Archives for February 2021

Multi-use industrial product is a new favorite among industrial investors. A new report from JLL delves into the trend, noting that location and limited supply has made these properties an ideal investment opportunity.

The JLL report defines multi-use industrial as a multi-tenant industrial property ranging in size from 20,000 to 100,000 square feet with a wide ranging of uses, from distribution and warehouse to shallow/small bay, flex industrial, research and development and even high-office finish flex. These properties were typically built on the fringe of urban communities, but with urban expansion, many are now “engulfed,” as the report describes, in population centers. This has made them a perfect asset for supply chain networks, according to the report.

Location isn’t the only benefit. Multi-use industrial product is in limited supply. New industrial construction has focused on state-of-the-art industrial product targeting e-commerce users. Multi-use industrial, on the other hand, has seen little new construction activity. As a result, multi-use industrial makes up only 15% of the total industrial inventory in the US. By comparison, single-tenant properties make up 62% of total inventory and multi-tenant properties account for more than 22% of total inventory.

The limited supply has driven record low vacancy rates for this market segment, in turn putting upward pressure on rents. Nationally, multi-use industrial has a 6.7% vacancy rate, only 120 basis points higher than the total industrial vacancy for US industrial product. Single-tenant industrial has a 4% vacancy rate, while multi-tenant vacancy rate trends above 12%.

The downward trend in multi-use industrial vacancy has produced strong rent growth, trending above the national industrial rent growth. From 2010 to 2020, multi-use industrial rents increased 54.3%, while overall industrial rents nationally grew 41.8%. In 2020, multi-use industrial rents grew to $8.87 per square foot, up from $8.45 per square foot in 2019. The JLL report expects rents for this product to continue to grow through 2024.

Despite the attention and attractive story around multi-use industrial, cap rates actually increased in 2020 amid cap rate compression in the remainder of the industrial market. Cap rates for multi-use industrial properties trended 219 basis points wider than institutional grade properties and 124 basis points wider than US industrial cap rates.

Multi-use industrial is also perfect for investors skeptical of the highly popular and pricey class-A industrial product. In a recent interview with GlobeSt.com, Jonathan Needell, president and chief investment officer of KIMC, said that high price tags are worthy of top tier tenants, like Amazon, but other tenant profiles won’t warrant the high price tags. As a result, the firm has focused on unique infill product and logistics uses near population centers, which also see strong demand but offer better returns compared to the big box product.

Source: “Why Multi-Use Industrial Is the New Investor Favorite”

The pandemic forced retailers and retail owners to adapt quickly. These changes were different than adjusting business models to meet new online shopping trends, as was the case for the years leading up to the pandemic. Instead, retailers needed to adapt physical spaces to accommodate social distancing and health-and-safety requirements. 2021 will be more of the same, with retail and retail owners forces to focus on adaptation to stay alive.

“Retail developers will continue to be forced to adapt, by working with their tenants to keep them open and improving their projects to deal with whatever the future brings,” Dan Villalpando, a partner at Cox, Castle & Nicholson, tells GlobeSt.com. “After all, none of us could have predicted what happened in 2020. Isn’t it safe to say the same thing about 2021?”

In 2020, retail developers and owners learned to work closely with tenants both to support business and respond to new regulatory challenges. This trend is likely to gain momentum through 2021. “Many retail developers spent much of 2020 trying to support their tenants, either through negotiating rent relief amendments to help keep struggling tenants afloat, or by spending money to attempt to entice leery customers to return to their projects,” says Villalpando. “Some retail developers have helped organize curbside pickup programs at their properties to assist smaller retailers who lack the resources to establish their own programs.”

Retail players made all of the standard changes: installing hand sanitizing stations, posting safety signage and enhancing cleaning policies. “The common thread is landlords working with tenants to keep businesses open, and somewhat profitable, and making retail establishments as safe as possible for consumers in order to lure them back,” says Villalpando.

The good news is that there is still strong demand for retail in general. In fact, many experts have noted pent-up demand for all aspects of retail and entertainment, which is likely to support a swift recovery. “When it comes to the world of retail development, the pandemic has certainly highlighted the difference between essential and non-essential retail, and the different types of retail developments have been affected accordingly,” says Villalpando. “The good news is that many in the industry expect consumers to return with a vengeance once the pandemic is under control and to resume spending money on non-essential items.”

Source: “Retail Developers Will Spend 2021 Adapting to the New Market”

Office tenants looking for the “sweet spot” to re-enter a market will likely have to move more quickly than during previous recessions, according to new research from Cushman & Wakefield. 

C&W economists say the sweet spot occurs when 75% or more of a market’s peak-to-trough decline has occurred. Historically, most CBDs have seen larger rent declines and have taken longer to hit their trough than suburban submarkets, and C&W predicts that 42% of CBD submarkets are twice as likely to take more than 11 quarters to bottom out than their suburban counterparts. On average, CBD rents decline 375 bps more during recessions than non-CBD submarkets, and they also take slightly longer to hit their trough.

In previous recessions, national office asking rents didn’t decline until four quarters after vacancy began to increase. Rebecca Rockey, head of Economic Analysis and Forecasting, Global Research at Cushman & Wakefield, said that trend is playing out again currently in the US, as both overall Class A asking rents ended the fourth quarter at all-time highs and national vacancy ended the year 257 bps higher than in the year prior.

Typically, rent troughs happen 14 to 15 quarters after a recession starts, but rents remain in that sweet spot for some time thereafter. But given the “unprecedented size and timing of the labor market shock” during COVID, C&W predicts more markets will reach their sweet spots sooner than usual.

So what does that mean for tenants? You’ve got time, according to Rockey. After the Dot Com bust and the Great Financial Crisis, no US markets hit their overall rent trough within a year, she said, and only a third of markets hit bottom within the first 12 quarters. And the variance among the top 10 most volatile North American markets is typically nine times that of their top 10 most volatile counterparts.  That means strategically timing the market in volatile locations “can pay significantly higher dividends,” according to Rockey.

“This patience can be well worth it as CBD rents for the 11 slowest markets to hit rent troughs decrease by an average of 402 bps more than the 11 quickest CBD markets,” Rockey says in the report.  “Of course, perfectly timing the market is very difficult, if not impossible. Having a data-driven approach and a market-specific, flexible strategy can help occupiers identify when and where there are opportunities.”

Source: “The Perfect Moment to Negotiate Office Rent”

Commercial real estate lending closed the fourth quarter up 38.2% from Q3, thanks to higher levels of liquidity, tighter credit spreads and a loosening of some underwriting standards, according to new research from CBRE.

Commercial loan closings reached a value on CBRE’s Lending Momentum Index of 221 in December, an amount that reflects a significant increase from the prior quarter but was still down 16% year-over-year.

The non-government agency CRE lending market was more balanced in Q4 and looked a little more like conditions CBRE observed pre-pandemic. It included strong participation from alternative lenders, which accounted for 36% of non-agency loan closing volume in the quarter, and life companies for stabilized low-leveraged loans, which gained momentum in late 2020 to snag a market share of almost 30% in the quarter. Alternative lenders like debt funds, finance companies, and mortgage REITs were also the leading source of bridge loans for the office, retail, and multifamily sectors.

Regional banks accounted for 23.7% of commercial mortgage originations in the fourth quarter, only a slight decrease from prior levels, and also played a key role for construction financing for multifamily and industrial development.

CMBS lenders accounted for a little more than 10% of originations in the quarter, at about $16.55 billion industry-wide in Q4. Average loan-to-value ratios also increased for permanent commercial and multifamily debt.

“Capital markets helped bolster commercial mortgage lending at year-end as equity prices rose and corporate loan spreads tightened. With lending markets anticipating the effects of additional government economic stimulus on growth and inflation, Q4 2020 saw increased participation by alternative lenders and life companies compared with Q3. Certain deals remained challenging to underwrite, especially for retail, hotel and transitional assets,” said Brian Stoffers, Global President of Debt & Structured Finance for Capital Markets at CBRE.

The numbers are heartening, but there may be some cracks in the façade: in recent remarks in Kansas City, Fed President Esther George noted that when government stimulus efforts end, many renters and businesses could find themselves unable to meet their debt obligations, forcing defaults and restricting credit growth.

“Forbearance has been a significant contributor to improved metrics of CRE loan performance,” George said in those remarks. “Still, market analysts predict that a significant volume of commercial loans currently in modification programs may ultimately default. Given this backdrop, a worrying scenario is that the economic impact of the pandemic outlasts the policy support programs currently in place.”

Source: “CRE Lending Rose 38% Last Quarter”