Archives for June 2019

The Counselors of Real Estate Releases 2019-2020 Top Ten Issues Affecting Real Estate™

June 26, 2019 by CARNM

Infrastructure and Housing Lead 2019-2020 List

The Counselors of Real Estate has identified the current and emerging issues expected to have the most significant impact on real estate, with U.S. infrastructure being the leading concern of the 1,100-member organization. The Counselors released its Top Ten Issues Affecting Real Estate during the keynote address of the National Association of Real Estate Editors’ annual conference in Austin, Texas.
“Inadequate infrastructure creates a hard ceiling to economic development, and real estate values are tied to sustainable growth,” said Julie Melander, CRE, 2019 chair of The Counselors of Real Estate. “The U.S. must invest in infrastructure to compete globally, but right now it is lagging other nations on infrastructure investment.” The report cites that roads, bridges, tunnels, railways, airports, the power grid, water systems, and levees are giving way with greater frequency. While the White House and Congressional leadership have discussed funding of up to $2 trillion, it remains unclear what action government leaders will take.
Housing in America ranked second on The Counselors’ list, with the gap widening between increasingly expensive supply and the decreasing level of ability to pay. The underlying causes can be found both on the supply side and the demand side of the housing equation. “Housing affordability is threatening the stability of the middle class, which will hit other parts of the economy as well,” said Melander. “Additionally, the new limits on the deductibility of state and local taxes are affecting both urban and suburban homeowners, while the liquidity of the housing market has been compromised by the difficulty of the Baby Boomer generation in finding buyers for the homes that represent a major portion of their net worth.”
Weather and climate-related risks rounded out the top three issues of concern for The Counselors, as real estate investors are requiring that climate risk be assessed and factored into return projections and day-to-day decisions. “Weather and climate-related risk has emerged as a new—and likely permanent—aspect of fiduciary duty and what it means to assess, disclose, and manage these risks for real estate investments,” said Melander. “Real estate investors can no longer rely on historic performance to predict future returns.” With the frequency and intensity of events increasing, the report states that weather and climate-related events present physical and operational risks for real property.
The remaining issues identified by The Counselors of Real Estate are The Technology Effect, End-of-Cycle Economics, Political Division, Capital Market Risk, Population Migration, Volatility and Confidence, and Public and Private Indebtedness, respectively.
“Many of these issues are interrelated and thus influence one another,” said Melander. “Clients of Counselors seek unbiased, objective advice on the critical factors that will impact all property sectors today, as well as those issues that may affect their decisions over the next ten years. This thought leadership initiative is an invaluable service to those clients and to the real estate industry in general.”
The Top Ten Issues Affecting Real Estate™ are developed by The Counselors of Real Estate’s External Affairs Committee, with issues identified, debated, and voted on by the general membership. For additional information and perspective on each issue, visit https://www.cre.org/external-affairs/2019-20-top-ten-issues-affecting-real-estate/.
By: The Counselors of Real Estate
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How Should Retail Leases Account for Omni-Channel Transactions?

June 26, 2019 by CARNM

Retailers’ omni-channel sales efforts pose a challenge for retail landlords on how to properly calculate rents.

Retail landlords need to adapt to tenants increasingly employing omni-channel sales formats, according to industry insiders.
“Many times, [landlords] have a clause in the lease that requires tenants to report sales, just as a way for the landlord to track the health of the tenant,” says Scott Holmes, senior vice president and national director of the national retail group with brokerage firm Marcus & Millichap. “That gives the landlord some degree of leverage in leases that are due for renegotiation if they know that the tenant is doing great in that location. So, landlords for quite some time have been concerned about how do they track all sources of sales being generated by the trade area surrounding a store, especially as more and more sales are happening online?”

Opening one new physical store in a market results in an average 37 percent increase in overall traffic to that retailer’s website. For emerging brands, new store openings drive an average 45 percent increase in web traffic following a store opening, according to ICSC research.
For this reason, as retailers realize a bricks-and-mortar presence can drive online sales, landlords are examining the role their real estate plays in this, and how that should ultimately affect rents.
Uncertainty about retail’s future caused the sector’s net absorption and its new supply pipeline to fall off drastically from what they were a decade ago, according to data from real estate research firm CoStar. Less new space coming on-line has caused rent levels to increase since 2013, albeit at a slow rate, according to Mike Mallon, senior vice president, Draper and Kramer, a financial and property services provider. Retail leases are now getting shorter in length, according to Holmes—partly due to higher rents and partly to the overall uncertainty in the sector.
A number of retailers pays a percentage of in-store sales revenue towards their rent. But landlords are questioning the value of these types of leases as e-commerce continues to grow and more sales occur away from the physical store.
“Percentage rent, as it’s called, I would say, is not particularly common,” says Holmes. “I wouldn’t say it’s a widescale problem, it is something that I’ve had several discussions with landlords about, particularly those who do have that feature in their leases.”
Retail landlords and retailers also struggle with how to record a sale after an online return. For example, a customer purchases a product online, but then decides to return it in the store, and instead, purchases another item in the store during that return visit. Whether this should be recorded as an online sale, since the transaction originated online, or a bricks-and-mortar sale, since the final purchase was in-store, is up for debate.
“This is a question that I think has plagued the retail industry and the accounting industry the last several years—how to basically categorize those sales,” says Mallon. “To me, if in fact somebody goes ahead and makes the purchase outside of a physical environment, in other words, through the internet, then that is tracked as an internet sale versus obviously something that is transacted in the stores.”
A store dealing with too many online returns will show negative results, as the inventory increases but the store never reports a sale.
“It can make a store look worse than it really is if they’re taking a lot of returns from online, but the online sales are not being reported to that same store,” says Holmes. “It’s a concern that I’ve been hearing about for years.”

But retailers are rolling out in-store formats encouraging quick in-store returns for consumers on online purchases. Therefore, landlords must come up with a universal standard for attributing those transactions sooner rather than later.
“I wouldn’t say that there is a universal standard yet, I think that’s something that the industry is still working through and coming to terms with,” says Holmes. “It’s still getting a lot of discussion, the fact that online sales are a part of the total retailer ecosystem.”
By: Sebastian Obando (NREI)
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Out with the Old: Embracing the Value of Evolved Retail Centers

June 26, 2019 by CARNM

How retail center owners can meet the evolving demands of today’s shoppers.

Store closures are an all too common occurrence nowadays, with announcements hitting the news cycle on a semi-weekly basis. Mass closings by household names like Victoria’s Secret, Gap, and J.C. Penney have raised concerns amongst developers that traditional retail centers are in danger of extinction as e-commerce gains steam. Fortunately, the outlook isn’t nearly this pessimistic. In fact, these empty boxes unlock potential for new e-commerce concepts and alternate uses and could be leading us towards a whole new era of bricks-and-mortar retail.
Shopping centers with compelling assets relevant to consumers will attract investors this year, according to Nuveen’s 2019 Real Estate Outlook, especially properties like destination malls with experiential offerings. To leverage new opportunities and grow value, developers must understand the consumer expectations driving industry shifts and adjust accordingly to meet the evolving demands.

Shopping center diversification

Now more than ever, profitable retail centers are straying from tradition. Malls are frequently redeveloped and rebranded as “town centers,” “shops,” and villages,” and older occupants are often replaced with non-traditional retail tenants. Suburban retail developers are realizing that converting retail centers to mixed-use destinations will attract the key demographic consisting of older millennials ready to settle down outside of urban areas.
Though the mixed-use trend has gained in popularity, it’s not a new phenomenon. Research by CoStar shows the share of space occupied by non-retail tenants at regional malls climbed to about 13.0 percent in 2016, up from 10.5 percent in 2012. By reducing dependence on traditional shopping center retailers like big-box stores or apparel shops, developers can make room for alternative tenants like entertainment facilities, fitness centers, hotels, food hall concepts, and multifamily offerings. These diverse tenant mixes meet consumers’ desires for speed and convenience by fulfilling multiple needs at one location. Adopting mixed-use enables developers to fill vacated spaces and add value without abandoning the original retail center concept.

Filling mixed-use centers

Before signing new leases, developers and owners must analyze regional consumer trends. Is the retail center in a suburban area? If so, mixing home, food and beverage, and entertainment occupants will add appeal for different age groups. Is the property near downtown employment drivers? Adding a craft brew pub or fitness club is a great way to attract young professionals.
This type of outside-the-box thinking is critical when it comes to creating a successful tenant mix. We live in an age of instant gratification, when consumers expect and appreciate a one-stop-shop experience, so developers need to identify and implement strategies to meet this demand. For example, RD Management recently added MedFirst Primary & Urgent Care to our tenant mix at Waterview Marketplace in Parsippany, N.J. MedFirst will join DSW, Whole Foods Market, Ulta Beauty, Orangetheory Fitness, Homesense, Shake Shack, B.GOOD, and The Paper Store at the center once it’s completed. This gives regional shoppers easy access to premier retailers and health and wellness offerings, with community-based medical care right next door.
From medicine to co-working spaces, there are very few rules when it comes to leasing up a retail center these days. One thing that hasn’t changed is the necessity of a strong anchor, preferably grocery, with complementary yet diverse in-line tenants. This combination will put any retail center on a path to long-term success. It also creates another opportunity for developers to think strategically. What will best fit the area and drive traffic to other tenants? What’s missing from the local community that can be added to create value for residents?
Since department stores are losing momentum as profitable anchors, developers should analyze local needs before finalizing tenants.

Trends to watch

A well-honed knowledge of industry trends is critical for the viability of any business. For retail center developers, there is no exception. It’s important to stay on top of shifting consumer preferences to remain successful. Unsurprisingly, many of today’s trends are influenced by technology and largely driven by millennials.
Millennials, in particular, are responsible for the rise in experiential retail, which for developers means creating a unique and photo-ready shopping environment to keep young shoppers engaged. It also explains the surge of pop-up shops in areas targeting younger foot traffic. While pop-ups lack permanence, their ability to attract customers makes them effective marketing tools.
Pop-up shops are increasingly utilized by online retailers looking to improve their omni-channel presence; it allows them to test physical retail without the burden of a long-term lease. This interest in bricks-and-mortar retail will continue to rise this year as digitally native retailers recognize the need for customers to touch and feel their products in order to spur business growth.
Despite the headlines of store closures, there is strong value in real estate for retailers. To attract the latest concepts and customers, developers must be willing to diversify. A mixed-use retail center conceived through both analytical and creative thinking will find success in the months and years to come.
Richard Birdoff serves as principal and president of RD Management, a privately-held real estate development and management organization with over 150 commercial properties in its national portfolio.
By: Richard Birdoff (NREI)
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The Evolution of the Urban Warehouse

June 26, 2019 by CARNM

Andrew Chung, the CEO of Innovo Property Group, knows industrial assets, and as with so much of real estate, he emphasizes location, location, location.

Although today New York City is known for its thriving financial services industry, advanced health care, and upscale real estate industries, in the early 1900’s, the city of New York was the world’s busiest port, importing and exporting goods to and from all over the world. As the city’s landscape began to change with the onslaught of high-rise buildings, and the creation of more white-collar jobs became more prevalent, large warehouses from previous years became better suited for the more expansive, and less expensive suburban outskirts.

By the mid-1950’s, New York City, fueled by post-war prosperity was experiencing a burgeoning resurgence, and while new buildings were being constructed throughout the city, existing industrial infrastructures were converted into office and living spaces to keep up with the demand. Brooklyn was once referred to as, “The Walled City,” for the seemingly never-ending warehouses lining its shores. Today, many of those buildings have been converted into high-end housing or open-floor-plan offices, and there is very little actual warehouse space functioning within the five boroughs.

By the 1970’s, the U.S. economy began to decline, which hit New York City particularly hard. During this time, there was a large movement of middle-class residents who began to move to nearby suburbs, which largely impacted the city’s tax revenue. By 1975, New York City was in a full-on financial crisis, which only further shifted the surrounding area and its economy. The city was no longer a prosperous industrial metropolis, but a troubled one at the brink of bankruptcy.

As the economy improved in the city, the landscape continued to shift, and many of the former manufacturing and industrial jobs stayed in the surrounding suburbs, where they have remained for the greater part of the last three decades.

However, with the rise of e-commerce and changing consumer needs, New York City is yet again at a turning point. Over the last two decades, Amazon has gone from a convenient e-tailer, to America’s solution for almost anything and everything – and fast. And other companies are jumping on board. With the introduction of two-day, same-day and multi-hour delivery options, Amazon has certainly been at the forefront of an evolution in the way we shop, and in-turn, how we expect to shop moving forward. Consumers now expect the accessibility to their online orders almost instantly, but our infrastructures have not yet adapted, which leads to the resurrection of the urban warehouse.

Throughout the last half-century, retail fulfillment warehouses and distribution centers have mainly sprouted up in suburban locations not too far from cities. Ten years ago, when 8-10 business days was a luxury, the routes were efficient. There was time to account for traffic, and for tolls, but with customer delivery expectations continuing to shrink, and high-stakes for businesses to deliver, the infrastructure needs to adapt, and through this, the urban warehouse is having a comeback.

There are few urban warehouses for fulfillment within the New York City area at present, but the demand has certainly increased due to the rise of e-commerce, while the supply has mainly stayed the same. Currently, about 25-30% of warehouse space in the United States is devoted to e-commerce, and the number is expected to rise. In New York City especially, space is at a premium. There is only so much available land within close proximity to the urban core that can be equipped to handle our modern delivery needs. As shoppers become accustomed to almost-immediate deliveries, to stay relevant in today’s market, businesses need to modify their delivery strategies to compete. New, urban warehouses with updated features are the solution to supporting today’s needs.

Modern, state-of-the-art warehouses within the urban core provide one major advantage that suburban warehouses don’t: location, location, location. Since the 2010 census, the estimated population of New York City has seen a 4.6% increase, which also means an increase in automobile use and road congestion. The city’s population is expected to keep growing, and by 2040, growth is projected to be the highest in the Bronx, at a rate of 14%.

With more people to serve and the immediacy that e-commerce offers, it is evident that our current infrastructures have reached a critical point in which we will need to reshape and restructure. There is opportunity to overhaul the current freight system and logistics in the area, by utilizing today’s technology with new and modern urban warehouses.

By: Andrew Chung (GlobeSt)
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