Archives for February 2021

Office Landlords Need to Beware of These Risks

February 8, 2021 by CARNM

While an increase in remote work remains enemy number one for the foreseeable future, a score of other factors are also at play.

The burgeoning WFH trend shouldn’t be the only thing troubling the office asset class, according to a new report from Green Street. Slipping job growth and an uptick in real interest rates pose significant risk to the sector, and while an increase in remote work remains enemy number one for the foreseeable future, a score of other factors are also at play.
The Green Street report notes that the outlook for job growth in office-dominant industries—likely driven at least in part by increased automation—is less favorable than in years past, and a slowdown in “TAMI” sectors (tech, advertising, media, and information industries) has further decreased office demand.
Similarly, demand for financial services office space has softened as the result of Fintech advances and passive investment management. What’s more, a general trend toward increased space efficiencies is likely to go on for longer and at greater depth than previously forecast—a trend that will have the practical effect of reducing net absorption. And from a global perspective, a reduction in overseas capital for US CRE is also thinning demand.
The report predicts that an accelerated increase in real interest rates would dampen value in the office sector as longer lease terms are a less effective hedge against inflation. Also, if supply grows faster than expected, rent growth will slow, but COVID-19 uncertainties swirling in the sector are likely to hamper near-term starts.
Green Street’s analysis dovetails off trends outlined in a recent JLL report, which revealed that most companies are adopting a wait-and-see approach to lease strategies. Office tenants are increasingly favoring smaller footprints and about 43% of renewals in Q4 2021 were five years or shorter in duration. Weighted-average lease terms are also slipping, according to JLL research.
Source: “Office Landlords Need to Beware of These Risks“

New Mexico Land Commissioner Increases Oversight Of Oil And Gas Operators

February 7, 2021 by CARNM

Oil and gas operators must abide by their contractual obligations to run productive wells on public lands and clean up when they’re finished — or face a new enforcement hammer.

State Land Commissioner Stephanie Garcia Richard launched an effort late last year to more strictly enforce the terms of the state’s oil and gas contracts, most notably companies’ obligation to plug expired oil wells and clean up junked equipment, debris and spills when their leases end. This more comprehensive oversight differs from a past approach that Garcia Richard called “hit or miss.”

The land office has invested in new satellite technology to take aerial photographs of state lands and catch littered and contaminated sites, Garcia Richard said. And she recently banned the commercial sale of freshwater from public lands to fossil fuel companies to encourage them to use recycled water. “State land is a public resource, and it needs to remain a resource for years to come,” Garcia Richard said in a phone interview. “I take that responsibility of the office very seriously.”

The state leases lands for other purposes, such as grazing and renewable energy, but oil and gas account for more than 90 percent of the leasing revenue, putting about $900 million a year in the state’s coffers. Most of that money goes toward education. The land office is in charge of oil and gas leases on public lands, the Oil Conservation Division regulates the industry statewide, and the state Environment Department oversees the emissions, Garcia Richard said.

A legal team combed through all the oil and gas contracts to see where the operators might be out of compliance, Garcia Richard said. After researching the history, she said she’s certain none of her predecessors had done such a review. The office can’t create new leasing terms for oil and gas operators because those contracts are fixed in state law, she said, noting the Legislature set most of the provisions in the 1970s.

However, Garcia Richard said officials can make certain all the provisions are enforced, including the full remediation of the site, which might involve removing leftover well pads, batteries and other junk, and cleaning up any contamination. “If folks aren’t compliant, we are taking a series of actions to ensure they’re compliant,” Garcia Richard said.

A New Mexico Oil & Gas Association spokesman said the industry is committed to operating safely and responsibly on state lands. “Ultimately, enforcement creates opportunities for greater partnership and dialogue to ensure the well-being and longevity of these vital resources,” spokesman Robert McEntyre wrote in an email. An environmental advocate said any increased oversight of this industry in New Mexico is needed. “I’m sure what Commissioner Garcia Richard is doing is almost certainly more than what has been done in the past, and I commend that,” said Charles de Saillan, an attorney with the New Mexico Environmental Law Center.

The land office’s push to hold these operators more accountable aligns with other state efforts to regulate the industry, such as the Oil Conservation Division getting more enforcement power and the Governor’s Office drafting a climate plan that includes measures to curb fossil fuel emissions, de Saillan said. Companies that are out of compliance receive letters describing the violations and what they must do to fix them, said Ari Biernoff, the land office’s general counsel. If they fail to respond or if they deny the violations, legal action is taken, Biernoff said.

“Going to court is a last resort for us,” Biernoff said.

An operator has five years to produce oil and gas on the land after signing the lease, Biernoff said. A lease continues indefinitely as long as the site yields fossil fuel, he said, adding some of the state’s leases date to the 1950s. If an operation is idled for months or barely produces, the state can cancel the lease, Biernoff said. One example is the state’s lawsuit against Cross Border Resources, a Nevada corporation whose main business office is in Dallas.

At one site in Chaves County, Cross Border left behind junk, debris and at least five unplugged abandoned wells, the lawsuit said. The state canceled the lease in 2019 because of minuscule output for three years, the lawsuit said. The company trespassed after the lease was voided and ran wells with minimal production, according to the lawsuit. In a different lawsuit, the state sued Cross Border and David R. Stearns for similar alleged infractions of unplugged wells and discarded junk at a site roughly five miles from the other site where Cross Border operated.

The company filed for bankruptcy protection a few years ago, reorganized under Chapter 11 and operated in New Mexico through summer 2020, Biernoff said.

“This highlights one of the problems we are confronting head on,” Biernoff said. “There are not enough safeguards to prevent companies from using and damaging state trust land, failing to clean up their mess and then walking away.”

Garcia Richard wrote in an email she thought it was necessary to bar new commercial sales of freshwater from public lands as a conservation measure. Companies pumping freshwater from the ground can have a huge impact on small communities near the Permian Basin that are vying for that water, she wrote. If the wells run dry — an increasing threat amid climate change — there is no economical process to produce freshwater that is safe to drink or irrigate crops, Garcia Richard wrote.

“If we are reliant on an economy based on getting oil out of the ground, we should be prioritizing the use of recycled or produced water to do so,” Garcia Richard wrote. “Our future generations are counting on us to make smart decisions that will profoundly affect their quality of life.”
Source: “New Mexico Land Commissioner Increases Oversight Of Oil And Gas Operators”

Despite Headwinds Retailers Expect a Return to Normal in 2021

February 5, 2021 by CARNM

The pandemic forced retailers to innovate in both offerings and store formats.

Even after 2020’s struggles, the retail real estate industry is optimistic about recovery and the future of stores and shopping centers, according to a new ICSC survey of retailers and commercial real estate companies.
Though the pandemic led to sharp declines in foot traffic, 60% of CRE leaders and 55% of retailers expect a return to pre-pandemic levels by the end of the year.
If anything, the pandemic forced retailers to innovate in both offerings and store formats. A large amount, two-thirds of respondents, began offering in-store fulfillment of online orders during the pandemic. Seventy-three percent of small retailers implemented a click-and-collect option, while 88% of shopping centers are being used to fulfill online orders, according to CRE leaders, according to ICSC. Almost all respondents (99%) indicated that their stores fulfilled online orders in some form or fashion.
Looking forward, both retailers and CRE firms are planning targeted investments in digital marketing and online storefronts to keep up with the convergence of online and physical retail. Seventy-eight percent of large retailers say their marketing efforts will target the digital customer experience, while 73% said in-store sales were a priority, according to ICSC.
Convenience is also a priority. Forty-six percent of retailers and 50% of CRE firms have worked to increase accessibility for quick trips. Around 75% of retailers have used their parking lots to accommodate curbside pickup.
Safety will also remain a priority to retailers and CRE leaders. Even after vaccines are widespread, nearly 80% of small CRE firms are likely to continue using plexiglass barriers to protect employees and shoppers over the next 12 months, according to ICSC. Seventy-six percent plan to continue shortened hours, while 53% of larger firms will continue shortened hours. Seventy-six percent of large CRE firms have prioritized increased sanitation (76%) over other restrictions. Most independent retailers, 58%, are prioritizing crowd management.
While the ICSC survey paints an optimistic picture of retail, there are clearly stresses in this segment of commercial real estate.
Approximately 40% of the CFOs surveyed by global accounting firm BDO say they are reevaluating their real estate footprint this year, as high unemployment rates and stalled COVID-19 vaccination strategies have brands girding for a lengthy period of reduced consumer spending.
A mere 37% of middle-market retailers anticipated increased revenue this year, a sharp decline from 83% of respondents last year in the same category. And only 49% of those polled have enough cash reserves to cover the next three months or less of expenses. Over the last six months, 94% of retailers secured external financing—a significantly higher percentage than expected—and 93% say they plan to in the next six months, with proceeds from a sale or divestment the most likely sources of outside capital.
Separately, research from Moody’s Analytics REIS showed that most of the decline in retail rents and increased vacancies will happen in 2021.
The retail vacancy rate increased to 10.5% in Q4, a slight uptick from 10.4% in the third quarter and the highest level since 2013, while mall vacancies also jumped another 0.4% to 10.5%, the highest level in more than two decades, according to Moody’s.
Average mall asking rents slumped 0.8% in Q4 and 1.8% over the course of the year. Moody’s expects malls will suffer more than neighborhood and community shopping centers as they bear the ongoing weight of department store anchors closing and the slow struggle of “experiential” tenants like trampoline parks or entertainment companies to rebound in the wake of the COVID-19 crisis.
As retailer bankruptcies continue to stack up and the pandemic continues, Moody’s predicts even steeper declines in 2021, saying many retailers could get “crushed” with the surge in COVID cases.
Source: “Despite Headwinds Retailers Expect a Return to Normal in 2021“

At 70%, Renewals Dominate Office Leasing

February 5, 2021 by CARNM

A “wait-and-see” approach characterizes most companies’ strategies in 2021.

Lease renewals accounted for 70% of office leasing activity in the US in 2020, a significant uptick from 2019 levels.
A JLL report released this week reveals that most companies are adopting a wait-and-see approach to lease strategies as COVID-19 continues to throw a wrench into planning. Generally, office users have favored smaller footprints over the last year, supporting the idea that demand would shrink in response to WFH and remote work policies.
Pre-pandemic renewals made up around 29% of total office leasing activity. About 43% of renewals in the Q4 were five years or shorter in duration, and weighted-average lease terms are also slipping.
“There’s a short-term nature to many leases, with an increase in renegotiations for more favorable terms in the interim,” explains Phil Ryan, US office research director for JLL. The gap between where US office rent levels are and where they end up after discounts and other incentives has widened in New York, for instance, to 28 percent in the third quarter of 2020 from 6 percent in 2008, according to JLL.
Companies are also taking less space whether the lease is a renewal or a new one.
The 100 largest office leases last year totaled 29 million square feet, a 32% decrease year-over-year, according to CBRE research. Renewals accounted for 43% of those top transactions. Tech drove leasing in 2020, but all industries saw a drop in leasing activity with the exception of business services (which experienced a 7% increase in average lease size).
Whitley Collins, Global President of CBRE Advisory & Transaction Services, anticipates that activity likely will perk up in 2021 as the vaccines roll out and the economy improves, but in the meantime “companies will map out their long-term office strategies with new emphasis on determining the most efficient use of workspace with more employees working flexibly from multiple locations.”
Source: “At 70%, Renewals Dominate Office Leasing“