Archives for September 2022

Even as industry insiders noted the possibility of new challenges to the U.S. industrial real estate market recently, came the news that Pontegadea Inmobiliaria, the family investment company of Zara owner Amancio Ortega, struck deals to acquire seven U.S. distribution facilities for nearly $1 billion. The deals fit in with a larger pattern of family office investors switching their focus from office properties to logistics facilities.

“The bullishness of industrial as an asset class is highly attractive to high-net-worth, family office and institutional investors, and it continues to grow in investment capital at the expense of other sectors, especially office,” says San Francisco-based Al Pontius, senior vice president, national director for office, industrial and healthcare at real estate services firm Marcus & Millichap.

Traditionally, family offices favored office towers, especially those that were located in the central business districts (CBDs) of core U.S. cities, Pontius notes. That was partly because those types of properties allowed investors to deploy large sums of capital in a single transaction, adds Philadelphia-based Adrian Ponsen, national director, U.S. industrial market analysis, at real estate data firm CoStar Group.

However, the increase in companies adopting more friendly policies towards remote work has weakened many investors’ long-term outlook for office leasing. “In response, many institutions are shifting capital that would have previously gone into office properties to industrial assets instead, which have seen their leasing prospects improve dramatically as a result of the surge in e-commerce spending that accompanied the pandemic,” Ponsen notes.

High demand from tenants, low vacancy rates and healthy rent growth continue to make the industrial sector an appealing investment option, but amid significantly higher interest rates, the deals aren’t as lucrative as they were six months ago, when cap rates were compressing and interest rates were low, notes Pontius. Since then, rent acceleration has slowed and cap rates are expanding.

According to Spanish newspaper El Pais, Pontegadea paid $137.6 million for a one-million-sq.-ft. distribution center in Pennsylvania’s Lehigh Valley, for example, which the seller of the asset acquired in May 2019 for $61.8 million. Pontegadea likely won’t be raising rents at the property anytime soon, as the tenant, Nestle, has six years left on its lease. That doesn’t mean, however, that Pontegadea is “late to the party” because expectations for growth in rents and values still exist, according to Pontius. The difference is that industrial values just won’t be doubling every few years under current market conditions.

Due to the higher interest rates, cap rates are expanding on most real estate assets, with the exception of those with short-term leases, as new owners will be able to raise rents to market in the near-term. Still, Pontius stresses that values and cap rates will vary widely based on each property’s unique composition and location.

All of the logistics assets acquired by Pontegadea are massive facilities containing one to two million sq. ft., with long-term leases to quality tenants, including Amazon, FedEx TJX, Home Depot, Marshalls and Nestle, and located in Texas, Pennsylvania, Wisconsin, South Carolina, Virginia and Tennessee markets.

Prior to the pandemic, Pontegadea’s U.S. acquisition representative, Miami-based Ponte Gadia Compass, invested mostly in office assets in core U.S. markets, and to a lesser extent, in hotels and retail. In fact, from 2016 to 2019, Pontegadea invested $2.5 billion in U.S. office assets—among them, two Seattle office blocks leased to Amazon acquired for $740 million and two office buildings in Miami that cost Ortega nearly $887 million. Now the firm is diversifying into other sectors.

El Pais notes that logistics real estate is just one of the diversification strategies Ortega has implemented since the office, hotel and retail sectors went south. For example, Pontegadea recently acquired a 64-floor luxury apartment building in New York City for $500 million. The firm also recently invested in alternative industrial sectors in Spain, a 40 percent share of Telxius Telecom, Spanish telecom operator Telefonica’s telecommunications infrastructure arm for €378.8.

Source: “Family Offices Turn Focus Away from Office Towers and Toward Industrial“

COMMERCIAL REAL ESTATE EVENT OF THE YEAR!

Thursday, October 6, 2022

Event Center at Sandia Golf Club | Albuquerque, New Mexico

Welcoming 5 National Speakers! | View Speaker Overview
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By the beginning of 2021, live and leisure activities like sporting events and concerts were going back to normal — but office attendance still lagged. And that begs the question: will office usage ever return to normal?

“The big movement toward working from home was started by the pandemic, but at this point, it would be hard to argue the people are still it doing because of health risks,” says Marcus & Millichap’s John Chang. And while most companies would like their folks back in the office, “even the most adamant business leaders have had to back off their hard line positions,” he says.

The reason? A booming employment market. The US added 3.5 million jobs during the first eight months of this year, well above pre-pandemic norms, and unemployment is hovering at 3.7%. (The rate for college-educated people is just 1.9%, well below the 3.1% 20-year average for the segment.) The tight labor market is sustaining the WFH trend as companies are increasingly looking to WFH policies as a way to woo and retain talent.

The next recession likely won’t be severe enough to change the prevalent hybrid model, Chang says. He analyzed past recessions to determine how job losses might impact office usage and found similarities to the 1990 recession, which saw a 400 bps rate hike by the Fed amid elevated inflation that resulted in 1.3% job loss, or 2.1 million jobs in today’s terms. But he says similar losses today “probably wouldn’t be enough to get staff back into the office.

“Remember, right now there are about 5 million more job openings than there are people looking for work,” Chang says. “There’s a labor shortage. So unless we have a more severe recession…the employment market is simply too tight for companies to bring employees back to the office full-time. And that impacts all types of commercial real estate.”

Barring a major economic disruption, it will likely take years for office employment to recalibrate and realign with the employment market, Chang says.

“It appears office space demand has structurally changed,” Chang says. “The labor shortage is key and it will like be a driving factor for commercial real estate, a factor that investors will need to watch.”

Suburban office will likely lead the recovery, having outperformed CBD markets over the past two years, serving as a “middle ground’” between working from home and commuting to an urban core. Suburban office absorption hit 2.2 million square feet in the first quarter, according to Colliers, while CBD office markets posted negative 2.6 million square feet of absorption during the same period.

Earlier this year, Colliers US CEO Gil Borok told CNBC that his firm’s professionals are seeing more interest in suburban markets from buyers.

“Pretty much anywhere where there’s a lesser commute or you’re in a suburban area or a less dense area—that’s from an office standpoint where folks are most likely to return,” he said. “And in terms of opportunities, if you’re an investor, obviously those markets follow suit.”

A recent analysis out of the NYU Stern School of Business and the Columbia University Graduate School of Business, predicts significant changes in lease revenues, office occupancy, lease renewal rates, lease durations, and market rents as a result of enduring WFH and hybrid work policies, with potentially big impacts on valuation.

“We find a 32% decline in office values in 2020 and 28% in the longer-run, the latter representing a $500 billion value destruction,” they wrote. “Higher quality office buildings were somewhat buffered against these trends due to a flight to quality, while lower quality office buildings see much more dramatic swings. These valuation changes have repercussions for local public finances and financial sector stability.”

Source: “Even the Next Recession Won’t Send Employees Back to the Office“

Gen X is the demographic using the most self-storage units as the sector continues to enjoy a boom sparked by pandemic-driven renter preferences and migration changes.

A recent RentCafe survey of 4,200 renters reveals that currently, about 21% of renters are using self-storage, while another 12% intend to use it in the future. And Gen Xers are the biggest users of self-storage, with 44% reporting they currently use units and 21% declaring an intention to use self-storage in the near future. Gen X is followed by baby boomers, with 38% reporting an interest in self storage. Around 30% of the millennial cohort use self-storage.

“As a service largely responding to life events, self storage is becoming increasingly popular. The recent need to carve out space at home for home offices or gyms, plus an increase in multigenerational living, have joined the traditional reasons for using self storage including growing families, living with roommates, moving and downsizing,” says RentCafe’s Maria Gatea.

Around 44 million households in the US, or 36%, are renters, according to RentCafe. Moving is the most frequent reason survey respondents reported using self-storage, with 42% renting a unit while switching homes, while 31% say their current space is too small for their belongings. But the amount of space is not necessarily a driver for usage: about 28% of the renters in 3-bedroom homes need a storage unit for their extra belongings, compared to only 20% of the renters in studio apartments.