Archives for April 2019

Retail Properties With Strong Tenants Thrive

April 17, 2019 by CARNM

Positive economic activity and an abundance of capital have further sustained demand for well-located investment property, both within single-tenant and multi-tenant sites, says Matthew Mosavi of SRS.
The net lease retail investment market, in general terms, is on pace to meet or exceed volumes experienced through the first quarter of 2018. Transactional activity through the first quarter of 2019 appears to have benefited from the compression of the 10-yr treasury, swap rates and other financing indexes, providing a welcomed boost to investor yields and cash-on-cash returns, while simultaneously generating motivation for owners to deploy assets to the market to take advantage of this “window” of compressed interest rates. The 10-year treasury was 3.23 percent in mid-November, by the first week of April, it was 2.49 percent.

Positive economic activity and an abundance of capital have further sustained demand for well-located retail investment property, both within single tenant and multi-tenant property types. Buyers are more prudent, measured in their approach of underwriting centers with junior anchor and anchor space. Concerns within certain categories of retail continue, such as clothing and soft goods, as e-commerce continues to change the retail landscape. According to Coresight Research, a retail analytics think tank, store closures in 2018 fell to approximately 5,524 in 2018 from over 7,000 in 2017. We expect to see more tactical store closures through the rest of the year and into the near future. Retailers who are well positioned with a sustainable business model and strong financial health, will survive, and potentially thrive, in this market. Debt laden retailers, like Toys R Us, suffered from both a changing retail landscape and an unsustainable financial position as a company.
On the Strip
Aside from net lease, grocery-anchored retail and core assets, strip retail is a product type that continues to experience strong demand, and that we see as a buying opportunity for middle market investors. Most of these retail strip centers and multi-tenant outparcels generally include two to 10 tenants, and transact at price points accessible by a wider buyer pool and typically offer higher cap rates and cash-on-cash returns than single-tenant alternatives. Strip retail centers can provide upside and repositioning opportunities as there’s an abundance of suburban and infill strip retail centers throughout the country, often in well-located, infill sites needing capital improvements and a forward-thinking tenant mix. Remodeling older strip retail can result in re-tooling those centers into small format community centers, driving traffic and creating a synergistic environment for the right tenant mix. In addition, strip retail centers tend to have shorter-term leases and can have substantially higher rent growth when compared to single tenant net lease properties. Throughout this continued recovery and compressed cap rate environment, strong buying opportunities can be found, with strip retail centers being one of the often under looked, undervalued product types.
By: Matthew Mousavi (Commercial Property Executive)
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Despite ‘Retail Apocalypse,’ U.S. Grocery Store Openings Jumped 30 Percent in 2018

April 17, 2019 by CARNM

Supermarket chains continue to open new stores, but they are focusing on smaller concepts.

While a new report by investment firm USB estimates 75,000 more U.S. stores could close by 2026 as the shift to online shopping expands, it appears that the grocery sector continues bucking that trend.

The report points to future closings of apparel stores, consumer electronics retailers and home furnishing stores, noting that online sales are expected to make up 26 percent of all retail sales in 2026, up from about 16 percent today.

However, new grocery store openings increased by 30 percent in 2018 over 2017, with more than 17 million sq. ft. of new space added to the market, according to a recent report by real estate services firm JLL.
JLL reports that more than a quarter of those openings were in Florida, California and Texas due to expansions of their respective local, market-leading grocers, including Publix, Sprouts Farmers Market, Aldi, Kroger and H-E-B.
“Grocery is one of the strongest retail sectors, with nearly twice as many new stores opening than closings last year,” said James Cook, director of retail research at JLL, in a statement.
Of course, that doesn’t mean that the grocery business isn’t being disrupted by e-commerce and changing consumer buying habits. Weaker grocery chains struggle to compete in a very crowded market.
But many grocers are responding to changing consumers’ needs. For example, JLL reports that the grocery sector has seen consumer habits shift to more frequent, shorter trips, vs. big weekly hauls. As a result, grocers are focusing on developing smaller-format stores—under 10,000 square feet—with more local offerings.
A big player well-equipped with the small-formats strategy is Germany-based, no-frills Aldi, which opened 82 stores in 2018 and accounted for nearly 16 percent of the total new stores by square footage. Aldi combines smaller stores and private-label products with deep discounts. The chain is investing $5.3 billion in the U.S. over five years to build about 800 new stores and remodel existing locations.
Aldi has about 1,800 stores in the U.S., and by 2022, plans to be the third-largest U.S. grocer, with 2,500 stores, behind powerhouses Walmart and Kroger.
“They’ve done such a great job with building up a brand allegiance,” says Taylor Coyne, research manager of U.S. retail for JLL. “They’re clearly appealing to the consumer, and it just allows them to expand pretty rapidly across the country.”
Other smaller formats in expansion mode
German discount chain Lidl is looking to grow its footprint, but slowed its expansion push in 2018 with only 15 store openings. However, Lidl announced plans to purchase 27 Best Market stores in New York and New Jersey to ramp up its East Coast presence. Industry sources say it might also consider vacant Sears and Kmart locations for expansion.
Sprouts continued at a quick pace, adding 30 stores in 2018 with another 30 planned for this year.
“Sprouts is all about the farmer’s market vibe, which ties into the rise in wellness and everyone trying to be more aware about where their food is coming from,” Coyne says.
Meanwhile, Trader Joe’s is opening about 30 to 35 stores a year.
“In 2019, we expect to see even more grocery stores rolling out their smaller format stores as they battle razor thin margins in prime locations, while still serving evolving consumer needs,” Cook said.
Even big grocers like Kroger and H-E-B are experimenting with smaller format stores.
“That really speaks to providing flexibility for customers,” Coyne notes. Some people are still going to need large format stores for big shopping trips, but they’re also recognizing that people can benefit from smaller stores, she adds.
Challenges for landlords
One challenge for retail landlords is the format of the grocery store has been “turned upside down,” says Garrick Brown, vice president and Americas head of retail research with real estate services firm Cushman & Wakefield.
“It used to be the traditional grocer had 50,000 to 80,000 square feet and they would go into the community center or neighborhood center,” Brown notes. “There are still a few players that use that model, but most of the growth we’ve been seeing is smaller formats. That has been true on the value side and the high-end, organic side.”
Those grocers still doing big-box stores are typically building in new, suburban subdivisions with large populations.
Brown adds that it’s often the grocers in the middle of the market facing challenges.
“What’s happening to some degree is you’ve got value growing like gangbusters,” Brown says. “You’ve got upscale seeing strong growth. The challenges tend to be in the middle, with a lot of smaller regional or local chains that are unionized and don’t have the buying power. They struggle to compete on pricing, because they have overhead that these other guys don’t have.”
Amazon shakes up grocery industry
Amazon’s 2017 acquisition of Whole Foods has forced retailers like Walmart and Kroger to get creative. Almost immediately following the acquisition, Amazon made significant changes to the chain, like introducing sales and discounts at Whole Foods for Amazon Prime members and expanding grocery delivery and pick-up services with the aid of the brick-and-mortar stores.
Now, Amazon is reportedly planning to beef up Whole Foods’ expansion by adding new stores and is considering filling former Sears and Kmart stores.
There are also reports that Amazon plans to launch a separate chain of grocery stores, according to the Wall Street Journal. They will offer different, less expensive products than Whole Foods. The retailer plans to open its first outlet in Los Angeles.
Amazon introduced its first small format grocery store—Amazon Go—in 2016, and the giant online retailer continues to pursue new formats of physical grocery stores.
“Certainly, Amazon is pretty tight-lipped about their plans, but there are a lot of indicators in the marketplace that they’re ramping up their brick-and-mortar presence,” Brown says.
Brown notes that Amazon regards Walmart, Albertsons and Kroger as primary grocery competitors, and each of those chains has 2,000-plus stores.
Online grocery delivery/pick-up services
Fear of Amazon’s dominance has led many grocers to invest in expensive online grocery services. While Amazon leads the grocery delivery business with roughly 100 million Prime subscribers, Walmart dominates online grocery pick-up with 1,800-plus stores offering the service. Walmart is currently spending $11 billion to remodel stores, including expanding online grocery pick-up and grocery delivery services.
Target will open about 30 stores this year that will be mostly smaller format, urban stores heavy on grocery, says Brown. It’s also undertaking remodels of existing stores. Target acquired delivery service Shipt in 2017 and is rolling out same-day delivery service in certain markets. Kroger continues to expand its Kroger Pickup locations and grocery delivery services.
Most e-grocery delivery is fueled by delivery from store, Brown notes. Therefore, grocery retailers need to set aside more space internally within their physical stores for order picking and storage. Also, they’re setting aside parking spaces convenient to the front of their stores for quick pick-ups.
Today’s grocers need to do both digital and physical well to be successful, according to Coyne.
“Flexibility of online grocery shopping is important; so is the store experience,” she says. “I think the ones who are going to be really successful going forward are those who can balance and not put too many eggs into the online delivery basket and forget about that in-store experience.”
She points to in-store concepts like kombucha on tap and a craft-your-own olive oil stand. Hy-Vee opened four in-store Wahlburgers restaurants, while Wegmans opened its first New York City store at the Brooklyn Navy Yard featuring an in-store café with a full bar.
Coyne also points to new technology like “Kroger Edge,” which are digital shelf labels that make it easier for customers to navigate and find products in Kroger stores. The company is working on developing an app that will eventually communicate with customers’ smartphones.
Walmart is launching a new app called “Dotcom Store” that allows in-store shoppers to buy items on Walmart.com with the help of an employee, who places the order on a handheld touchscreen device.
“With some of these shifts in the grocery industry, you’re getting some grocery owners who really feel the pressure to innovate and change,” Coyne says.
Another example is the JLL report prediction that “robots will deliver your groceries sooner than you think,” as retailers like Walmart and Kroger are investing in driverless technology and experimenting with autonomous grocery delivery.
Also, with the focus on grocery delivery, 2018 saw an increase in grocers building new distribution centers and systems to meet the demand for quicker fulfillment.
Giant Foods, for example, opened its first e-commerce pick-up and fulfillment hub in Lancaster, Pa., with dedicated click-and-collect lanes for drivers visiting the hub. The company said the facility will allow Giant to serve 40 percent more customers than the company store that previously occupied the space.
By: NREI
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NAR Commercial Priority Issues – 116th Congress

April 16, 2019 by CARNM

Download the summary(link is external) (PDF 190KB)
The National Association of REALTORS® advocates every day on behalf of the nation’s 1.3 million REALTORS® and 75 million property owners. NAR is widely considered one of the most effective advocacy organizations in the country. Listed below are some of NAR’s priority commercial real estate issues in the 116th Congress.

Americans with Disabilities Act Lawsuit Reform

Title III of the Americans with Disabilities Act (ADA) requires that public accommodations – including commercial establishments – be ADA compliant. Under the ADA, attorneys may collect fees related to pursuing claims of non-compliance, but plaintiffs do not collect damages. This has led to an increase in suits targeting easily-corrected infractions; owners often have a reasonable belief that the properties are in compliance with the law based on state and local inspections.
In the 115th Congress, the House of Representatives passed a bill which would have added a notice-and-cure provision to the ADA, giving commercial property owners an opportunity to fix infractions before a lawsuit is filed, therefore redirecting resources from attorneys’ costs, court fees, and settlements, to resolving ADA violations in a timely manner. The bill did not gain traction in the Senate, however. NAR is part of a coalition dedicated to finding a solution which protects disability rights while reducing frivolous lawsuits, and will continue this work in the 116th Congress.
For more information, visit the Americans with Disabilities Act page.

Energy Efficient Commercial Buildings Deduction (179D)

Section 179D of the IRC allows commercial building owners who improve the building’s energy-efficiency to receive a deduction of up to $1.80/square foot in the year the upgrade goes into service (following proper certification). It is available for both new construction and retrofits, and does not favor any particular method of conserving or reducing energy use. Section 179D is not a permanent part of the tax code, and has been reauthorized several times; most recently, in February 2018 Congress retroactively reauthorized it through 2017, allowing property owners to claim the deduction on their 2017 taxes filed that year. Unless Congress once again reauthorizes it retroactively to include 2018, the deduction will lapse, possibly permanently. NAR belongs to the 179D Coalition, and consistently advocates for Congress to make this deduction permanent, or, at least give it a long-term reauthorization.
For more information, visit the 179-D Energy Efficient Commercial Building Tax Provision issue summary(link is external).

Infrastructure

Infrastructure improvements can positively impact property values, create livable communities, and enhance economic vitality, but poorly maintained infrastructure imposes opportunity costs and can negatively impact the local economy. In recent years, attention has been drawn to the lack of proper maintenance of U.S. infrastructure, from roads and bridges to mass transportation and broadband access. Despite agreement that this is a pressing issue, Congress has not passed a large-scale infrastructure bill.
NAR supports spending for infrastructure and believes funds should be sufficient to maintain the current physical condition and level of performance of highways and transit systems while making improvements to reduce congestion and foster economic growth. Infrastructure investment should consider all transportation users, and should be all-inclusive so that critical systems, such as water or ports, are also prioritized while maintaining a community’s infrastructure.
For more information, visit the Transportation and Infrastructure page.

National Flood Insurance Program

The National Flood Insurance Program (NFIP) had several short-term extensions in 2018, ranging from several months to just one week. It was ultimately extended through May 2019. NAR works closely with Congress and FEMA to ensure that the program does not lapse, and has advocated for reforms to improve it and make it more responsive to commercial real estate needs. These include improved mapping utilizing “3DEP” technology, a voluntary “opt-out” for commercial properties that are able to obtain the necessary coverage from private insurers, and broadened covered options, including multiple-structure and business-interruption coverage.
For more information, visit the National Flood Insurance Program page.

Qualified Business Income Deduction (Section 199A)

The Tax Cuts and Jobs Act of 2017 includes a 20% deduction from the net of business income in sole proprietors and owners of S corporations, LLCs, or partnerships. This can greatly reduce federal taxes, but is complex for many. For example, it is unclear whether owners of rental real estate will be able to claim the deduction. NAR has commented to the IRS on the deduction, urging that it be available to real estate brokers. The IRS proposed rules state that real estate brokers will be eligible for the deduction, reflecting NAR’s comment letter request. NAR also sent a comment letter asking that all rental property activity be eligible for the deduction, and testified at an IRS hearing on the issue in October 2018. NAR will continue to work to ensure that the deduction is available to all real estate agents and brokers and that its application to income from rental real estate is straightforward.
For more information, visit the Tax Reform page.

Qualified Opportunity Zones

The Qualified Opportunity Zones (“QOZ”) program, created by the Tax Cuts and Jobs Act of 2017, provides tax incentives for investing in under-served communities designated as “Opportunity Zones.” The Treasury finalized the designations in 2018. Capital gains reinvested within 180 days of a sale into an “Opportunity Fund” are tax-deferred until the end of 2026 or their interest in the Fund is sold, whichever comes first. (An Opportunity Fund is a vehicle created for the purpose of investing into QOZs, required by the law; there are specific requirements for their certification.) If an investment is held for five years, the capital gains tax ultimately owed on it is reduced by 10%; if held for seven years, it is reduce by 15%. Additionally, gains that accrue on investments that are held at least ten years are tax-free.
Proposed rules for the QOZ program were released in October 2018, with at least one more round expected. The White House issued an Executive Order in December 2018 creating a cross-agency council with the purpose of coordinating federal revitalization programs, including QOZs, across federal agencies. NAR belongs to two industry coalitions focusing on QOZs, which were a featured topic at the November 2018 Conference & Trade Expo.
For more information, please visit the Qualified Opportunity Zones page.

Terrorism Risk Insurance Program

The Terrorism Risk Insurance Program (TRIP) was created in 2002, following the terrorist attacks of September 11, 2001, and the subsequent lack of affordable terrorism insurance. Absent terrorism insurance, many commercial properties were in technical default of their loans, and new lending slowed. The program provides a federal backstop, triggered if a terrorist attack (certified by the Treasury) exceeds a certain amount of damages ($200 million). The government has a share in losses above that point, and there is a mandatory recoupment from private insurers. The overall effect is that terrorism insurance is affordable and available for those who need it. It has been reauthorized several times, most recently in 2015 for six years (through 2020).
NAR belongs to the Coalition to Insurance Against Terrorism (CIAT), comprised of commercial real estate industry groups. The Treasury has conducted multiple studies on the effectiveness of the program, which NAR and CIAT submitted comments to in support of the program. NAR will work with the 116th Congress to ensure that the program is reauthorized and continues to protect access to this important insurance coverage.
For more information, please visit the Terrorism Insurance page.

Waters of the U.S. Rule

The Clean Water Act (CWA) regulates “navigable” waters, and the Obama Administration’s Waters of the U.S. (“WOTUS”) rulemaking was designed to broaden it, including many more U.S. waters under federal jurisdiction. Finalized in 2015, it was never fully implemented due to a federal court ruling to stay the rule. President Trump issued an Executive Order in 2017 directing the EPA to rescind WOTUS and replace it with a rule providing a definition of “waters of the U.S.” to protect water quality while alleviating unnecessary regulatory burdens on development. To that end, the EPA and Army Corps of Engineers recently released a proposed rule with a clear definition of waters in the U.S. However, other court decisions have complicated the issue, and currently about half the states are required to implement the Obama WOTUS rule. NAR has consistently advocated in Congress and the federal agencies for the WOTUS rule to be withdrawn and replaced with a rule protecting water quality without unnecessarily hampering development and intruding on private property rights.
For more information, visit the Clean Water Act page.
By: NAR
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Which Properties are Like-Kind? (You May Be Surprised!)

April 11, 2019 by CARNM

Like-kind real property is broadly defined: All real estate in the United States is like-kind. Section 1031 makes no distinction in qualities of real estate. A city lot is like-kind to farmland; an apartment building is like-kind to a shopping center, a condominium unit is like-kind to a factory, and so on. Real estate located outside the United States (i.e. “Foreign” real estate) is not like-kind to real estate in the 50 states, even if it is located in an affiliated commonwealth or territory, such as Puerto Rico.   The U.S. Virgin Islands (PLR 9038030) are an exception to the rule, as are Guam and the Northern Mariana Islands. (26 C.F.R. 1.935-1.)
Interests in a partnership are not like-kind, although the partnership itself can take advantage of a §1031 exchange. The exchange of partnership interests is specifically prohibited.  §1031 (a)(2)(D). Individuals can only exchange their interests in the partnership property if they have made a valid election under §761(a).
Assets that may not appear to be like-kind often are. To determine the nature of a property interest, look to the law of the state where the property is located. Unfortunately, this may lead to conflicting results. For example, growing timber is not like kind to fee title in Oregon (Oregon Lumber Co. v. Comm., 20 T.C. 192 (1953); TAM 9525002), while it is like-kind to fee title in Georgia. Smalley v. Comm., 116 T.C. No. 29 (2001).
Trusts – Certificates of trust or beneficial interests in trusts are specifically excluded from non-recognition treatment under §1031. Illinois Land Trusts present a unique problem. The beneficial interest in an Illinois land trust is personal property under state law. Despite those factors, the IRS will treat that interest as like-kind for the purpose of an exchange. The trustee is merely an agent to hold and transfer title, not a trustee who actively works to protect and conserve property for a beneficiary. Rev. Rul. 92-105, 1992-491 I.R.B. 4. Similar reasoning has been applied to allow the exchange of properties held in revocable trusts for estate planning purposes.
Leaseholds – A leasehold interest with an unexpired term of greater than 30 years (including optional renewal periods) is like-kind to a fee interest. A lessee can exchange his leasehold interest for a fee interest. However, the Lessor cannot exchange a lease for a fee interest, because the Lessor’ interest in the lease is only to receive money (rent), which is not like kind to the real estate. This “30-year rule” also applies to other terminable interests (e.g., a life estate or estate for years).
Development Rights – Development rights are a relatively modern land use planning tool that local governments grant to limit or prevent development in special zoning districts. These rights can be sold on the open market to owners of other real property in a receiving zone, permitting development of property in that zone beyond what would otherwise have been permitted. While development rights may not be treated identically to real property for all purposes, they are treated like real property in a number of important ways, including the fact that their grant is not discretionary, they appear to be permanent, are transferred in a manner similar to the transfer of a deed or an easement, and are recorded and indexed against the granting and receiving sites. Furthermore, the tax statutes and transfer tax provisions in most states usually define development rights as real estate.  See: PLR 200901020.
The IRS has held that a fee interest in real property is like kind to development rights with respect to other property that the taxpayer already owned. PLR 200805012 (10-30-07).  This ruling shows that the IRS is increasingly willing to rule on what property is of a like kind. For a number of years, this was thought to be too factual of an area for the IRS to rule on. Also, the IRS has once again held that an intangible right with respect to real property can be treated as real property under the exchange rules, provided the right is real property under state law. The IRS did not seem troubled by the fact that the development rights would be transferred to property the taxpayer already owned. (See Also: PLR 2006-49028, a stewardship easement is like kind to a fee interest.)
Even though a transaction meets the like-kind requirement, you must still meet all the other requirements of §1031 (i.e., holding; purpose) before a transaction can qualify for tax-deferred treatment. Contact your local First American Exchange office whenever you intend to dispose of real property used in your trade or business, or held for investment. We can help you harness the power of tax-deferral.
By: First American Exchange Company
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