It’s already been six and a half months into 2023, and time seems to be moving at a rapid pace. As temperatures rise in Southern California, so does the national economy. Interestingly, inflation has cooled down, thanks to the Federal Reserve’s tightening policies. Although we are still above the desired 2% target, core inflation is now around 3% on an annualized basis.
While interest rates are historically low compared to the pandemic years of 2020-2022, they are significantly higher. Typically, interest rates are determined by the spread over the 10-year duration of Treasuries.
Normally, I wait until the end of the year to evaluate the previous year’s predictions. However, due to the rapid pace of change, I want to provide a mid-year recap for last year and this year so far.
With earnings season in full swing, I thought it would be fitting to report my own progress as if I were a big employer.
Industrial Spaces
In January, I discussed the prediction that third-party logistics providers would give back warehouse space. To clarify, a third-party logistics provider (3PL) is an outsourced warehousing service. Say you’re a company that needs to distribute products to Walmart, but you lack the space or resources to do it yourself. That’s where a 3PL comes in, offering services such as receiving, storing, re-packaging, and shipping your goods for a fee.
During the pandemic and even now, 3PLs have thrived and leased large warehouses. However, as inventory levels decrease, these providers require less space. Additionally, many 3PLs have signed term leases that have yet to expire, which means we can expect to see sublease space enter the market.
Now, for my July 2023 update: We have witnessed some giveback as Amazon started reducing its space in 2022. The demand for warehouse space seems to have declined compared to the frenzy of 2021 and 2022.
I initially anticipated a much larger return of space from 3PLs, but it hasn’t happened extensively. This falls into the category of “let’s wait and see what happens in the remaining months of the year.”
Recession?
I voted against a recession, going against the popular belief. Here’s why: Last year, the Federal Reserve implemented rate increases to curb a rapidly growing economy. The idea was that more expensive borrowing would discourage businesses from expanding and cool down the economy. Interestingly, the third quarter of 2022 saw an increase in the gross domestic product compared to the second quarter.
In addition, core inflation has been declining for several months, and retailers are reducing inventory. Some argue that we haven’t felt the full impact of the rate increases and that massive layoffs are imminent. However, I choose to have faith in the resilience of the U.S. economy and the unstoppable spending habits of consumers, especially evident during the holidays.
Now, for my July 2023 update: I correctly predicted that our economy would not experience a recession. While some argue that we haven’t fully felt the effects of the Fed’s rate increases, I still have confidence in the resilience of the U.S. economy and our ability to innovate.
We will have to wait and see what the next six months hold, but I believe we have successfully avoided a recession.
Return to the Office
There has been much discussion about whether we will return to the office after being forced to work from home for nearly three years. I vividly remember that fateful day in March 2020 when we all had to quickly adapt to remote work.
Fortunately, our team had already prepared for such mobility by figuring out how to work productively from different locations. We simply wanted the flexibility to work in client lobbies, dining rooms, or even the front seat of our cars without losing productivity.
While we were lucky to have an easy transition, many others struggled to remain viable. Some turned to online shopping and consumed lots of food. As for my prediction, I believed the workforce would return to the office this year while adopting a hybrid model. This means spending Tuesday through Thursday in the office and having Mondays and Fridays as optional work-from-home days.
Now, for my July 2023 update: Recent articles by Jeff Collins and Jonathan Lansner in Southern California News Group newspapers reveal that office space vacancies have doubled since the start of the pandemic. The new normal appears to be a hybrid workspace, with a few exceptions in certain industries.
Wealth advisory businesses have returned to the office full-time, while industries like real estate, healthcare, and insurance continue to work remotely. As of now, my prediction is considered a miss, but we will see what the next six months bring.
What about Retail?
The trend of returning to brick-and-mortar stores that emerged in 2022 will continue. For example, during a recent visit to the Main Place mall in Santa Ana, my wife and I were pleasantly surprised by the lively atmosphere. The mall was packed, and we could hardly believe there was a recession happening.
However, when it comes to convenience, online shopping is still preferred due to the avoidance of out-of-stocks, long lines, unhelpful staff, crowded spaces, and limited parking. Speaking of the Main Place mall, some of our favorite parking spaces have been taken up by a new multi-family building under construction. While this building will create its own customer base and foot traffic once occupied, it raises concerns about reducing tax revenue while increasing the need for police and fire services. It’s an ongoing tug-of-war.
Now, for my July 2023 update: The resilience of brick-and-mortar retail continues to amaze me. I recently made some online purchases and chose to return them at the physical store instead of dealing with re-packaging and shipping. To my surprise, the return lanes were as busy as a traffic jam on the notorious 405 freeway. This was the case for both a lower-end big box retailer and a higher-end specialty seller. People are definitely traveling! I heard a report that Los Angeles International Airport experienced its busiest July 4 weekend ever. It seems the pent-up demand for travel is finally being unleashed.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected] or 714.564.7104. Check out his website at allencbuchanan.blogspot.com.
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