The Flight to Quality in Commercial Real Estate
The pandemic has changed many things within the commercial real estate industry, not least of which is the sharpening effect it has had on Landlords’ selectivity when it comes to tenants. Combined with the unfortunate weeding out of struggling concepts, particularly in the hospitality space, there is a new playing field emerging: one where quality is everything and the value of your concept is under a new microscope.
To talk about this new landscape, we chatted with Metro 1 Managing Director Andres Nava to get his thoughts on “The Flight to Quality.”
Q: How would you define the “Flight to Quality”
Nava: I would define the “Flight to Quality” as, in the face of all the challenges 2020 has presented, the overall trend of being more selective in what we do (as consumers). Everything, whether due to limited options, health concerns, or a reduction in financial liberty, is now under careful consideration. Where we eat. How many times we leave the house. Where we shop. We are all picking collectively with our voting power, which is our dollars, which businesses are going to survive and thrive during these times and which are not.
In the case of hospitality concepts, that translates to the best restaurants doing even better than before, and the “bad ones” doing worse than ever. As consumers, we are gravitating and consolidating our buying power around our favorite concepts.
It’s the same thing with office buildings, and really every aspect of real estate.
For landlords, they are evaluating tenants with a renewed sense of scrutiny. They want to know that the concept going into their space is going to be successful and sustainable, and will provide them with cash flow regardless of a pandemic or something else cataclysmic like this affecting the market. You’re going to pick the tenant that has the best chance of adapting to the new world.
Q: Are you seeing this trend affect both Landlords and Tenants?
Nava: It goes both ways, because as a tenant, you are looking for the best location, too. We (as tenants) are being more selective with our choice with how we spend our business’s money. Where we place our company. We don’t want to spend money on rent unless we believe that the location or the building we are in is delivering the top value for our business.
That’s why it’s so important to market the quality aspects of your product in terms of the Landlord.
Q: Was this a trend that you were seeing before the pandemic?
Nava: It’s something that has always been the case, but is definitely more pronounced now. For example in the investor world of CRE, there is of course a segment of investors that only want to go after trophy assets and so on and so forth, and have always been that way, versus a value-add investor who is looking to flip a property or hold it over time. But now, if you’re not a value-add investor, and you’ve never fallen in the “trophy asset” category, you want to go to for something that is safe, and that means quality. If you’re falling somewhere in the middle, then you might end up getting screwed.
Q: What are the attributes of a “Quality User” — at least when evaluating a tenant from a landlord’s perspective?
Nava: Always sales as number one! The track record of a company will give you that clarity on how profitable the company is, and how it will perform in the future. And believe it or not, the next thing we start to look at is their social media following, if it’s a B2C concept. Do they have a huge following and a huge presence, that demonstrates a loyal customer base…one for instance that will continue to support them during a pandemic? There were a lot of businesses who didn’t adapt to online and eCommerce before the pandemic, who neglected their social media, and now they are at a massive disadvantage.
Q: How do you find quality users if your space isn’t organically attracting a high-volume of interest?
Nava: You’ve got to cover your bases, I won’t give you the recipe for the secret sauce, but work with a good broker.
In a market where it was a landlord’s market, for a couple of years before COVID, there was not as much inventory and so there wasn’t as much of a need to push commercial products in innovative ways, because of limited supply and a great amount of demand.
Now, it’s a tenants’ market and a buyers’ market in a lot of ways in the CRE space, so it’s even more important to be as quality-driven as possible. Marketing the property in a quality way is really important now.
Q: What industry do you see being affected the most by the “Flight to Quality?”
Nava: Retail has definitely been hit the hardest — you need to have a good reason why someone would want to interact with your brick and mortar. There has to be a reason why someone will still come and visit your location rather than shop online.
To connect with Andres Nava, Managing Director of Metro 1 Commercial Real Estate in Miami, visit www.metro1.com or follow Andres on Instagram at @juanandresnavacre.
