Archives for June 2019

Slowing economic growth, trade wars and a pipeline that is delivering new supply to the market may force investors to adjust return expectations for industrial properties, but it doesn’t appear to be putting much of a dent in buyer demand.
Industrial has edged out multifamily as the favored asset class and there continues to be abundant capital targeting the sector as investors expand allocations. In fact, industrial property transaction volume jumped 32.6 percent last year to a cyclical high of $97.7 billion, according to research firm Real Capital Analytics (RCA). Yet a new industrial real estate forecast from Deloitte suggests that investors may need to brace for slower growth ahead.

Deloitte is predicting that the annual demand growth rate, although still positive, will likely decline over the next three years to a little below 0.9 percent—nearly one-half of 2018 levels. Specifically, Deloitte expects the vacancy rate to rise from 7.0 percent in 2018 to 10.3 percent by 2023. Some of the factors that will weigh on occupancies and demand for space include the rising cost of capital, new supply and new space alternatives, such as aggregators that offer on-demand warehouse space for seasonal needs.
“It’s not that our model is saying there is real trouble here,” says John D’Angelo, managing director and real estate leader at Deloitte Consulting. It’s just been such a hot sector for so long that finally supply is catching up to demand and there might be some signs that demand is tempering. “Like what we have seen happen with multifamily earlier, returns were so great that at some point they had to level off a bit, and that’s what we’re calling for in the near- to mid-term for industrial,” he says.

Trade war fuels uncertainty

Despite the lift from e-commerce, industry researchgenerally agrees on a forecast that shows decelerating demand for space ahead. Trade policy could create some additional short-term disruptions in demand.
“The one sector that is definitely in the crosshairs of all this trade and tariff wars is industrial. What it has done is put a lot of fear in participants, whether it be lessors, developers, lenders or investors,” says Barbara Byrne Denham, a senior economist at Moody’s Analytics Reis.
It is still a bit early to tell what the full impact might be on industrial demand from U.S. trade policy that includes stalled trade agreements with China; new proposed tariffs on Mexico; and a looming ratification for NAFTA 2.0 between the U.S., Mexico and Canada that now sits in a more precarious position. In the short-term, there is a lot of hesitation in the sector based on fear and uncertainty, and early trade statistics do appear weaker, says Denham.
The current forecast from Reis on warehouse/distribution space shows the overall vacancy rate of 9.4 percent that improves further to 9.0 percent by the end of the year and drops slightly more to 8.8 percent next year. Generally, Reis expects demand growth to exceed supply growth in most markets.
There are several markets that do show supply growth exceeding demand growth, resulting in higher vacancy rates ahead. However, the imbalance is small and the markets where that is occurring are generally smaller metros, with examples that include Dayton, Ohio, Harrisburg, Pa., Louisville, Ken., El Paso, Texas and Charleston, S.C., says Denham. Due to the shorter construction period for industrial, projects already underway should be completed within 12 months. For those planned projects that do not have a construction loan already locked in, it may be more difficult to obtain one until the uncertainty from the trade war talks ends, she says.
Cushman & Wakefield is projecting that vacancies will creep higher nationally, while still remaining well below historical averages. Rent growth may moderate slightly, but demand will continue to support positive rent growth, according to David Bitner, senior research director, capital markets, at Cushman & Wakefield. Bitner also acknowledges that there are factors, such as an economic downturn, that could weigh on that forecast. “But we really have a hard time envisioning an environment where industrial rents have any meaningful correction downwards,” he says.
Leasing fundamentals have been improving for some class-B and older assets, but it is not the occupier’s first preference. Occupiers want the efficiencies that come with modern space, such as higher clear ceiling heights and more open pillar spacing. “The implication from that is, if there is an air pocket, it is in this older space,” says Bitner.

Buyers keep foot on the gas

There is still a deep bidder pool for industrial assets, and buyers are not pulling back from industrial. Year-to-date through April sales reached $23.0 billion. Although that is below the blistering pace of 2018, it is still ahead of 2016 and 2017 levels, and just slightly behind the pace of 2015, according to RCA.
What investors really like about industrial is the e-commerce growth, which continues to be very robust. “We still think we are at the beginning, maybe the third inning, of e-commerce growth in America,” says Bitner. There is huge growth potential ahead in other sectors, such as grocery, pharmaceuticals and furniture, which is underpinning demand for space, he notes.
For example, Blackstone recently bought a portfolio of U.S. industrial properties from Singapore-based GLP for a record high $18.7 billion. According to Reuters, the portfolio is the largest private real estate transaction in history. The acquisition encompasses 179 million sq. ft. of space and makes Blackstone the second largest landlord of logistics properties behind Prologis.
“If anything, that shows that sentiment among the smartest money in the world is still very aggressively chasing industrial,” says Bitner. Anecdotally, investors are frustrated that they are not able to get out as much capital into industrial as they would like, he adds. “I think you are going to continue to see investors who are trying to rapidly build scale and be very opportunistic on any platform plays.”
Investors like the long-term secular changes that bode well for industrial. At the same time, they recognize that the industrial market is evolving with occupiers that want more modern, well-located space. Deloitte cautions investors and owners to be more selective in acquisitions, focusing on location, innovation and efficiency by capitalizing on high-growth areas, developing smarter facilities and improving the efficiency of existing properties.
By: Beth Mattson-Tig (NREI)
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Some student housing properties rent their retail spaces to national retailers like CVS or Target. But in other cases, retail spaces inside student housing buildings stand empty for years—unable to support even a pizza shop.
“Most ground level retail is a drag on a student housing project,” says Frederick Pierce, president and CEO of Pierce Education Properties, which invests in, develops and manages student housing properties. “But in the right location, retail, restaurant or food can be an asset to a project and can support credit tenants.”

Local officials have forced many developers to make room for retail space at student housing projects, even if the location does not have enough potential customers. Many of these unwanted storefronts eventually have to be renovated to serve another purpose. But in busy locations—especially those close to campus—retail space can add significant value.
“The so-called ‘retail apocalypse’ hasn’t hit university-adjacent retail as hard as other retail locations,” says Shannon Benson, director of retail for Greystar, which specializes in rental housing. “A well-positioned retailer can capitalize on that need with a location close to a university campus.”

Retail space performs better close to campus

Developers fight to find locations for student housing properties that are as close as they can get to college campuses. However, often sites a few miles from campus are under the jurisdiction of local officials who require new buildings to include retail space.
“Cities are forcing you to do that retail component,” says Walter Hughes, chief innovation officer for Humphreys & Partners, a Dallas-based architecture firm.
Officials often demand retail space in exchange for allowing a taller mid-rise or high-rise building to be built. The problem is that many new student housing buildings don’t have enough pedestrian traffic to support sidewalk retail space. The students who live in a single student housing property can’t provide enough potential customers to keep even a modest shop running profitably without the addition of a busy neighborhood surrounding the building. “Even if you have 700 beds, that is not enough,” says Hughes. “You need at least 2,000 people right there—within less than a quarter mile.”
Retailers rarely want to set up shop in a location without enough potential customers. “Often these spaces are difficult to lease,” says Pierce. “They are often occupied by ‘mom-and-pop’ or non-credit tenants that result in high turnover of these retail spaces.”
Designers can satisfy local officials by creating first-floor “storefront” spaces that work as common areas for the student housing community. “In many instances, after retail and food uses fail in these projects, the space is often repurposed to amenity spaces to serve the housing,” says Pierce.

Best retail spaces

The outlook for retail space at student housing complexes is much better in a bustling neighborhood.
“If you are in close proximity to campus and can generate a lot of foot traffic, that might work,” says Hughes.
Often the area closer to campus is a stronger location for retail space. “A significant number of the nation’s 20 million college students have access to disposable income via their parents,” says Benson. “And while college students do spend quite a bit with internet retailers, they also have more than a few immediate needs for products and services (the newest sneakers, a mani-pedi, a 2 a.m. pizza) that the internet can’t fulfill in a timely enough manner.”
Greystar includes an average of 10,000 to 15,000 sq. ft. of retail space in its high-rise properties. Other developers report that retail spaces typically fill 70 percent to 90 percent of the first-floor space of new projects, adding up to 10,000 to 20,000 sq. ft. of retail space.
The vast majority of these retail spaces provide some kind of service. Nearly two-thirds (65 percent) of the retailers at Greystar’s student housing properties sell food and beverages.
“Specifically, places where students can gather—like coffee shops and smoothie bars—do well,” says Benson. “Restaurants that deliver or offer late-night options (pizza, cookies, calzones) are successful more often than not.”
“Students love food,” says Pierce. “There are many national tenants that actually target university markets, including Chipotle and Insomnia Cookies.”
Another 20 percent of the retailers at Greystar’s student housing properties provide health and beauty products and services.
Sometimes even a retailer that usually occupies much larger spaces will squeeze into smaller storefronts at student housing properties if the location is right. “We’ve had some big-box retailers like Target and CVS do well with smaller footprints in off-campus student housing, because they filled a need for a pharmacy or convenience foods in a location that is close to campus,” says Benson.
“Target loves the student market and likes university-adjacent locations, but typically requires plus or minus 25,000 square feet of space,” says Pierce.

Investors accept first-floor retail

For all the challenges that come with retail, investors can put a high value on retail space at student housing properties.
“Everyone is used to it and they know how to value it,” says Dorothy Jackman, executive managing director of the student housing group with real estate services firm Colliers International.
A dollar of proven income from retail space adds just as much to the sale price of a student housing property as a dollar of income from student housing rents at a property in which the retail spaces adds up to less than a fifth of the total space, according to Jackman. That’s true even though average cap rates for student housing properties are near historical lows.
“They put the same cap rate on the retail space as they put on the residential space,” Jackman notes.
By: Bendix Anderson (NREI)
Click here to view source article.

Baby boomers transformed society as they came of age—from free-thinking flower children to drivers of our economy. Now the oldest boomers are retiring and can expect to live significantly longer than their parents and grandparents. The progeny of the Greatest Generation is again on the verge of changing everything—this time, the way seniors are cared for and where they live.
New research from NORC at the University of Chicago shows that in just 10 years there will be 33.6 million seniors age 75 or over, and more than 14 million of them will be considered to be in the middle-income bracket. These retired nurses, schoolteachers, firefighters and steel workers are notable because they likely won’t be able to afford seniors housing the way it’s priced today, nor will they qualify for Medicaid to cover their costs in care facilities because they have too much money. Nevertheless, they are expected to need the mobility, cognitive and other supportive services that seniors housing and care offers. If their housing and care needs are to be met, real estate investors, developers, owners and operators must innovate, and they need to hurry.

Solutions that cater to boomers’ lifestyles need to look different than today’s seniors housing. Not only will boomers reject many of the features of today’s seniors housing, they also can’t afford them. Boomers want modern amenities and greater independence, integrated with healthcare services when they need them.
The paradigm needs to change to deliver products that tomorrow’s seniors can both like and afford. The solution begins with having everyone involved in seniors housing and healthcare services understand the potential of the large and growing “middle market.” In addition to revealing the emerging “middle market’s” size, new research indicates that decreasing the annual cost of rent and other expenses by $15,000 annually would enable nearly 6 million more middle-income seniors to afford seniors housing and care.
There are dozens of paths leading to lower-priced options that middle-income seniors will need. They include ideas like tax incentives, repurposing existing real estate like former malls and big-box retail, designing for construction, operational efficiency and cost savings, and creatively engaged volunteer caregivers.
Shared living areas, in particular, could cut costs dramatically and drive much-welcomed interaction among residents. Social isolation is one of the biggest concerns among older adults, but providing the right space to interact is just as important as interaction itself. Today, between 35 to 40 percent of private-pay seniors living is taken up by large common areas, often an underutilized space. With construction costs on the rise and land costs remaining high, creating smaller properties with more efficient use of space, including integrating services, could keep costs down and satisfy residents. In fact, property performance is often better when there are two or more types of care provided (e.g. assisted and independent living in the same building, or skilled nursing and assisted living).
The seniors housing industry can learn a lot from early adopters. For example, one mid-size operator designs properties and features in tandem with prospective middle-income residents. Before properties are built, they use focus groups, surveys and other feedback-generating methods to learn what these seniors want and what they are willing to give up if it means having a property and services they can afford.
With demand for affordable middle-income seniors housing expected to rise sharply in 10 years, industry innovations are needed more than ever. Public-private partnerships could play heavily in solutions, particularly with continued financial pressures on Medicaid. State budgets will be irreparably harmed if affordable housing solutions are not developed and seniors housing operators will miss a major market opportunity.
The seniors housing and care industry of 2029 must adapt now to address the needs of millions of middle-income seniors who might have no affordable options. They demand change, and await either a boomer, or bust, market for meeting their housing and care needs.
By: Beth Burnham Mace (NREI)
Click here to view source article.