Archives for November 2017

The “repeal and replace” attempts at healthcare reform haven’t displaced investor confidence, given the ongoing strength of medical office fundamentals.

“Healthcare reform has been a major topic of the new administration, and while efforts to repeal and replace the Affordable Care Act have thus far been unsuccessful, many legislators continue to press for change.” So says Alan Pontius, SVP and national director of Marcus & Millichap’s specialty divisions. The company recently released its second-half Medical Office Research Report. “This ongoing uncertainty about healthcare will likely persist for an extended period, but positive, demographic factors continue to support a growing medical office market.”
Specifically, we can thank the ongoing aging of the Baby Boomers for those continued strong fundamentals. Pontius notes that by 2030 the number of people 65 or older will represent no less than 20% of the total US population, a fact that bodes well for ongoing medical services.
And millennials too are helping to sustain the market, as they seek care most commonly in retail clinics.  This is part of a larger movement on the part of medical practitioners to offsite facilities. “Healthcare providers continue their push into communities by taking space in outpatient medical offices that are coming online outside of traditional hospital campuses,” says the Pontius. “Micro-hospitals are also an emerging trend.”
Neither has the talk of legislative changes dampened the investment sector, and Pontius reports that “investment activity remains healthy as investors target the segment for its strong demographic factors.” Most of the current raft of deals involve portfolios, while smaller private buyers and new market players scour the terrain for value-add deals.
Hughes notes that despite recent Fed moves, long term rates remain stable.
This positive scenario is backed by interest-rate stability, as William E. Hughes, SVP of Marcus & Millichap Capital Corp., explains: “Despite the Fed raising its benchmark short-term rate three times in seven months and signaling another rise before the end of the year, long-term rates have remained stable. The yield on the 10-year US Treasury bond remained in the low- to mid-two-percent range throughout the second quarter of 2017. The Federal Reserve wants to normalize monetary policy and, in addition to rate hikes, will likely start paring its balance sheet.”
Drilling down deeper into the market fundamentals, vacancy numbers break down largely in terms of asset age. “The majority of space demand is funneling into newly built properties,” says Pontius, “and vacancy in buildings constructed since 2000 has plunged 630 basis points since peaking in 2009. Properties built in the 1970s boast the highest vacancy among vintages in the country, reaching 10.1% in the second quarter after falling 50 basis points.”
On a national basis, rents have increased at what Pontius calls the sector’s “strongest annual pace since 2015. Year-over-year second quarter, rents rose 1.2% to $23 a foot.”
By: John Salustri (Globe St)
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For many investors, net leased assets are proving to be steady, low-risk alternative investments for their portfolios. Read on to learn why.
Jonathan Hipp
Investors today are increasingly turning to alternative assets for their portfolios. And many of those investors are examining net leased properties as a viable addition to their portfolio.
In a lot of cases, net leased assets can provide favorable returns with less risk and minimal oversight. This is because net lease properties have the “three-C” advantage: corporate, credit, and contract.

• Corporate. Net leased properties contain occupiers that, in many cases, are backed by national corporations or well-known regional companies. Advanced Auto, Dollar General, Kohl’s, McDonald’s and Walgreens are great examples of net lease tenants. Depending on the lease, income stream won’t dry up if the tenant leaves before the end of the lease. The corporation guarantees payments through the lease term.

• Credit. The properties are frequently occupied by credit-worthy tenants. Even tenants carrying a level or two below a BB+ investment grade can provide a steady income stream, at little risk.

• Contracts. The contract, or lease, on a net lease property can span 10 to 25 years, with renewal options and rent bumps. If the contract spells out an absolute net lease – also known as triple-net (NNN) – the investor doesn’t have to worry about maintenance costs, tax payments or other financials connected to the property.

Even with the benefits of net leased properties as alternative investments, there is another “c” to consider: caveats. Though caveats can be minimized with good real estate fundamentals, it would be negligent to ignore them.
First, similar to all real estate, net lease properties are illiquid. They can’t be immediately sold if the investor needs immediate money. In addition, property values can change, depending on market demand and cycle, with those values having an impact on cap rates.
Second, even with rent increases, a net leased property’s rate of return is fixed throughout a hold, thereby limiting its upside. Still, the return from net leased investments are higher than bonds, which is why they could be considered real estate wrapped in a bond.
Finally, though 100% occupancy is a given with a net leased property, so is 100% vacancy if the tenant doesn’t renew. In such a case, the owner needs to find another tenant and could incur additional capital expenses to prepare and re-lease the space. However, choosing a prime location and adaptable floorplan at the onset can help kickstart a new income stream with a relatively easy re-tenanting process.
Though there are risks in any kind of investment, net leased assets can provide a stable fixed income, with little worry and hassle. Such properties can help investors advance returns, with only a slight risk increase, and should be included in any balanced portfolio.
By: Jonathan Hipp (GlobeSt)
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Tracking the trend of increasing alternatives allocation is worth a longer look, as it is indicative of a shift by HNW investors and will result in increased capital flows into real estate.
The rethinking of traditional investment allocations is causing high-net-worth (HNW) investors to seek ways to diversify their investment portfolios, especially given the current low yield environment. The increased allocation to alternative investments, such as private equity, hedge funds, commodities and real estate, is aiding HNW investors in achieving improved portfolio diversification, a hedge against future inflation and increased current yield, with certain tax benefits in the case of real estate.
Portfolio challenges for HNW investors
HNW investors have traditionally looked to stocks and bonds, with their market breadth and attractive liquidity, for the bulk of their portfolio allocations. While historically effective, the traditional approach to investing will be increasingly challenged as future equity returns are likely to be significantly lower and fixed income returns continue to be low in this “new normal” environment. HNW investors, and to a greater extent ultra HNW investors, are showing greater interest in alternative assets as a means to diversify their portfolios and achieve more attractive risk-adjusted returns.
Given the current liquidity premium characteristic of conventional equity and fixed income markets, and the relative increased (liquid) cash positions among HNW investors, investment managers, generally, are of the belief that most HNW portfolios are over-allocated by prior standards. Further, many alternative investments now offer certain forms of liquidity, enabling increased allocations in alternatives yet with flexible exit strategies.
The increasing shift toward alternatives
Until recently, alternatives warranted a roughly 10 percent allocation to the typical HNW investor, perhaps even up to 20 percent. The move towards higher allocations for alternative investments within a HNW investor portfolio is increasing, to a large extent due to the low correlation when compared to traditional asset classes. Investment managers are commonly advocating a much greater allocation to alternatives, ranging from 20 percent to 40 percent. For ultra HNW investors, an alternative asset allocation in the mid-40 percent range is not uncommon.
A considerable amount of new independent RIAs are being formed to allow advisors who are leaving traditional brokerage firms to provide clients with an “open architecture” platform. This creates increased flexibility in providing clients more diverse investments, including alternatives, than the limitations incumbent with approved brokerage platform products.
Additionally, advisors are leaving traditional brokerage firms to avoid the perceived conflict of earned commissions on proprietary products, as opposed to compensation for assets under management in an open architecture platform. Not only does this diversification help HNW investors, it eases the difficulty by smaller investment managers in accessing advisor platforms.
Conclusion
Tracking the trend of increasing alternatives allocation is worth a longer look, as it is indicative of a shift by HNW investors and will result in increased capital flows into real estate. By combining a variety of alternative assets in a HNW portfolio, notably real estate, a more optimal diversification can be created, one that avoids the liquidity premium found in traditional asset classes, benefits from low correlation and provides investors with enhanced portfolio returns and current yield.
Robert Brunswick is the co-founder and CEO of Buchanan Street Partners, a real estate investment management firm that focuses on value-add investing by providing debt and equity capital to owners and operators of commercial real estate as well as buying direct investment for their own account.
By: Robert Brunswick (National RE Investor)
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Approximately 277 million sq. ft. of industrial space is currently under construction.
U.S. industrial real estate development hit an all-time high in 2017, with more than 208 million sq. ft. completed so far, and another 277 million sq. ft. currently under construction, according to research firm CoStar. Real estate services firm JLL is seeing similar trends, according to Mason Mularoni, JLL senior research analyst. Last year, a total of about 164 million sq. ft. of new industrial space was completed in JLL’s calculations.
Robust development activity is partly due to the industrial vacancy averaging just 5.2 percent for the second consecutive quarter, Mularono notes. He attributes the trend to increasing demand from e-commerce tenants.
E-commerce sales have increased by 16 percent year-over-year and now account for 9 percent of all U.S. retail sales. E-commerce also accounts for about 12 percent of industrial leasing activity and an additional 22 to 30 percent of indirect leasing through closely tied logistics, distribution and 3PL channels.
“E-commerce continues to take a larger share of the industrial pie,” says Mularoni. “While 9 percent doesn’t sound like much, it’s pretty substantial considering it is growing so quickly and driving new development.”
He suggests that this is just the beginning of exponential growth in e-commerce and will continue to have a significant impact on industrial development for the next few years. One of the biggest drivers for new industrial projects is the need to put distribution facilities closer to consumers, he notes.
Over the last few quarters an average of 70 percent of all new industrial development has been done on spec, Mularoni notes. “This is proof of investor/developer confidence in this sector’s [strength],” he says, pointing out that more than 29 percent of new speculative industrial product coming to market during the first three quarters of the year was leased by the time it was completed.
The greatest growth in new industrial development is taking place in six markets with high population density. These include: Southern California, particularly the Inland Empire; Dallas; Chicago, New Jersey; Atlanta; and Pennsylvania, from the central part of the state to Philadelphia.
At the same time, secondary markets including Indianapolis, Phoenix and Kansas City, Mo. are also becoming important distribution hubs, notes Colliers International’s Director of Industrial Services Pete Quinn.
Due to e-commerce being the driving force behind new development, site selection for industrial facilities has switched from location of material resources to availability of labor. Quinn notes that “total landed costs” vs. the cost of real estate now figure into location of new distribution hubs. These includes the availability and cost of labor, taxes or tax incentives and cost of utilities, as well building costs.
Demand for “last mile” distribution space is also creating opportunities for developers to redevelop or replace older facilities within urban markets with new product. Mularoni notes. That type of industrial space is more expensive to redevelop, but users are willing to pay higher rates to be closer to their customers.
With a tightening market, the average asking rent for modern industrial space reached an overall record high of $5.40 per sq. ft. in the third quarter, according to JLL. In spite of an increasing amount of new product, rents are likely to remain at record highs in the coming quarters. In fact, the asking rate in certain markets, including Southern California, where vacancy averages 3 percent, is already up to $6.15 per sq. ft. for newer class-A space, according to Colliers International.
By: Patricia Kirk (National RE Investor)
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