Archives for November 2020

Factors like the nature of the items fulfilled, the delivery level of service, availability of capital and variability in throughput can help determine whether an investment in automation makes sense.

Warehouse employment is one of the few bright spots in the job market. The sector is now employing more people than before the start of COVID, with employment up 3.8% or 46,000 positions, since mid-March, according to the Bureau of Labor Statistics.
When choosing an infill location for a warehouse, investors need to keep this tight labor market in mind. “A proper labor analysis digs into employee drive-times, extent of existing warehouse jobs, turnover, number of eligible workers, unemployment and wage rate trends. It’s also vital to consider labor availability for peak season,” writes Cushman & Wakefield’s Benjamin Conwell.
Solving for the labor issue is particularly crucial for e-commerce operations, which is taking an increasingly significant share of the industrial sector. “E-commerce orders are fulfilled differently than wholesale or traditional store replenishment. Rather than being palletized, orders are shipped as ‘eaches,’ which are received, stowed, picked and shipped individually. This process requires a greater number of associates than comparable legacy warehouses,” Conwell writes.
Labor availability has been a concern for industrial operations for several years. As technology improves, companies might be tempted to turn to automation to ease their capacity needs. But Conwell urges caution in making that decision, saying that the “tradeoff between automation and labor is a huge business decision.”
The massive cost of automation is only one reason this is a huge business decision. Automation can also limit the flexibility of a warehouse operation, according to Conwell. For instance, it can be difficult to scale operations for peak season because it locks operations into a specific process flow.
Factors like the nature of the items fulfilled, the delivery level of service, availability of capital and variability in throughput can help determine whether an investment in automation makes sense. Conwell also points out that having more automation doesn’t automatically mean employing a smaller workforce. Automation may require workers to perform maintenance, coding and other tasks.
For the big players, however,  increasing their investment in automation is a no brainer. NKF’s chairman Thad Mallory points to companies like Amazon, Costco, Walmart, Lowes and Home Depot leading the way with automation.
“Those companies are going to double down their investment because they’re making money right now, they’re getting more market share and they’re going to come out on the other side stronger,” Mallory told GlobeSt.com in an earlier interview. “I don’t think they’re going to be afraid to make an additional investment.”
Even though the jury is out on how much automation will help warehouse operators reduce costs, experts foresee an increase in automation, especially as the pandemic continues to remake supply chains.
Already, COVID is prompting investment. The pandemic has forced various industries, including healthcare and grocery stores, to automate rapidly. The supply chain isn’t far behind. “I think that, given the spotlight that the pandemic has put on the fragile nature of our global supply chain, automation and robotics will gain a lot of attention,” Rich Thompson, international director, supply chain and logistics at JLL, told GlobeSt.com in an earlier interview. “And for anyone interested in those investments, it will just accelerate that interest.”
Will O’Donnell, managing partner, Prologis Ventures, thinks COVID-19 has also highlighted the need to rethink global supply chains and their adaptability to meet today’s unprecedented challenges.
“As part of this major supply chain evolution, I expect to see companies continue to optimize the operations of their logistics facilities, as well as increased investment in robotic systems to enhance processes, as they seek to create environments that prioritize the health, safety and well-being of employees,” O’Donnell told GlobeSt.com in an earlier interview.
Source:”Can Warehouse Automation Make Up for a Tight Labor Market?“

The top office markets in the US are seeing negative absorption, flat or decreasing rents and rising vacancy rates.

The top 10 office markets in US are continuing to struggle amid the ongoing pandemic. In the third quarter, office performance deteriorated compared to the second quarter, illustrating the depths of this downturn. Negative absorption, flat or decreasing rents and rising vacancy marked the top office markets in the US, according to new research from Colliers International.
The top markets from the report include Manhattan, Washington DC, Chicago, Houston, Los Angeles, San Francisco, Atlanta, Dallas, Seattle and Boston. Among these markets, Chicago was the only city to see positive absorption in the third quarter, but the report expects this to be temporary. It also wasn’t enough to offset the losses. Together, all 10 markets had 15.7 million square feet in negative office absorption, accounting for nearly half of the 37.1 million square feet in total negative office absorption nationwide.
Negative absorption came hand-in-hand with rising vacancy rates. With the exception of Chicago, vacancy increased in all of the top markets. Tech-heavyweights San Francisco and Boston had the biggest jump with vacancy rates rising 160 and 220 basis points respectively in the third quarter. Manhattan’s vacancy rate increased 170 basis points, while Los Angeles saw a 160 basis point bump in vacancy. On the other hand, Chicago’s vacancy rate fell 20 basis points, thanks largely to leasing activity that produced 228,309 square feet of absorption.
In addition, all 10 markets showed the beginning signs of rent declines. In Manhattan and the San Francisco Bay Area, the reality has already set in. The remaining markets had flat rent growth, meaning any change was less that 1%, according to the Colliers report.
The sublease market has added additional pressure for office owners. US sublease space is up 35% to 170 million square feet in supply. Manhattan leads the nation with 3.1 million square feet of space, but San Francisco, Seattle and Los Angeles have all seen significant increases in sublease supply as well. Tenants are finding significant discounts in this alternative market, with an average 23.9% discount over to direct lease space in class-A properties. However, the discount varies wildly between markets with Houston posting a 50% discount on average for sublease space, while sublease space in San Francisco was reduced 11.3%.
This alternative will likely ensure more challenges ahead for direct office owners, and unfortunately, the sublease market is growing rapidly. A September report from Cushman & Wakefield showed a 21.3% increase in sublease supply in the first half of the year. In the third quarter, that number jumped to 35%.
Source: “10 Office Markets Facing Deep Challenges“

While there is concern about distress in the short term, lenders of all kinds are willing to finance the right office transactions.
A decline in office utilization if it lasts beyond the pandemic could pose risks for loans backed by office assets, because it is likely to impact office rents, occupancy rates and market values, according to a recent report from Moody’s Investors Service. The report notes that the impact would be greatest in urban markets with the highest average rents. That, in turn, would heighten risk to office-backed CMBS loans—the largest segment of the CMBS market. It would be a particular problem for loans with aggressive underwriting that are maturing in four to seven years, according to Moody’s.
The coronavirus’ impact on loans across property types is already evident, as total CMBS loan delinquencies reached 7.77 percent in October, according to Moody’s CMBS Conduit Loan Delinquency Tracker. However, the lion’s share of loan modifications and the resulting increased debt has so far fallen on hotel and retail properties.
While Moody’s does not believe the physical office will be entirely abandoned, Blair Coulson, vice president and senior credit officer for CMBS new ratings at Moody’s Investors Service, notes that tenants may give some space back when leases come up for renewal. This would take place gradually, because only about 10 percent of leases will roll over per year over the next five years, he says. In the meantime, office-using companies will continue to need some centralized space for employees to meet, but with many laying off large sections of their staff in a struggling economy, there could still be a lot of sublease space coming on the market. That’s having an impact on lenders’ approach to financing office properties.

“Lenders, or equity investors, fundamentally believe the physical office is here to stay as companies need an environment to collaborate, build culture, grow employees, and foster creativity, all of which enables their businesses to grow,” says Keith Largay, senior managing director and co-head of the Chicago office of JLL Capital Markets. “They are underwriting muted leasing activity over the next 12 to 24 months as companies get their employees back into the office and start planning their workplace strategy for the next 10 to 15 years.”
Largay adds that with the expected lower near-term office leasing velocity, cash flow stability is the cornerstone of lender underwriting right now.
Lenders are being more cautious than before the pandemic, says Manhattan-based Richard Katzenstein, senior vice president/national director with Marcus & Millichap Capital Corp.  “Now more than ever lenders are scrutinizing tenants, are concerned about who is occupying the space,” he notes. For example, an entity like WeWork will have to make major changes in its physical space and limit the number of users at its locations to remain viable.
But lenders are looking at all aspects of a deal, according to Katzenstein, including tenant lease terms and structures, sustainability of cash flow, tenant credit status, rent collections, safety protocols that have been put in place, and the building’s location and attractiveness. For example, has an older asset been modernized, and is the location convenient to public transit and retail amenities?
“Before COVID, if a building had 25 tenants with lease rates at or below market, there was less credence given to collections than now,” Katzenstein says, noting that due to current concerns about rent collections, lenders have also dialed back debt coverage requirements from 1.30 percent to 1.40-1.50 percent.
While there is still sufficient debt capital today for new office acquisitions, says Largay, the pricing and leverage offered will be highly dependent on the sponsor, location, quality of the asset, stability of cash flow and business plan, with terms varying significantly depending on the combination of those factors. “New acquisitions mean fresh equity is coming into the deal, which lenders love to see where basis and asset valuation are established,” he adds.
In fact, there is a significant amount of liquidity in today’s market from all groups of lenders, including banks, life companies, specialty finance groups and investment banks, according to Robert Tonnessen, director of JLL Capital Markets in the Greater New York City area.
“But due to the uncertain market volatility driven by COVID-19 and noise around work-from- home, lenders are being more selective and patient in chasing the opportunities that best suit their capital,” he says. Cash flow stability, current market fundamentals and prospects for long-term tenant demand are among their key criteria.
In addition, loan terms have changed as a result of the pandemic, especially for urban assets, according to Katzenstein. While interest rates remain low, in the 3.50 to 4.25 percent range, loan-to-value (LTV) ratios has decreased by about 10 percent, depending on the lender. For example, before the pandemic, LTVs offered by life insurers averaged about 65 percent. Now that figure is at 55 percent. LTVs offered by CMBS lenders average 75 percent before COVID-19, but are now in the 60 to 65 percent range.
For the best-of-the-best properties, long-term, fixed-rated financing at moderate leverage levels will price between 2.75 and 3.25 percent, says Largay. More transitional, higher leverage and weaker market properties will price in the higher rate range, depending on an asset’s specifics.
Both Coulson and Katzenstein note that big office loans are getting done in CBDs, as long as they involve good credit tenants and long leases. Recent large financing deals analyzed by Moody’s include some examples of this. There was a $410-million COMM2020-CX Mortgage Trust transaction for a nine-story, 426,869-sq.-ft. class-A lab-office building located in Cambridge, Mass. and a $415 million VLS Commercial Mortgage Trust 2020-LAB transaction collateralized by a first-lien mortgage on the fee interest in two class A-lab-office towers with nearly 711,000 sq. ft in the South San Francisco market.
In fact, lenders particularly like office assets with lab space because not only does lab work generally require on-site presence, there is currently a lot of demand for that type of space from pharmaceutical and healthcare companies, notes Coulson. The San Francisco asset is 93.4 percent occupied by 21 tenants with 7.5 years weighted-average lease terms remaining. The Cambridge property’s largest tenant is Philips’ North American headquarters, which has nearly 15 years remaining on its lease, occupies 80.6 percent of the building’s net rentable area and represents 78.2 percent of its base rent.
In addition, a Manhattan West 2020-1MW Mortgage Trust transaction provided a $1.43 billion CMBS loan for One Manhattan, a 70-story, class-A, 2.1-million-sq.-ft. office-condominium project located a block away from Hudson Yards. The asset is 93.8 percent occupied by 10 tenants with weighted-average remaining lease terms of 17.5 years.
Despite the sector’s current challenges, Katzenstein says that investors are still buying office assets and seeing risk-return opportunities. “People have learned a lot from before to after COVID and are adapting to today’s lending environment,” he notes.
In seeking opportunities in today’s market, Largay says investors continue to be cautious, with heightened scrutiny in their approach to deals. “Opportunistic funds and high-net-worth investors are in a position to capitalize on market fragmentation, while institutional investors remain critical of pricing.”
There is definitely financing available for office properties and some demand from potential investors, adds Tonnessen. “The bigger question today is whether or not there are sufficient sellers,” he says, noting that given short-term uncertainty in the market, many buyers are underwriting deals very conservatively, leading to valuations that may be substantially below long-term value. As a result, Tonnessen notes that many owners of non-core office assets are opting to refinance instead.
Still, “For core office assets with credit and long-term leases, the market is as aggressive as it ever has been, both on the equity and the debt side,” adds Tonnessen. He suggests that both investors and lenders are willing to accept record-low returns in exchange for stability and current yield.
There is also capital available from bridge lenders for capital improvements, according to Katzenstein and Largay. “Lenders always consider financing that improves the value of the asset, but they will want to make sure the debt structure (coverage) is in decent shape” says Katzenstein. “This may be a challenge because values have decreased, and the pricing would be a little higher depending on value vs. mortgage.”
Source: “There’s Both Debt and Equity Available for Office Deals. Stringent Underwriting Is the Key.“