Archives for August 2017

Two digital information providers are locked in a titanic lawsuit claiming rights to provide the public with commercial real estate data. CoStar, a $9 billion company, claims exclusive rights under copyrights and patents to collect and disseminate information about commercial real estate. Xcelligent claims that CoStar is an unlawful monopoly. So far, the litigation has been a study in stealth, attracting little public attention.

A Public Problem

Because these days life is all about information: its source, reliability, immediacy and accuracy. CoStar vs. Xcelligent is testing whether only one company will be allowed to provide to the public and to commercial real estate brokers information about commercial properties. As reported by Bisnow on June 28, 2017, CoStar “has maintained a dominant perch as the gatekeeper” for information about the commercial real estate world. Why is that a big deal? Because the commercial real estate market is a $17 trillion — repeat, $17 trillion — industry. Every month CoStar draws 24 million visitors to its information resources. The company went public in 1998 at $9 per share; it now trades at about $261 per share.

The Big Deal

If the court grants CoStar an exclusive monopoly to provide buyers, sellers, brokers, investors, lenders and others information about commercial real estate, the cost of obtaining information likely will increase. Why are commercial real estate brokers and their clients closely watching the case? Today’s commercial real estate brokers are information providers. Selling and salesmanship, always useful, no longer are the defining traits of commercial brokers. Their clients want and expect data, particularly comparative data. Today’s commercial brokers gather
and present facts that clients use to make decisions to buy, sell, lease, trade, etc. Much of the germane information is housed in CoStar’s platforms (although often inaccurate, but that’s another story).

Case in Court

The court’s decision in CoStar vs. Xcelligent will decide if another company, Xcelligent, will also be allowed to gather and disseminate information about commercial properties nationwide. Competition, we are told, helps control costs, and compels improvements in the delivery of services, another reason why the case is a big deal. The litigation is a classic intellectual property versus free market battle to the death: presumably, only one company will prevail. Will the courts rule in favor of monopoly, or in favor of open markets? Is CoStar engaged in anti-competitive behavior? And oh, by the way, who actually “owns” commercial real estate data? Do CoStar’s patents and copyrights, and its numerous algorithms, secure exclusivity by CoStar? These and a host of related issues will be litigated.

Restrictions

Earlier, when CoStar bought LoopNet, another information provider, for almost a billion dollars, the Federal Trade Commission imposed restrictions on CoStar to preclude CoStar from becoming a monopoly. Xcelligent alleges CoStar has failed to comply with those restrictions. So the battle is on. The outcome could determine not only who “owns” commercial real estate information, but also who will have access to reliable, immediate and accurate information about commercial real estate — and at what cost. As an African proverb indicates, “When elephants fight it is the grass that suffers.”
By: Ray Regan, Realty One of New Mexico (HomeStyle Magazine by Albuquerque Journal)

Ten-X’s Peter Muoio says the current state of the multifamily sector is “a perfect example of the time-honored notion that ‘demographics is destiny.’ “
Positive demographic trends are keeping wind in the apartment market’s sails even as fundamentals are becoming spotty, Ten-X Commercial said Thursday. Among the areas in which fundamentals are uneven is the supply pipeline, a contributing factor in most of the top five markets in which Ten-X recommends that investors consider selling their apartment properties.
Ten-X Commercial’s latest US Multifamily Outlook report shows that vacancies nationwide rose 10 basis points during the first quarter to 4.3% after remaining flat over the past year. By the time 2017 is over, 330,000 new apartment units will be added to the inventory, and over time that will have a negative impact on vacancies as the absorption rate lags the influx of new supply. The report projects the national vacancy rate increasing to 5% by 2018 before declining demand pushes it to 6.2% by 2020 during a modeled economic downturn.
Rent growth, too, has faltered, with seasonally adjusted effective rents rising just 0.4% during the first quarter, according to Reis data. Annual growth has tapered to just 3%, in contrast to the greater year-over-year increases seen in 2015 and 2016.
Deal volume in the apartment sector reached a three-year quarterly low of just below $27 billion in Q1, although it had improved to $35.2 billion in Q2—still a 1% Y-O-Y decline, according to Real Capital Analytics. Multifamily cap rates remained flat in Q1 at 5.2% after a rise late last year.
With it all, though, demographic trends continue to prop up the multifamily market, Ten-X says. Household formations remained steady at a healthy pace of around 1.6 million in ‘16. A solid labor market continues to fuel absorption, as debt-ridden millennials increasingly delay marriage and homeownership in favor of renting. Ten-X says that as employment and wages continue to rise among younger adults, the 31% of 18- to- 34-year-olds still living with their parents should be drawn into the market, giving rise to a key demand source that has yet to be fully tapped.
“The current state of the multifamily sector is a perfect example of the time-honored notion that ‘demographics is destiny,’ ” says Peter Muoio, chief economist with Ten-X. “While softening fundamentals indicate that the sector is poised for a slowdown, that shift has yet to arrive in earnest.”
Even as many large metro areas are increasingly exposed to both cyclical risk and massive oversupply, “the overall market is being sustained by significant societal shifts that is driving strong, sustained demand,” Muoio says. “As long as gainfully employed millennials and other Americans continue to choose renting over homeownership, a majority of multifamily investors can be confident that rents will continue to rise.”
That’s especially true for the five metro areas that Ten-X pinpoints as markets where investors should consider buying multifamily properties: Sacramento, CA; Phoenix; Las Vegas; Raleigh-Durham, NC; and Jacksonville, FL. The favorable demographic trends cited by Ten-X are front and center in these regions, where employment stands at record or near-record levels, and a combination of high demand and light supply pipelines are bolstering rent levels.
Conversely, Ten-X lists five markets in which investors might consider selling. Three are those are in the Bay Area: number two San Francisco, number three San Jose and number five Oakland. Topping the list is New York City, with Washington, DC in fourth place. They’re seeing an onslaught of new supply pushing up vacancies, Ten-X says, while rents may already have reached their peaks, leaving them vulnerable to diminished returns for investors.
By: Paul Bubny
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Sales in the sector registered an almost 6 percent decline for the rolling four quarters, according to CBRE.
Activist investors are stepping up their efforts to get chain department stores to spin off their real estate holdings, as the sector as a whole continues to struggle.
Department stores ranked among the industry’s sales laggards for yet another quarter, according to latest research from real estate services firm CBRE on overall retail performance and rents. Sales in the sector registered an almost 6 percent decline for the rolling four quarters, according to findings from the company’s second quarter U.S. Retail Figures.
The decline was worse than the sector’s sales performance in the first quarter of the year, although the difference was less than one percentage point. Compared with overall retail sales, which went up by a modest 4.2 percent year-over-year, department stores looked like a weak link among chain store operators. Other sectors that were slow on sales included electronics and appliance stores and sporting goods, hobby, book and music stores.
One obvious culprit for department stores’ struggles is competition from e-commerce. Another, more technical, cause is that some large operators have expanded their food and grocery departments, shifting their revenue out of the department store category and into warehouse clubs and supercenters, according to research firm IBIS World. The international company, which analyzed results from JCPenney, Macy’s, Nordstrom, Sears and Target, found that annual sales growth declined by 4 percent from 2012 to 2017. The company expects that trend to continue into 2022.
In response, investors are intensifying their ongoing campaigns to monetize department stores’ property holdings. Snow Park Capital, a New York City-based hedge fund, for instance, targeted Little Rock, Ark.-based Dillard’s in such an effort, according to Bloomberg.
The company operates 268 stores and 25 clearance centers in 28 states. After the close of its first quarter, the company reported that net sales dropped to $1.4 billion, a 4 percent decline from the same period in 2016, according to the company’s quarterly report. Same-store sales were also down 4 percent. Snow Park reportedly values Dillard’s real estate at $200 per share, and wants the company to extract some of that value.
Some department stores carve their own paths
Not all department stores are languishing under the weight of carrying physical properties in a changing retail environment. Belk, for instance, is launching a campaign to open three new stores, as well as improve and remodel existing ones by the end of 2018. The company is investing almost $40 million in its bricks-and-mortar improvement and expansion effort, according to an official statement.
Belk recently closed a store in Huntsville, Ala., a decision it made because it already has five stores in Huntsville and the surrounding area, according to the company spokesman. Overall, however, Belk’s presence often makes it the only department store within a community’s trade area, helping to entrench customer loyalty.
“In this 16-state footprint people have embraced the modern, Southern style aesthetic,” says the spokesman. “We feel good about the business. It is allowing us to make this $40 million investment.”
By: Donna Mitchell (National Real Estate Investor)
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