Archives for November 2020

Get Ready for Flex Workspace 2.0

November 12, 2020 by CARNM

A new report from Colliers International makes a case for the continued growth of the flexible workspace market.

The pandemic has sparked a series of questions about the future of office, and the answers have swung in every direction. Some have argued that this is the end of the flexible office environment, which requires density and shared workspaces. In its latest flexible office report, however, Colliers International makes a case for continued growth of the flexible workspace market.
The report also argues that a new generation of flexible space is on the horizon. “If Flex 1.0 was about where people work; Flex 2.0 will be increasingly centered around how people work,” Knotel CEO Amol Sarvar said in the report. Currently, flex space accounts for 25% of total office inventory worldwide. However, the report predicts that the supply of flex space will grow by two to three times over the next five years.
The report outlines six drivers of the flex market growth. Corporate demand is the top reason. Corporate office users have needed more flexibility in workspace, fueling the adoption of flex leases over the last few years. The pandemic has only accelerated this trend, according to the report.
In addition, growth in secondary and tertiary markets; new operating models, including revenue partnerships between flex space operators and managers; the flex space vendor economy, which has lowered the barrier-to-entry for new operators; the entry of traditional landlords providing flexible spaces; and the emergence of niche operators who specialize in spaces for artists, engineers, women or other working groups, are also driving growth in the market.
Office occupiers are also bullish on the flex space market. A survey conducted by Colliers found that 90% of occupiers believe that flexible office space will increase in the future. Most of those respondents, 44%, said that this would mean a need for flexibility in traditional lease structures, while a smaller portion, 25%, said that the growth in flexible lease space would mean more agreements with flex operators.
In the US, flex space currently has a flexible inventory of 62.5 million square feet, with the majority, 41.1 million square feet, located in CBD markets and another 21.4 million square feet located in the suburbs. Manhattan is by far the leader in flex space supply, accounting for 16.2% of the total in the US. The remaining top 10 markets—which includes Miami, Boston, Los Angeles, Seattle and San Francisco—for flexible workspace together account for 29.6% of the total market supply.
From 2018 to 2020, the supply of flexible workspace increased by 36.5%, and growth was the strongest in secondary markets. It was still growing rapidly through the first half of 2019. That growth has slowed significantly in the last 12 months, largely due to the first half of the pandemic. While the market has been slowed by the virus outbreak, the pandemic has likely set in motion trends that will support growth once workers can go back into the office.
Source: “Get Ready for Flex Workspace 2.0”

Industrial Remains 2020’s Top Performer

November 12, 2020 by CARNM

Buoyed by continuing strength in e-commerce, the warehouse/distribution vacancy rate was unchanged in the Q3.

While most commercial real estate sectors are suffering from rising vacancies and falling rents during the pandemic, industrial keeps outperforming its peers.
Buoyed by continuing strength in e-commerce, the warehouse/distribution vacancy rate was unchanged in the Q3. It posted positive net absorption for the 40th quarter in a row, according to Moody’s Analytics.
Overall, net absorption came in at 20.74 million square feet in the quarter, increasing from 15.2 million in the second quarter. However, the third quarter’s net absorption was lower than the 41.7 million square feet posted in 2019.
Construction fell to 17.6 million square feet in the quarter, down from the 29.2 million square feet added in Q2. According to Moody’s Analytics, the vacancy rate remained unchanged at 10.5% in the Q3 but increased from 10.1% year-over-year.
Average asking and effective rents grew 0.2% and 0.3%, respectively, in Q3, which was an increase over the 0.1% both posted in Q2.
The flex and R&D space didn’t do as well in the quarter. Its vacancy rate increased by 0.2% to 10.3%, while it incurred negative net absorption. Overall, net absorption was negative 2.4 million square feet, which was an improvement compared to Q2’s 4.0 million square feet decline.
New completions of flex and R&D space came in at 240,000 square feet, which was the lowest quarterly change since 2012. Rent growth in flex and R&D space was nearly flat at 0.1% for asking rents and 0.0% for effective rents. In Q2, the average rent grew by 0.2%, and the effective rent fell 0.1%.
“In short, the warehouse/distribution sector is withstanding the pressures from the pandemic, while the flex and R&D sector is showing some signs of distress, similar to the office sector,” according to Moody’s Analytics. “With two full quarters into the pandemic and no end in sight, these trends of a flat warehouse and distribution and weakness in flex and R&D should continue over the next quarter and next year.”
In a separate report, Moody’s Analytics projected that industrial vacancy rates are expected to rise to 11.8% in 2021. It projects that the sector will incur its most significant drop in effective rents in 10 years, down 4.5% in 2021.
The downturn shouldn’t last long, though. Moody’s predicts that online commerce will drive a rebound in industrial. As vacancy rates decline steadily over the next five years, effective rents will rise by 1.4% in 2022.
Source: “Industrial Remains 2020’s Top Performer“

Amazon Launches Key In-Garage Grocery Delivery Service

November 12, 2020 by CARNM

Third Amazon Fresh supermarket opens in Northridge, Calif.

Amazon is expanding its contactless Key In-Garage Delivery service to more than 4,000 U.S. cities and adding grocery to the mix.

The e-tail giant said Thursday that Amazon Key In-Garage Grocery Delivery has launched in selected areas of Chicago, Dallas, Los Angeles, San Francisco and Seattle. Through the new service, Prime members can opt to have their Whole Foods Market or Amazon Fresh online grocery delivery orders placed inside their garage. Plans call for the program to expanded to other cities.
First launched in 50 cities in April 2019, Key In-Garage Delivery enables Prime members with a Chamberlain Group myQ smart garage door opener to receive packages in their garage. After linking their myQ app with Key, customers click on “Free In-Garage Delivery” at checkout on Amazon.com. Packages are brought by a delivery service professional, and customers can use the Key by Amazon app or Amazon mobile shopping app to get an alert when their package is delivered. The also can view videos of the delivery by using a compatible Ring smart home camera with their Ring Protect Plan or a LiftMaster Smart Garage Camera powered by myQ with a myQ Video Storage Subscription, Amazon said.
New cities where Prime members can use Key In-Garage Delivery include New York, Los Angeles, Chicago, Philadelphia, Dallas, Houston, Boston, Atlanta, Phoenix and Washington, D.C., as well as metropolitan communities such as Astoria, N.Y.; Valencia, Calif.; Oswego, Ill.; Elverson, Pa.; Farmersville and Magnolia, Texas; Frederick, Md.; Salisbury, Mass.; Peachtree City, Ga.; and Casa Grande, Ariz.

For a limited time, new Key by Amazon customers can get $30 in Amazon credits after their first in-garage delivery, the Seattle-based company said.
“Customers tell us they appreciate the convenience and peace of mind that in-garage delivery offers, and we’re happy to expand the service to thousands of additional cities,” Pete Gerstberger, head of Key by Amazon at Amazon, said in a statement. “With this latest expansion, Amazon customers in thousands of big cities and small towns across the U.S. can now enjoy another Prime benefit with convenient, contactless deliveries right in their garage, all backed by the Key by Amazon Happiness Guarantee.”
Also on Thursday, Amazon opened its third Amazon Fresh supermarket, in Northridge, Calif.
The 30,000-square-foot store, at 19340 Rinaldi St. in Northridge, is the smallest of the Amazon Fresh locations opened thus far. The first, a 35,000-square-foot store in Woodland Hills, Calif., opened in mid-September, followed by a 40,000-square-foot location in Irvine, Calif., in late October.
Like the first two stores, the Northridge Amazon Fresh offers an assortment of national, private and regional brands — including Amazon own brands, such as Fresh, Cursive and 365 by Whole Foods Market — plus fresh produce, meat and seafood, along with an array of prepared foods made fresh in the store daily. Local and regional brands include American Golden Nuts, CAULIPOWER pizza, Rockenwagner Bakery, Groundwork Coffee, Duke’s Mayo, Ellenos Yogurt and Boston Chowda.
The new store also emphasizes low pricing, including everyday-low-price items such as bananas, rotisserie chicken, and fresh-baked bread and pizza slices, as well as grand-opening deals on such national brands as Coca-Cola soda, Frito-Lay chips, Butterball frozen turkey and Nature’s Own brioche butter rolls.
Amenities include the Amazon Dash Cart, a smart shopping cart that helps customers find products, track purchases and expedite checkout; an in-store station with Amazon’s Alexa virtual assistant, which can help customers manage shopping lists and navigate the store’s aisles; and same-day grocery delivery and pickup.
The Northridge, Irvine and Woodland Hills stores are among eight Amazon Fresh locations disclosed by Amazon. In late October, before the Irvine Amazon Fresh opened to the public, Amazon said it began hiring for four Amazon Fresh stores in the Chicago area: Naperville, Bloomingdale, Oak Lawn and Schaumburg, Ill. The company also previously confirmed an upcoming Amazon Fresh opening in North Hollywood, Calif. In addition, Amazon acquired two Fairway Market store leases in Paramus and Woodland Park, N.J., in March but hasn’t disclosed plans for the locations.
Source: “Amazon Launches Key In-Garage Grocery Delivery Service”

Making Sense of CRE Valuations and Appraisals

November 11, 2020 by CARNM

It’s prudent to keep in mind what questions you are trying to answer with an appraisal before engaging an appraiser.

Much attention has been paid to the immediate effects of the COVID-19 pandemic on public health and the economy. As the months continue to move by, the economic shutdown’s broader implications on commercial real estate begin to materialize. The pandemic has presented lenders, servicers, and appraisers with a unique problem: What is a property with severely impacted cash-flow worth, and what will the long-term impact on value be?
As defined, market value is “the most probable price which a property should bring in a competitive and open market under a) conditions requisite to a fair sale, b) the buyer and seller each acting prudently and knowledgeably, and c) assuming the price is not affected by undue stimulus.” From historical experience, the definition as constructed is reasonable and appropriate when markets are balanced and definable. However, when markets become dislocated, issues begin to arise.
The accepted understanding of market value relies on verifiable data and sound reasoning,not short-term occupancy and revenue declines caused by external forces. In this environment, appraisers are challenged to reconcile the rapidly changing landscape and the confines placed on their work. With income, sales, and cost predictors few and far between, how can a user of appraisals extract the most value for their assets?

Begin with the end in mind

Appraisers help their clients understand and apply a value to their portfolios under the current market circumstances. Ultimately, appraisals use a standard set of guidelines and regulations produced with a high level of rigorous research and documentation that supports the conclusion. However, a dive below any deal’s surface may reveal many different paths and potential outcomes, ultimately creating uncertainty in the business plan. For this reason, it’s prudent to keep in mind what questions you are trying to answer with an appraisal before engaging an appraiser. The devil is in the details, and understanding those details puts you ahead of the curb.
Consider the following. User A is looking to identify the value of a portfolio of distressed debt. An appraiser needs to determine the value of that note by valuing the asset collateral itself, foreclosure costs, asset procurement cost, and many other factors. This unique valuation scenario is tied directly to the market value definition; thus, a standard appraisal would not currently be accurate without any active market predictors. User A may not stand to benefit from an appraisal in the first place.
Consider this a change in mindset. It’s not just an appraisal, but an appraisal for a specific purpose. Having a game plan for the application and implementation of an appraisal and how it can inform the decision-making process increases the overall benefit it can bring.

Ask the right questions

Once a comprehensive understanding of the deal and the desired outcome is reached, and an appraisal has been deemed necessary, full involvement throughout the appraisal process is required to ensure the desired result is met. This is not true for new loan originations where there is a distinct removal of all direct conversation between borrower/originator and appraiser.
Appraisers have been accommodating through the current times. However, without the proper comps to support their conclusions, appraisers will likely be hesitant to extend themselves at the behest of their clients. Therefore, a lack of proactive involvement and guidance might limit the overall value an astute appraiser can provide. Keep in mind that appraisers have great flexibility within the compliance regulations of USPAP’s, allowing them to give well-thought-out and supported appraisals. Take advantage of this by providing a clear explanation of how the appraisal will be used.
For example, consider the stage an asset is in. Collateral sitting in asset management, special servicing, workouts, diligence & advisory, or underwriting all present unique factors that can help guide appraisers to a more accurate value. Generally, appraisals will only present an as-is and an as-stabilized value. However, a defaulted asset in special servicing in need of a workout would likely require an estimate of liquidation value within a 6-month timeframe or other defined timeframe. Present the entire story of an asset rather than just its current state. Provide the appraiser with useful guidance so they can return a well-supported valuation.

Get a range of values

Appraisers used to present market value as a range of values. Only when the tug-of-war between production and credit became untenable did the standard of providing a singular value occur. This standard is much too prevalent now with the emergence of larger firms’ automated programs that only provide final values. These systems cannot factor in a specific deal or asset’s nuances. While these systems lower the overall cost of appraisals, they also cheapen the quality. This large-scale standardization of processes has lulled many into misguided acceptance of the current appraisal status quo.
Enter COVID-19. With minimal traditional indicators currently available, a more nuanced approach is required. Encourage appraisers to provide a range of values along with a likely single value from within that given range, even if a single value suffices. This approach can help account for independent variables that undoubtedly exist within every appraisal scenario. Granting the appraiser flexibility to determine a value range within the assignment’s scope increases the value an astute appraiser can provide. It also allows the user to manage expectations and ascertain a broader range of possibilities.

Conduct a rigorous and thorough review

Finally, rethink the appraisal review process for a new era. For too long, the appraisal review has been a review of compliance rather than an assessment of relevancy and provided value. Many appraisal users have become conditioned to file the resulting documents away after one glance, never to be seen again. While that level of trust is somewhat understandable within a balanced and quantifiable economic environment, current (and likely future) circumstances dictate careful due diligence of the assumptions used, the projections made, and the value range presented is essential. Highlight areas of confusion and follow-up with the appraiser for clarification on those points. Apply a level of rigor to the appraisal that ensures nothing has been overlooked, and all questions have been answered.
Many are beginning to ponder the effects this economic downturn might have on values post-COVID-19. Will appraisers be able to get on-site? If not, how could that affect the appraisal process? These questions will likely differ from region to region. We don’t have the necessary market indicators to fully understand how COVID-19 impacts various property types, and we may not for some time. The expression, “one sale can make a market,” has never been more relevant. Still, understanding the assumptions involved in the appraisal process may transform this “check-the-box” requirement into a tool that can assist your decision-making.
Source: “Making Sense of CRE Valuations and Appraisals”