Archives for March 2014

Tea leaves at the ready, quite a few heavy hitters in commercial market prognostication have envisioned the US marketplace circa 2039. One in particular caught my eye:
As Ken Riggs, CEO of Real Estate Research Corp. puts it: “Most shopping malls will be extinct,”
“[The shopping center market] has been a Darwinian environment since the 1990s with the advent of big-box retail and the ‘Wal-Marting’ of the world—and it will stay that way.” In other words, expect malls to continue their decline due to the rise in e-commerce, with only those consistently producing very strong revenues still doing business in 25 years.”
(Over)supply And Demand
If you ask me, there’s two problems with this: Darwin’s concept is misapplied here (actually the phrase is attributed to a different scientist named Spencer.) “Darwinism” is regularly misapplied in business writing to mean “survival of the fittest”, e.g. describing an arena where competition and inexorable laws of supply and demand settle all questions of capital allocation. That implies a efficient market. But nobody could look at shopping malls nationally and imagine that it’s an efficient marketplace: generally speaking, supply is so heavy and demand so comparatively flexible and spotty — again, I’m speaking nationally in the aggregate because many individual markets are different — that the only thing you can say about its efficiency is that its’ efficient at building shopping centers.
The “Walmarting” or consolidation of the retail marketplace is what happens when aggregate consumer demand remains unsatisfied and needs a new home. That’s happens when it makes sense to aggregate that demand under one roof. But we have plenty of indications that demand itself isn’t being shifted per se, but was overestimated in many places. Waves of closures such as the recent ones of national chains lead us in this direction.
In fact, there are national numbers that imply that supply of retail space in the US was on the high side to begin with. According to the 2007 Economic Census, there were 1,122,703 retail establishments in the United States and a total of 14.2 billion square feet of retail space. That means that there was approximately 46.6 square feet of retail space per capita in the U.S., compared to two square feet per capita in very rapidly growing India, 1.5 square feet per capita in Mexico, 23 square feet per capita in the United Kingdom, 13 square feet per capita in Canada, and 6.5 square feet per capita in Australia.
These things say “correction” to me. New Economic Census numbers could illuminate this further when they begin appearing later this year.
Not A Zero-Sum Game
But the shifts in shopping centers and the role of demand isn’t the only place where the predicted death of the shopping center falls short. It’s in the claims about electronic commerce.
I agree that twenty-five years of growth in e-commerce is likely to come, and that some of that will be at the cost of traditional retail. Yet we have to remember that brick and mortar vs. e-tailing is not a zero-sum game all the way.
The fundamental need of Americans to put their hands and eyes on products hanging on racks, to travel, to make a day of it, to, in a word, shop in the physical world, is in my opinion unlikely to radically diminish in twenty-five years. The industry may have overbuilt retail space, but it hasn’t overestimated what the personal automobile and consumer freedom really imply: choices for consumers are the life blood of our consumer economy. To the degree that electronic commerce has displaced purchasing in physical locations, it’s because of the net addition of choice and an opportunity for convenience. That doesn’t mean every choice made is best made online. Far from it: we will always have physical bodies and needs beyond what shipping goods can deliver. We will always need to spend time with some prospective purchases.
Extinction for shopping malls just isn’t in the cards.
Shopping mall (Photo credit: pix.plz)
By: Wayne Grohl (The Source)
Click here for source article.
 

Tea leaves at the ready, quite a few heavy hitters in commercial market prognostication have envisioned the US marketplace circa 2039. One in particular caught my eye: As Ken Riggs, CEO of Real Estate Research Corp. puts it: “Most shopping malls will be extinct,” “[The shopping center market] has been a Darwinian environment since the 1990s with the advent of big-box retail and the ‘Wal-Marting’ of the world—and it will stay that way.” In other words, expect malls to continue their decline due to the rise in e-commerce, with only those consistently producing very strong revenues still doing business in 25 years.”

(Over)supply And Demand

If you ask me, there’s two problems with this: Darwin’s concept is misapplied here (actually the phrase is attributed to a different scientist named Spencer.) “Darwinism” is regularly misapplied in business writing to mean “survival of the fittest”, e.g. describing an arena where competition and inexorable laws of supply and demand settle all questions of capital allocation. That implies a efficient market. But nobody could look at shopping malls nationally and imagine that it’s an efficient marketplace: generally speaking, supply is so heavy and demand so comparatively flexible and spotty — again, I’m speaking nationally in the aggregate because many individual markets are different — that the only thing you can say about its efficiency is that its’ efficient at building shopping centers. The “Walmarting” or consolidation of the retail marketplace is what happens when aggregate consumer demand remains unsatisfied and needs a new home. That’s happens when it makes sense to aggregate that demand under one roof. But we have plenty of indications that demand itself isn’t being shifted per se, but was overestimated in many places. Waves of closures such as the recent ones of national chains lead us in this direction. In fact, there are national numbers that imply that supply of retail space in the US was on the high side to begin with. According to the 2007 Economic Census, there were 1,122,703 retail establishments in the United States and a total of 14.2 billion square feet of retail space. That means that there was approximately 46.6 square feet of retail space per capita in the U.S., compared to two square feet per capita in very rapidly growing India, 1.5 square feet per capita in Mexico, 23 square feet per capita in the United Kingdom, 13 square feet per capita in Canada, and 6.5 square feet per capita in Australia. These things say “correction” to me. New Economic Census numbers could illuminate this further when they begin appearing later this year.

Not A Zero-Sum Game

But the shifts in shopping centers and the role of demand isn’t the only place where the predicted death of the shopping center falls short. It’s in the claims about electronic commerce. I agree that twenty-five years of growth in e-commerce is likely to come, and that some of that will be at the cost of traditional retail. Yet we have to remember that brick and mortar vs. e-tailing is not a zero-sum game all the way. The fundamental need of Americans to put their hands and eyes on products hanging on racks, to travel, to make a day of it, to, in a word, shop in the physical world, is in my opinion unlikely to radically diminish in twenty-five years. The industry may have overbuilt retail space, but it hasn’t overestimated what the personal automobile and consumer freedom really imply: choices for consumers are the life blood of our consumer economy. To the degree that electronic commerce has displaced purchasing in physical locations, it’s because of the net addition of choice and an opportunity for convenience. That doesn’t mean every choice made is best made online. Far from it: we will always have physical bodies and needs beyond what shipping goods can deliver. We will always need to spend time with some prospective purchases. Extinction for shopping malls just isn’t in the cards. Shopping mall (Photo credit: pix.plz) 31. March 2014 by Wayne Grohl Read source article here.

Secondary markets are riding a wave of recovery that has brought a welcome resurgence of investment sales activity.
The expansion into secondary markets is the theme du jour in the commercial real estate market. “We have seen a massive movement of capital from primary locations to secondary locations, both on the equity and debt side,” says Dan Fasulo, a managing director at Real Capital Analytics in New York. “That has created not only an explosion of investment activity, but a corresponding rise in values in these secondary markets,” he adds.
Growing confidence in the economic and commercial real estate market recovery has been a boon to investment sales in the past 18 months. Fueled by interest rates that remain near historic lows, investment sales surpassed $355 billion in 2013 — up 19 percent over the $299 billion in sales that occurred in 2012, according to Real Capital Analytics. After a considerable dry spell, secondary and even tertiary markets across the country are experiencing a spike in investment sales.
That momentum is expected to continue in 2014 as investors both increase and broaden their interest in secondary markets as they search for higher yields. Certainly, secondary markets in Texas, such as Houston and Dallas, as well as West Coast markets including the likes of Portland, Ore., and Seattle have been on the short list for the past year. But investors also are stepping up buying across the country in markets ranging from Las Vegas to Nashville, Tenn.
“In general, there is so much more confidence among investors that they are willing to take more risk than they were in the past, and they are more willing to step up and buy properties that they were not willing to a year or two ago,” says Dave Winder, CCIM, director of office and investment properties at Boise, Idaho-based Cushman & Wakefield/Commerce.
For many markets, that confidence stems from marked improvement in the local economies. In Boise, for example, the unemployment rate has dropped from a high of around 10 percent to now below 6 percent. “It hasn’t been stellar job growth, but there is good job growth occurring,” Winder says. A significant amount of employment in Boise is driven by the residential market. Mortgage financing and residential construction stopped in 2007 and 2008 and now that industry is coming back, which is helping to drive the broader economy, he adds.
Sales Rise
Commercial investment real estate sales have been on the upswing since 2010. The increase in investment sales nationally is creating a trickle-down effect across markets. Greenville, S.C., for example, saw an uptick in activity in the past year among both buyers and sellers as more properties landed on the for-sale market.
“The activity that we are seeing now across the board in office, industrial, and even retail has been terrific,” says Brian Young, CCIM, SIOR, a senior vice president and managing broker at Cushman & Wakefield/Thalhimer in Greenville. In 2013, about $250 million in sales had either closed or were under contract for sale at year-end.
That is an impressive amount for a market the size of Greenville, which is home to about 840,000 people in the surrounding metro area. Although the number of transactions has increased, the total volume also was bolstered by a single large transaction. Cushman & Wakefield/Thalhimer listed the 2 million-square-foot Adidas campus last fall. Young expects that property, which will continue to be leased long-term by Adidas, to sell for about $125 million.
Although large institutional investors and real estate investment trusts are generally the ones that grab attention for their transactions, the lifeblood for many secondary and tertiary markets remains the smaller local and regional investors. Traditionally, Boise is an investment market that has been dominated by local and regional buyers and now that the sales market is rebounding, those same players are back and actively looking for new opportunities. “In the last year, transaction activity has increased exponentially in my market,” Winder says.
For example, Cushman & Wakefield recently brokered the sale of a 25,584-sf medical office building in downtown Boise. The building is 100 percent occupied by strong tenants, most of which have long terms remaining on their leases. It was purchased by a local investor with an out-of-town partner. The property sold for a lower-than-typical capitalization rate of 6.5 percent due to its strong tenants and stable, long-term cash flows.
Canadian buyers also have stepped up their buying activity in Midwest markets such as Minneapolis and Columbus, Ohio. They see opportunities to buy properties as real estate markets improve. And they also are using those investments as a hedge against the U.S. dollar, notes Shad Phipps, CCIM, a senior associate in the investment properties/private capital group at CBRE Capital Markets in Columbus.
In Columbus, Canadians are acquiring quality, multitenant office buildings in good locations that are still priced well below replacement value. For example, Montreal-based Amcor Holdings has acquired seven office buildings totaling about 950,000 sf from AEW Capital for $25.1 million. “I think there is opportunity here, and I think that is ultimately what they are looking for,” Phipps says.
Yield Search
The lure of higher returns has served as a magnet to draw capital to the secondary markets. Investors are clearly driven by the need to boost yield. Buying property in Manhattan or San Francisco at a 4 percent yield per year is just not going to cut it, Fasulo says. “So, all of a sudden places like Minneapolis and Pittsburgh and Phoenix that were considered a little risky have now come back on the radar,” he adds.
After moving to a near 10-year high, the price spread between properties in primary and secondary markets has started to narrow again. Pricing among the six major metros rose 9 percent through October 2013, while prices in non-major metros were up 13 percent, according to Real Capital Analytics.
Competition and bidding wars for core properties in gateway cities such as New York, San Francisco, and Washington, D.C., have prompted buyers to expand their list of target markets. “As these investors continue to look for a certain yield, they have been forced to look in secondary and tertiary markets like Greenville,” Young says. For example, Cushman & Wakefield/Thalhimer had the listing on a 221,000-sf industrial building in south suburban Greenville. The property drew about 10 offers and had five serious bidders that made it to the third round. Exeter Property Group, a Pennsylvania-based private equity firm, ended up buying the building in November for $9.7 million or a cap rate of 7.5 percent.
“You’re seeing more and more investors seeking a better yield and coming to markets like Lexington, Ky.,” agrees Bruce R. Isaac, CCIM, SIOR, senior vice president at NAI Isaac Commercial Properties in Lexington. Buyers are looking for well-located, highly occupied properties that are leased to good credit tenants. In Lexington, for example, apartments as well as single-tenant net-leased and grocery-anchored retail centers are in demand.
Typically, investors can find investments that generate returns higher than in primary markets. For example, Lexington currently has a triple-net-leased Walgreens property listed that will likely sell at a 5.5 percent to 6.5 percent cap rate. Even though that is an aggressive cap rate for Lexington, it is still well above the 4 or 4.5 percent cap rate that similar “A” credit net-leased deals could draw in larger cities.
Stability vs. Value-Add
Although buyers are making decisions based on their own unique investment criteria, there are two distinct strategies that have emerged. One group of investors is searching for stability and cash flow, while at the opposite side of the spectrum are those buyers pursuing the higher yields of value-add opportunities.
Both strategies are in play in the Columbus market. For example, CBRE recently represented the lender on the sale of a real estate-owned retail property that was 42 percent occupied in suburban Columbus. The 26,150-sf retail strip center ultimately sold to a local private investor for well below replacement cost at $850,000 or $32.50 per square foot. The new owner has since invested in the property, improved occupancy, and now has a property with positive cash flow. “These are the types of projects that, when bought at the right price and managed correctly, will produce quite a return for the owner,” Phipps says.
Buyers are more hesitant when it comes to acquiring properties that fall somewhere in between those two categories, Phipps notes. Those stabilized properties that are priced at market are generating less interest, because there is still some leasing risk. So, it lacks the security of a triple-net-leased property and also the upside of a more value-add buy.
There is a risk that rising interest rates could create price uncertainty, which could slow investment sales. However, some industry experts believe that concerns of higher interest rates are offset by improving market fundamentals in terms of rising occupancies and rents. “I see a wave of capital built up that feels every bit as deep as 2007,” Fasulo says. “I think you will see a continued expansion of recovery to different geographies around the country and into almost every property sector, irrespective of interest rates that may be moving higher. There is just too much capital right now.”
Economic Growth Offsets Risk
Investors seem willing to take on more risk in exchange for the higher returns available in secondary markets. That shift suggests growing confidence in both the economic recovery and improving commercial real estate fundamentals.
Yet, buyers are diligent in their underwriting and need to be comfortable with the long-term outlook for those markets. As such, investors are gravitating to secondary markets that have a compelling story: a growing economy, good employment, and business diversity. Such factors are apparent in Texas markets such as Dallas and Houston, where sales are on the rise. The state has led the country in job growth and continues to benefit from the booming energy industry. Dallas reported $14 billion and Houston reached $13.7 billion in sales in 2013, which was behind only Manhattan, Los Angeles, and Chicago, according to New York-based Real Capital Analytics.
Investors also are finding strengths in smaller metros such as Albuquerque, N.M., Denver, and Phoenix. Lexington, Ky., for example, has a stable economic base from the University of Kentucky, not to mention strong employers such as Toyota. University enrollment hit a record 29,000 students last fall, while Toyota recently invested more than $500 million to expand its Lexus production. “There are a lot of positive things that are going on here. You have a highly educated workforce and a population here that appeals to a lot of investors,” says Bruce R. Isaac, CCIM, SIOR, senior vice president at NAI Isaac in Lexington.
Toyota’s expansion has created an influx of suppliers and increased the demand for industrial space. During the first half of last year alone there was a 27 percent reduction of industrial vacancy in Lexington, Isaac notes. In fact, there is very little industrial vacancy in central Kentucky. “So, you are seeing more and more people interested in those industrial facilities,” Isaac says.
Greenville, S.C., also has benefited from the rebound in manufacturing. In addition, the local economy draws on diversity from other industries such as banking and engineering, as well as a growing population. “A lot of these investors see that they can not only make their return, but long-term, their underlying investments are safe,” says Brian Young, CCIM, SIOR, a senior vice president and managing broker at Cushman & Wakefield/Thalhimer in Greenville. “I think that is critical as they look at these secondary and tertiary markets.”
Although investors are dipping a toe in the water in secondary and even tertiary markets, there are definite limits to their tolerance for risk: Certain property types and locations still have a difficult time attracting buyers. Greenville, for instance, has a significant number of pre-fab metal industrial buildings. “We have seen a real reluctance from investors to purchase those metal buildings,” Young notes. Buyers want institutional quality construction, because they are not just thinking about the return they can get today. They also are planning ahead to their exit strategy in the future, he adds.
By: Beth Mattson-Teig (Commercial Investment Real Estate)
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By 2039, commercial real estate is expected to be thriving. But over the next 25 years, it will be greatly influenced by changes in demographics, technology, globalization, and economic and environmental realities, according to CNBC.
Commercial practitioners gave CNBC several “bold” predictions for commercial real estate sector in the U.S. by 2039:
1: The fading away of shopping malls. Malls are expected to continue declining due to the rise in e-commerce. Rick Fedrizzi, president and CEO of the U.S. Green Building Council, expects some teardowns, but repurposing will give new life to these spaces. “Established places like shopping malls will become like town centers, where people can come together, where their doctors and day care will be, where they can gather after major devastations.”
2: Baby boomers drive a construction boom. Several areas of commercial real estate will likely continue to see baby boomers’ influence, experts predict. For one, “we’re an aging population, so in 25 years, there’s going to be a heavy focus on medical-related facilities,” says Kenneth Riggs, president and CEO of Real Estate Research Corp. Riggs also predicts a shift toward affordable multigenerational housing, particularly near mass transit. Also, more boomers may turn to senior housing, and growth will be explosive, Riggs predicts. “Right now, senior housing is a food group in real estate, but it’s like vegan or something, not that established,” Riggs says. “In 25 years, it will be a major food group.”
3: Urbanization will boom. This trend will, in part, be driven by Gen Xers and Yers who have shown preferences for living and working in compact areas. The multifamily residential market is expected to show gains due to the growing preferences of urbanization, and more companies will be moving to downtown areas to aid in recruitment efforts, says Rick Cleveland, a managing director at Cushman & Wakefield. Suburbs will also remain important, but may look to replicate the city experience more with greater mixed-use projects that comprise rental, retail, and office. “The way most of the suburbs will evolve is that there’s an interim step: They’ll be connected to cities by high-speed or light rail, and they’ll become walkable communities with a sense of place,” says Fedrizzi.
4: Green building continues to evolve. Efforts to meet environmental standards tend to be costly, but industries realize that they are important in the long-run. Commercial buildings 25 years from now will need to be up to the U.S. Green Building Council’s LEED standards, according to the commercial experts interviewed by CNBC. That may mean some existing structures will need to be torn down or undergo a retrofit.
By: Daily Real Estate News (REALTORMag)
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