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Q3 2019 Edition

A Message from Chip Clarke

Cover Story
Layers in the Coworking Landscape
George Vogelei

Differentiating Office Space
Adam Stoltz

Industrial Infill Complexities
Brian Banaszynski

CRE Sector Downturn Readiness
Jonathan Chambers


The Transwestern enterprise comprises diversified real estate services, investment management and development companies. The privately held, fully integrated organization leverages competencies in office, industrial, retail, multifamily and healthcare to add value for investors, owners and occupiers of real estate. Experience Extraordinary at and @Transwestern

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A Message from
Chip Clarke

In this issue of Insights, we examine changing landscapes in commercial real estate. Our cover story on coworking highlights the variety of workplace environments available to occupiers in this evolving office niche, and explores the underlying strategies landlords and coworking operators are using to bring the shared workplace experience to their properties. This story package includes an advance peek at Common Desk’s space in 3400 at CityLine, a speculative office project by UBS Asset Management and Transwestern Development Co. in North Dallas.

Our article on industrial development discusses the increasing complexity of these projects. We show how e-commerce has shifted much of the nation’s industrial demand to urban neighborhoods for faster last-mile delivery to consumers. Then, we touch on infill construction’s numerous challenges, from increased competition for sites, to the nuances of demolition and environmental remediation, and how those factors contribute to rising rental rates.

"We offer these insights to help light your path in this changing real estate landscape."

In “Practicing What We Preach,” we offer up recent Transwestern office relocations and a new technology tool as examples of Transwestern’s collaborative approach to client service. Our case studies demonstrate how subject-matter experts in offices across the country join forces to forge real estate solutions to client challenges.

Finally, our research consulting affiliate, Delta Associates, predicts how the major property types are likely to perform in the event of an economic downturn.

We offer these insights to help light your path in this changing real estate landscape.

Warm regards,

Chip Clarke
President - Western U.S.

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George Vogelei
Executive Vice President
Occupier Solutions

In just 10 years, coworking has brought fundamental changes to commercial real estate. Providers of shared workspace grew 399% from 2010 to year-end 2018, the most recent data available, according to Emergent Research. While that growth seems to be slowing, the sector could take on another 22.2 million square feet by 2022 and expand its memberships by 1.1 million users, a 99% increase.

The number of providers and operating models in the coworking niche can make it a confusing field, however. New brands account for about 65% of the new coworking spaces that open each year, according to research by Coworking Resources, which follows the industry. That means myriad types of coworking are available today. Furthermore, providers – and landlords – are using a variety of business structures to bring those spaces to the market, giving property owners more options to incorporate coworking into their buildings.

Coworking Occupancy

Outsized Influence

While coworking providers occupy less than 1% of the U.S. office market, their rapid growth and rising popularity have had an outsized influence on perceptions of what the workplace can offer. Office users today expect their leased space to offer features that initially made coworking unique, including flexible terms, compelling amenities and a variety of settings within the workplace. Ranging in size from sole proprietorships to global enterprises, firms increasingly include coworking options in their real estate searches and are raising the pressure on landlords to offer some form of the product type in their portfolios.


The drive for differentiation has yielded a host of specialized coworking locations that cater to workers by industry, aesthetic tastes, gender and other characteristics. Specialization is usually a function of local demand, as reflected in these examples from across the United States.

coveHQ, which has locations in Washington, D.C., and Virginia, provides the atmosphere of a private, fully serviced office and is aimed at companies seeking to develop their identity. This white-label concept expands on cove’s network of neighborhood locations, which serve primarily individuals in a more casual setting.

Eastern Foundry has two locations near the District of Columbia serving businesses and start-ups working with government. It plans to open a third facility soon just south of Fort Bragg in Fayetteville, North Carolina.

InDo Nashville, which stands for Inspiration Domain, primarily serves the music industry in Tennessee’s capital city.

Clinicube opened its second New York City space in 2019 and provides medical office space with shared services including reception, electronic health record management, billing and other activities.

The Wing, designed for female clientele, launched in New York City in 2016 and expanded to San Francisco and the District of Columbia in 2018. This year it is growing with a fourth New York location and new facilities in Chicago, Boston, West Hollywood and London, with openings planned for Seattle and Toronto in 2020.

Tradecraft Industries, in Denver, serves construction contractors and firms with conference and classroom space as well as seated and standing coworking.

...and networks

Of the hundreds of coworking providers in the U.S. market, only 20 had 10 or more locations at year-end 2017. Within the top 10 providers ranked by leased square footage, WeWork is by far the largest, with more than half of the top 10’s market share. Like the larger providers of conventional office suites, the major chains can offer users the convenience of access to multiple locations, a useful perk for travelers.

In an industry that is ripe for consolidation, landlords may consider size and number of locations as a partial indicator of a coworking provider’s credit quality as a tenant. As some markets approach a saturation point, providers themselves are growing more sensitive to the risk of oversupply and are adjusting their exposure through evolving structures that extend beyond standard leases.

Landlord's role evolves

Only about 17% of coworking providers own their locations, Transwestern found. Until recently, most have signed long-term leases and then sublet space on flexible terms to individual members or to corporate clients. (The latter is growing more common, by the way – WeWork initially built its rooms for small groups, with large rooms available to serve about 30. Today it is building rooms for as many as 50 workers, enabling it to better serve corporate clients.)

Today the major providers are keenly interested in sharing the subleasing risk at new locations with landlords. Options include joint ventures in which the landlord assumes some of the risk inherent in operating the coworking space, usually by charging the operator below-market rent in exchange for a cut of coworking profits.

"Providers themselves are growing more sensitive to the risk of oversupply and are adjusting their exposure through evolving structures that extend beyond standard leases."

In an increasingly popular alternative to the standard, 10-year office lease, the provider partners with the landlord under a management contract to establish and run a coworking space. The parties share setup costs, risks and profits. This helps growing providers stretch their capital to more locations while mitigating some of the risk for each party.

The most recent trend taking shape is for established coworking providers to offer catering and other hospitality features from their own locations as a third-party, amenities-management service to landlords.

3400 at CityLine

Partners UBS Asset Management and Transwestern Development Co. (TDC) decided early on that coworking would be an effective way to enhance the amenity offering and accelerate the leasing velocity at 3400 at CityLine, a speculative office project in North Dallas. They considered the majority of coworking options a competitive threat, however, because of those providers’ ability to offer more flexible lease terms than the landlord’s conventional leases.

An innovative solution was a joint venture structure with Common Desk, which operates five coworking centers in the Dallas-Fort Worth area and has more in the works. In exchange for a landlord-funded, turnkey buildout, Common Desk would run the coworking operation and provide concierge-level amenities for the balance of the building’s occupants. In return, the landlord and Common Desk would share in the revenue from the coworking operation.

Common Desk will greatly enhance the building’s technology offering by allowing occupants to use the firm’s smart-building app to order from its espresso café, register for upcoming fitness classes and even book slots for upcoming social hours programmed in the building or out on the one-acre event lawn.

“Common Desk is integral to our amenity offering and recent leasing success,” says Will Paton, Partner at TDC. “Additionally, we now have the ability to accommodate a wider array of both lease terms and tenants, capturing value which would otherwise flow to a lease-structured coworking operation.”

Joining the movement

Landlords can tap the popularity of the coworking movement by finishing out portions of their buildings to offer the flexibility that is now part of mainstream demand, with large common areas, shared meeting space and high-density capacity. Investing in finished space, preferably furnished and with amenities designed to help users recruit and retain labor, can enable landlords to compete directly with coworking providers.

A logical next step, particularly for portfolio owners, is to weigh the benefits of profit sharing with an established operator. This is often the fastest way to begin offering coworking and allows both parties to remain focused on their own core competencies, increasing the owner’s profit potential while mitigating tenant-default risk.

George Vogelei
George Vogelei
Office article

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Adam Stoltz
National Director
Consulting Services

Faced with a complex challenge, Transwestern taps the collective know-how of experts across the country to forge a solution for its client – even when the client is Transwestern. The firm’s new offices in Phoenix, Denver and Dallas reflect collaboration between local and national teams to produce accretive real estate strategies. Each is an example of putting into practice tools and approaches for providing clients with space that supports cultural and operational objectives.

Phoenix rising

Like many of the firms it represents, Transwestern Phoenix needed an office configuration to accommodate its rapid growth, with a vibrancy that would aid further recruitment and retention. The team identified an adaptive reuse opportunity in a former Morton’s Steakhouse in The Esplanade, the same mixed-use project that housed its existing offices. Adjacent to Starbucks and WeWork’s first local coworking location, the 9,000-square-foot space, vacant since 2012, offered high visibility, great pedestrian experiences and an opportunity to engage the market in building Transwestern’s brand presence in Phoenix.

The Esplanade, Phoenix

There was much at stake. The group’s leaders didn’t want a traditional design, particularly in juxtaposition to a hip coworking space next door. The new digs had to be a stunning demonstration of workplace potential, a highly functional showplace expressing the firm’s vision and brand on a level that would draw in clients and job candidates alike. To augment its planning, the selection team called in Transwestern Consulting Services, a national group that brings a wealth of data analytics, modeling and problem-solving to the table.

Work began with a four-month discovery process, or needs assessment, that included staff engagement, data crunching and analysis of workplace usage patterns. Depending on a client’s goals, discovery can involve analyzing volumes of data, usually economic, financial, demographic, behavioral, operational and/or logistical. Specialists distill that information into a clear picture that drives site selection and space planning, supplemented with models to show how various decisions may affect employees, clients, partners and suppliers.

For Phoenix, the discovery process revealed the want for a pronounced change from the 2000s, when the firm’s offices chiefly provided a base for internal meetings and support activities. In those earlier years, brokers and leasing agents typically travelled to clients’ offices or met them offsite. To reflect changing needs, the new space would be more outward-facing and vibrant, helping to draw people in, welcoming team members and clients with a variety of gathering places and work areas. A kitchen setup and facilities for hosting events were a must.

“Depending on a client’s goals, discovery can involve analyzing volumes of data, usually economic, financial, demographic, behavioral, operational and/or logistical.”

The team turned the needs list into a cohesive plan rooted in engagement and collaboration. The final design by Gensler serves a variety of work styles ranging from group collaboration to solitary concentration. Boasting 18-foot ceilings, natural light and 15-foot retractable glass windows opening to an outdoor patio, the dynamic environment positions team members to foster creative real estate solutions and strengthen relationships with clients and the community. Layton Construction is on track to complete the buildout before the end of the year.

Consulting Services has supported similar analyses and planning for Transwestern office relocations in Denver and Dallas and is helping teams in three other cities prepare for their own moves. The group’s specialists augment location searches with geographic information systems that help identify opportunities and challenges related to labor, product type, transportation access, market areas and other mapped data. The same fact-finding exercises, modeling, strategy development and other tools used in those efforts are available to all the firm’s clients through collaboration with local teams.

Data-driven solutions

Location intelligence, labor analytics and forecasting

Transwestern Investment Group Property Dashboard

Tackling clients’ challenges through collaboration between local and national teams extends beyond workplace strategy and can occur across an array of service lines. Consulting Services’ analytics specialists, for example, helped Transwestern Investment Group automate much of the due diligence required to identify properties for acquisition.

The team developed a dashboard for filtering property lists according to population density, labor, major industries and a host of other investment criteria. A user beginning with thousands of assets can apply layers of requirements that whittle the list to a manageable few assets meriting investigation by brokers. This reduced to hours an elimination process that once took months of direct inquiry.

Mountain views

One DTC, Denver

Before moving in 2018, Transwestern’s Denver team worked in a dated office layout with dark, 1990s finishes and frosted partitions that limited views and natural light reaching the interior work spaces. After identifying needs for easier movement in the space, projecting a more progressive image and providing areas for varying degrees of privacy and collaboration, the team set about bringing those elements together in a new space.

The new, 11th floor office at One DTC combines contemporary private offices and open workstations, three fully equipped conference rooms, a huddle room, private phone rooms and a mothers room. Team members enjoy a more efficient workflow, superior technology, increased natural light and ample space that encourages collaboration. Building and area amenities increase quality of life. The kitchen, break area and adjacent open workroom combine for event hosting.

Later this year, Consulting Services will lead the Denver team through a post-occupancy study to quantify how the new space is contributing to individual and group performance.

Uptown upgrade

The Union, Dallas

The Dallas team showcases the latest in workplace design in its 21,000 square feet at The Union, a newly constructed, 22-story office tower in Uptown. The Union is a mixed-use development that also features a residential high-rise and five onsite restaurants in the highly walkable Uptown neighborhood. The move gives Transwestern brokers better proximity to clients and industry colleagues, while exterior signage proclaims Transwestern’s presence in the vibrant, 24-hour district.

As planners determined which team members needed to relocate and which functions would remain at the current location a few miles up the Dallas North Tollway, Consulting Services helped explore the space programming implications of those decisions for each location. This avoided a commute change for some team members, allowed the firm to substantially reduce the size of its existing leased space and, by choosing to move only specific functions to Union, limited the space required in the costlier Uptown building.

The new offices offer 10 meeting rooms and eight focus rooms for undisturbed work, transitioning the group to a more open concept with fewer private offices. The overall design promotes connectivity and communication while still effectively supporting individual, focused work. Floor-to-ceiling glass, exposed ceilings and spectacular views project a sophisticated image, while elements such as a kitchen beer tap and Grateful Dead songs identifying the meeting rooms show this is also a place to have fun at the end of the day.

Adam Stoltz
Adam Stoltz

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Brian Banaszynski
Transwestern Development Co.

Developing industrial properties to support logistics strategies has never been more complex than it is today. Demand is high for well-located properties in densely populated primary and secondary markets, which offer large numbers of consumers for food and beverage providers as well as labor for manufacturers. E-commerce firms want that same proximity to offer same-day or even two-hour delivery to customers.

“The lack of shovel-ready sites makes development in these mature markets increasingly complicated, time-consuming and costly.”

The relentless push for new space has intensified with the expansion of e-commerce, which has grown from negligible sales volume in 1991 to about 10.2% of U.S. retail sales today, according to Census data. Even if overall sales were to flatten in 2019, demand for distribution centers and space to fulfill online purchases should continue to grow as retailers make e-commerce a larger part of their omnichannel strategies. Conservative estimates project online purchases will account for 14% to 15% of overall retail sales by 2021, requiring the industrial sector to accommodate a larger slice of the retail pie.

Developers are working to meet those needs, but they and their clients often find that the industrial sector’s low-hanging fruit has already been picked. Whether in built-out business parks or highly sought-after urban locations, the lack of shovel-ready sites makes development in these mature markets increasingly complicated, time-consuming and costly.

Real estate rehabilitation

Much of the added difficulty associated with infill development reflects the need to either remove existing structures to obtain clear land or, in the case of an undeveloped tract, the need to correct whatever conditions may have precluded its development previously.

Either scenario may require remediation to address environmental contamination. The likelihood of environmental issues increases with the age of existing structures (potentially containing asbestos, for example) and former uses, such as manufacturing operations that may have contaminated the building or soil.

Demolition and remediation work almost always affect site design and building construction, because the new structures become part of an integrated remedy. For logistics facilities, the remedy for contaminated soil is often to cap the site with parking lots and buildings. Redevelopment of these properties typically involves state and federal oversight for compliance with guidelines and remediation standards.

In some cases, the environmental phase of development has stretched to 10 years, and ongoing responsibilities can run much longer. Monitoring of environmental conditions, especially if groundwater is involved, can last up to 30 years.

IBISWorld research estimates that the remediation and environmental cleanup services business is a $17.7 billion industry and will grow 8.4% this year. Coupled with rising costs for construction materials and labor, environmental considerations have imposed a degree of self-governance on the development of new supply that has helped to prevent overbuilding.

Here are a few other scenarios that frequently complicate infill industrial development:

“Industrial developers aren’t the only buyers combing the urban landscape for infill opportunities.”

Bidder battles
Industrial developers aren’t the only buyers combing the urban landscape for infill opportunities; they often compete head-to-head with office, multifamily or mixed-use bidders vying for the same asset. These contests tend to drive up acquisition prices and can strain project feasibility.

In San Jose, California, for example, an aging office building ready for teardown drew bids from more than a dozen industrial, office and multifamily developers. In land-starved submarkets such as Silicon Valley and New Jersey Meadowlands, industrial sites have traded for as much as $100 per square foot, eclipsing pricing for some office and multifamily tracts.

Replace or renovate?
Even when an existing building doesn’t require demolition, the developer may need to remove sections of the structure to accommodate today’s larger truck court requirements. Other upgrades typically required to make older buildings practical for modern industrial occupiers include raising ceiling heights to allow modern racking systems, upgrading fire-suppression and life-safety fixtures, and adding loading docks.

Higher costs = higher rents
The additional capital, time and effort that goes into some infill projects can necessitate above-average rent to recoup development costs. In many markets, state-of-the-art industrial buildings garner rents about 40% higher than less-functional space built in the 1980s or earlier.

In general, the rapid leasing and preleasing of well-located projects suggest the market is eager for new and efficient properties despite the cost. Currently, 40% to 45% of the industrial projects under construction in the United States is already leased, and of the space completed in 2018, 75% had leased by midyear 2019, according to CoStar.

Transwestern believes growing demand from e-commerce reflects a change in consumer behavior that will increasingly contribute to the absorption of industrial space in the years ahead. And rather than opt for existing inventory in more remote submarkets, it is evident that many occupiers are biding their time for yet-to-be-delivered projects that will provide access to the nation’s valuable population centers and labor pools.

“Growing demand from e-commerce reflects a change in consumer behavior that will increasingly contribute to the absorption of industrial space.”

For industrial occupiers, labor and location outweigh rent

Rising rents and single-digit vacancy rates are only a few of the challenges confronting industrial occupiers in 2019.

With unemployment hovering near a 50-year low at 3.7% nationally and even lower in some primary and secondary markets, selecting a location with access to an adequate workforce is a primary concern for most industrial occupiers seeking new space. To avoid investing efforts on lease negotiations that later prove moot if a labor analysis indicates the location won’t serve the user, some property owners and developers now provide labor market data upfront to prospective tenants.

Rising industrial rents have not hampered leasing, and that’s because users are just as concerned about labor access and proximity to customers as they are with occupancy cost. On a national basis, the average industrial asking rent has increased approximately 20% since 2011 to a little more than $6 per square foot, fueled by intensifying demand and rising costs for construction and labor.

Remember, too, that current industrial demand stems from a combination of economic expansion and an increase in e-commerce, including the conversion of a growing portion of retailers’ in-store sales to online purchases. For those retailers, warehouse rent is a fraction of the roughly $20 per square foot that U.S. landlords are demanding for brick-and-mortar stores. A 2018 study by Prologis found that users of logistics real estate spend $10 on transportation – and $5-$7 on labor – for every $1 spent on rent.

Occupiers are willing to pay premium rent for highly efficient projects that put distribution centers close to end users, thereby shortening travel routes for last-mile delivery. The same is true for locations that can reduce drayage, which is the cost of trucking bulk shipments from a sea or inland port to a distribution center or warehouse.

Brian Banaszynski
Brian Banaszynski

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Jonathan Chambers
Vice President
Delta Associates

The current economic expansion is now 10 years old, and the pace of growth continues to moderate. What are the implications for commercial real estate?

Payroll Job Growth

First, let’s take a brief look at recent economic performance. More evidence of a slowdown came in May, with just 72,000 net job additions during the month—the second-lowest monthly gain in three years. While June hiring exceeded expectations with 224,000 new payroll positions, the average monthly gain of 172,000 jobs in the first half of the year still lags 2018’s average of 223,000 net hires. Annual wage growth has also decelerated in recent months, although it remains over 3%.

The job sectors leading growth remain largely unchanged from prior periods with Education/Health and Professional/ Business Services driving the bulk of payroll gains. Hiring increased significantly in Government and Transportation and Warehousing. Notably, Retail Trade experienced its fifth consecutive month of net job losses in June. Notwithstanding, the national unemployment rate edged up one basis point to 3.7%, near its lowest level in a generation.

Real growth in gross domestic product (GDP) during the first quarter of 2019 was a respectable 3.1%, but growth in future quarters of the year is widely expected to slow (most likely between 2% and 3%). An expected pullback in business investment thanks to the ongoing trade war will weigh heavily on economic activity soon. Given prevailing conditions, there is a fair chance that the Federal Reserve will cut interest rates at least once before the end of the year to stimulate the economy.

Payroll Job Growth

When is the recession coming?

The current administration’s ongoing unpredictability has complicated the already imprecise practice of predicting recessions. If the various indicators are to be believed, however, the possibility of a downturn beginning within the next 18 months (or by the end of 2020) is higher than at any other point since the Great Recession. Any Fed action will merely prolong the cycle (as the “Tax Cuts and Jobs Act” did) rather than avert economic calamity entirely.

Unemployment Rate

Nearly all the preconditions of a recession are now in play: The economy has been operating well above full employment since 2017; economic output growth is slowing; and the U.S. Treasury yield curve has partially inverted, meaning some short-term yields are higher than those on long-term bonds. Corporate profits, which have been at record highs for years, have recently come under pressure as the labor market tightens, tax reform support fades and productivity struggles to keep pace with wage growth. Meanwhile, geopolitical risk has soared in the form of a dramatic escalation of tariffs on Chinese imports; a threat of tariffs on some Mexican, European and Japanese products; a strict clampdown on immigration; and saber-rattling against Iran.

What to expect

The upside is that the recession isn’t likely within the next six months, especially if the Fed follows through with its dovish strategy and begins cutting interest rates. This is predicated on a trade deal with China and the lack of any major shocks to the economy. Also, the severity of the next recession will more than likely pale in comparison to the last one.

Employment Growth By Job Status


The residential market typically fares well during recessions (the Great Recession notwithstanding) as housing is generally considered a necessity. Demand for luxury housing will fall relative to the overall market, but demand for cheaper alternatives (including Class B apartments) will increase or hold steady.

GDP Percent Change

Apartments have been one of the most resilient real estate property types in economic downturns. Market fundamentals for the sector remain strong, especially on the demand side where the pool of largely millennial renters is projected to continue growing through at least the middle of the next decade. Apartment owners also have the flexibility to lower rents during periods of weak demand.

That said, all assets wouldn’t fare equally. Currently stabilized properties will outperform projects that deliver during a recession, which could subject the latter to a protracted leaseup period in an environment of weaker job growth, while still seeking top-of-market rents. Location also matters, as some markets perform significantly better than others in downturns.


A recession could weigh more heavily on the office market due to a stronger relationship with job growth. With a decline in employment, office owners should see a pullback in demand, and negotiating leverage at the leasing table will swing to favor tenants.

Selected U.S. Government Interest Rates

As with multifamily, performance among office properties will vary significantly due to local market factors, meaning some will be more resilient than others during the downturn. Similarly, higher-quality, well-located assets will outperform the greater market, although submarkets with intensive development activity could be burdened with higher vacancy. The medical office subsector is well-positioned to weather a recession, as demand for healthcare is historically inelastic.

“The medical office subsector is well-positioned to weather a recession, as demand for healthcare is historically inelastic.”

The wildcard for the office market during the next downcycle will be the coworking niche. The industry subset had a negligible presence in the office market during the last recession, but much of the recent leasing activity in many major metros has come from coworking firms. Industry behemoth WeWork has been particularly active, rapidly growing to become the largest private-sector tenant in both the District of Columbia and Manhattan. The coworking model itself is relatively high-risk, as tenants of most providers are small-to-medium-sized firms that aren’t as well capitalized as traditional tenants. WeWork itself has largely insulated itself from risk by creating various shell companies to sign leases.

S&P 500
“Certain niches, such as grocery-anchored shopping centers that provide access to basic, high-frequency consumer goods and services, will do relatively well during a downturn.”

Retail & industrial

It’s been no secret that brick-and-mortar retail has struggled while other asset types experienced growth during the economic recovery. That said, an economic trough won’t necessarily strain the entire sector. Certain niches, such as grocery-anchored shopping centers that provide access to basic, high-frequency consumer goods and services, will do relatively well during a downturn, especially in higher-income areas. Even more so, discount and off-price retailers tend to thrive during a recession, as consumers seek more affordable alternatives for high-cost goods. Walmart, for instance, saw its annual net income increase each year from 2008 through 2010.

Inflation and personal consumption annual change

With the rise of e-commerce, the line between retail and industrial has blurred. Logistics assets have become a hot commodity among investors, with average cap rates plunging below those for office and retail properties over the last couple of years. Demand for warehouses and fulfillment centers will taper during a recession as business and consumer spending declines, but not to the extent seen in more cyclical sectors such as office.

Jonathan Chambers
Jonathan Chambers

Delta Associates