Archives for August 2023

Albuquerque-based Titan Development has found its first tenant for Building 1 at Westpointe40.

Scholastic Corporation, a children’s publishing, education and media company, will utilize a third of the 150,000-square-foot industrial warehouse. The company is the first to occupy space in the business park near Interstate 40 and 98th Street, according to Titan Development Partner Brian Patterson.

Titan is currently searching for tenants to lease the remaining space. The company is working with NAI SunVista to market the property, broker Riley McKee said. McKee, Alex Pulliam, Jim Wible and Jim Hakeem are the property brokers.

The meanings of autumn: leaves turning beautiful colors, temperatures cooling, and … pumpkin spice lattes at Starbucks (and almost everywhere else in the coffee universe).

Yes, PSL, the official nickname, is coming back this week. But devotee or not, people in CRE might ask if they should pay some attention to it. Anything that brings many consumers in to buy for such a long stretch — PSL turns 20 this year — would seem to mean more foot traffic, which might improve surrounding retail performance.

Web data scraping company ScrapeHero pulled together some data about 16,061 Starbucks locations in the U.S. Moody’s Analytics put that together with 2023 Q2 vacancy rates and Q2 quarter-over-quarter asking rents and said that “it would be very difficult to conclude that there is a relationship between the number of Starbucks locations and rent performance with only Las Vegas and Seattle beating the national average.”

Not terribly surprising if you’re looking for evidence of a specific boost from PSL days, as they would happen in the latter part of Q3.

However, when comparing average Q3 rent growth with national average quarterly rent growth, there seems to be something. “When looking at average quarter-over-quarter rent growth, the relationship between the number of Starbucks locations and rent performance seems stronger and perhaps a stronger relationship between the PSL season and rent performance,” Moody’s said. “Of the nine cities with the most Starbucks locations, six have outperformed the nation for average quarter-over-quarter rent growth.”

Moody’s also looked at the statistical correlation between the list of Starbucks stores and average Q3 quarter-over-quarter rent growth at 0.88, which would normally be considered a significant level.

That still leaves questions. As Moody’s put it, which came first, Starbucks or rent performance? “Starbucks has a strategic, data-driven approach when selecting a location by analyzing store data and customer behavior to even foot traffic patterns,” Moody’s wrote. “Starbucks could very well be looking into demographic/geographic data and economic/market data in order to position themselves in markets with high foot traffic and strong retail performance.”

It would also be wise to consider a number of other things. One, to really look at a correlation, you’d ideally want to look at how much of one there was historically. Another would be to look at the distribution of rent improvement on a weekly basis to find if there was a close relationship between PSL and rent increases. Then there is the potential of a confounding factor that might be connected to both but more of an actual cause.

And was there never a correlation between rent increases and third quarters before the onslaught of PSL?

But, if PSL does help drive increased rents, does it mean that groceries should convince Hormel Foods to run that pretty clever 2019 Pumpkin Spice Spam promotion?

Let’s hope not.

Source: “It’s Fall. Time to Sprinkle Pumpkin Pie Spice on Your Retail Property“

Companies are trying their best to get their office workers to return to the office, at least a few days a week, with only middling success. Landlords are starting to face what many say is the inevitable: some buildings will simply stay empty. As they come to this reckoning, they turn to the oft-repeated mantra that these properties can be candidates for a residential conversion.

The truth is, though, that not many are, according to a white paper by Northmarq.

The concept is good in theory, but it comes with several practical challenges, according to SVP Craig Tomlinson. Still, it is worth considering especially in view of the increasing office vacancies, now estimated by CoStar at 13.2% nationwide, with some markets showing even higher numbers. In addition, many companies are about to see leases expire in the coming few years, which will make the supply of office space grow more.

The challenges, though, are many.

For starters, to convert an office building into a condominium or apartment structure requires a different floor plan and systems. “Developers would have to almost completely demolish floor plans in order to accommodate residential preferences,” Tomlinson said.

Among these are three major transformations for a building’s plumbing, heating and air and natural light. Instead of restrooms in common areas on each floor, developers would need to add plumbing for each unit for individual toilets, showers, sinks and dishwashers. Commercial HVAC ducting for a floor would have to be updated also for each unit, so residents can control their own thermostats. Windows represent a major difference, too, and access and ability to open them would be essential for residents and owners. As the report said, “no one wants to feel like they live in an office.”

But life outside the building is also key to attracting residents. There is a need for amenities such as grocery stores and other businesses that aren’t always found in commercial districts. The report says that already some building owners are working with developers to turn their commercial properties into residences, supported by nearby retail or mixed-use options such as gyms, restaurants, hair salons and more.

How many buildings might make a good fit? In Washington, D.C., experts estimate that only 5% of office buildings might work for conversion. In New York, the percentage drops down to 3%. Moreover, the cost can be staggering. A recent New York Times article about converting these buildings could cost between $400 and $500 per usable square foot.

But despite challenges, help is coming from governments offering grant programs, Tomlinson said. Multiple cities and states are working to provide grants to investors. In California, lawmakers have approved $500 million in incentives for commercial-to-residential conversions, including $105 million to convert spaces to affordable housing units. In Wisconsin, legislators approved a plan to grant interest-free loans of up to $1 million to developers who will convert empty office buildings and big-box retail stores into affordable housing. Chicago also has seen city leaders plan to offer $197 million in tax-increment financing to developers who can convert vacant or underutilized office buildings.

The conversion possibilities may not work for every asset, but it’s a “high-potential opportunity,” Tomlinson said, which has the support of essential players across the country–including governments, residents and lenders. The bottom line is that office owners should consider evaluating the option for their most viable contenders.

Source: “The Hard Reality of Converting an Office Into a Residence“

As a wave of distress rolls towards commercial real estate, lenders are pulling back accordingly.

Debt origination volumes in the sector fell 52 percent year-over-year in the second quarter, according a capital markets report from Newmark reported by the Commercial Observer. The advisory firm also found there are 32 percent fewer lenders than a year ago.

Lenders have grown more selective in recent months, demanding lower loan-to-value ratios amid the Federal Reserve’s interest rate hikes. No sector was immune from the narrowed activity.

CMBS and collateralized loan obligations originations fell by 79 percent from last July, while debt fund loan originations are down 73 percent annually. Lending volume among banks, a typical source of loans for the real estate industry, also fell 48 percent year-over-year.

The CMBS market did show some glimmers of hope after an abysmal first quarter that saw the lowest volume of issuances in 15 years. Issuance volumes rose 57 percent from the previous quarter, but were still down 59 percent year-over-year.

As banks and other lenders tread carefully, one place commercial real estate landlords are turning to is the private equity market. The industry has raised $219 billion in dry powder for equity or debt investments. Newmark estimated that more than half of that capital will be aimed towards multifamily assets while a big chunk will also be targeted for industrial assets, sending office and retail assets to the back of the line.

Borrowers will be jockeying for position to be among those taking advantage of any private equity deployments. There is roughly $1.2 trillion in outstanding commercial real estate debt that is “potentially troubled,” according to Newmark, and more than $626 billion of debt is set to mature in the next three years.

Newmark executive David Bitner is trying to sound an optimistic note about capital markets in the coming year, saying there will be interest rate clarity and a tacit agreement on price points across asset classes between borrowers and lenders forthcoming.

“I’m optimistic that this impasse will break in the next six months,” Bitner told the Observer.

Source: “Commercial lending fell 52% in second quarter“