Hi, I'm Jeff Rea, your host for Economic Outlook.

Welcome to our show.

We hope you make plans each week to join us as we discuss the region's most important economic development initiatives.

Retail is at a crossroads, and the future of office space is unclear.

Supply chain issues persist and inflation is near 40 year high.

But there are some bright spots in the commercial real estate forecast as the hot streak for industrial properties remains and multifamily properties continue to perform well.

We'll take a closer look at what's happening in the commercial real estate markets coming up on economic outlook.

Most analysts predict that 2023 could be a challenging year in the commercial real estate markets impacted by things like the war in Ukraine, market volatility, high inflation and interest rate hikes.

At the same time, a number of critical projects are advancing in our region.

We're taking a closer look at what's happening in the commercial real estate space, and I'm joined for that conversation by two experts, Tim Mehall, the vice president of retail services and principal at NAI Cressy.

And Jeremy McClements, senior vice president at the Bradley Company.

Gentlemen, welcome.

Thank you.

Thanks for coming back.

We've had you a couple of times before, and it's always been a pretty popular discussion to talk about what's happened in commercial real estate.

I think people are it's the bigger buildings in town.

It's the high profile stuff people want to know a little bit about.

So thanks for coming and being part of this conversation today.

Tim, come your way.

First, just just more of an introduction.

If people don't know NAI Cressy, tell us about what that is.

NAI Cressy is we're actually coming up on our seventh fifth year anniversary in the community.

We started out as Cressy Everett years ago and and made the shift to a rebranding and a realignment with NAI I don't know, five or six years ago.

And Jeremy, if people don't know the Bradley name, what's it tell us about the Bradley Company?

So Bradley Company is again, a commercial real estate firm locally been around since 1978 and based out of South Bend.

I'm based out of the South Bend office.

Our corporate offices now are based out of Indianapolis but have offices all over the region and kind of service the entire commercial real estate market kind of beginning to end anything that people need.

Great.

So you guys are in the middle of what's going on.

Let's let's just let's have a high level conversation before it is.

Experts are talking about 2023, kind of some uncertainty out there.

We're not sure what's with like I mentioned inflation rates and, um, so what's what's the general state of commercial real estate?

Tim, I'll come your way first.

How is it how are things going in the commercial space right now?

Well, I can speak to the retail space at this point and it's, it's I think 2023 will be similar to 2022.

We haven't seen a lot of large scale development at all in the community.

There's been some smaller, smaller multitenant two or three tenant kinds of activity.

There's been some larger tenant backfill of space, but there hasn't been a lot of that either.

I think we've been over the years, we've been blessed as a community where, where when things really boom, we haven't exploded and there hasn't been a ton of space getting thrown on the market at one time, which, you know, the down or I guess the good part of that is that when the market does go to sleep for a while, we don't have a ton of space laying around waiting to get occupied.

So there's there's some demand right now, but there's a little bit of a we're having a hard time matching up available space with the users.

But but by and large, it's it's not going to be huge scale development going on.

Right.

Jeremy, same question.

So talk a little bit about the kind of the state of commercial real estate now.

Sure.

I mean, I think I spent a lot of time in the industrial space and obviously that's been pretty strong all throughout the pandemic and continues to be that way with really low vacancy rates.

So there's not a lot of space available.

There is a little bit of development going on on that piece for sure.

You know, there's a 296,000 square foot building on the northwest side that's available as a speculative building, and that's the fifth building by Great Lakes Capital that's going up out there.

And so there's a there's a little bit of that.

But right now, there's a lot more people looking than actually willing to actually move forward on a deal.

I think there's a lot of uncertainty.

You know, decisions last year that were telling people were telling us that we're going to get made in the first quarter of this year have gotten pushed to the third quarter while they try to kind of figure out what's going on.

And so there's definitely a little bit of slowdown in terms of activity.

There typically is in the wintertime anyway.

There's a little bit of a slowdown in activity, but part of that is just because of like what Tim said, there's not a ton of available space out there for people to do to go into.

So there's definitely that.

I think on the office market, you know, there's there's kind of two different areas locally here.

There's the downtown sort of office market and then the Mishawaka office market, which has done really well.

I think there's there's a little bit of a flight to quality and space and people trying to find smaller spaces for their offices, people trying to get people back to the offices and what that looks like.

So all that's kind of going into this this time of the year and causing us to have a little bit slower pace of deals getting done, but definitely a lot of activity in the market to come back.

You're renting retail for a second, so so I think of maybe retail in two buckets sometimes, maybe the suburban retail and kind of the downtown.

There's been a lot of interest in, especially in all the downtowns here recently to do more commercial retail type development.

It is one doing better than the other.

Is that a is that a good strategy for folks to be thinking about new retail spaces in their downtowns?

Well, it's it's new retail space in downtown ground floor of multi family buildings or office buildings with ground floor retail.

It's there too to fill what hopefully is a need the you know, the more people move downtown, the more they're going to require services of some type or another.

You know what we've seen for the most part the last several years when that's happened is it's been restaurants that have come in to service that that's that always seems to be the first thing that that that I think that local government wants when they're generating trying to generate traffic in their downtowns so it can work and I think it has worked in South Bend it's working I think in downtown Mishawaka as well with the you know, the what's happened at the mill and with South Bend Chocolate opening up a public house at the skating facility.

But but I think there's I think the expectations of the kinds of tenants and and and the sales volume that people are going to do that's going to be tempered a little bit because we're still not you know, there's still only so many people that are going to be in those, you know, that are going to be around those kinds of projects Jeremy to come back here.

We touch on Office for a second.

So obviously, pandemic was one of those where everybody left the office and work from home.

I think.

I see you think many communities still wrestling with how many came back to work down as many people are in the offices.

But talk a little bit about this pandemic impacts on things like the office market.

So obviously the pandemic had a huge impact on the office market.

It felt like everybody left and they did.

Everybody was at home and, you know, trying to get people to come back to the office.

It's not just about being in the office as much as it is about the culture and what you're trying to build as a company with the employees.

And so I think that's the big rub right now, is people trying to understand what does that look like to do a hybrid model or to have people come back into the office to focus on that a little more because people then just change how they live their lives during that time in terms of taking care of their kids and doing school at home and doing things like that.

They also they also changed the way that they were prioritizing their time and and trying to be effective at what they were doing.

And so I think that's the biggest struggle right now.

It's not that people don't want to be in an office at all, it's that they want to be on a smaller footprint than they were in before.

And so, you know, that that can have a like downtown South Bend could have 30% vacant space right now as opposed to Mishawaka.

That might be ten or less single digits in terms of what's available, just because they're caring more about certain amenities like free parking and available parking and restaurants and things to go to when they're in the office.

So it's kind of changed the whole idea of what office space looks like and needs to look like.

And companies have figured out how they can be profitable and how they can be successful by having a smaller footprint.

And now we're just trying to figure out how to put those people in those spaces in the right way Tim to come back your way.

So we took pandemic impacts a little bit.

I think a little bit of retail.

I think for years people have been ready to proclaim retail dead, dying, suggested everybody's buying everything e-commerce, right?

They don't even need to go out to the store anymore.

But I think similar to the office, there's a little bit of this.

Some people still like the shopping experience a little bit.

Just talk about sort of maybe e-commerce, retail, how those two things are fitting together.

Yeah, well, the point's a good one about about how people, you know, people still want to interact, they need to interact.

I think there is a cultural thing about shopping and touching and feeling and seeing the merchandise that you're looking at.

There's not a lot of there's no question that e-commerce is is obviously exploded.

But but people are still are still getting out, getting on the street and getting into stores.

Smaller footprints in retail just as an office and and there's there's still things that you you have to go out for.

You can't you know you're not going to get your haircut online.

You're you know there's there's certain things that you've you've just got to get out and do.

So I think that's where a lot of the concentration is going to be over the course of the next couple of years.

But but I think I think retailers are also seeing that that they don't that everything isn't going to be bought online.

A lot of stuff obviously, is.

But not it's it's not going to it's not going to go away.

The bricks and mortar Jeremy coming your way on the industrial side.

So as we talk about e-commerce, I think what we've seen is the explosion of warehouse space is people need to meet the just in time delivery stuff.

So just talk about its impact on industrial and kind of what's happening, how it's influenced, what's going on.

I mean, the biggest thing has done is it's changed the type of buildings and quality of buildings that are getting put in the market.

So if you look at the northwest side of South Bend or you look into other Elkhart County, you're seeing different buildings going up today.

Then we're going up before.

So they're taller, they have more docks, they're they're more geared towards warehouse distribution as opposed to manufacturing.

Although there's a ton of manufacturing here still.

And and then they're getting bigger.

So you're seeing bigger buildings come in because, you know, the pandemic did cause and it still causes and continues to cause issues with supply chain.

And when manufacturers and warehouse distributors are trying to figure out what kind of inventory levels they have and they're they they don't know when they're going to get product that impacts things and it impacts things on the retail side when they go to sell them.

So I think footprints are changing some some are getting bigger, some are getting smaller, but it's again, similar to what we talked about before.

It's kind of a flight to quality.

So trying to find good buildings that meet the needs that are tall, that are big, that meet the needs of your business, but also meet the needs long term for an owner or a developer that's putting us together.

So that's kind of changed a little bit.

What we're seeing, interest rates haven't helped.

So, you know, if you have six and a half, 7% interest on a general note and then even higher on a construction note, it makes it a lot harder to put these deals together today to build these buildings on speculation or even to build them for a specific tenant.

So it does causes interest rates.

Interest rates are causing our rates to go up on buildings, and construction costs obviously have an impact on that, too.

Right.

Guys, Want to take a quick break here in the studio.

I'm going out in the field.

George Lepeniotis, my co-host, is out to dive a little deeper into a project here in the area.

George, let me toss it to you.

Thanks, Jeff.

I'm on the west side of South Bend over near the 31 bypass.

I'm joined today by young Isaac Hall with Great Lakes Capital.

Isaac, thanks for being around.

Hey, thanks for having us.

Hey, I want to talk to you a little bit about the projects you guys have going on here.

A lot of our viewers and residents across Michiana have noticed that this industrial park, I'll call it over near the west side of South Bend, near the Cleveland Road exit, has really multiplied and grown.

And that's a big part of what you're doing out here now.

But beyond that, I did want to talk a little bit about you and what what brought you to this point.

You're an analyst with Great Lakes Capital.

What does an analyst do?

I do a lot of analysis.

No, I, I look into a lot of market data, Look at where demand is, you know, for commercial real estate.

I do a lot of lease analysis looking at what a tenant is going to do in a space that we're going to provide to them and in a lot of numbers, got a lot of numbers.

Got it.

So when we are looking at the numbers and you're thinking about a project, what are the actual metrics that you look at to help you decide whether you should invest a lot of money building a project?

So our key metric that we use is the return on cost.

So it's the annual money that we get coming back in before debt service as compared to the overall cost of the project.

So as you looked at these new projects here, were these projects that you had tenants lined up before you developed or built the property.

So these were all speculative developments.

So we started construction before we had a tenant and we as we're building the project, we're going through the leasing process.

We're using brokers in the area who are looking for four tenants that actively need space in some of these larger warehouse type buildings that we've done in the past and done and focused on them on our show, we have noticed that there's a premium or a value to an already existing building for a business that's looking for space because they don't have to go through that time process of waiting for construction.

Absolutely.

You know, usually the build a suit process for an industrial building can take anywhere from 18 to 24 months with a speculative build.

You know, you bring a tenant in through the construction process and they're able to occupy this space in as little as eight, eight months.

Okay.

Now, what geographic early about this area or maybe even beyond that, what makes this so attractive to these tenants and businesses wanting to be located right here on the west side of South Bend?

So we're very centrally located in South Bend.

We have good access to the toll road, 80, 90, going east to west across the country and as well as north south roads that are very important for distribution.

So a lot of our tenants, our distributions centers, so goods come in from other DCs in the region nationally and then they go out to other other locations in the region.

And I know we talk about and our viewers are probably seeing some of our graphics of the construction site next door.

But this is one of your buildings that it houses what looks to be electrical infrastructure here and supply parts.

And that's really fits that model that you just described.

So.

All right, now let's focus a little bit on you.

So you grew up in LaVille?

Yes, I grew up in Lakeville, Indiana, was a LaVille Lancer.

And after high school went to IU South Bend.

So what made you decide to stay here in this region to pursue your professional career?

Yeah, it's mostly personal.

Have a lot of family in the area.

But on top of that, you know, cost of living in northern Indiana is much cheaper than than anyplace else that I've looked into.

So, yeah, and that's one of the things that we focus on a lot in the show is, you know, retention of talent and what makes younger members of our workforce want to stay in this area.

And I'm sure that the opportunity to work for an organization like Great Lakes Capital didn't hurt either.

No, it did not.

Very, very grateful for the opportunity to work with such a dynamic group.

Great.

Now you guys are focused on industrial and multifamily developments that seems to be the primary focus of your of your development.

How far does your geographic region span So Great Lakes Capital as a whole?

We have projects as far south as North Carolina and we are just now starting some some projects out west in Utah and Nevada.

So we're here, there and everywhere in between.

Arguably a national company based right here in South Bend.

That's right.

That's awesome.

So what's next after after the building across the street is built, which again, our viewers are saying, you and I have been out there.

What do we have a tenant for that facility that you can announce?

We do not yet.

We are talking to a couple of different tenants, but hope to have at least before construction is complete here in June.

Cool.

And then is there plans to further develop?

I noticed there's some other buildings, maybe not Great Lakes, Capitol buildings, but there are some other projects in this area.

Yeah, we do have an option on the remainder of the land from here to the state line, so we are looking at doing two more projects up there.

That's great.

Well, as we wrap this up and talk a little bit about the commercial real estate market, I know some of our viewers are thinking that may be slowing down or are you guys seeing signs of that in your industry?

You know, I think there is a little bit of slowdown just given interest rates.

It's the cost of debt has doubled in the last three years.

So there is a slowdown, but I think there is still a lot of demand for both industrial and multifamily in our area for sure.

Well, thanks for being with us.

Thanks for showing us around.

Thanks to the tenant for allowing us to film in here.

Jeff, back to you in the studio.

I'm sure you've got more to talk about, the commercial real estate market and some of the interesting things happening there in.

George, thank you.

Appreciate the inside look out there, guys, back in the studio as we continue our conversation.

Let's talk a little bit about maybe local real estate markets versus what's happened elsewhere is so are the trends here similar?

Are we better or worse than the rest of the country?

What are what are how do we stack up against other parts of the country?

Well, I think there's a lot of advantages to this area that that we're seeing that people that live here understand right.

It's a good place to sort of live, work and play.

And from a business perspective, Indiana is very, very friendly and on that piece of it.

So we've seen a lot of kind of flight from other states, adjoining states at times.

But, you know, we're all competing for the same thing right now, which is just workforce talent and being in the market and then available properties.

And so everybody's kind of having a struggle with that right now and specifically on the industrial side of buildings.

But our building is cheaper here than in other places.

They are they are cheaper than in metro areas like Chicago or larger markets, certainly cheaper.

It's a little bit cheaper to do business here in general from that perspective.

But it really does kind of comes back to the talent and workforce and what's available in Indiana does a good job promoting that.

And I think this area has so much to offer with what people have been spending and doing in the downtown areas.

And you know, what we talked about earlier, about everything that's going on in Mishawaka and downtown South Bend and Saint Joe, Michigan and all our different markets that we're in here.

There's there's a definite push to increasing the amount of people that live in the downtown areas and those areas and are available to work in the in the pool.

So I think those things have a lot of benefits for Indiana, and we certainly have the ability with the developers and the owners in this market to create buildings that people want to be in and want to be a part of.

Tim talk a little bit about just the retail market, like I feel like historically we were on the radars of all the big national retailers.

There was a critical mass here when somebody was growing or expanding, we were often on their radar and ended up with expansion here.

How do we stack up?

We still held in high regard by national retailers who look at this marketplace.

I think the market is still held in high regard.

It's it's and I don't think we're experiencing anything any different than any other, whether it's a similar size market to us or suburban Chicago or Grand Rapids or, you know, suburban Indianapolis, I think I think everybody's experiencing the same thing with just the general state of how retail is going and who's going to be active in brick and mortar and who isn't.

I don't think we're a lot different than anybody else.

And when you see people announcing closings or retailers having trouble, it's it's not this market.

It's it's across the board for that particular retailer.

They're shutting down everywhere.

Right.

If you take a look at it, when retailers announced closings, this is kind of interesting.

I think when they announced closings, if ultimately the whole chain shuts down, Mishawaka is on the back end of that of that list.

We are not the first market to get cut by any stretch.

We're always we always kind of hang in there until the bitter end with these guys right.

Great Jeremy to come back here.

We're in an industrial so so during pandemic and you mentioned still have some of this lingering impacts with supply chain and such but I remember supply chain and I remember costs were up significantly.

So that idea of building a building now versus building it a month ago or so have some of those costs started to level out a little bit?

Is it or are we still experiencing like a higher than normal cost?

Because and how long does it take to even get something going?

Can you can you get steel for a building?

I feel like there is a portion of time where you couldn't get it.

How's that going now?

So it's it's loosened up a little bit.

It's not all the way there by any stretch of the imagination.

But, you know, in the last I would say 12 to 16 months, we've certainly seen some of those prices come down a little bit, but it's taken a little bit longer to get buildings done.

So if you want to build one of those larger buildings today and then you had the steel package available, which is still a struggle, but you had all that available and ready to go and the land was ready to go.

You know, you're still looking at 9 to 12 months to be able to get that in the ground and get that delivered to somebody.

So that's the struggle is is how do you as a business, figure out what you're going to do today to grow your business in the middle of this economy, but not but also not really necessarily understanding how long it's going to take to get something done.

And with such a limited amount of product on the market, it makes it it makes it challenging.

So we we are seeing rates kind of go increase, write cost increase, raise rates increase.

So rates are going up.

It's costing a little bit more to to lease those buildings.

It's also costing a lot more to to own them, to build them.

So that is definitely a struggle, but it's a struggle that we're not that that's not uncommon.

It's a struggle everywhere.

So it's just something that we try to figure out.

There's a little bit of musical chairs that you have to play to move people around to make it work.

But that's what we're dealing with and everybody else is dealing with it too, right?

Tim to come your way for a second.

So so advice to you.

I think the the retail space a little bit to be an important entrepreneurial ecosystem.

A lot of folks thinking about starting up their barbershop or their restaurant or retail store or something.

What advice to somebody who's watching at home today, who's thinking about starting and then they're thinking about the real estate market?

Any advice to them as they're thinking about getting started?

Unless you've got a lot of cash in the bank, wait for rates to come down.

Yeah.

So I think it's really hard for for the really small, you know, one and two shop businesses to finance these days and to afford it and look really, really hard at the labor pool and where you're going to be able to pull people from and be as realistic, you know, as you possibly can be, you know, about about all of this stuff, about doing any of the analysis.

The labor market is obviously everybody knows is particularly difficult right now and particularly difficult for restaurants and in the interest rate environment is tough and, you know, rents aren't getting cheaper.

So it's it's it's there's a you know, there's getting to be a bit of a constriction there that people have to recognize and deal with.

All right.

So in our last couple minutes, I want to keep on this labor market piece, because you've both been in the marketplace for a little while now.

So why is it where is the labor market so different now than before?

Have we always had a little bit of this challenge?

Is it not enough people in the workforce?

Is there any anything in particular that you feel like is is causing the the big shortage there?

Yeah, I mean, I think in general, we've always had a little bit of a struggle, right.

And with labor and everybody does, everybody experiences that, you know, when the we're right next door to Elkhart County and 85% RVs are made there, you know, those guys did really, really well during the recession in terms of producing units.

And now they're going to have a little bit of a pullback this year, still higher than traditional years.

But that that impacts the market.

That impacts the labor market.

And when you have a significant amount of people that are employed in these different manufacturing facilities and sent to our county and Elkhart County and the surrounding counties, that does change how how things work for everybody else.

And so I think that's a that's a big deal and it's something that everybody is trying to figure out.

So if people get laid off, can they can they come back to work at a lower wage or what does that look like where interest rates going up, consumer confidence is still high.

People are still spending money.

So we have to increase rates more aggressively.

That makes a huge impact on the down the road to everybody, not just people in the labor market, but to people that are trying to employ those people.

So that's that's something that we've always dealt with.

It's just everything's gotten magnified by the pandemic.

So he's Tim Mehall from NAI Cressy Jeremy McClements from the Bradley Company gentlemen thanks for joining us today appreciate the chance.

So some cautious optimism, a little cautious with inflation rate inflation and some of those things.

But we'll we'll look forward to having you back and looking at real estate again here in the future.

So that sounds good.

That's it for our show today.

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I'm Jeff Rea.

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