Archives for September 2021

One-Third Of All Digital Retail Sales Will Be Fulfilled By Stores

September 22, 2021 by CARNM

Supporting high volumes requires brick-and-mortar locations to accommodate a range of distribution and fulfillment options.

Nearly a third of all digital retail transactions will be fulfilled by a physical bricks-and-mortar location, according to new research from Colliers, as more and more online orders become connected to stores. In 2020, just under 22% of digital sales were fulfilled by omnichannel methods.

“This continuity has compelled retailers to adapt their store operations to manage the influx,” a recent retail report released by the firm notes. “Supporting high volumes requires brick-and-mortar locations to accommodate a range of distribution and fulfillment options, prioritizing a dedicated space for packaging and shipping, in addition to having adequate staff to process and handle orders.”

That fulfillment could run the gamut from curbside pickup and in-store collection, both of which enjoyed a major boom during the pandemic, to direct shipment to consumers’ homes. Target has reported that sales through its drive-up service went up by a staggering 600% last year alone.

Despite the boom in omnichannel fulfillment, there are growing pains – at least from the consumer’s perspective. Colliers data shows that 43% of shoppers reported at least one issue using omnichannel services, “suggesting retailers need to further streamline this shopping experience,” the report notes.

And as omnichannel demand has boomed against the backdrop of a tightening labor market, many retailers are contemplating investments in machine learning and AI to address those concerns. According to McKinsey, using AI-enabled supply chain management allowed early adopters of that tech to improve logistics costs by 15%, inventory levels by 35%, and service levels by 65%.

“The pandemic provided retailers with a testing ground for automation technologies, determining their ability to manage distribution and warehouse fulfillment efficiently,” the Colliers report notes. “Despite initial fears, implementing automation is expected to create more new jobs than it replaces by 2025. This is good news for per diem employees, as it will require employers to retrain and upskill staff to ensure they are properly equipped for the future of work.”

Grocers are already betting big on automation, as evidenced by Albertsons’ partnership with Takeoff Technologies to create micro-fulfillment centers to specifically post online orders. Stop & Shop, Meijer and Target are all also following suit with plans to begin building their own MFCs to increase digital reach.

Such tools will be critical for grocery chains to meet still-burgeoning demand for online orders and deliveries quickly and efficiently, according to JLL.

“Micro-fulfillment centers (also known as MFCs) aren’t new, but they are a growing solution for many grocers,” the report notes. “MFCs provide flexibility as they are much smaller in size than a typical industrial-grade fulfillment center. They can be put into dark stores, adjacent to existing stores, or located centrally to multiple stores as a hub-and-spoke model.”

Source: “One-Third Of All Digital Retail Sales Will Be Fulfilled By Stores“

Uh-Oh, Growth is Slowing. Is CRE Next?

September 22, 2021 by CARNM

Some experts say it’s too early to fret.

Nobody likes being corrected, especially an entire industry. But some are suggesting that one is overdue in commercial real estate. And some outside data seem to say that things are slowing.

JP Morgan cut its third quarter GDP annualized growth forecast from 7% to 5%, Dow Jones reported. Morgan Stanley chief US equity strategist Mike Wilson reportedly said that as fiscal stimulus ends, the S&P 500 could see a 20% correction, according to The Street. A drop in equities could make them more appealing and draw some money away from alternative assets like real estate.

For some, that future is already here.

“For the first time in over a year, clients are reporting some softness in sale prices in what had otherwise been very strong markets, such as senior housing and apartments,” Kyle Hauberg, director of Dykema’s real estate and environmental services department, tells GlobeSt.com. “This is likely due to a combination of very aggressive pricing by sellers and some hesitation on the longer-term outlook by buyers and investors. Industrial continues to be very strong.”

“Certainly, we are seeing cap rates of select asset types, particularly apartments and warehouses, compress at such a tremendous rate that the trajectory is realistically unsustainable, especially if you believe interest rates will increase over the intermediate term,” Aaron Halfacre, CEO of Modiv, tells GlobeSt.com. “That said, buying opportunities do exist but your strategy needs to be focused and your underwriting thorough. Even with tighter cap rates, we are seeing compelling opportunities in the single-tenant net lease sector.”

Others also suggest a measured and detailed approach. “JPM’s forecasts around Q3 and Q4 are certainly relevant and indicative for the near term,” Brian Ward, CEO of Trimont, tells GlobeSt.com. “However, commercial real estate is inherently a long-term asset class, and unless there are certain transactions priced to perfection requiring near-term execution, then what goes on in Q3 and Q4 should not make a lot of difference.”

“We believe that the recovery momentum will not slow as much given where we started before the pandemic and all the money pumped into the economy from the government,” George Smith Partners managing director Gary Mozer says. “Growth is slowing because of supply chain issues, however conversely, commercial real estate transactions are speeding up because of potential changes to the tax code such as loss of 1031 tax treatment and increasing capital gains rate. This increase in transaction volume should offset much of the effects of the delta variant.”

Mozer adds that given the amount of money in the monetary system and the pressure it creates to invest, “investors are trying to invest in hard assets as an inflation hedge.” He adds, “Perception that the stock market is fully priced, and the bond markets are producing nominal yields, investors are pouring money into real estate. Real estate has historically outperformed on a risk-adjusted basis when economies are expanding, and inflation is diminishing returns.”

Mozer and others do say that some sectors are feeling the pinch.

“Offices are still recovering from the impacts of the pandemic,” Dianne Crocker, principal analyst at Lightbox, tells GlobeSt.com. “With low occupancy daily, corporations are postponing back to work plans.” And yet, she adds that “retail reinvention is well underway as companies are redesigning their spaces to appeal to today’s shoppers demanding more of an experiential visit than traditional brick and mortar.”

Source: “Uh-Oh, Growth is Slowing. Is CRE Next?“

How to Identify Common Fire Sprinkler Problems

September 21, 2021 by CARNM

Managers need to ensure buildings are regularly inspected and maintained in proper working order.

Automatic sprinkler systems play an important part in the safety of the occupants of institutional and commercial facilities. These systems are designed to limit the spread of a fire and contain it to the compartment of origin.

But in many facilities, problems can arise. If the sprinkler system has not been designed, installed and maintained properly, the fire can spread, increasing the risk of damage to the building and harm to occupants.

Looking for trouble

Sprinkler systems must be designed properly in accordance with the local building code and NFPA 13 Standard for the Installation of Sprinkler Systems. In addition to a properly designed sprinkler system, the sprinkler contractor must install the sprinkler system in accordance with the design. When the design changes or unforeseen interferences arise, the contractor and designer must come up with solutions that meet the code requirements.

Once a sprinkler system has been successfully installed, the responsibility of maintaining it falls to the building owner. According to the International Fire Code (IFC) 2015 Edition, 901.6 Inspection, Testing and Maintenance, the fire detection, alarm, and extinguishing systems, mechanical smoke exhaust systems, and smoke and heat vents must be maintained in an operative condition at all times and shall be replaced or repaired where defective.

The IFC goes on to require that NFPA 25 Standard for the Inspection, Testing and Maintenance of Water-Based Fire Protection Systems be used to keep an automatic sprinkler system in good working order.

As a fire protection engineer, I have participated in all phases of automatic sprinkler system design, installation, inspection, testing, and maintenance. While local jurisdictions require fire protection professionals to be involved in the design and installation process, this is enforced through the permitting process. The inspection, testing and maintenance typically is left to the building owner.

From my experience, this is where the process is most lacking. We regularly inspect buildings and identify many deficiencies with sprinkler systems. Although some issues are technical and require a fire protection professional to work through, many other problems can be identified by maintenance and engineering managers and front-line technicians.

Spotlight on violations

What should managers and their staff look for when it comes to fire sprinklers? To maintain buildings in the safest condition, managers need to ensure buildings are regularly inspected in accordance with NFPA 25 and maintained in proper working order.

During our inspections, we repeatedly see the problems listed below. The items are relatively easy to identify and should not cost much to repair.

NFPA 13, 2019 Edition, “10.2.5.3 Minimum Distances from Walls. Sprinklers shall be located a minimum of 4 inches from a wall.” This is required for all types of sprinklers — pendant, upright and sidewall. Sprinklers located closer than 4 inches to a wall might be subjected to cooler air and result in a delayed activation. We typically see this violation after a minor remodel where a partition was relocated and a fire protection professional was not brought in.

NFPA 13, 2019 Edition, “16.2.3.2 Where cover plates on concealed sprinklers have been painted by other than the sprinkler manufacturer, the cover plate shall be replaced.” In buildings or spaces that use concealed sprinkler heads, an aesthetically pleasing cover plate is used to conceal the sprinkler. The cover plates must be listed for use with the sprinkler to ensure proper activation and deployment of the sprinkler. The cover plate shall not be painted by anyone other than the manufacturer.

In many buildings we survey, cover plates have been painted over. In a time-saving effort, the contractor tried to paint around the cover plate but still got paint on it or painted the entire cover plate. Similar to a window that is painted shut, a small amount of paint can adhere the cover plate to the ceiling, resulting in delayed activation of the sprinkler head or possible obstruction of the spray when it is activated.

NFPA 13, 2019 Edition, “7.2.5.2 Painting. Sprinkler shall only be painted by the sprinkler manufacturer.” When sprinklers have been painted, whether accidentally or purposely by persons other than the manufacturer, it can cause delayed activation or malfunction. Once the sprinkler has been painted, it is not acceptable to use solvent or other means to remove the paint.

According to NFPA 13, 2019 Edition, “16.2.3.1 Where sprinklers have had paint applied by other than the sprinkler manufacturer, they shall be replaced with new listed sprinklers of the same characteristics, including K-factor, thermal response, and water distribution.” NFPA 25 Standard for the Inspection, Testing and Maintenance of Water Based Fire Protection Systems, 2017 Edition, Table A.3.3.7, notes that, “One sprinkler and less than 50 percent of sprinklers in compartment is heavily loaded or corroded; painted operating element, bulb, deflector, or cover plate” is a critical deficiency.

A critical deficiency is defined as “a deficiency that, if not corrected, can have a material effect on the ability of the fire protection system or unit to function as intended in a fire event.” Table A.3.3.7 notes that “Two or more sprinklers in compartment are heavily loaded or corroded; painted operating element, bulb, deflector, or cover plate” is an impairment. An impairment is defined as “a condition where a fire protection system or unit or portion thereof is out of order, and the condition can result in the fire protection system or unit not functioning in a fire event.”

NFPA 13, 2019 Edition, “16.2.5.4 The use of caulking or glue to seal the penetration or to affix the components of a recessed escutcheon or concealed cover plate shall not be permitted.” This issue can be difficult to detect because the glue or caulk is not always visible. But once a technician has seen it on one sprinkler, he or she can look closely at others to see if the problem is widespread.

The problem with gluing or caulking the recessed escutcheon or concealed cover plate to the ceiling is that this step violates the manufacturer’s instructions. For the concealed head cover plate, the glue or caulk will block the heat from getting to the head, and if the head does activate, then the cover plate can block the spray pattern and delivery of water to the fire.

NFPA 25, 2017 Edition, “5.2.1.1.5 Escutcheons and cover plates for recessed, flush, and concealed sprinklers shall be replaced with their listed escutcheon or cover plate if found missing during the inspection.” During our inspections, we frequently see missing escutcheon or cover plates. The escutcheon and cover plates are part of the listed sprinkler assembly and are required. This situation is a concern because hot gases from a fire can escape into the space above the ceiling.

NFPA 25 lists this as a noncritical deficiency because the activation time of the sprinkler should not be impacted. A noncritical deficiency is defined as “a deficiency that does not have a material effect on the ability of the fire protection system or unit to function in a fire event, but correction is needed to meet the requirements of this standard or for the proper inspection, testing, and maintenance of the system or unit.”

Source: “How to Identify Common Fire Sprinkler Problems“

Net Lease’s Love Affair With Industrial

September 21, 2021 by CARNM

Fundamentals are surging and the capital circling this space has gotten very aggressive.

Earlier this summer, Bridge Industrial acquired a future development site located in an infill market close to O’Hare International Airport in Chicago—an area that is very difficult to source industrial product for obvious reasons. How did Bridge Industrial accomplish this feat? It struck a sales leaseback deal with a company that was planning to vacate its building and didn’t care if it was demolished once it was gone. Bridge plans to build a state-of-the-art industrial facility in its place that can accommodate many different industrial uses.

At first glance this could just be a story about fortuitous timing. The seller, Nu-Way Industries, is currently looking for a new facility for itself and will remain at the site until its lease runs out.

But dig a little deeper and you will find much larger trends at play, namely the growing number of industrial sale leaseback transactions such as this one. These deals accounted for 7% of the total sales closed last year and 9% of property trades made since the start of this year, according to a mid-year report by CommercialEdge. In general, sale leasebacks are a way for companies to monetize their real estate, allowing them to stay in the building while using the proceeds from the sale of their property to grow their business. But dig deeper even more. While that is surely one of the drivers behind the increase in industrial sale leasebacks, it is not the only.

Simply put, there is so much capital circling the industrial asset class that buyers are making offers for properties that owners could have only dreamed of a few years ago.

“Finding capital is not an issue today,” says Adam Roth, a director of NAI Global Logistics at NAI Hiffman. “It is all about finding deals that pencil out. We are seeing more sale leasebacks because of the aggressive nature of the capital that is being placed.”

It is no accident that the industrial asset class is leading the way with these transactions. Simply put, the sector and its robust fundamentals can do no wrong in the eyes of net lease investors.

Warehouse rents rose by a record 4% in the second quarter while vacancies fell to 4.1%, another record, according to Prologis’ recent Industrial Business Indicator.

For 2021 as a whole, Prologis is predicting net effective market rent growth will set a new high that exceeds 10%.

The surge is happening as supply chains race to restock amid rapid consumer purchasing, which in turn is creating strong future demand. For the first time in more than five years in the US, the REIT sees no markets where supply appears to be a threat to local vacancies or rents.

Meanwhile, tenants, at least the ones that do business with Prologis, are brushing off the rising rents. On Prologis’ Q2 earnings call, Chief Customer Officer Mike Curless said the competition for space among customers is as fierce as he has seen it. He added that Prologis probably wouldn’t lose much business if it did raise rents. Overall, less than 5% of customers are leaving due to higher rents. “I got to tell you the rent becomes a very minor discussion. Just the availability and accessibility of that space becomes the priority,” he said.

To help meet the rapid demand, Prologis says developers are working hard to monetize entitled land, but new starts do not appear significant enough to weigh on rental rate levels and growth. In fact, developers are struggling to secure suitable development land and planning permission for logistics facilities in many markets globally and leasing decisions are being put on hold due to a lack of the right space, according to JLL’s inaugural survey on global logistics real estate.

More than two out of every five respondents, 43%, said they consider ‘limited availability of entitled land’ as the number one constraint on occupier demand. Over one out of every three cited a ‘lack of available speculative buildings’ as the main constraint.

Hence, the increase in sale leasebacks and their pricing. Since the beginning of 2020, the price of a sale leaseback averaged $116 per square foot—significantly higher than the overall average of $93 per square foot of industrial space sold during that same timeframe, according to CommercialEdge.

Furthermore, as of May 31, $18.1 billion in transactions have closed across the US industrial markets. In that timeframe, the average sale price per square foot for industrial space rested at $103 per square foot by May—16.3% higher than May 2020. And, with investor interest for industrial assets expected to remain strong for the foreseeable future, sales activity in 2021 could match—or even exceed—the record $44.4 billion in transactions closed during 2020, CommercialEdge says.

Can these trends continue? Almost uniformly experts say yes they can. Usually they point to e-commerce as a significant driver and in-deed that is true.

Industrial “never experienced a setback in terms of the Covid pandemic recession,” DWS Group’s head of Americas real estate Todd Henderson says, primarily because of the dramatic shift in the supply chains to support e-commerce. “Pre-pandemic, e-commerce had been running between 11% and 13% of retail sales, peaking at the mid-20s and then falling back a bit. “But it’s still almost double where it was before. That translates into industrial demand, and a significant amount of industrial demand.”

NAI Hiffman’s Roth, though, says there are multiple other indicators that signify continued strong demand for industrial space. “I’ve learned over the last 25 years that when something happens in transportation, trucking and retail, it will hit industrial a year-and-a-half later. I call it the Rule of 1.5.” In other words, events from a year-and-a-half ago are influencing industrial now.

Transportation costs, for instance, are the biggest dictator in site selection for distribution facilities. “Commercial real estate costs are just a rounding error.” In December 2017, Regulations were passed requiring truck drivers to log their hours into an electronic logging device that made it difficult to fudge their hours. “That took 8% to 10% out of capacity of truck drivers, which in turn impacted the haul costs to distributors,” Roth said. “There are two ways to offset the length of the haul. One is modal transport, the other is having more real estate. And real estate costs are a lot lower than transport costs.”

Today the rule of 1.5 is still in play. Factors that will influence demand over the next eighteen months include insurance costs, which are really squeezing the trucking industry at the month and the growing unreliability of the international supply line, Roth says. “As the international supply chain becomes more expensive and unreliable, domestic manufacturing becomes more competitive. All of this bodes extremely well for industrial real estate and absorption.”

Source: “Net Lease’s Love Affair With Industrial“