Office Oversupply Looms, But Global Economies Look Solid, Commercial Real Estate Economist Says

China, some US cities could face glut due to aggressive development.

As the world’s economies rebound, developers have embarked on a construction spree that will create a “scary” amount of office space, says Kevin Thorpe, global chief economist at commercial real estate brokerage Cushman & Wakefield.

Some 700 million square feet of office space is under construction worldwide, and Thorpe fears an oversupply.

“This massive wave of supply is absolutely going to create pain in the world’s office sector,” Thorpe said Thursday at the National Association of Real Estate Editors’ conference in Denver.

The most aggressive development is occurring in China, Thorpe said, but some US markets also are in danger of a glut. He pointed to Brooklyn, New York; Austin, Texas; San Francisco, Nashville, Tennessee; and Seattle as the areas most at risk of office overbuilding.

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Office owners face a number of headwinds, Thorpe said. With more employees working remotely, companies are using less space per employee. What’s more, US job growth has been so strong in recent years that the labor market is approaching an inevitable plateau.

“We are nearing full employment,” Thorpe said. “Job growth is slowing, and therefore there is going to be less demand for real estate space going forward.”

Overall, Thorpe sees continued expansion for the US and world economies in the coming years. Consumer confidence is soaring in the United States and Europe, and trillions of dollars in stock wealth have been created since November.

Thorpe said the next recession is likely to be a mild one. In fact, it’s possible that the dip in the global economy after last year’s Brexit vote qualified as a mild recession.

“Maybe we have reset into a new expansionary cycle,” Thorpe said.

Meanwhile, the tight financial regulations imposed after the Great Recession mean banks have robust balance sheets.

“The US financial system is about as solid as I’ve ever seen,” Thorpe said.

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Amazon’s Whole Foods Purchase Sends Worldwide Retail Stock Shock

 Acquisition shows value of brink-and-mortar establishments for food purchases, UBS says.

In addition to the retail industry, Amazon is looking to shake things up for the grocery industry with a proposed $13.7 billion purchase of Whole Foods—engulfing the market in chaos in the process.

While the deal thrusts Amazon deeper into the grocery sector as well as directly into the brick-and-mortar market, the news has caused shares of US, Canadian, and European retailers, supermarkets and food manufacturers to plummet.  Meanwhile, share of both Amazon and Whole Foods rose 2.44% and 29.10%, respectively, with Amazon closing Friday at $987.71 and Whole Foods at $42.68.

“A few years ago, people were talking about the death of brick-and-mortar, and Amazon’s up because they’re buying a brick-and-mortar. I think it’s kind of an affirmation that you need brick-and-mortar,” Thomas Digenan, CFA, CPA, Head of US Intrinsic Value Equity, UBS Asset Management (Americas) told CIO.

As close of market Friday, the disruption brought down US shares of Wal-Mart Stores Inc.) and Target Corp. by 5%, and  Kroger Co. and  United Natural Foods Inc. approximately 10%,  10.97%-.  Sprouts Farmers Market Inc.  was down 6.29%. In Europe, shares of supermarket chain Tesco Plc  were down 4.26% and Carrefour  were down 3.22%. In Canada, both Loblaw Companies Ltd. and Metro Inc. fell more than 5.5% at one point. Consumer staples stocks also took a hit, falling to their largest drop since October 2008.

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The alliance also managed to throw the S&P 1500 food and staples retailing index off 4.28%, as well as the S&P 1500 sector index, which dropped 2.11%.

Shares of packaged food companies and food distributors fell as well. Oreo cookies and Nabisco brand owner Mondelez International Inc. slipped 1.50%, Heinz Co. saw a 2.24% dip, Hershey Co. dropped 2.65%, and Sysco Corp. fell 2.07%.

“If this works, I think Amazon could expand further in grocery, or look at the other things they do,” said Digenan.  “They could buy an apparel line or they could look into media. They’re always wanting to extend their footprint. If you look at it, they built this giant foundation and I think they want to plug things into it. I don’t think the grocers are dead. Those stocks that got hit, it will be a challenge. But Amazon has been in the grocery business for seven or eight years (Amazon Fresh or Amazon Go), but they had to buy a grocer to make an impact. It’ll be interesting to see how it’s integrated within the Amazon platform. I’m sure they’re going to tie it in with Amazon Prime, somehow.”

As for what the grocery industry should do to compete, Digenan suggested fellow brick-and-mortars should improve their service without having to increase their prices.

“I think it would be a mistake to try to compete on e-commerce, because the reason Amazon is doing this is because Amazon has shown that they don’t really have an attraction on ecommerce [for groceries]. People don’t want meat left on their doorstep. People will continue to go to the grocery store, and Amazon identified that they weren’t going to be able to get them online. They needed a physical presence. I think it will increase the efficiency of the ordering process, maybe the grocer experience. They’ll have to step it up, but if they improve their service without increasing the price, that hits margins. Amazon, for the consumer, is phenomenal for price discovery. The one thing that the internet has done is make everyone a more educated consumer. If anything, that trend will continue and it will be even higher in groceries than it ever was before.”

Amazon is UBS’s second-largest holding.

Whole Foods will continue to operate stores under the Whole Foods name. The deal is expected to close in the second half of this year.

 

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