Archives for October 2020

Next Up: Preserving the 1031 Like-Kind Exchanges

October 16, 2020 by CARNM

View a recording of the “Next Up: Preserving the 1031 Like-Kind Exchanges – the Data Speaks” webinar from October, 2020. Listen as NAR’s Charlie Dawson, VP of Engagement, Evan Liddiard, Director of Federal Taxation and Erin Stackley, Senior Representative of Commercial Legislative Policy discuss the status of 1031 Like-Kind Exchanges. This includes an overview of the updated study by leading real estate professors David Ling and Milena Petrova on the tax and economic impacts of 1031 Like-Kind Exchanges on the commercial real estate sector and the Treasury. Watch video here.
View or download the presentation slides
Source: “Next Up: Preserving the 1031 Like-Kind Exchanges”

Valuations Forecasted to Decline in COVID-19’s Wake

October 15, 2020 by CARNM

In a new survey of CRE executives 70% of respondents expect the metric to head lower in 2020.
Taking a pulse on the impact of the pandemic on all sectors of global commercial real estate, valuation firm Duff & Phelps, in conjunction with the GRI club, surveyed over 300 directors on the state of affairs.
A vast majority of US-based responders, 83% anticipate a U-shaped recovery, and just under half of those surveyed, 49%, said little damage has been done to GDP.

However, many respondents said they expect valuations to take a big hit. Nearly four out of 10 respondents, or 39%, expect valuations to fall by 5% to 10%, and another 31% feared a heavier impact. Also telling, 90% of those surveyed are hoping that “valuations may start to creep back to their pre-pandemic levels” in 2021.
On a positive note, when asked by Duff & Phelps if they could take advantage of valuation opportunities as they arise, 70% of the executives said they could deploy capital when needed. However, private property companies did indicate that they would lag in their response to receive approval and 41% of respondents admitted they don’t have the capital ready so they’re freezing their commitments for a few months. Meanwhile, 15% of respondents are set to increase their capital requirements.

In a separate measure, pricing has shown significant variation by property type, according to Green Street’s all-property index, which is 10% below pre-pandemic levels.
“Pricing of properties with little downside to rents—and those with a high-credit tenant and significant lease term—has held up; in some instances, values are higher than they were prior to the pandemic,” said Peter Rothemund, managing director, Green Street. “Prices of most other properties are lower by 5-15%.”
Evaluating CRE by industry, retail, hotels and restaurants and bars were expected to bear the worst long-term impact of the shut-downs, with 37%, 36% and 16% of respondents to the Duff & Phelps survey, respectively, tagging those sectors. “As a result, the report said, commercial real estate investors will naturally be looking elsewhere for assets that have proven to be more pandemic resistant.”

Office also didn’t fare well in the survey either, with just 2% of survey responders anticipating growth in the segment.
On the flip side, more than a third of respondents, 36%, predicted that the industrial and logistics sector will emerge the strongest from the pandemic. Given the surge in online shopping brought about by the crisis, last mile facilities will become increasingly important, the report stated.
Residential real estate also ranked high, with 26% of respondents forecasting growth on that front.
Commented Ross Prindle, managing director and global head, real estate advisory group, Duff & Phelps, “COVID-19 has affected the real estate industry profoundly as transaction activity is down and many industries are in outright stress. Retail properties that have reopened have seen mixed results, with some in premium locales faring well and others in secondary locations doing poorly due to ongoing restrictions on capacity and lack of foot traffic.”
But he continued, “The bright spots have been logistics properties and, unsurprisingly, properties occupied by businesses deemed as essential. As we work to make it out on the other side of this pandemic, logistics warehouses will become an increasingly desired investment opportunity as the preferred retail shopping method accelerates from brick-and-mortar stores to e-commerce.”
Source: “Valuations Forecasted to Decline in COVID-19’s Wake“

How Lease Restructuring Can Help with Dispositions and Financing

October 15, 2020 by CARNM

If the landlord has designs on selling the property, the lease restructuring can be more beneficial than forbearance.

Right now, in the wake of the COVID crisis, many forbearance discussions are occurring.
But, in some situations, Michael Wiener, the founder and president of Excess Space Retail Services, thinks landlords may want to look beyond that and consider just restructuring the lease. Excess Space Retail Services began in 1992 as a firm that helps retailers reduce occupancy costs through real estate disposition, lease restructuring and lease renewals.
With retailers struggling and going out of business, landlords have seen their rent collection go from above to 90% to 70% and below in a short period of time.
“Looking at it from the landlord side, the benefits of lease restructuring would obviously be long-term stability in their portfolio and not having to wake up tomorrow and worry about rent payments,” Wiener says. “That assumes that they’re dealing with a creditworthy retailer who’s not having too much trouble.”
If the landlord has designs on selling the property, the lease restructuring can also be beneficial. With a long-term lease commitment, their property is easier to sell and finance down the road.
In an environment where rents are going down, the lease restructure can also protect the landlord by locking in a tenant at today’s rates. Even though the situation is challenging now, it could be worse in the future. By locking in a tenant, the landlord is protected, according to Weiner. Without that, tenants could start looking for less expensive space.
For the retailer, lease restructuring can offer a noticeable benefit—low rent. “For certain businesses, like supermarkets and home improvement stores, things have been thriving,” Weiner says. “But many other businesses are really suffering, whether it’s a restaurant or an apparel store. These businesses need assistance in order to thrive in the future. Their two biggest expenses are rent and labor.”
By helping with the rent side equation, landlords can offer the retailer a major boost. Stores are already laying off workers and reducing pay and hours to corral personnel costs.
Right now, Weiner thinks lease restructuring programs make sense for retailers who want to take further steps to limit uncertainty, especially if they face e-commerce threats..
“It’s always hard to predict what’s going to happen to any one retailer at any given time,” Weiner says. “There are always shifts in business models.”
For instance, e-commerce has added a level of uncertainty over the past decade.
“Amazon has changed that dynamic exponentially for retailers,” Weiner says. “They have a business model where if they see a certain amount of retail has moved online, they go into that business themselves in a more robust fashion. That then impacts retailers.”
Source: “How Lease Restructuring Can Help with Dispositions and Financing“

Increasing Demand for Cold Storage Spurs Spec Projects, Institutional Investment

October 15, 2020 by CARNM

U.S. online grocery sales continue to accelerate amid escalating COVID-19 cases, and this trend is likely to continue long after the pandemic subsides, boosting demand for cold storage facilities nationwide.
“COVID has accelerated and catalyzed that sector and is a huge point of growth for the industrial cold storage sector and remuneration of retail,” says Chicago-based Peter Kroner, research manager for industrial capital markets with real estate services firm JLL. The pandemic changed the perception of online shopping for many consumers who were formerly reluctant to shop online or unfamiliar with the process, such as the elderly, he notes.
Online grocery sales represented just 3.9 percent of all grocery dollars spent at the end of 2019. By May 2020 that figure had increased significantly, says Kroner. He predicts that in response to rising demand, grocery chains’ supply-chain infrastructure will evolve, mirroring many of the lessons e-commerce direct-to-consumer, supply-chain models have developed since 2010. These lessons include establishing separate facilities for merchandise going to physical stores and those operating as e-commerce fulfillment centers. This will have a significant upward impact on demand for cold storage space, Kroner says.
Long before the pandemic arrived at U.S. shores, in May 2019, real estate services firm CBRE estimated that the number of consumers buying packaged food items online would rise from about 50 percent to 70 percent, creating demand for an additional 75 to 100 million sq. ft. of cold storage space over the following five years. That estimate did not reflect the current surge in online grocery sales, nor did it take into account the need to replace obsolete cold storage facilities. The average age of U.S. cold storage buildings is 42 years, with more than 78 percent of the total inventory built prior to 2000.
Meanwhile, the current typical grocer supply-chain network involves a hub-and-spoke system that consists of cold storage distribution centers with pallets of food for delivery to grocery stores, according to Kroner. This doesn’t work well for e-commerce order fulfillment, in which food products are packaged according to individual orders and delivered to consumers living in proximity to each other, similar to parcel carrier distribution models.
As a result, Kroner notes that developers are beginning to build speculative projects—a rare occurrence in the past due to the high cost of construction. However, most new projects rising still have a prelease or at the very least, a handshake promise.
Matthew Walaszek, associate director of industrial and logistics research at CBRE, agrees, noting that of the seven to nine million square feet of new cold storage space currently in the pipeline only a handful are spec projects, with the large majority comprised of build- to-suits. “User requirements are very specific, making it difficult to build on spec,” he says. “With that said, there are definitely more spec projects this year than last year, especially as architects get more sophisticated designing for cold storage.”
Because they are highly automated, energy efficient and feature clear heights above that of traditional warehouses, the cost to build a cold storage facility today is about double that of conventional warehouse space. On average, it costs between $130 and $180 per sq. ft, compared to $70 to $90 per sq. ft. for traditional warehouses, according to a recent JLL cold storage report.
The majority of new cold storage construction is taking place in port-centric and coastal markets, often referred to as the Elite 11 markets, notes Lori Zuck, managing director for the industrial group in the New Jersey office of real estate services firm Transwestern. This includes the New York metro area, Northern California, Dallas-Ft. Worth, Houston, Texas, South Florida and Pennsylvania’s Lehigh Valley.
According to Walaszek, however, cold storage construction is happening in major metros nationwide. Most projects are ground-up, as opposed to conversions from other uses. New facilities are being located in proximity to highly populated metro areas, but many developers are also seeking infill sites even closer to consumers.
The capacity for cold storage construction is currently limited, according to Zuck, due to the scarcity of land in highly populated metros, development challenges, and the high cost of these projects due to user automation requirements. Even so, she says, “With changing market dynamics that were occurring before COVID-19, coupled with the impact of the pandemic, we anticipate accelerated growth in (new cold storage construction) in the near term.”

Driving investment

The surge in demand for cold storage space is also driving investment in this sector. Two of the country’s largest cold storage owner/investors, for example—Lineage with nearly 32 percent of total inventory and Americold with 29 percent—are both acquiring new cold storage portfolios and developing new assets.
Lineage Logistics recently raised $1.6 billion in new equity to drive growth and support future investment in tech and automation for its properties. The firm also recently completed 10 acquisitions totaling 153 million cubic sq. ft. of cold storage in 24 locations throughout North America, including acquisition of assets owned by Southern Cold Storage, Allied Cold Storage and Western Distribution Services, reports SupplyChainDive.
Americold, the world’s largest REIT focused on cold storage, has invested nearly $2 billion in cold storage acquisitions during the last two quarters, according to company press releases. This includes this month’s acquisition of Agro Merchants Group for $1.74 billion. Agro Merchants is the fourth largest temperature-controlled warehouse owner and operator globally, with 46 facilities totaling 236 million cubic feet in 10 countries. Americold also plans to invest $400 $500 million in new construction.
Some industry experts maintain that the e-commerce surge of 2020 will level out in 2021, but Walaszek suggests that COVID-19’s disruption has accelerated the predicted five-year, upward trend in online grocery sales. “This, coupled with the sector becoming more institutionalized, may put upward pressure on (cold storage) values,” he notes.
As recently as a few years ago, cold storage assets in most markets would trade at a discount of 150 to 200 basis points compared to convention warehouse properties, notes Kroner. That discount has now dropped below 100 basis points. While few transactions have closed since the beginning of the pandemic, there are indications that pricing for any cold storage assets coming on the market will be higher than pre-COVID-19 levels, noted the JLL report.
Cold storage rents tend to be significantly higher than those for dry warehouse space, but Walaszek says that there’s not enough transparency in the market to know what the rent premium is on average. He maintains, however, that rent growth will be robust over the next few years, in line with the overall industrial market.
As a result of growing demand for cold storage space, there are now more investors, including both institutional and private players, interested in this asset class, which traditionally had a very limited buyer pool.
Authors of Transwestern’s recent cold storage Insights report noted, “More institutional investors feel that cold storage is a safe bet for their capital, and occupiers are clamoring for modern space in key geographies.” Zuck, the report’s co-author, says that the institutional investor pool now includes Prudential and Angelo Gordon.
Walaszek adds PGIM Real Estate to the list of new entrants. The firm has partnered with Bridge Development to invest in and develop cold storage facilities. Grove Capital (owner of Lineage Logistics), Blackstone and New Mountain Capital are on the list as well.
Even Sam Zell has been making bets on cold storage logistics. His Chicago-based Equity Group Investments purchased a majority stake in Able Freight, a Los Angeles-based, international cold-chain logistics provider specializing in the transport of perishable goods, reported Freightwaves. According to Freighwaves, this is Equity Group’s fourth logistics investment in two years.
Source:”Increasing Demand for Cold Storage Spurs Spec Projects, Institutional Investment“