Archives for April 2023

What type of cold storage occupiers need today may result in changes for builders of the facilities, the occupiers, corporate bottom lines, and ultimately consumers when they seek the once stored cold/frozen items on their grocery store shelves.

Why is this happening now? According to an interview between Colliers Capital Markets and Rick Kingery, senior vice president and leader of Colliers’ Food & Beverage practice group, it’s because of a typical reason: supply and demand. In this case, industrial vacancies are low and rents at such facilities are at record highs.

The second key question is what can occupiers do? In many cases when they realize that cold/frozen space in the size and configuration they want is unavailable in the exact location they favor, they can look for other choices, which may also influence builders of these facilities. Altogether, five key changes may take place in this niche that industry participants should be aware of:

#1. Alternative Locations

What occupiers find that’s affordable and acceptable may be located in a secondary market rather than what they have traditionally selected. “This is happening faster,” Kingery says.

#2. Temperature Variations

It also is pushing investment in new and the next generation of facilities since so much existing inventory is older and not as appealing. To meet demand in the most flexible way, some of the new product may be built on speculation and then customized to client needs. And one key to flexibility in this category is to offer different temperature zones within buildings, what’s called a “cold box within a box” since no two occupiers have the same cold-to-frozen mixture. With this kind of built-in flexibility, occupiers can crank the temperature down or up as demand requires for what they’re storing, Kingery says.

#3 Less Spoilage, Faster Turnover

What else helps attract occupiers is knowing they can turn over products rapidly to avoid spoilage. Automation investments that are coming on fast and strong help achieve this, Kingery says.

#4 Knowing Where to Build

Because of population growth in the Southeast and Southwest, food service distribution networks have focused on locations there. But the savviest keep an eye on emerging markets, too, such as Missouri where new production facilities range from meat packing to indoor vertical farming. And California has taken a share, too.

#5 Reducing Labor and Number of SKUs

Offering fewer SKUs in a market means fewer frequent changeovers at a factory, which can help increase company profits. It also can free up warehouse space for faster-moving products and reduce the number of pallet positions in the distribution network, Kingery says. All of this may ultimately affect consumers’ choices since they may find fewer items on shelves and in cold and frozen cases at their supermarket in coming months, he says. But that may not be all bad, he adds, “Maybe, we didn’t need so many varieties of ‘cherry’ to begin with!”

Source: “Five Developments That Are Changing Cold Storage“

Office buildings were hit hard during the pandemic, leading to higher vacancy rates and reduced occupancy demand– trends that continue today. The 10% hit the very hardest between the first quarter of 2020 when the pandemic began and the fourth quarter in 2022 when it had greatly waned have been labeled the “hardest-hit buildings” or HHBs, by CBRE in a new report.  On average these buildings had an average vacancy rate of 18% at the end of 2022. Key is that they shared several common denominators.

Age

The largest number or 70% was built between 1980 and 2009, with differences in the age a factor in less versus more mature markets. For example, in less mature markets such as Austin and Phoenix the HHBs were built after 2009 while in more mature markets like Chicago, the buildings are older.

Downtown vs. Suburban

Downtown buildings were hit far greater, with 41% falling into the category of HHB–one in every seven office buildings qualified. In the suburbs, however, only one in every 12 did. The prime reason is that many workers pivoted to remote work at the start of the pandemic to flee congested downtown areas, which left many downtowns empty. And since that time, many of those areas have experienced only a slow—albeit steady–return to offices. In addition, some fast-growing downtowns in the Sun Belt like Austin and Miami have recovered faster than expensive, tech-focused centers like downtown San Francisco and Seattle.

Building Size

Size or square footage also reflected a trend. Buildings between 100,000 and 300,000 square feet, which represented the smallest group being analyzed, accounted for 84% of HHBs, with the average vacancy rate increasing to 57% in the fourth quarter of 2022 from 9% in the first quarter of 2020. Underrepresentation of larger buildings may be attributed to them having more tenants so those who vacated didn’t leave as much vacancy as those exiting smaller buildings did.

Region 

In which part of the country buildings were located also had an impact. The Northeast and Pacific regions had larger concentrations of HHBs and a slower return to offices than other areas, again as workers left crowded, expensive markets. The mid-Atlantic and Southeast had smaller concentrations of HHBs.

Crime Risks and Restaurants

Buildings of 100,000 square feet or more were considered in this comparison. A crime risk index developed revealed that HHBs nationwide had an average score that was 11% higher than for other buildings in their market, whether downtown or suburban. The crime score was the biggest external driver of what makes an HHB.

When it comes to amenities, measured by the number of nearby restaurants, suburban markets generally had lower amenity scores than downtown ones, since the latter usually had more restaurants close by.

Bottom Line 

Buildings that suffered the biggest occupancy loss fell into the 100,000-to-300,000-square-foot size, were located downtown, dated from between 1980 and 2009, were in a high crime area and had few nearby restaurants. These are the properties that owners and property managers must focus on to add tenants to reverse the trend.

Source: “The Office Buildings Struggling the Most Share Several Characteristics“

Getting hit in the head by an acorn and deciding that the sky is falling, as happened in the old folk tale, is objectively silly. And yet, seeing two banks collapse within a short period of each other and then wondering what might happen to CRE lending, especially after the experience of the global financial crisis, isn’t necessarily ridiculous. But it may not be reasonable.

“When examining the real cross-exposures of the sectors and structural differences between now and 15 years ago during the Global Financial Crisis (GFC), the conclusions are less sensationalistic and more nuanced than some headlines suggest, though both banking and CRE face challenges of a rapidly rising rate environment,” Moody’s Analytics said in a recent commentary.

As the firm noted, rising interest rates have already slowed transactions and pushed valuations downward. With rounds of refinancing coming, there will be some CRE loan defaults. For example, Chetrit Group, Columbia Property Trust, Brookfield, and Veritas Investments have all defaulted on loans this year. M&T Bank has said that 20% of its office loans are distressed.

But the specifics of how these dynamics might play out are complex. For example, many quote numbers that say 70% to 80% of CRE debt is held by small and regional banks. The distribution, and so vulnerability, is more complex.

“However, the 135 US regional banks (generally considered as those with about $10 billion to $160 billion in assets) hold just 13.8% of debt on income-producing properties,” says Moody’s. “The top 25 largest banks, which the Federal Reserve (Fed) considers “large”, hold 12.1%. The 829 community banks (with $1 billion to $10 billion of assets) hold 9.6%, and the remaining 3.2% is spread among the 3,726 very small local banks with less than $1 billion in assets.”

In other words, the U.S. CRE debt market is broader and deeper than often considered “and large banks and various non-bank lenders such as mortgage REITs, life insurance companies, and private bridge lenders could step in at fill a potential gap.”

Marcus & Millichap had recently made a similar point that the distribution of CRE loans among banks was more diverse than often mentioned. John Chang, senior vice president, national director research and advisory services, in a video for the company acknowledged that some loans will default, but most won’t.

At the same time, there are signs that bank stability is holding up. “Developments in the Fed lending programs over the last week have been credit positive and point to possible stabilization,” Moody’s Analytics said. “The Fed’s aggregate balance sheet contracted by $28 billion to $8.76 trillion, and the Fed lending to the banking sector declined $11 billion to $153 billion. On the asset side of the Fed’s balance sheet, the amount of outstanding discount window loans declined to $88 billion this week from $110 billion last week.”

Source: “Experts Say Connecting Bank Collapses to CRE Loans Isn’t So Simple“

Now that nobody wants to see our vax cards anymore, maybe it’s time to issue debt cards to everyone in the CRE community. We need to know if your regional bank got its booster shot.

During our annual State of the Industry panel discussion at the GlobeSt. Net Lease Spring conference in NYC this week, the conversation kept circling back to the dreaded D-word.

Everyone in the room wanted to know the best strategy for dealing with debt and—as one of our panelists put it—if the motivation to sell quickly under the stress of the rising cost of debt will be matched by the motivation to pursue deals with new price profiles.

Opinions on the best deal-making strategies in a market where uncertainty rules ran the gamut, and every question raised another question:

What type of debt do you want to use?

How long can you keep servicing that debt?

How does the cost of debt affect your debt?

Can you restructure debt without banks?

Can banks restructure debt for other banks?

Are we still indebted to Barney Frank for saving the financial system?

Does Barney get to keep his nameplate as a Signature director?

Can Janet Yellen cure the national debt by minting a platinum coin?

How many catalytic converters does it take to make a $32T coin?

Did you know there are no balloon payments at the end of a sale-leaseback?

Okay, maybe we spent too much time talking to that pure-play cannabis investment firm—or we didn’t hold our breath walking to the Marriott Marquis conference venue in Times Square, which had so much of his product wafting through the air even the Naked Cowboy was stumbling around.

Here’s our personal favorite: what kind of debt would you no longer touch with a 10-foot pole?

“We’ve pivoted away from CMBS clients and switched from regional banks on the debt side of the business,” said Coler Yoakam, senior managing director, corporate finance, at JLL Capital Markets.

“We pivoted away from regional, local banks because of the unpredictability. Frankly, their solvency and ability to perform is very much in question,” Yoakam said.

“Pricing started to change in December,” he said. “We’ll see if the motivation to sell under stress is matched by the motivation to pursue deals with [new] price profiles.”

“We use bank financing, insurance financing, CMBS financing,” Gordon Whiting, managing director, Angelo Gordon said. “I don’t think you can look at this in a vacuum. You need to look at all the capital that’s out there and how many of your tenants have debt coming due this year and in 2024.”

“The smart ones are paying down debt, those are the ones you want to deal with,” Whiting said. “I don’t think the debt markets are going to significantly change in the near future. I think we’re looking at significantly higher rates for the next year or two.”

“People are waiting for a recession to happen, and if everybody keeps waiting, it will. I think rates are going to be high for a long time,” he added.

“We use lines of credit, we use cash. At the end of the day, we finance our properties like every other buyer. You cannot be a buyer of real estate without a financing assumption and without financing the asset in some manner,” said Gino Sabatini, managing director, head of investments, W.P. Carey.

W.P. Carey has been very careful to maintain its triple A+ credit ratings while it issues debt into the bond market, he said, which sometimes put the company at a competitive disadvantage in recent months.

“The ratings agencies want us to keep our debt much tighter—they want us to stay within a 45% to 50% leverage range on deals. Lenders from last year until now would lend [on deals leveraged] up to 60% to 65%,” he said. “That puts us at a competitive disadvantage, because when we’re modeling 45%, our competitors were modeling 65%.”

“That advantage is now going away,” Sabatini said. “With our continuing ability to issue debt at the balance sheet level and get deals done, were in a relatively strong position.”

How strong? Strong enough to close the largest sale-leaseback deal in the NYC-based company’s 50-year history earlier this week: a $468M sale-leaseback of a Greater Toronto Area life science portfolio.

“That would have been a lot tougher to do when there were $200M to $300M CMBS deals that could close simultaneously,” Sabatini said. “So, we’re feeling great about our position.”

Gary Baumann, managing director, head of investments at NJ-based ARCTRUST Properties, didn’t shy away from embracing the R-word.

“We do a lot with regional banks. We have a lot of outstanding relationships with well capitalized banks whose names you would recognize,” Baumann said, without naming any of them.

[Full disclosure: JLL’s Yoakam did not pivot away from Baumann on the dais when he vouched for regional banks.]

Apparently, having an outstanding relationship with a well-capitalized bank means stuffing more capital into said unnamed financial institution.

“Our banking relationships are more than ever demanding deposits,” Baumann said. “You have to put money into the banks in order for them to issue the loan. That’s adding pressure to the system for us.”

“Where the credit climate is creating an advantage for all of us now is that it’s opening the window for the sale-leaseback market, larger than it’s been for a long time,” he said. “Because of what’s happening with the banks, we’re seeing opportunities to acquire net leases that weren’t there before.”

There’s no more “easy money” Baumann said.

“Yields on the deals have to move to market with what the capital costs are. There’s still a lot of money out there. The buying side will create pressure later in the year,” he said.

According to Sabatini, “For the right deal, equity [players] are going to write the check even if the debt isn’t the most attractive. Capital is still available for the right deals. Deals will still get done.”

Which leaves us with two questions:

If you deposit a platinum coin in your account at a well-capitalized bank, will they loan you a platinum coin?

Does Barney get to keep the 24-carat gold Signature calligraphy pen set they gave him when he became a member of the Board of Directors?

Source: “Let’s Talk About Debt: The Good, the Bad and the Ugly“