Archives for June 2020

Real Estate Investors Are Taking ‘Barbell’ Approach to Crisis

June 10, 2020 by CARNM

CRE investors are looking for both assets that have been hard-hit by the pandemic, as well as more stable properties.

Investors are increasingly taking a “barbell” approach to a commercial real estate market that’s been roiled by the coronavirus.
They’re looking at distressed assets like malls and hotels hurt by the pandemic, as well as logistics facilities that are in demand as more shopping shifts online, according to Mike Van Konynenburg, president of real estate investment bank Eastdil Secured.

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The changing strategies are playing out against a backdrop of high unemployment in and low interest rates in the U.S. that may persist for a long time, Van Konynenburg said Tuesday in an interview on Bloomberg Television.
That has investors look for properties that have been hit hard by the virus outbreak, but also stable real estate assets that are holding up.
“There are two places to play,” said Van Konynenburg, who has advised Blackstone Group Inc. on real estate deals and began his career at Drexel Burnham Lambert. “One is playing into distressed assets, assets that were over-leveraged, or assets like the commodity office, certain lower-quality malls, and hotels that have been really hit.”
The other option, he said, is to “start buying those better quality logistics and office properties and life-sciences properties that have long-term leases and locking in a secure returning income stream while I have the opportunity to do it at yields that are very high relative to where Treasuries are right now. Really it’s a barbell.”

–With assistance from Ed Hammond.
To contact the reporter on this story: Noah Buhayar in Seattle at nbuhayar@bloomberg.net.
To contact the editors responsible for this story: Craig Giammona at cgiammona@bloomberg.net
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© 2020 Bloomberg L.P.
Source: “Real Estate Investors Are Taking ‘Barbell’ Approach to Crisis”

Medical Office Rents Weather the Storm

June 10, 2020 by CARNM

One company reports rents collected above 97%

The medical office sector hasn’t been immune from issues caused by COVID-19. But Kyle O’Connor, president and founder of MLL Capital, would still rather be in that commercial real estate asset class than any other part right now.
“The medical health care sector and the science sector seems to be holding up a bit better than some other property types,” O’Connor says. “Certainly, hotels or retail are having a different experience. For us, it’s one of the reasons why we liked the sector and continue to like it a lot. We viewed the asset class as having a number of supportive features associated with it.”
Still, there are issues in the medical sector. “A lot of people are very concerned that the risk of catching something in the doctor’s office might be greater than whatever the issue in the house,” O’Connor says. “Over time, I think the expectation is that it will dissipate, and the need for those basic health care services will resume.
In April, MLL, which has 15 buildings in the medical and life sciences sector, collected 97% of rents. In May, the company collected more than 97%. And, as things open up in June, O’Connor sees things improving further.
America’s vast, aging baby boomer demographic is one reason that O’Connor likes the medical segment, but it’s not the only reason.
“We find that a lot of the practices are in relatively healthy condition,” O’Connor says. “Their leverage levels tend to be lower in many cases. It is a business that does not have a lot of high highs or low lows.”
In a market where there’s still a lot of capital, and other sectors of CRE are floundering, O’Connor expects more interest in medical office properties. But interested buyers will run into roadblocks.
“Because of the specialty nature of the property types and the things that you learn by being in the space for a bit, I’m not concerned,” he says. “It is a type of property where it’s very beneficial to have experience and knowledge. We don’t think it’s one that, you know, capital readily flows into.”
But investors are still taking a wait-and-see approach for the time being, according to O’Connor. “For a small asset class like medical is, it’s too early to make any real prognostications,” he says. “We do think that it is the right time to be in the market and looking for investment opportunities, which we’re trying to put a lot of energy into doing right now.”
Right now, O’Connor doesn’t see large loads of capital focused on the space. “They may have some other opportunities that are distracting them or maybe presenting themselves,” he says.
Right now, O’Connor sees that capital focused on other targets. “I think if you’re an opportunistic fund, you’re probably spending a lot more time looking at the hotel sector, than you would be the medical sector. There’s probably distress pricing happening there. I’m sure some hotels are in default. Whereas, most medical office buildings have had a performing loan in March or probably still going to have a performing loan [in the future].”
Source: “Medical Office Rents Weather the Storm“

1031 Exchanges Are Challenging in a Pandemic. Opportunity Zone Funds Can Offer a Solution

June 9, 2020 by CARNM

Opportunity Zone funds offer similar benefits to 1031 exchanges, but come with an extended investment horizon.

My heart goes out to all of those real estate investors who sold a property before COVID-19 struck. Most folks had it all planned out. They were going to avoid paying capital gains taxes on the sale of their property with a 1031 exchange.
Now, investors are having difficulty completing their 1031 exchanges. A government extension (until July 15th) gives them more time to close on a new property, but it isn’t enough.

Investing in Opportunity Zone Funds is an excellent alternative to a 1031 exchange with similar tax benefits and a lot less stress.
I’ve worked in the real estate world for nearly two decades, and I’ve seen my share of complex property transactions when it comes to 1031 exchanges. While an exchange can be a terrific tax-free investment strategy, it can also be a tricky deal that goes south fast.
To qualify for the 1031 exchange tax benefits, real estate investors must identify their next property purchase within 45 days of selling their last property. And they must reinvest their gains in a replacement property of equal or greater value within 180 days.
In this uncertain market, I’m talking to tons of investors who are struggling to find 1031 exchanges before the impending July 15th IRS deadline.

In the San Francisco Bay Area alone, the number of 1031 exchanges fell by 40 percent starting in March, according to Ron Ricard with the national intermediary firm IPX 1031, who recently led a webinar on 1031s with me.
Starting in March, we saw a significant increase in the number of these investors coming to our fund with capital gains from the sale of real estate.
We aren’t alone. Opportunity Zone Fund fundraising accelerated across the country this spring, according to media accounts and reports from other OZ Fund managers.
Here’s what investors and experts are saying about the most common 1031 exchange pitfalls to watch out for in today’s challenging market:

1. Finances might fall through at the last minute

You had your bank all lined up to give you a loan close escrow on your 1031 exchange property. Then the bank saw the April rent roll from the building, and 50 percent of the tenants didn’t pay rent because of COVID-19. Now the bank either won’t give you the loan or (for example) they will give you 40 percent loan to value instead of 70 percent loan to value. Many folks don’t have the financial ability to come up with the additional funds necessary to close escrow.

2. You’re buying blind

Shelter-in-place guidelines made it extremely difficult for buyers to tour and inspect properties. Many buyers don’t feel comfortable closing escrow on a property they have not seen.

3. You can’t find a replacement property, especially one that will make you money

While it’s always challenging to find real estate investments that provide returns equal to or higher than that of the building you are selling, it’s particularly challenging during a pandemic.
Inventory is low. Even before the pandemic, the supply of homes for sale was falling across the nation. December saw the largest year-over-year decline of housing inventory in almost three years, with a 12 percent dip, according to Realtor.com. And now fewer properties are hitting the market—because why would someone sell during a pandemic unless they absolutely have to?
Also, believe it or not, home prices are still rising in tight markets such as in the Bay Area.
Beware if you are looking to invest in rental properties. Longtime Bay Area realtor and consultant Elisabeth Watson recently told me she looked at nearly 60 multifamily and commercial properties for her 1031 exchange client and found nothing that would generate positive, or even neutral, cash flow because of high sale prices, relatively low rents, and rent control.

OZ funds offer a solution to failed 1031 exchanges

In light of today’s COVID-19 challenges, people tell me they want an easier to understand, easier to execute real estate reinvestment strategy, with tax benefits that are similar to a 1031 exchange. So, they’re looking at Opportunity Zone Funds because, like 1031 exchanges, OZ Funds are real estate investments, have the same investment timeline (180 days), and have capital gains tax deferral benefits.
OZs were created as part of the 2017 Tax Cuts and Jobs Act, which allows investors to roll over capital gains from the sale of a property, business, or stocks into a fund that’s investing in development in distressed communities. Investors get to defer, reduce, and even eliminate their capital gains tax burden.
OZ Funds are uniquely positioned to ride out these uncertain times because OZ Funds have a long investment horizon. At Urban Catalyst, for example, we’re developing seven housing and commercial projects in downtown San Jose and plan to distribute profits from our assets over the next 10 years.
OZ Funds are also in a unique position because many developments around the nation haven’t broken ground yet, which means the pandemic and shelter-in-place orders haven’t caused much construction delays. That is certainly the case with Urban Catalyst.
When we do break ground, construction costs might be lower than pre-pandemic levels. I saw construction prices in the Bay Area decline by 20 percent during the 2008 recession. If history repeats itself, we’re looking at significant savings.
In addition to OZ Funds being recession-resistant, I find that former 1031 investors are attracted to our mission to revitalize our local communities, more so than ever since the pandemic.
OZ Funds provide a once-in-a-lifetime answer to 1031 exchange woes while fulfilling a larger purpose. It doesn’t get better than that.
Source: “1031 Exchanges Are Challenging in a Pandemic. Opportunity Zone Funds Can Offer a Solution”

It’s Not Dine-in, Carryout or Curbside, It’s Delivery-Only Ghost Kitchen

June 9, 2020 by CARNM

The Commercial Market Insights June 2020 report discusses how the coronavirus has impacted U.S. retail and food services for which has resulted in the closure of many restaurants and bars. U.S. retail and food services sales continued a downward trend along with its subset food services and drinking place market and significant employment reductions. Advanced monthly sales for retail and food services for April 2020 were $403.9 billion with food services & drinking places accounting for $32 billion. Both represent a decrease from the prior month, 16.4% and 29% respectively.

Despite the downward trends of monthly sales of retail and food services and its subset markets, food delivery monthly sales for some of the largest delivery firms such as Uber Eats, Grubhub, Postmates, and DoorDash grew as restaurant customers and restaurants adjust to the new norm of providing no dine-in service.

Not only are monthly sales increasing, but it is contributing to the food delivery firms increases in total revenues according to food delivery firm financial statements such as Grubhub and Uber Eats. Uber Eats revenue for three months ending on March 31 grew 53% year-over-year to $819 million and Grubhub had an 12% year-over-year increase for $363 million in the first quarter of 2020.

Not only are revenues increasing but the number of users of on-demand delivery services is increasing as well as restaurants partner with food delivery companies in an effort to meet the steady increase in delivery demand and new demand as customers adjust to “stay-at-home” orders and no dine-in restrictions.

The resultant dine-in closures and an increase in delivery growth, in essence, have converted every operational restaurant into a ghost kitchen. Ghost kitchens, otherwise called dark kitchens or cloud kitchens, are facilities that contain the necessary kitchen equipment to facilitate off-site food preparation and cooking solely for on-demand food delivery without a traditional dining area for walk-in patrons.
While the concept has been receiving notoriety in recent months, more restaurants, third-party delivery platforms, and startups have pursued this path as a means to manage the demand for delivery services, increase efficiency, and by reducing rent and labor costs. The ghost kitchen model not only services higher delivery volume but in addition, they can be staffed exclusively with kitchen employees, thus lowering overall labor costs. Ghost kitchens are not limited to only restaurant companies though, as other businesses are in pursuit of the model such as mall developers, supermarket chains, delivery providers, and many more. Here are a couple of examples of ghost kitchens ventures:

Malls located in Pennsylvania and Georgia have seen investors prepare to repurpose mall space for ghost kitchens. The Simon Property Group, who owns and operates the 1,558,678 square foot Lennox Square shopping center located in Buckhead district of Atlanta, Georgia and the 2,793,200 square foot King of Prussia Mall located in King of Prussia, Pennsylvania, will repurpose shuttered restaurant space as dark kitchen space. Simon Property Group, the largest retail real estate investment trust (REIT) and the largest shopping mall operator in the United States, and multinational hospitality group Accor formed a partnership with hospitality company SBE Entertainment Group in 2019 to form C3, also known as Creating Culinary Communities. Accor has a 50 percent stake in SBE. C3 will occupy space that was previously occupied by one brand. C3 will then bring in nearly 6 of SBE’s brands to share the new space. SBE brands include Krispy Rice, Plan Nation, Sam’s Crispy Chicken, Umami Burger, and many more. C3 then intends to deliver consumers their food in under 30 minutes for less than $30. C3 intends to open more than 250 ghost kitchens by the end of 2021 with 140 opening by the end of 2020 in major cities across the U.S. including Chicago, Miami, New York, Los Angeles, and San Francisco.

Wendy’s began experimenting with ghost kitchens in 2019 as they announced the intention to utilize ghost kitchens as a significant portion of their expansion strategy at the company’s investor day. Wendy’s intends on using the model in high delivery volume areas and underserved regions where its physical locations are deficient. Wendy’s opened two delivery-centric kitchen locations, one in Kitchen United’s Pasadena, California facility in late February, and one in Chicago.

While the ghost kitchen model was increasing in popularity before the coronavirus, more are opening to meet the demand for on-demand food delivery services. According to Pitchbook Data Inc, a data, research and technology company, global investment in ghost kitchens and their operators continues to increase with investments totaling $1.9 billion in 2019 spanning 16 transactions.
While ghost kitchens may be in a position to assist with a restaurant’s demand for delivery-only services in the midst of the global coronavirus pandemic and may provide an advantage towards medium and larger sized restaurant companies, the industry is still developing. While the ghost kitchen model gives the impression that it is a long-term viable model as food delivery demand continues to increase, it is largely unknown as its livelihood is based on delivery volume and consumer delivery habits.
To view in its entirety, the report can be downloaded here: https://www.nar.realtor/research-and-statistics/research-reports/commercial-market-insights.
Source: “It’s Not Dine-in, Carryout or Curbside, It’s Delivery-Only Ghost Kitchen”