Archives for May 2022

Occupancy rates are still recovering and costs remain a concern, but the long-term outlook for the sector remains positive.

Investors are eager to buy skilled nursing facilities–and prices are still high, even though many properties are still recovering from spikes in occupancy that took place during the height of the pandemic.

Skilled nursing properties are the one of most complicated kinds of housing for seniors. These communities also suffered some of the worst of the coronavirus pandemic, and many have not yet recovered.

“The market fundamentals don’t necessarily support the prices—but they haven’t fallen yet,” says Beth Burnham Mace, chief economist and director of outreach for the National Investment Center for Seniors Housing & Care (NIC), headquartered in Annapolis, Md.

Investors paid an average of $93,000 per bed for skilled nursing facilities in 2021, according to data from Real Capital Analytics, based in New York City. That’s 10 percent higher than the price investors paid in 2020.

“It’s above the pre-pandemic level,” says Mace. “The pricing on a per-unit basis has held up. There has been a lot of buyer interest.”

The high prices these buyers are paying might seem strange, considering the stress that pandemic put on skilled nursing communities. Their elderly residents were especially vulnerable to the coronavirus. Many communities shut their doors to visitors in an effort to keep these seniors protected.

The demand for skilled nursing beds fell sharply during the pandemic and has only begun to recover. Just 77.6 percent were occupied in the first quarter of 2022, according to NIC. That up from 74.1 percent the year before. But it’s still much lower than 86.6 percent before the pandemic. It’s also much lower than the occupancy rates at other types of seniors housing like assisted living and independent living.

“Skilled nursing facilities lost more occupancy than seniors housing overall,” says Mace.

Skilled nursing facilities are also struggling to find qualified staff. Many are having to increase the amount they pay to keep employees from leaving.

Help from government programs helped many skilled nursing facilities make up for the loss of income from empty beds and the rising cost of providing care and housing to their remaining residents.

That government support may not be available for much longer. “The government funding provided during the pandemic is starting to run out,” says Mace. “This may prompt some owners that were able to stay afloat during the times of additional government support to eventually sell.  Some owners are starting to think about selling or lowering their exposure to skilled nursing.”

Even with government help, the combination of rising property prices and lower income from rents have cut into the yield that investors get from skilled nursing properties.

That may motivate some owners to sell, according to Mace. It might also help attract new buyers hungry for yield who feel they can navigate the complexity of providing skilled nursing care and the government programs that help pay for it.

The cap rates investors are willing to accept have been shrinking since before the pandemic, from more than 12.7 percent at the end of 2018 down to about 12.0 percent in the first half of 2022, according to CBRE’s Seniors Housing & Care Investor Survey, conducted in February 2022. Cap rates fell 19 basis points compared to the year before in the last year alone.

The average cap rates for skilled nursing facilities averaged 10.7 percent for core, class-A properties, down 17 basis points from the year before, according to CBRE’s survey. Core, class-B averaged 11.5 percent, down 17 basis points and core, class-C averaged 13.3 percent, down 2 basis points.

“Some owners may be selling but others are looking to buy aggressively and look for higher yields in real estate, which skilled nursing properties can provide relative to other types of real estate,” says Mace.

Source: “Investment Activity in the Skilled Nursing Sector is Ramping Back Up“

The model is being used to test the waters and may not become permanent.

A modern hub and spoke model is slowly emerging through flexible office providers as companies reconsider their optimal CRE footprint, according to one industry expert.

“Most of our clients are telling us that they are actually looking to consolidate into locations – partly for efficiency reasons, but also because if people are going to be expected to come together when they’re in the office, then coming all into the same office as much as possible is probably the best way forward down the line,” said Julie Whelan, Global Lead of Occupier Thought Leadership at CBRE, on the firm’s Weekly Take podcast.

And Whelan says some of those large organizations are engaging with flex office providers that are scaled across the US and globally to create on-demand models or all-access subscription passes for their space.

“If they use it, they pay for it, and if they don’t, they don’t,” Whelan said. “And the beauty of that is that after six months or twelve months, the organization can look at the use patterns and actually determine if this was a success or if they need to change their model going forward.”

Whelan cautions that while CBRE “absolutely” thinks the model could pick up serious steam down the line, “it is very much being used to test the waters, and certainly not anything that we would consider to be a solid trend at the moment.”

Office usage is up: physical office usage hit 40.5% nationally last month, the highest since the onset of the COVID-19 pandemic in 2020., according to data from Kastle Systems. And the physical utilization rate has been climbing since then.

“As (return-to-office) plans ramp up, we expect office physical utilization to climb at least in the short run,” write Moody’s Analytics researchers Xiaodi Li, Victor Calanog and Kevin Fagan.  “However, a multitude of surveys and early indications from initial post-COVID-19 work arrangements, it is likely that some workers will average around two days less in the office, which may ultimately form somewhat of a fuzzy ceiling at around 60%, with continued wide variance by office market, firm industry, and individual job type.”

For central business districts, the calculus over how to use space has been drastically altered. The gap between overall suburban and CBD vacancy levels narrowed from 190 to 50 basis points over seven quarters ending in Q4 2021, according to Colliers, while absorption in CBD markets clocked in at negative 719,525 square feet in the fourth quarter of last year.

“The ratio of employees to office space is forever changed,” Whelan says. “In past cycles, you have always had a lot of new office development that’s come online to be able to satisfy all the new job growth that’s happening throughout that cycle. Well, we believe going forward is that perhaps that’s not the case. Perhaps we actually don’t need a lot more office space. However, we do need the right type of office space.”

The trick will be figuring out the latter question, according to CBRE. Historically, office buildings in CBDs have relied on large, long-term, creditworthy tenants, but now those tenants – who Whelan say have been the “lifeblood” of those buildings – want something different.

“They still absolutely desire office space,” Whelan says. “However, they desire landlords that are going to be partners with them on their journey of, really, their employee experience…things like food and beverage, and fitness facilities, and green space, are, of course, very important. Those were always the bedrock of a class-A, quality office space, and they will continue to be in the future. However, there are real things that are differentiating some buildings right now.”

Specifically, the question of “what is Class A space” is changing moment to moment. Health and wellness has assumed center stage, with indoor air quality being a big concern, as well as sustainability and net-zero goals.

“There are a lot of things that are much more operational in nature, not to say even, flexibility,” Whelan said. “That’s a huge thing that we’re seeing as a differentiator for buildings where, yes, you may have that 100,000-foot tenant that’s still going to come into your building. But they might want to take down 60,000 square feet in that long term committed way, and then 40,000 of it be a little bit more flexible in order to help them ebb and flow with the needs of their business cycle, or whatever the uncertainty is that they’re dealing with. So these are very different things that are really defining what that next level of building is, that tenants are really after. And that’s what these buildings in these CBD’s need to do to really attract that next generation of talent.”

Source: “A New Hub and Spoke Model Emerges As Office Occupiers Rethink Plans”

Powered by robotic technology, micro-fulfillment centers can be in a parking lot or in the back of an existing store.

Grocery is the last frontier of e-commerce expansion. While online shopping has rapidly attracted consumers and forced the evolution of retail, online grocery shopping has yet to usurp a significant portion of the market.

Back in 2019, only about 3% of grocery sales took place online, and shoppers weren’t enthusiastic about the concept of grocery shopping over the internet. A survey from Bain & Co. found that only 6% of consumers at the time planned to complete at least one online grocery order per month. Consumers hadn’t shown the same fervency for online grocery shopping as they had in other retail categories because the process was cumbersome and clunky. Deloitte had uncovered the central pain point almost a decade ago in a 2013 Supermarket E-commerce survey, saying that the reason why most consumers buy food, households consumables and personal items in a physical store is because “consumer packaged goods companies and retailers [had] yet to create a compelling online or mobile shopping experience for the majority of consumers.”

Micro-fulfillment is the solution. In as small as 3,000 square feet, micro-fulfillment centers have been solving these pain points for grocery retailers and creating a more seamless customer experience. While the pandemic and stay-at-home restrictions have driven more consumers to fill virtual shopping carts with groceries, micro-fulfillment centers have played a crucial role in forging a pathway to a future for online grocery shopping.

SOLVING GROCERY’S E-COMMERCE PROBLEM

Micro-fulfillment provides two value propositions for grocers, according to Ethan Chernofsky, VP of marketing at Placer.ai and an expert in the micro-fulfillment space. First, it automates the process of fulfilling orders through robotics technology, and second, it solves a spatial problem in that the facilities are located near or within an existing grocery store, allowing orders to meet the one- or two-hour expectation of grocery delivery. “Micro-fulfillment’s promise is to enable fulfillment in a much smaller space,” says Chernofsky. “That is what makes this so exciting. It fulfills the promise of one-hour delivery by bringing online grocery as close to the end user as possible.”

Micro-fulfillment centers also allow grocers to narrow the focus of online shopping. “During the pandemic, we learned there are certain items that people don’t want to buy online. It might be an annoying process; it might be that they prefer doing it offline; it might be they want to touch and feel the products,” says Chernofsky. However, there are also a myriad of grocery items that consumers are willing to buy online, like paper products and dry or boxed food products, like crackers, cereal or rice. Micro-fulfillment centers can be tailored to serve orders of goods in these categories. “If you are buying paper towels, toilet paper and cereal and you want those things quickly, there is no real value in going to the supermarket to get those few items,” says Chernofsky. “What grocery stores can do with online fulfillment is very efficiently and quickly solve that problem, and, perhaps even most importantly, they can solve it almost anywhere.”

Now more than ever, grocery retailers are furiously looking for solutions to streamline the backend system that processes these orders. In the last two years, the growth in online sales has been significant. Up from 3% in 2019, online sales accounted for 8.1% of total grocery sales in 2020 and 9.5% of total grocery sales in 2021. By 2026, research from Mercatus expects online grocery sales volume will grow to 20% of the market.

Grocers need to rapidly evolve and invest in last-mile logistics technologies, like micro-fulfillment, to meet demand from this growing group of customers. With the expectation that online orders will continue to increase over the next five years, grocers are looking to alleviate the pain points in the shopping process today. “Micro-fulfillment makes the speed and convenience of online that much more palpable,” says Chernofsky.

INSIDE MICRO-FULFILLMENT SPACES

Today, the typical grocery store has wide aisles and products stacked low, within arm’s reach. They are perfect for in-store shopping, but not adequate to accommodate online ordering. Plus, workers fulfilling online orders often create a negative in-store experience for offline shoppers. Warehouses, on the other hand, are large boxes in a separate location outside of the city center. While these spaces are conducive to fulfilling online orders, they fail in the last-mile delivery, taking too long to deliver products to users in a timely manner.

Micro-fulfillment centers bridge the divide. These are small-footprint facilities that can be located in the parking lot or in the back of an existing store. Excess space is retrofitted into a warehouse-type facility, but located close to the end-user to ensure speedy delivery times. “In a major city, the idea that you can take a small piece of real estate oriented towards items that people really want, want regularly and want quickly is a huge plus. It offers a lot of potential for that middle of the store experience,” says Chernofsky.

This is where the value proposition of a micro-fulfillment center really shines. The national industrial vacancy rate currently hovers around 4%, and it is even lower in some major metros; Los Angeles and the Inland Empire, the largest industrial markets in the country, have a 0.5% vacancy rate. Across the country, there is almost no warehouse space available. The small footprint of micro-fulfillment means that grocers can create distribution space in almost any city where there is already a brick-and-mortar presence. “It is not very easy to find big warehouses and it is not easy in major urban areas, but if I can plug them into the urban areas themselves, that is when things get exciting. The key then is deciding which products to get to people,” says Chernofsky.

Both investors and grocers are quickly waking up to the benefits of micro-fulfillment centers. Kroger, Albertsons and H-E-B are already utilizing this technology, and SoftBank has invested $2.8 billion in Norwegian robotics technology firm AutoStore, which allows warehouses to maximize space through automation. AutoStore’s clients already include British grocery chain Asda.

Using robotics technology, like that offered by AutoStore, grocers can convert a portion of a store or parking lot into a fulfillment center with products stacked from floor to ceiling. “In so doing, it can allow any retailers but particularly grocery stores, to maximize smaller spaces,” says Chernofsky, adding that from there, grocers can be strategic about what products they can stock in the fulfillment center. “When you get into urban areas, you have to get smaller and smarter about the merchandise you want to store.”

INFINITE APPLICATIONS

Micro-fulfillment isn’t exclusively beneficial to the grocery sector. It actually has a wide application for retailers. “When you recognize that there is a complementary component for specific products, it widens what micro-fulfillment can do. We often box it into the grocery space because that is one of the areas where we have seen an initial uptick, but the expansive areas where the technology can go is unbelievably significant,” says Chernofsky. “Grocery was an early adopter of micro-fulfillment, but the applications to the wider retail market make this really exciting.”

Chernofsky imagines that micro-fulfillment can solve a host of last-mile issues for retailers. A single shopping center, for example, could have a large portion of tenancy that struggles with last-mile fulfillment. These tenants could dedicate overlapping space to a micro-fulfillment center that would support online orders. “That might be a better utilization of space, especially if companies are downsizing the footprint that they use for a specific retail location,” says Chernofsky. “Micro-fulfillment is such an exciting technological step forward in that it brings so many opportunities to take fulfillment elements and put them in a wider array of spaces.”

Micro-fulfillment can also expand the potential uses of a retail location. Zoning restrictions limit industrial uses in retail-designated areas. It is one reason why there hasn’t been more adaptive reuse projects of obsolete and vacant retail boxes. Micro-fulfillment facilities, however, can exist within or next to a retail store, blurring the lines between these two uses and bringing the last-mile closer to the customer. “Micro-fulfillment is such an exciting technological step forward in that it brings so many opportunities to take fulfillment elements and put them in a wider array of spaces,” says Chernofsky, explaining that, ultimately, micro-fulfillment maximizes what a location can be utilized for.

Micro-fulfillment benefits grocers in that it allows for efficient fulfillment of online orders through automation, and it supports the speedy delivery of online orders because the facilities are located in populous areas. However, these are not the only benefits of micro-fulfillment. The technology can aid retailers in wide-scale distribution and last-mile logistics. This illustrates the adaptability of the technology—which is crucial to success in today’s retail market, where customers expect efficiency, accuracy and lightning-fast delivery. “We expect excellence everywhere. If we get bad apples in our grocery delivery, we don’t think, ‘it must have been a hard day at the grocery store.’ We think, ‘how dare you waste my money.’ Therefore, as a retailer, you have to think much more carefully about how you use technology to provide an optimal experience,” explains Chernofsky.

In many ways, micro-fulfillment represents an evolving supply chain. Today, the standard system requires a warehouse and a storefront—two separate locations, disconnected from one another. Micro-fulfillment offers something different. “It doesn’t demand you have a fulfillment center and another store,” says Chernofsky. “With micro-fulfillment, you can do both. That is where you get really exciting things moving forward.”

Source: “Micro-Fulfillment Centers Resolve Online Grocery’s Pain Points“