviews were about 1/3 of where they were in the previous 2 years while.

17 Residential Trends Where are People Moving From?

18 Residential Trends

19 Residential Trends

• Residential – March 15 Dover Post article • Sales in all 3 counties were up in 2020 • Sussex up 24.4% • Kent up 13.8% • NCC up 3.0% • Median days on the market also dropped • NCC, 20 days to 9. • Kent, 28 days to 14. • Sussex, 44 days to 25. • Many more buyers coming from NY, NJ, PA and CN

20 National Research • Retail • In 2020 retail growth slowed considerably. • The shift to delivery services such as Amazon increased dramatically. • Retailers are likely to look at downsizing the format of many of their stores. • Even stores that offer essential goods will be impacted, including grocery stores. • Ultimately the “death of retail” has been exaggerated, but the market was already overbuilt and now there will be much less demand. Source: ICSC "The Impact of COVID 19 on Evolving Use of Retail Real Estate 2021"

21 National Research • Retail – 5 Ways Retail is Changing for Good 1. Back rooms turn into mini-warehouses. a. “The store is becoming an extended part of the supply chain, to do ship from store,” said John Morris, head of CBRE’s industrial and logistics and retail divisions. 2. More space for handling returns in stores. a. “Part of a retailer’s overall strategy will be to encourage online customers to bring their returns to the store rather than mail them,” CBRE said 3. Curbside pickup will become the new normal. a. “I think our retail stores are going to become fulfillment centers,” Galleria Dallas’ general manager, Angie Freed, said in an interview 4. Fundamental changes to store staffing. a. Future stores will have a mix of customer service and fulfillment staff. 5. Changes to rent structures and leasing. a. “A new and more sophisticated pricing mechanism is needed to determine the value of stores and retail rents, especially for retailers that have more online channels,” CBRE said.

Source: CNBC article “5 ways the coronavirus pandemic is reshaping the future of retail stores” 12/17/20

22 National Research

• Office • Office users adjusted quickly and relatively well to the pandemic. • As a result, large companies are already planning to downsize space but have not done so yet. • Most are in a holding pattern, waiting to see what works well for their business as they return to the office. • We can expect a large downsizing of office space, guesses seem to be between 20%-40% overall. • In the future, this is likely to have a huge impact on our built environment.

23 National Research

Source: “The Great Real Estate Reset: The Office Reimagined” Brookings December 2020

24 National Research • Residential • The for sale housing market boomed in 2020 with low mortgage rates and a desire by some for more living space. • Apartments are also experiencing very high demand despite the eviction crisis. • 2021 is expected to be another very strong year in both for sale and rental markets. • Moving forward, home ownership is likely to become more and more expensive and exclusive. • Rental demand is expected to rise, as fewer people are able to afford homes.

25 National Research

• Affordability Crisis • Growing income disparity • Entry level housing not being built • Middle income housing is not being built • Not enough density is allowed in high demand locations • Larger luxury homes a growing portion of the market • Lower marriage rates & household development

26 National Research

• Industrial • Warehouse distribution facilities have been in high demand for over a decade, and that trend accelerated in 2020. • The growth in online delivery services has only strengthened this market, and it continues to be a favored asset type for investors. • Interestingly, NET completions for this property type hit all time highs in each Qtr in 2020 while absorption and rents dropped. • Eventually this growth will slow once the percentage of online retail sales hits a limit, which some experts expect to be around 30% eventually, but it is not known what that will be at this point.

27 National Research • Industrial – 5 New Warehouse Types • Multistory Warehouses: Designed to overcome the limitations of smaller lots, these warehouses are built vertically, with truck ramps and docks located on multiple floors. • Darkstore Distribution Centers: These distribution centers are designed to replace retail distribution with last-mile delivery and frequently employ partially automated fulfillment systems. Although they are not open to the public, many appear similar to conventional stores, with aisles and shelves. • Grocery Conversion: Micro-fulfillment systems installed in existing grocery stores. • Flexible Micro-Distribution Centers (MDC): Smaller spaces that have been repurposed for distribution using automated systems, such as turning an empty underground parking garage into a grocery fulfillment center. • Nano-Distribution: “Last-touch” fulfillment from former office or retail space. Source: "The Evolution of the Warehouse: Trends in Technology, Design, Development and Delivery" October 2020 NAIOP report

28 A Need to Rethink Land Use in Delaware? • Retail – Definitely Overbuilt • Demand for retail declining swiftly, what to do with all the “extra” space? • What do trends mean for parking? • Office – Probably Overbuilt • Similar to retail in terms of the decreasing demand, but unclear where the impact will be. • Flight to quality? • Residential – Not enough and many other issues • Both for sale residential and multifamily are in high demand, for differing reasons. • How can we create new more affordable housing options? • Industrial – Not slowing down yet, but what is next? • Warehouse distribution development is here for good, but unclear when the market will peak and what could be next. • How do we plan for the “new normal” challenges that logistics and product distribution present?

29 So What Can Local Governments Do? • Most local government in Delaware are small towns • Large distribution warehouses are often not an option • Large office buildings are not in demand, and would not be an option for most • Many small towns consist largely of residential and retail uses • Residential in high demand, retail has struggled

30 So What Can Local Governments Do?

• Potential Steps & Strategies

• Closely evaluate zoning and land use regulations

• Consider allowing more flexibility in uses

• Consider encouraging redevelopment of existing sites

• Focus on “placemaking”

• The 15 minute city/town

31 So What Can Local Governments Do?

• Closely evaluate zoning and land use regulations • Revisit your future land use map • Is your zoning flexible enough? • Are your regulations overly restrictive? • Are you allowing uses that are in high demand in your market? • Are you managing parking appropriately?

32 So What Can Local Governments Do?

• Consider allowing more flexibility in uses • Retail is changing quickly and demand for retail is declining • “Main Streets” are at a disadvantage to shopping centers • After reviewing zoning, consider allowing for a wide variety of uses throughout town • Focus on allowing owners to provide uses in demand, and be flexible on issues like parking • Consider a market analysis to identify uses in demand

33 So What Can Local Governments Do? • Encouraging redevelopment • Do you have underutilized sites with frequent issues for tenants? • Do you have properties that are often vacant? • Consider zoning changes to encourage redevelopment • Balance with historic interests, but poorly maintained vacant buildings are a deterrent • Increasing density and promoting residential uses can help

34 So What Can Local Governments Do? • Focus on “placemaking” • Make your town an “experience”, not just a place to live or visit • Engage community leaders • Begin with the end in mind • Engage artists and promote culture • Understand and articulate stakeholder benefits (property owners, residents, businesses) • Seek early and easy wins • Pursue creative financing options • Stay focused on the long view

35 36 So What Can Local Governments Do? • 20 minute neighborhood • Provide homes, jobs, parks, services, medical services, restaurants etc within 20 minute bike ride (3 miles) • Creating a dynamic place • How COULD you do this? • Do you have high speed internet? • Are you walkable and bikable? • Are there places where someone could work remotely? • Do you have public spaces?

37 38 Break Out Groups • What might changes to the real estate landscape mean for your area?

• What could be done to help adapt to these changes?

• Identify specific opportunities in your town to capitalize on these trends

• What are the likely obstacles you’d face in pursuing changes?

39 THANK YOU

Questions?