Archives for June 2022

Colorado-based Sierra Space plans to land some of its Dream Chaser flights in New Mexico, after the company announced on Tuesday it signed an agreement with Spaceport America.

Located in southern New Mexico and known for its anchor tenant Virgin Galactic, Spaceport America is one of the newest runways across the globe where the Dream Chaser can land efficiently, Sierra Space said in a news release. The runway at Spaceport America is 200 feet wide and 12,000 feet long.

“Spaceport America is enormously proud to combine efforts with Sierra Space,” Spaceport America Executive Director Scott McLaughlin said in the release. “As a potential landing site for the Dream Chaser spaceplane, we will continue to open affordable access to space for all in the United States and the world. We are excited to expand the partnership and working relationship with Sierra Space.”

The Dream Chaser is a “space utility vehicle” that is meant to serve multiple missions and is designed for the transportation of crew and cargo in low-Earth orbit.

Currently, Sierra Space’s Dream Chaser has a contract with NASA that starts in 2023 for cargo supply and return missions to deliver up to 12,000 pounds of cargo at one time to the International Space Station. Sierra Space said its Dream Chaser spacecraft is the only commercial spacecraft capable of low-gravity earth return to compatible commercial runways.

“Sierra Space is building the future of space – from transportation, to commercial space destinations and all of the emerging applications – to develop a vibrant, growing and accessible commercial space economy,” Sierra Space CEO Tom Vice said in a statement. “With that vision in mind, we are creating space-tech hubs within the commercial space ecosystem and adding Spaceport America as a prospective landing site for Dream Chaser to continue to open up affordable access to space for all.”

Sierra Space recently launched an astronaut training program led by a former NASA astronaut to lead a crewed version of Dream Chaser, according to the outlet SpaceNews. The company in February also signed agreements with Kanematsu Corp. and Oita Prefecture to study future landings at an airport in Japan for the Dream Chaser spacecraft.

Source: “CO-Based Commercial Space Firm to Land in New Mexico“

After seeing a windfall of flows in 2021, real estate ETFs have experienced net outflows of $2.1 billion so far in 2022.

Real estate ETFs that were riding high after a record high year of capital inflows in 2021 have seen the tide turn the other way with net outflows year-to-date in 2022 fueled by negative performance and broader market volatility. Despite these near-term headwinds, industry participants continue to believe the sector offers good opportunities for investors.

According to CFRA Research, real estate ETFs that welcomed $13.3 billion last year have since seen capital slip away with net outflows of $2.1 billion year-to-date through early June. Not surprising, real estate ETFs have been swept up in the sharp decline across the broader stock market. Many of the largest real estate ETFs that are down 20+ percent year-to-date as of mid-June.

“It has been a rollercoaster for real estate fund flows this year,” says David Auerbach, managing director of Armada ETF Advisors and portfolio manager of the Home Appreciation U.S. REIT ETF (HAUS). During first quarter, there was a bit of a frenzy into the markets based on coming out of COVID, while second quarter was the opposite with turmoil caused by high inflation and rising interest rates and the crisis in Russia and Ukraine.

“I think we have seen some investors move to the sidelines as they experience the ‘catch a falling knife’ type of market, but they are dabbling around quality names based on valuation or market strength,” says Auerbach. “I also believe that some investors are waiting for markets to stabilize, but it’s hard to see what catalyst will cause things to even out and get back to normal.”

Notably, a bulk of outflows across the roughly 60 real estate funds in the sector has been from a single passive ETF. According to CFRA Research, iShares US Real Estate ETF reported outflows of roughly $1.5 billion. The balance of real estate ETFs are reporting a mix of flows from negative or flat to continued positive levels. “On a slightly longer-term basis, the category has seen some nice growth with net flows of $17 billion for the three years ending May 31,” says Greg Kuhl, portfolio manager at Janus Henderson.

Buying opportunities ahead?

Given challenges in the market that include persistently high inflation, rising interest rates and fears of a recession, the third quarter could prove to be just as rocky as the second quarter. However, if the market sentiment shifts to one where the Federal Reserve is perceived to have a handle on inflation, then confidence could start returning to the markets, which could result in positive flows for the fourth quarter, notes Auerbach.

Investors typically like real estate ETFs as an investment vehicle that can deliver income, portfolio diversification and a potential hedge against inflation. For some, the downturn could present a buying opportunity. Many REITs saw a run-up in values in 2021 that have since dropped back. “I don’t think there is quite as much capital buying that dip as there was in the last couple of quarters, but there are those investors who do see this as a bargain opportunity,” says Alex Pettee of Hoya Capital. Hoya Capital has two real estate ETFs with its High Dividend Yield (RIET) and its Housing ETF (HOMZ). REIT fundamentals are very strong. On a pure multiple basis, REITs are as cheap as they’ve been since March of 2020, and before that, as cheap as they’ve been since 2013 or 2014, he adds.

Real estate ETFs also have been competing for investor capital with private vehicles, such as non-traded REITs, which have continued on their record fundraising pace in 2022. Non-traded REITs have traditionally touted greater stability because they are not subject to public market swings and holdings are not marked to market on a daily basis. However, non-traded REITs are reporting year-to-date returns of about 6 percent against real estate ETFs of -13 percent, notes Kuhl. “The underlying exposure of both non-traded REITs and real estate ETFs is commercial real estate that is very highly comparable. This means that either nontraded REITs will need to write down values, or that real estate ETFs are “on sale” by comparison,” he says.

Based on those metrics, Kuhl sees a scenario where investors could redeem out of their nontraded REIT holdings at 6 percent year-to-date and buy into effectively the same underlying assets via real estate ETFs at -13 percent year-to-date, capturing almost a 20 percent relative discount. “If this happens, it will result in more flows back into real estate ETFs,” he adds.

Evolving marketplace

Despite near-term hurdles, industry participants continue to remain optimistic about the fairly young sector and believe it is poised for further expansion. Real estate ETFs also are likely to benefit from the longer-term trend of investors shifting money from mutual funds to ETFs, which is still in the early stages. There is still roughly $150 to $200 billion in real estate mutual funds versus roughly $85 billion in real estate ETFs, estimates Pettee.

Although the current market is dominated by one giant player, there are a number of fairly new entrants that see opportunities to carve out a bigger foothold. Vanguard Real Estate ETF (VNQ) has roughly $41.5 billion in net assets in a total market with AUM that is currently around $85 billion. Schwab U.S. REIT ETF (SCHH) is a distant second at $6.3 billion.

“The real estate ETF market is heavily dominated by a few very large passive ETFs, which is part of the reason we’ve launched a vehicle in the space, as we believe there is ample room for a product aimed at investors who prefer a more targeted, forward-looking, ‘best ideas’ approach to commercial real estate,” says Kuhl. Janus Henderson launched its U.S. Real Estate ETF (JRE) in June 2021.

According to Kuhl, the median real estate ETF had returned, net of fees, about 5.5 percent annually on a three- and five-year basis ending May 31, 2022. “We find these longer-term historical returns underwhelming and they are another reason why we feel there is room for high-quality, actively-managed funds in this space,” he says.

In particular, investors seem to be gravitating towards a few key themes—income focused funds, actively managed funds and sector specific funds. “We also are seeing slow and steady growth in the more specialty products,” notes Pettee. “The key is to find that middle ground where it’s a unique enough strategy that it has that kind of interest and investment case to it, but it’s not so niche that the total investment marketplace is too small.” Given some of the current market challenges, it also is important for fund managers to have a good sales channel to reach a broader audience and be able to tell your story, he adds.

Managing expectations of investors in a rising interest rate environment poses another near-term challenge for fund managers. Conventional wisdom dictates that dividend-paying stocks such as REITs do not perform well during periods of rising interest rates. However, research shows that while REITs typically do have larger drawdowns at the onset of a rising rate cycle, they are quick to make up that ground and outperform general equities in subsequent quarters, notes Auerbach. “This is an important nuance and one of the reasons why investors should try and avoid reactionary responses in environments such as the one we are currently experiencing,” he says. “This said, not all property sectors will perform equally as markets begin to stabilize, and thus managers need to be hyper focused on fundamentals, valuation and balance sheet strength.”

Source: “Market Volatility Brings Real Estate ETF Momentum to a Halt“

The dynamics in the cold storage sector are complicated, but the outlook remains strong.

As online sales for groceries, meal delivery services, specialty perishable foods and the distribution of vaccines surged during the past two years, so did demand for cold storage properties, which prior to the pandemic occupied a niche space in the U.S. commercial real estate market. Now, with COVID-19 precautions and mitigation strategies increasingly becoming a thing of the past, is the demand for cold storage holding up?

Overall, there is still high demand for cold storage facilities amid end-users, leading to low vacancy and continued rent growth. The average vacancy for cold storage is around 3.5 percent today, according to New Jersey-based Marc Duval, managing director with JLL Capital Markets. That’s below the 4.2 percent average vacancy for traditional warehouse space, and in some markets, cold storage vacancy is close to zero. Core markets in the cold storage sector are those that typically have a high population, significant agricultural receipts, proximity to large ports and a limited amount of new cold storage space, Duval notes. That includes Jacksonville, Fla, Detroit and Southern New Jersey.

Extremely low cold storage vacancy reflects very healthy demand. And similar to the overall industrial market, Duval notes that this sector is also experiencing a flight to quality. Demand for new, state-of-the-art facilities is extremely high, as more than 50 percent of the existing infrastructure was built 30 years ago, he says. JLL is currently tracking 40 (proposed) cold storage projects nationally, but only 30 percent of them are under construction. “Due to high construction costs, complexities of building on speculation and challenging zoning ordinances—particularly building height, projects actually beginning construction will always be a fraction of what is proposed,” adds Duval.

Over the past two years, cold storage rents have grown by 27 percent, according to Healy. And cold storage lease terms tend to be longer than those for dry warehouses, given the highly specialized nature of these facilities, he adds.

In markets where land costs are higher and make up 50 or more percent of the total cost of the cold storage development project, rents can be north of $30 per sq. ft., says Duval.

Still in demand

As a result of these dynamics, cold storage continues to be in demand among commercial real estate investors.

Historically, the refrigerated warehouse sector has been dominated by a small group of cold storage REITs, including Americold Realty Trust, and third-party, publicly-traded refrigeration warehouse (PRW) logistics providers, like Lineage Logistics, Agile Cold Storage and NewCold.  But cold storage is now attracting both private equity and institutional capital. Sam Zell’s investment firm Equity Group Investments, for example, last year acquired an ownership stake in East Coast Warehouse, which operates 72 million cubic feet of temperature-controlled warehouse space.

In fact, the CBRE 2022 Investor Intention Survey reported that 39 percent of the firm’s survey participants indicated an interest in cold storage investment, up from 22 percent in 2021 and 7 percent in 2019.

Investors continue to be attracted to the cold storage sector due to its growth prospects and higher yields, compared to traditional warehouses, says Matthew Walaszek, director of research at JLL who specializes in industrial and logistics.

“The most attractive thing about cold storage is that investors are buying stable, non-commoditized, crucial infrastructure,” notes Duval.

Strong demand, however, has driven the cap rate spread between dry warehouses and cold storage facilities to as low as 50 basis points in core markets. (Walaszek notes that this trend has been in flux lately due to the rising interest rate environment.)

According to Chicago-based Steve Kozarits, senior vice president at commercial real estate services firm Transwestern who specializing in industrial services and tenant advisory, rising interest rates should intensify investor interest in alternative product type. “As interest rates rise, investors will look to place a higher percentage of capital into more stable asset classes,” he says. “The projected rent increases in the industrial market overall, including cold storage and refrigerated space, make for an attractive investment.”

What investors are looking for

Modern cold storage facilities, with higher ceiling heights and better efficiency, are more attractive to users and, therefore, more in demand among investors, notes Duval. “Purpose-built cold storage development is more complicated to design and develop than traditional warehouses, which limits speculative development and keeps supply low.”

Cold storage is still a niche subsector of the larger industrial market, representing just 1.0 to 1.5 percent of overall industrial inventory, according to Walaszek. Therefore, the development landscape is driven by build-to-suits.

“Cold storage is hot as an industry vertical, but it is not easy to develop,” adds Healy, noting that due to this product’s high capital expenditure, it’s rarely built on spec. ‘What we have seen is the major national players expanding their networks organically, as well as through acquisition of mom-and-pop regional players.”

In addition, while many of these older cold storage properties are less efficient than new class-A projects, they are often located close to core markets, making then valuable due to location, Healy says.

Meanwhile, the preference for modern cold storage is more about energy efficiency than the quality of the buildings themselves, notes Walaszek. Some of the older facilities are perfectly fine depending on how they’re used, he says.

Grocery demand

After peaking in the fourth quarter of 2020, overall e-commerce sales have tapered off as the pandemic receded, according to Orange County, Calif.-based Greg Healy, executive vice president and head of the industrial services group in North America with real estate services firm Savills. He attributes the decline to pent-up demand by consumers to get out of their homes and physically go to stores. “Still, e-commerce sales are far above pre-pandemic levels, and in some Asian countries, more than 50 percent of retail sales are performed online,” he adds.

In fact, online grocery sales have increased slightly from where they were last year, to $7.1 billion in May 2022, Healy says. Online sales penetration is reaching almost 13 percent of the total grocery market, up 2 percent from 2020 and 10 percent from its pre-COVID share. Mercatus/Incisiv,  a group that tracks the evolution of technology in the grocery space, projects that by 2025, e-commerce will capture 21.5 percent of total grocery sales.

However, there have been some changes in consumer preferences when it comes to online grocery sales recently. According to Healy, direct deliveries to consumer homes have declined, while in-store pick-ups have increased. This might be due to both people wanting more time outside of their homes and inflation leading cost-conscious consumers to try to save on delivery costs, which typically tack an additional 25 percent onto a grocery bill.

At the same time, an increase in online grocery sales doesn’t necessarily translate into outsized growth in cold storage infrastructure, says Duval. Temperature-controlled products purchased online for home delivery are mostly serviced out of individual grocery stores and therefore do not add to additional demand for cold storage, he says.

Grocery stores typically work with locations within three to five miles of their targeted shopper population, creating a situation where the cost of logistics, the availability of sites for development and construction expenses make it difficult to build cold storage fulfillment centers close to consumers, Duval notes. That’s pushing grocers to invest in automated solutions in the backroom of their stores instead. “The best play for last-mile grocery distribution is the grocery store itself,” Duval says.

Some grocers are also focusing on adding large fulfillment centers (of 300,000 sq. ft. or more) in proximity to customers for direct-to-consumer delivery, according to Walaszek, director of research at JLL who also notes that grocers are leveraging their stores for distribution, particularly pick-ups. “We’re still in the ‘early innings,’ and time will tell whether this model works given high construction, operational and delivery costs,” he says.

Noting that cold storage facilities typically cost twice as much money to build as dry warehouses, Healy says that alternately, grocers are also creating smaller, mobile, last-mile, temperature-controlled distribution facilities in locations where they are needed, often within an existing facility. Since the turnover of goods is fast, the required amount of temperature-controlled space tends to be limited, he adds.

Source: “As Consumers Take a Step Back from Home Deliveries, Will Cold Storage Remain a Hot Asset Type?“

Second of a two-part series. View part one here.

In my last column, I discussed the industrial boom in the Borderplex region (El Paso, Texas-Juárez, Chihuahua-southern New Mexico), and how industrial absorption and vacancy rates were at historic levels.

This is occurring due to factors such as strong consumer demand, the attempt to better manage supply chain disruptions, and the relocation of production facilities from Asia to North America. While industrial growth at the Borderplex seems to be strong for the foreseeable future, there remain challenges that could affect this growth.

One frustrating challenge is that certain building materials needed to complete industrial buildings, such as electrical components and roofing materials, can have a lead time of several months, which severely delays projects. I have a friend in the construction industry who is trying to deliver a building to a client. However, he has been waiting months for electrical components and a transformer box to complete the project. Demand for industrial space is intensely strong, but the time it takes to deliver a building can be extended due to lack of components and supplies.

In Juárez, buying industrial land is relatively easy; however, finding land with power or that can be connected to power can be difficult.

According to Christian Perez Giese, senior vice president/director of industrial and logistics at commercial real estate services company CBRE’s Borderplex branch, “Building a substation there used to take six months, but now can take three to four years. Power in Juárez could become a limiting factor in three to five years.”

This comes at a time where many companies are bringing their production and logistics operations to North America.

The rapid development of industry at the border is also revealing challenges at the international ports of entry. At the two El Paso commercial ports of entry, it is not unusual for northbound trucks to wait in line to cross into the U.S. for as long as three to six hours. These delays, along with aging port infrastructure, cause disruptions in supply chains, which result in costs going up. The Santa Teresa, New Mexico port of entry has been able to maintain fast northbound crossing times, typically crossing trucks in under 30 minutes. Within the Borderplex this port is becoming perceived more and more as a reliever route for northbound commercial traffic in the region.

According to Giese, “Trucking rates tripled last year, but are only predicted to be double pre-pandemic rates this year. These costs are almost always passed on to consumers, thus increasing inflation.” Longer wait times to cross the ports mean that more diesel has to be consumed. At well over $5 per gallon, the rising cost of this fuel is a major factor in the rise of logistics costs.

The Borderplex continues to be challenged by a perception that it is dangerous and unsafe. I have had many business owners and site-selection consultants ask me if I feel safe living in this region. Much of the concern is a holdover of the violence in Mexico that hit cities like Juárez hard over the last 15 years, and was covered extensively in the media. While violence in Juárez remains due to cartels jockeying to maintain drug and contraband routes into the U.S., this violence generally does not affect the foreign-owned production plants operating in that city. I find myself having to explain to people that El Paso and southern New Mexico are some of the safest places in the world when it comes to violent crimes.

In spite of these challenges, the future looks bright for industrial growth in the Borderplex. According to Giese, “People visiting the Borderplex for the first time always seem to be surprised at how big it is (approximately 2.5 million in population).” Because of growth, better connections to other cities are badly needed at the El Paso International Airport. Site-selection consultants, business representatives, and investors all take into account the ease of traveling to a potential site for a production project.

According to Giese, “Trends in growth and challenges have occurred quickly and the industrial leasing market in the Borderplex was unaware of how quickly these trends impacted the market. For the first time in twenty years, the Borderplex is operating lock-step with drivers in the greater U.S. market. It is no longer an outlier.”

So even though there are challenges affecting growth, the Borderplex promises to remain a major economic development opportunity for New Mexico, Texas and Chihuahua.

Source: “Despite Challenges, Borderplex Holds Huge Promise“