Archives for October 2023

CoStar Group released its review in retail, multifamily, hospitality and office for the third quarter of 2023. While not all have been bad, it was a tough period for each of these property types. The list doesn’t include all, like industrial, but each company has its own focus and data. The hope is that by bringing different sources together, a more accurate view might be possible.

Here are some of the numbers for retail.

The bad news is that retail leasing has “steadily declined” through the year. Even as activity with deals signed near the end of the quarter will likely rise in retrospect, CoStar still expects that Q3 will have been the worst performing for retail since 2020. So far, 176.9 million square feet have been leased since the beginning of the year, but that’s 16.5% down compared to the 211.9 million square feet in the same period during 2022. As always, it’s necessary to remember that 2021 and 2022 were very hot years that set high benchmarks.

A total of 13.7 million square feet of space was filled net in the quarter, marking the 11th quarter in a row that saw positive net filling. Still down, though.

“Overall, a net positive of 42.3 million square feet of space has been occupied year to date compared to 74.8 million square feet during the same period last year,” CoStar wrote.

One of the problems for the industry is a lack of available space, which is depressing both leasing and absorption activity. “The amount of available retail space fell to a new historic low of 4.65% in Q3 2023, which was down by 0.13% over the past year and by 1.5% over the past 3 years,” CoStar wrote.

Increasing the problem is that construction starts for retail hit their lowest levels for a number of decades during the first three quarters of 2023. That almost guarantees that low availability will hang over the industry for the foreseeable future.

Also, high interest rates are having a negative effect. “Despite strong space market performance, retail capital markets continue to be impacted by the high cost and limited availability of debt financing,” CoStar wrote. With strong occupancy and NOI increases, many retail landlords are staying put and not selling, given the difficulty of getting a price they want with finance costs making many deals untenable.

Transactions year to date have been $45.9 billion, down from $95.4 billion during the same period last year. What has gained traction, for the most part, are deals under $5 million because they make a private all-cash or 1031-style tax-advantaged move more possible.

Source: “2023 Q3 Saw Problems for Retail, Especially With Low Construction“

Welcome to our glorious SoCal fall!

As days shorten, leaves crunch underfoot, and temperatures cool – our commercial real estate market faces several headwinds.

Hamas’ blatant attack on Israel, the ouster of our House speaker, and the 10-year bond yields at 20-year highs headline the obstacles.

The first two – Israel being attacked and a certain game of pattycake in the House of Representatives each create uncertainty. As I’ve said here many times: In the face of uncertainty, long-term decisions are postponed or scrapped entirely until things level.

Headlines in my frame of reference target mortgage rates and highs not seen since the financial meltdown of last decade. Such high rates create gridlock in the housing market. As residential transactions ebb, we also feel it in the commercial sector.

How, you may be wondering? Allow me to expand on a few scenarios.

Turnover generates commerce

My mind is drawn to the pre-pandemic spate of deals in our small enclave of houses in East Orange.

On our street, my wife and I have owned our home the second-longest among neighbors. Kitty-corner to us are original owners since 1984. Their multi-generational setup remains today – only with a new generation.

But lately, several of our neighbors tapped out for assisted living or passed away, leading to four homes changing hands. Also, one rental converted into an ownership.

In every instance, a dramatic interior redo occurred followed by a freshening of the outside as well.

So let’s break this down. First, a transaction happened. In the process, real estate agents were deployed for the buyer and seller. Staging, signage, glossy brochures and touchup repairs preceded the sale. Maybe a lawyer or two got a look at the contract.

Then escrow officers, title representatives and lenders were engaged. Home inspectors, termite companies and moving vans were hired. Insurance for the new digs was a closing component.

And let’s not forget the bump in property taxes, which funds our governments. Once the deed records and title transfers, an army of contractors descends on the early 1980’s structure. Paint, flooring, kitchen upgrades, bathroom remodeling, wall removal, and additional square footage is added, all in earnest.

The old furniture surely can’t be set inside this pristine interior. So a trip to Living Spaces, Daniels, or Mathis Brothers follows.

Now an elderly couple – with limited consumption – is replaced by a family of four or five. Groceries, gasoline, dry cleaning, sports equipment, school clothes, orthodontics, urgent care, pets and pet supplies and Amazon home deliveries are all fueled by the new residents.

You see, commercial real estate activity is bolstered by the sale of houses!

Please take a moment to review the steps above. In every case, office, industrial and retail are enhanced. Residential real estate agents, escrow and title plants, lawyers, physicians, and insurance brokers all use office spaces, for the most part. Moving and storage, contractors and landscape companies ply their trades from industrial buildings.

Finally, buying stuff. Yes! Retail storefronts or online portals.

But absent such turnover in houses, these businesses are forced to downsize, close their doors or look elsewhere for new work.

Rate shock

The 10-year Treasuries eclipsed 4.8% last week for the first time since 2007!

It’s great news for savers but lousy for those looking to buy a house, refinance a mortgage, expand a business or purchase commercial real estate.

Two years ago today, that same yield was 1.61%. Yes, yields today are roughly three times where they were two years ago.

Now, backed by the full faith and credit of the United States government, passive investors can make a nice risk-free return on their money. Avoided are the gyrations of the stock market or the downside of real estate ownership – such as losing a tenant.

However, this astronomic rise in rates makes borrowing more expensive. Therefore, affordability in house purchases becomes less so.

If you’re among the unfortunate few who have maturing loan balances to refinance, brace yourselves. Finally, expanding a business becomes richer.

Here’s what I mean. Banks price loans based on their cost of funds and the strength of the collateral. As we just discussed, a saver can make 4.8% in Treasuries so banks must raise Certificate of Deposit rates to attract new money into their bank.

Expanding an enterprise into an uncertain economy could be viewed by some lenders as risky. Therefore, to hedge against default, the rates charged must compensate. And the circle continues.

For those hoping to secure ownership in a location to house their operation, many will encounter a debt service too expensive compared with a rental. More will find leasing to be more affordable.

This year, I’ve been quite bullish on our economy and the resilience of the consumer. When others predicted a slowdown, I took the contrarian position. Now, with student debt repayment ramping up after pandemic hibernation, home savings balances declining, the government money spigot ending, high interest rates ramping plus some new global unrest, I’m afraid a recession is inevitable. When, how deep and how long remain questionable.

Source: “How sky high mortgage rates rates slow commercial real estate“

Goodwill Industries of New Mexico is expanding its footprint to Carlsbad.

The new store and services center is located at 1108 West Pierce St. The 23,000-square-foot space will offer career service development, skills training, veteran programming and other resources.

Scooter Haynes is the general contractor on the project. Shauna Kastle, president and CEO of Goodwill Industries of New Mexico said the facility should open by February 2024.

“Part of the reason that we’re opening in Carlsbad is because we need to make sure that we are branching out to other parts of our territory that we’re currently not serving, and Carlsbad is one of those locations.” Kastle said. “There is an absolute need for services in Carlsbad, and we’re currently doing a community needs assessment to make sure that what we’re providing matches the needs of the community.”

Goodwill also recently started to lease the former Tuesday Morning store at 700 Juan Tabo Blvd. NE. The organization plans to renovate the facility to better suit its operations, but the 19,000-square-foot project is facing delays in permitting approvals, Kastle said.

Despite delays, the nonprofit aims to open the location by late November, she said. Barnsley Construction is the general contractor on that project.

Kastle said the new center is located off of Interstate 40 and “is more accessible and easier for donors to reach.”

Combined, the company will hire 37 employees to staff the two new locations, Kastle said. Wages start at $13 per hour.

With the addition of the two spaces, Goodwill will have 18 locations across New Mexico. In 2024, the charitable organization plans to open two more locations in the Albuquerque metro, Kastle said.

Since 2022, Goodwill has helped over 14,000 New Mexicans “enhance their skills and find jobs,” Kastle said. The company employs over 400 workers across the state and uses revenue generated from sales to fund their programs and services.

“Having more retail locations provides more revenue to support the programs and services that we provide free across the state,” Kastle said. “We have so many programs that we want to start providing, but we need the revenue for before we can launch them.”

Source: “Goodwill Industries of New Mexico to open retail, services center in Carlsbad“

MSCI’s series on capital trends in various CRE sectors took retail out for a trial run and brought it back to the store.

“Deal volume for the retail sector continued the slide that began in August 2022 with only one month of respite since then,” they wrote. “There was a bit of an improvement from recent months, but one-off events mask the severity of the decline.”

Over the previous five months, the average year-over-year fall had been 63%. But a merger between Regency Centers and Urstadt Biddle kicked up numbers in August by $1.4 billion, but that was a one-time event causing some data jitters. And even with it, year-over-year activity in August fell by 45%.

The — well, maybe a somewhat padded pothole — kept from dipping as far as immediately previous months because, according to MCSI, the deal was centered on shopping centers, not so much on shop space. “With that focus, deal volume for shopping centers fell only 40% from a year earlier in August versus a 54% YOY decline for sales involving shop space,” the firm said.

“Looking past portfolio and entity-level deals to individual asset sales though, shop space is on a slightly better path. Sales of shop space fell only 56% from a year earlier in August versus a 64% YOY decline for shopping centers.”

One reason for the drop in dollar-value transactions is the fall of property prices. The RCA CPPI for retail dropped 7.4% year over year in August, “front-loaded, however, with the steepest monthly declines seen in Q4 2022 and Q1 2023,” MSCI wrote.

Looking at the tabular data on different retail types — centers, shops, single asset, and portfolio and entity — the year-over-year results in August varied significantly. Centers were down 40%, as mentioned above, while shops fell 54%. But single asset dropped by 61%

Then there were the year-to-date performance figures: shops down only 10%, portfolio and entity off by 29%, and then single asset for -53% and centers in dead last at -64%.

Source: “Retail Continues a Long Slide“