Archives for January 2021

What does 2021 have in store for the economy and commercial real estate? Noted economist and real estate analyst Peter Linneman and CBRE’s Global Chief Economist Richard Barkham join Spencer to dig into what the Biden Presidency and vaccine rollout mean for the economic recovery and CRE sector performance.
Source: “Turn the Page: Economic Outlook for a New Year and New Administration”

An oil pumpjack east of Artesia. The fracking industry faces state and federal calls to reduce emissions in a bid to combat rising global temperatures. (Jim Thompson/Albuquerque Journal)
Hydraulic fracturing, or fracking, has made southeast New Mexico part of one of the most lucrative and productive oil basins in the world.
And that industry’s environmental footprint is coming under more intense scrutiny as the incoming presidential administration, lawmakers in the legislative session in Santa Fe next week and New Mexico state agencies all work to address the climate crisis.
As New Mexico and the Southwest grapple with the likelihood of more extended droughts and an unreliable snowpack, addressing pollution created by the industry and the resulting warming temperatures has reached the forefront of state and federal discussions.
Proposals to slash pollution include methane regulations, water reporting, and even restrictions on new drilling.
While fracking is not a new technique in New Mexico, a combination of fracking and horizontal well drilling has fueled an unprecedented oil boom in the Permian Basin.
The water issue
Ian Palmer, an Albuquerque resident, and former petroleum engineer and consultant for BP and Amoco, said he often encounters a misconception that fracking contaminates groundwater.
Palmer’s book, “The Shale Controversy,” examines the dilemma that oil companies face in reducing emissions while meeting global demand for oil and fossil fuel revenue.
“Aquifers do get polluted occasionally, but it’s pretty rare,” he said. “That happens because of well construction. If a cement job is not properly done, fluid leaks up.”
Fracking blasts a mixture of water, sand and chemicals deep underground to break up a shale formation.
Office of the State Engineer data shows the industry accounts for less than 1% of New Mexico’s freshwater use. Agriculture makes up about 75% of state water New Mexico encourages companies to recycle wastewater for future fracking instead of pumping rivers and aquifers.
Fracking also is a highly regulated engineering process with safeguards to prevent aquifer contamination, said Ryan Flynn, president of the New Mexico Oil and Gas Association.
“Number one is making sure we’re drilling wells to top-of-the-line industry standards, and that involves multiple layers of concrete and steel casing for your well,” he said.
Dealing with spills
Managing water and oil that surfaces from fracked wells is another statewide concern.
In 2019, state oil and gas companies reported 1,409 spills, down from 1,523 spills in 2018.
The amount of crude oil spilled went down, but the amount of spilled wastewater increased to 4.2 million gallons, up from about 3.7 million gallons the year before.
“We’re still developing in some fairly remote areas in the Permian and there’s not a lot of infrastructure, period, in those areas,” Flynn said. “In order to move water within the oil field, you need infrastructure. It’s not fancy, just pipes and lines, but it can be expensive.”
The State Land Office has stopped selling fresh water permits for fracking. The Oil Conservation Division now requires reports of how much water is used to complete wells.
Early reports show companies using as much as 26 million gallons to frack a single well.
Seeking reuse strategies
New Mexico State University is researching ways to treat and reuse the salty wastewater that surfaces from fracked wells.
Reusing that water could do more than ease strain on a limited freshwater supply, Palmer said.
In Oklahoma, the U.S. Geological Survey linked a rise in earthquakes since 2009 not to the actual fracking of wells, but to the subsequent injection of industry wastewater.
“Given enough time, the pressure increase created by injection can migrate substantial horizontal and vertical distances from the injection location,” the USGS reports read. “Induced earthquakes can occur 10 or more miles from injection wells. Induced earthquakes can also occur a few miles below injection wells.”
Strategic well spacing, or less injection of wastewater, can help prevent these events.
Fighting greenhouse gases
The United Nations Intergovernmental Panel on Climate Change warns that global temperature warming fueled by greenhouse gas emissions could increase “risks to health, livelihoods, food security, water supply, human security and economic growth.”
“Fixing methane leaks is a no-brainer, because methane is an awful gas with a greater warming potential than carbon dioxide,” Palmer said.
The latest state climate impact report revealed that the oil and gas industry accounts for 53% of New Mexico’s greenhouse gas emissions.
Methane leaks in southeast New Mexico were up 3% over last year, according to state data.
The state Oil Conservation Division is considering methane rules that would ban routine flaring and venting of natural gas.
Federal and state pressure
The incoming Biden administration has proposed bold climate action, including a potential ban on new drilling permits on federal lands.
Flynn, who represents the industry that contributed $2.8 billion in state revenue during the 2020 fiscal year, said such a policy could “devastate” New Mexico.
“I don’t believe the incoming administration wants to cripple the oil and gas industry or ruin the progress we’ve made in terms of energy independence in the U.S.,” he said. “Our approach is to listen, and to roll up our sleeves and understand what the policy objectives are, what the issues are, educate them on what we’re doing, and identify solutions.”
Fracking likely will be discussed and be a topic of new proposals in the upcoming state legislative session beginning next week in Santa Fe.
Sen. Antoinette Sedillo Lopez, an Albuquerque Democrat, already has pre-filed two bills that take regulatory aim at the industry.
Planned industry measures
One would prohibit any freshwater use in the oil and gas industry. Another is a “green amendment” to the state constitution that would direct New Mexico to “protect environmental resources for the benefit of all the people.”
Sedillo Lopez and Rep. Patricia Roybal Caballero, D-Albuquerque, are also sponsoring a bill that would further define fracking and horizontal drilling, and place a four-year moratorium on new fracking permits.
A similar piece of legislation that didn’t make the proposed agenda in 2020 would have directed state agencies to study fracking impacts on land, water and cultural resources.
Flynn said blanket drilling bans are not the answer to the climate crisis.
He pointed to New Mexico’s methane rule-making efforts as a “practical” partnership between industry and environmentalists that would reduce industry emissions.
Emissions reductions are not impossible. A December 2020 U.N. report said “carbon dioxide emissions are predicted to fall up to 7% in 2020.”
The reductions are largely attributed to the COVID-19 pandemic, which has slashed global travel and disrupted new drilling.
Despite that dip in emissions, “the world is still heading for a temperature rise in excess of 3°C this century,” the report said, and “governments should pull out all the stops to implement a green recovery and strengthen their pledges before the next climate meeting in 2021.”
Source: “NM’s fracking future in a changing climate”
 

“The beginnings of a transaction recovery are forming,” says Marcus & Millichap’s John Chang in a new research report.
The beginnings of a transaction recovery upon the CRE industry, says John Chang, SVP and director of research at Marcus & Millichap in a new video, with all signs pointing to a rebound in volumes in 2021.
Numerous factors coming into alignment have the potential to drive a surge in commercial real estate investment, says Chang. “Transaction velocity has already made strong headway since the second quarter trough. The total number of sales in the fourth quarter of 2020 is estimated to be double the levels we saw in the second quarter.”
Investors are also starting to show more optimism. “At this point, it looks like we have made it through the worst of the economic downturn created by the health crisis,” says Chang. “Now, instead of focusing on downside risk, investors are focusing on upside potential. Fueling that drive is an unprecedented wave of capital.”
At the close of 2020, transaction volume was not surprisingly down compared to 2019, but they were above real estate closings at the close of 2006, which is generally considered the height of the pre-financial crisis.
The $900 billion fiscal stimulus package will help to drive this recovery. The bill includes $284 billion in PPP funding, $600 in direct stimulus checks and additional funding for unemployment benefits. “Although a full recovery will require getting control of the pandemic, the new stimulus will be an important ingredient in sustaining the economy until we get there,” says Chang. The new stimulus will also eliminate investor uncertainty. “That will be a key ingredient in unlocking investor decision making in 2021,” adds Chang.
The combination of increased capital, low interest rates and increased debt financing will “reignite” investment in 2021, according to Chang. However, not all markets will recover simultaneously. Major metros and destination markets will take longer to recover and property types like office, senior housing, hotels and shopping centers will also be slower to reach pre-pandemic norms.
“Once the tide turns and there is more clarity on the outlook for these metros and property types and the flow of capital to these slower reviving segments will escalate,” says Chang. “If these factors align as expected, 2021 could deliver a significant rise in investment activity and the economy will take a significant step toward normalization.”
Source: “CRE Investors Are Ready to Make Deals Again“

At CES 2021, retailers spotlight how they are evolving to serve the changing customer.

U.S. retailers faced a serious blow last spring when many stores were forced to close due to the COVID-19 pandemic. As stores eventually reopened, retailers realized their customers were changing how they shop—and many are adapting their brick-and-mortar spaces in response.
Physical stores are not a thing of the past, retail store owners say, but they are quickly evolving to meet the needs of the new digital customer.
“The pandemic has accelerated retail’s transformation,” said Tony Shan, head of Tmall Global, the Americas with the Alibaba Group, an e-commerce marketplace based in China, during a Tuesday session on the evolving retail landscape at CES 2021. “It’s more important for businesses to have a digital mindset and both a digitally enabled experienced online and offline.”
Dick’s Sporting Goods—which has big-box retail stores across the country—saw its sales jump 23% in 2020, said President Lauren Hobart, demonstrating that the pandemic hasn’t pushed out her company’s need for brick-and-mortar stores.
“Our stores are absolutely critical to our digital business,” Hobart said. What’s helped, Hobart noted, is that their stores have become the hub of an “omnichannel ecosystem,” where customers can shop in person, use curbside pickup of in-stock items, or make ship-to-store pickups of online orders. The physical store presence, she said, plays an important support role in their e-commerce business.
Deborah Weinswig, CEO of Coresight Research, says the following trends to watch that could impact retail moving forward:

1. Consumers will change the way they spend. “The economic and social impact of the pandemic has changed the way people live and made lower-income consumers more cost conscious,” Weinswig said. U.S. dollar stores have seen a 6% or better year-over-year growth every month since May 2020. Also, an increased interest in health care since the pandemic started has driven an uptick in wellness products and businesses. While Dick’s Sporting Goods noticed a decrease in business coming from team sports during the initial months of the pandemic, consumer interest grew in outdoor activities, which Hobart says brought in new customers who were looking for ways to stay active.
2. New technologies and tenant mixes will reshape the retail landscape. A trend of digitally integrating new, diverse retail tenants is taking shape, Weinswig said. For example, mall owners are increasingly adding health care and residential tenants to their mix. Interactive advertisements and games at physical retail locations can boost shopper engagement, she said. Also, some retailers are turning to augmented reality and virtual reality in the retail industry to find new contactless ways to interact with customers. The creation of virtual retail stores with AR visualizations of product catalogs are on the horizon. Some retailers may even offer 3D product previews to let customers “try,” virtually, before they buy, Weinswig said.
3. Digital-first retail strategies will be key to success. Livestreaming and social media with e-commerce likely will continue to gain traction with retailers who are looking for new ways to engage customers. Online sales will continue to climb, Weinswig said. She expects livestream selling—which is already popular in China—to reach $25 billion in the U.S. by 2023. Livestreaming is a way for shoppers to research new products and get a visual demonstration before they decide what to buy. Salespeople, online influencers, or even celebrities may livestream shopping tips, demonstrate a product, or respond to questions from a digital audience, all in real-time. In May 2020, Facebook indicated it will experiment with livestream shopping functionality through its Facebook Marketplace and Instagram Shops features.
4. “Doing good” becomes a greater focus for retailers. “All retail stakeholders—consumers, investors, and employees—appear increasingly committed to sustainability and inclusivity, sparking the growth of new markets like ‘recommerce’ [the selling of previously owned or used products] and adaptive apparel,” Weinswig said. Fifty-six percent of consumers report a willingness to pay, on average, a 35% premium for sustainably made products, Weinswig said. More retailers may look to add sustainability into their businesses to attract new customers, but she said the connections must be authentic to the company’s point of view to resonate.
5. Retailers will find new ways to transact with customers. “Seamless payment systems, loyalty programs, and personalization will be key to attracting and retaining customers in the increasingly competitive retail space,” Weinswig said. Social media may be one area of growth. After all, nearly 78% of U.S. consumers who use social media to shop, report sometimes abandoning a purchase due to a lack of built-in functionality. Dick’s Sporting Goods was able to grow its business during the pandemic—even as the physical stores were temporarily shut down—by adding curbside pick-up for its online customers. It also is also planning contactless in-store checkouts for added convenience for its in-store customers. The company is placing greater focus on their loyalty programs, such as offering a special week of exclusive member discounts.
6. Resilient, flexible supply chains will be vital. The pandemic shed light on the vulnerabilities of many supply chains, Weinswig said. Demand for industrial real estate could require an extra 1 billion square feet by 2025, predicted JLL, a commercial real estate firm, in late 2020. Retailers and suppliers will likely invest heavily in technology and infrastructure that can be leveraged to adapt quickly in times of crisis. Warehouses are becoming a critical aspect of the commercial sector to support retailers’ growing e-commerce and omnichannel business models.

Source: “6 Tech Trends That Could Reshape the Retail Sector“