Archives for December 2018

Retail is changing rapidly, and landlords need to transition away from the standard lease-and-collect-rent model and invest in retailers and a branded experience.

Retail landlords have quickly caught on to the experiential retail concept, curating tenant mixes and investing in communal spaces that help drive consumers out of their homes. But, the change is far from over. Ultimately, retail landlords will need to abandon the standard real estate model of lease and rent collection and invest both in retailers and in creating a universal branded experience. Sean Slater of Retail Design Collaborative likens the future of retail to something akin to WeWork in office.
“If I had a vision for what the future of retail is going to look like, it is WeWork,” Slater, a principal at Retail Design Collaborative, tells GlobeSt.com. It is going to be a very different experience than the mall experience.” Companies like Simon, Macerich and Brookfield are “ahead of the curve,” according to Slater, and are investing in physical spaces and creating spaces for digitally native brands to temporarily operate in a highly branded space.
This is different than the pop-up trend that has become popular, which Salter calls a cheaper version of what will come. Landlords will need to play a more active role in the retail business, and that will naturally mean a shift in the retail real estate model. “The physical space that retailers need to invest heavily in isn’t really a return. It is survival for one and it is also a stake that they will take in these brands. I think that you are going to see landlords owning part of these retail companies in lieu of what was a really easy rent collection model in the past.
Today, landlords are focused on filling vacancies and collecting rent, largely because capital markets sources rely on occupancy and cash flow to underwrite an asset. “Today, it is better for a landlord to put a bad tenant in a space and collect some rent than to have an empty space, because their only business model is rent collection,” says Slater. “Landlords have to figure out a completely different model, and the underwriting also has to change. Lenders have to ask if they want their loan to be in default or if they are willing to change the expectations or change the payback.”
Slater said that new model has yet to emerge, but landlords will have to find another way to get a return. While 2019 isn’t necessarily the year when the rental retail model will end, Slater says that it is coming soon. “I think that we are really in time of transition, and I don’t know when the change will come. Institutions will realize that they need to revolutionize the way that they collect money from real estate transactions, and it isn’t rent. There are other intangibles and the value of the real estate itself. I think that lowering expectations of return will also provide some cover,” he says. “Landlords are going to have to invest on their retailers to get their return back in another way, rather than just collecting a rent check, which seems to be a model that its going to fade in the next couple of years.”
By: Kelsi Maree Borland (GlobeSt)
Click here to view source article.

Sandra Parét, senior vice president for AECOM, recently discussed the changing office workplace and how it is evolving to meet the needs of users in this EXCLUSIVE.

AECOM emphasizes its brand through integrated graphics displaying company values.
When examining what specific real estate is adapting to tenant needs, it might be easier to list the property types that aren’t changing in the face of rapidly evolving space requirements. But in fact, most all industry categories are undergoing some type of bolstering to keep up with current prerequisites, whether that be technology, transit, mobility, e-commerce or entertainment.
In this exclusive, Sandra Parét, senior vice president, corporate market sector for AECOM, recently discussed the changing office workplace and how it is evolving to meet the needs of users. For starters, she says the work scene is becoming less formal. Companies are adding more casual work settings to support a larger variety of work styles. Numerous tech companies and financial services clients are exploring these options to better suit a multigenerational workforce.
Also, companies are integrating branding into physical space elements around the office. First, this creates a visual brand experience for potential applicants, new hires and current employees who are in the office.
“For example, in our own offices, we emphasize our brand through integrated graphics displaying our company values, projects we have completed and community service opportunities,” Parét tells GlobeSt.com. “Second, the company branding teaches employees to live the brand daily. This aspect makes the company culture unique and memorable.”
Parét says open office plans will continue to be around but will be more flexible than ever, both from the “kit of parts” to create the space and from the plug-and-play ability to change the space when functional needs change.  The workspace will stay flexible for two reasons, she says. First, employees need a flexible space for activity-based tasks and it’s easier to collaborate with other team members in this setting. Next, the flexible space optimizes real estate portfolios. A reduction of square footage can occur if utilization studies show that workers only spend a portion of their days, if any, in actual work spaces.
Further, meeting rooms will be physically flexible in a sense that walls can open and close as needed to in increase collaboration or maintain privacy. Technology will be key for these rooms to function most effectively for any user group, Parét points out.
Also, work spaces will be designed for specialized teams or various work groups. For instance, while workstation components remain consistent, the support spaces can be used in different ways.
“A conference room for one group may be a storage room for a different group,” Parét tells GlobeSt.com. “The key is planning consistency and flexibility.”
Another part of the flexible office is creating a healthy environment to promote body movement for a better work/life balance. This can be done in several ways, she points out. Examples include vertical transportation, i.e. connecting stairs, healthy food options in the company’s cafeteria and furniture selection, such as sit/stand desks.
Lastly, spaces will be tech enabled beyond the audio visual set up, Parét predicts. Today’s technology provides smart settings for rooms, including lighting, temperature, noise reduction and other features, all connected to an energy-efficiency program to minimize costs. Special glass coating is used to prevent screen content from being readable outside the room, providing a level of privacy without completely blocking lines of sight.
Another technology element is data analytics being incorporated into rooms to monitor activity. Future spaces will be designed appropriately and underutilized spaces will be repositioned.
A final thought centers on the educational influences in the workplace, Parét says.
“How companies hire new graduates into the workforce does not yet provide the work settings in which those grads have been most productive through their educational years,” she tells GlobeSt.com. “An example is groups versus team environment. New graduates are adept to working in groups, not necessarily teams. In other words, a group can be seated in the same common area, all working on different tasks, but still having social interaction. For new hires to be successful, the environment they’ve worked in while in college should be explored as a planning concept in the office environment.”
According to Savills Studley’s third quarter office market report, Dallas-Fort Worth deal volume remained on par with the long-term historical average, totaling 3.5 million square feet but fell from the strong second quarter mark of 4.2 million square feet. Despite the slight drop in the third quarter, tenants have leased 14.6 million square feet in the four most recent quarters.
The overall market availability rate increased by 20 basis points from 25.2% to 25.4%. The continued flight to quality pushed the region’s class-A availability rate down by 60 basis points to 24.8%. The overall asking rent ticked up by 0.1% to $24.17, but jumped by 1.8% year-on-year. The average class-A asking rent remained at $26.30, but rose by 1.4% year-on-year, says the report.
By: Lisa Brown (GlobeSt)
Click here to view source article.

It isn’t all about amenities. Apartment developers and investors need to cultivate and activate a community atmosphere.

The concept of creating an experience is penetrating every asset class. Office and retail have been the most impacted, but multifamily owners will also need to cultivate and activate a community experience. Simply, people today expect a thoughtful, service-driven experience in the workplace, while shopping and at home. In 2019, creating a community experience is going to be a major trend.
“Anyone can build a nice project but the next trend will be thoughtfully activating the community. Creating a cultural ambassador role—somebody that can really cultivate the branded culture and curate one of a kind experiences rather than just a happy hour or game night,” Carlee Carpio, senior development manager at LaTerra Management, tells GlobeSt.com. “Highlighting the amenities by creating opportunities for residents and prospective residents to educate themselves through events, panels, lecture series, classes, pop up art & boutique shows. Setting the VIBE with curated music throughout the property and showcasing on brand DJ’s.”
Part of this experience is accessibility. Carpio says, at a minimum, apartment owners need to accommodate ride sharing services and food and package delivery services. “If an app can deliver something with the click of a button then the apartment building needs to ensure the same easy process to get the delivery to the resident,” says Carpio. “Hello Alfred takes this idea to the next step and I plan on seeing more companies offering trusted help & personal concierge services in the future. Especially in L.A. where running simple errands can turn into a day long, traffic fighting adventure.”
Owners also need to accommodate technology needs inside the building as well. That, generally, comes down to providing access to quality high-speed Internet that can support Internet use. “High speed internet will only become more necessary,” she adds. “Streaming TV consumption more than doubled in the last year so it’s crucial the correct infrastructure is in place to accommodate. Residents also want choices so it’s imperative to provide as many choices as possible to stay relevant.” This includes smart technology as well, like keyless entry and other smart technologies.
Caprio, however, says that it isn’t only amenities. Owners should also create a cohesive branded experience through the design of the property. “Going away from the completely bland interior color schemes and installing interesting designer touches,” she says. “Something that makes it feel “homey” from the day a new resident moves in.” Art curation is another option for apartment owners, and art can be integrated into parking garaged, public spaces and hallways.
By: Kelsi Maree Borland (GlobeSt)
Click here to view source article.

The probability of a CRE finance disruption in the next six to 18 months is as elevated as it was prior to 2007-2008, writes CCIM Institute’s chief economist.

CCIM Institute Chief Economist K.C. Conway is not optimistic that the commercial real estate finance markets will continue to operate smoothly in the mid term. Rather, he writes in a recently-released white paper, the probability of a CRE finance disruption in the next six to 18 months is as elevated as it was prior to 2007-2008.
The question, therefore, is not if or when, but how this disruption will occur. To be sure, it may seem hard to envision how the currently robust CRE capital markets could come to a halt, but Conway posits that a confluence of events are poised to do just that. These include the advance of technology in CRE finance and regulations that are not keeping up with these advances, rising interest rates and the concentration of the debt markets. In fact, he writes, “there’s no shortage of possible disruptors right now — the aftereffects of the midterm elections, tariffs on $200-plus billion of imported Chinese goods and the third interest rate hike in 2018 by the Federal Reserve, just to name a few.”

Rising Rates

Indeed from an interest rate perspective alone, CRE finance faces a headwind next year: simply put, the market is not prepared for the effects of a 3.5% 10-year Treasury on cap rates and commercial property valuations — let alone 4% or even 5%, according to Conway. “Properties purchased in the third quarter of 2018 assuming a 2.75% 10-year Treasury could justify a sub-6 percent cap rate but properties purchased in 2019 in a 3.5% to 4% 10-year Treasury rate environment cannot justify a price based on anything below a 7% cap rate,” he writes.

Technology Advances Into Finance

There is also the risk that technology may grow too advanced for regulators’ tastes, he also theorizes.
At first blush it is clear that technology advances in both data analytics and property cash flow have delivered transparency to real estate finance, Conway says in his paper. Applications now range from sophisticated discounted cash flow software that can value and underwrite more complex lease structures to mobile apps that provide access to data anywhere.
Regulators, it would seem, would like these developments. For example, so-called Smart Finance can incorporate artificial intelligence to automate the underwriting and credit scoring processes, thus speeding up approvals and closings while also documenting regulatory records and preloading — all required information for annual Dodd-Frank-mandated stress testing.
But it is equally clear that some of these developments are moving beyond the purview of regulators. SALT (Secured Automated Lending Technology) is based on blockchain technology and allows cryptocurrency asset holders to use their digital assets as collateral for cash loans. It eliminates the need to liquidate holdings and is creating a digital asset-backed market. SALT is already in use in CRE, Conway writes.
So what will happen once regulatory and legislative bodies turn their attention to these new technologies? Conway believes the worse-case scenario is a time-out period while legislation and regulation catch up to the technology in the short term. The best case scenario is one where “both industry and regulatory bodies embrace the technology and the latter quickly establishes effective controls to mitigate damages when any unintended consequences rears its head.”

Concentration of Debt Markets

Another concern for Conway is the concentration of the debt markets. The contraction in the number of financial institutions over the past three decades, coupled with exponential growth in debt capital, has created a concentration the likes of which we have never seen in history, he writes. “Combine that with assets being priced for perfection at record-low average cap rates of below 6% and you have an environment with simply no margin for error.”
By: Erika Morphy (GlobeSt)
Click here to view source article.