Archives for 2024

It takes time to turn a large vessel and after years of downward trajectories – but commercial real estate is seeing some positive movement.

CBRE said second-quarter capital markets and lending figures showed improvement in commercial debt and equity fundamentals. Here are some of the details:

Q2 investment volume at $85.7 billion was up 14% between the first and second quarters of 2024, but still down by 3% year-over-year. Q1 rose 15% over 2023 Q4 but dropped 15% year-over-year. CBRE called the quarter-to-quarter improvement in Q2 a “moderation” compared to Q1, but that is pretty close. Sometimes trying to cut too finely between results is to misclassify inherent volatility. It will take more data samples over time, but at least on the surface, it seems worth noting.

For context, the trailing four-quarter volume — a moving average to smooth out some volatility and still see trends — decreased by 31.9% year-over-year to $341 billion from $500.2 billion. That is the lowest total since the second quarter of 2013. However, that’s a short amount of time to define a “low” and suggests that going back more than a year doesn’t make it so dire.

After five consecutive down quarters, the CBRE Lending Momentum Index rose 4.3% in Q2. This also seems good news but is potentially misleading. The company says the index “tracks the pace of CBRE-originated commercial loan closings in the U.S.” CBRE has a large base of business, so wouldn’t seem something to dismiss out of hand. However, it looks only at its own activities, which may not be sufficiently predictive of national CRE trends.

Entity-level investment shot up in Q2 to $10 billion, but that was only because Blackstone acquired Apartment Income REIT and $10 billion was the amount Blackstone would pay. Put differently, without that one deal, Q2 overall investment would have been down 9.3% quarter-over-quarter and 14.4% year-over-year.

The split of sales among property types in 2024 Q2 was roughly the same as the year before, with multifamily ($38.3 billion, 44.7%); industrial ($18.8 billion, 21.9%); office ($10.6 billion, 12.4%); retail ($9.5 billion, 11.1%); hotel ($6.2 billion, 7.2%); and other ($2.3 billion, 2.7%).

Looking only at single-asset investments, which totaled $60.6 billion, the splits among property types were multifamily ($22.5 billion, 37.1%); industrial ($14.0 billion, 23.1%); office ($8.9 billion, 14.7%); retail ($8.4 billion, 13.9%); hotel ($5.1 billion, 8.4%); and other ($1.6 billion, 2.7%).

Source: “CRE Capital Markets, Lending Show Improvement”

Industrial vacancy has risen for six straight quarters to reach 6.1% in June and more space is soon to be delivered. But developers need not panic as the tide is about to turn, according to Marcus & Millichap’s midyear 2024 industrial report.

In those six quarters, the company noted, nearly 629 million SF of industrial space was delivered nationwide, increasing inventory by 3.5%. In 2Q 2024, the average asking rent fell for the first time since 2011, after spiking 44% over the preceding five years.

However, the report pointed out, that 27% of current vacancies occurred in just five metros: Atlanta, Dallas-Fort Worth, Houston, Riverside-San Bernardino, and Phoenix. Even though these are metros with high demand, vacancy is expected to rise as they are flooded with 108 million SF of new industrial space collectively in 2024, compared with 129 million SF to be spread among the remaining 31 metros studied.

With much new construction expected to be delivered before the end of the year, “completions may fall short of long-term demand in most markets, as tenants frequently favor newer and higher-tech facilities,” the report commented. That trend is spurred by automation and robotics, which encourage a search for newer facilities that offer these amenities. “New move-ins have generally entailed tenants vacating older, more rudimentary facilities,” it noted.

Demand for industrial space is also driven by the growth of e-commerce. “These factors will amplify omnichannel retailers’ and logistics providers’ long-term space demand, with leasing activity showing strength in the first half of 2024,” the report stated, citing the examples of Amazon, Walmart, Home Depot and Burlington.

In the first six months of the year, some companies opted to acquire their own facilities. They included Microsoft, NVIDIA, Nestlé and Fortinet.

The additional space required to accommodate increased automation is also driving industrial demand. Over 35% of the construction pipeline consists of facilities of one million or more SF and this was the only size category to improve net absorption in the year ended June 24. Rents in this category also improved 4.6% year-over-year for new supply.

At the same time, the report predicted demand for smaller to mid-sized facilities would rise over time, encouraged by new federal programs like the CHIPS Act and the Inflation Reduction Act as well as the shift to reshoring and nearshoring that encourage domestic manufacturing. Indeed, by segment, manufacturing had the lowest vacancy rate (4.5%) but also the lowest rent growth (3.2%). As of June, roughly 92 percent of the manufacturing space under construction already had a tenant in place.

“These dynamics position most metros to observe upticks in manufacturing demand for older, sub-250,000 square foot properties, influencing some owners to upgrade existing facilities to attract prospective tenants,” the report said.

Even the smallest facilities – which represented only 2.7% of active construction — are expected to benefit. “Ranking as the least-vacant size tranche as of mid-year 2024, assets between 10,000 and 50,000 square feet captured at least a 10-year-high share of trades in the first six months,” it noted.

The report also cited an active industrial lending environment that Fed rate cuts would boost. It noted that insurance companies accounted for 25% of all industrial financing in 2023 – the highest level in eight years – “mostly in the form of portfolios priced at $25 million and above.” Regional and local banks remained the primary lenders for loans of $10 million or less, representing 33% of all loans. Manufacturing and R&D sites are favored.

“Moving forward, the industrial sector’s long-term leases, limited move-out risk relative to other property types, and high availability of federal grants and tax breaks will continue to lead lenders to view these assets positively,” the report stated.

Source: “Industrial Demand Nears Turning Point”

Newmark’s report on net lease transactions in the second quarter of 2024 showed a 14.71% slowdown from the same period in 2023. The dollar volume dropped from $10.74 billion to $8.93 billion, according to the analysis of data from Real Capital Analytics.

Counting the number of transactions rather than the dollar volume showed a 6.49% drop from 832 in 2023 Q2 to 778 this year. That suggests average deals dropped further in the price for the dollar volume to drop faster than the deal number.

Net lease share of total transaction volume was 20.59% in the second quarter of 2024 on a rolling four-quarter average. That’s a 270-basis-point reduction from the same period in 2023. And sale-leaseback as a percentage of total net lease was 16.17% in 2023 Q2 compared with 13.62% in 2024 Q2.

Broken out by property type, industrial went from $5.68 billion sales in 2023 Q2 to $5.07 billion this year, a fall of 10.74%. Retail saw the second biggest drop of 18.22%, from $2.25 billion to $1.84 billion. That was the smallest dollar transaction volume of the three types. Office transaction volume had the biggest fall at 20.47%, moving from $2.54 billion to $2.02 billion.

For the first half year, private investors have been the most active buyers, taking 46.5% of volume. They have been the most active since at least 2018. The second largest was institutional, representing 25.2%. Cross-border was 7.7%, REIT/listed 7.3%, and user/other being 13.3%.

Among sellers, private was 45.6%, institutional was 19.0%, user/other was 18.3%, REIT/listed was 11.3%, and cross-border was 5.8%.

Overall, Q2 was the third-lowest quarter since the opening of 2018. The two worst quarters were 2024 Q1, when the volume was $8.1 billion, and 2023 Q4, with a volume of $8.6%.

In terms of number of transactions, Q2 2024 was the worst over the same period. The second worst was Q1’s 791.

The average cap rate for industrial during the quarter was 6.48%, with retail at 6.60% and office at 6.77%.

According to Newmark, the average spread between blended net lease cap rates and the 10-year Treasury was about 217 basis points in the second quarter, a drop of 28 basis points from 2023 Q2.

 

Source: “Net Lease Transaction Volume Down Nearly 15%”

Retailtainment has become a significant draw for consumers, especially now as many are being more cautious with their spending dollars. According to research from AIScreen, the experience has boosted store visits and sales by 30 percent.

PREIT, which focuses on businesses transforming traditional malls into more innovative districts, is at the forefront of this trend.

In-store shopping isn’t dead
Instead of sitting home and shopping, Joe Aristone, executive vice president and chief revenue officer told GlobeSt that “people are looking to have more social experience.”

“What you’re finding is that retailers are using their physical brick-and-mortar stores to support their online business,” Aristone said.

“So what they’re trying to do is to get consumers, if you are going to buy online, at the minimum, they want you to be able to return goods at the store.”

According to Aristone, retailers have been trying to improve their entertainment offerings to a broader consumer base and get people to stay on their property longer.

“Both of those things are being driven by how we merchandise the assets, the tenants we put in, and entertainment things you can’t necessarily do online to compete with that. And then also to have a really wide offering of retailers,” he said.

Where it works the best
But where is retailtainment working best? Right now, it’s the wealthiest suburbs, according to Aristone. So think Scarsdale, New York, which was ranked by GOBankingRates as the richest area in the country, with typical home value exceeding $1.4 million.

PREIT, which has properties on mainly the East Coast, has a major focus in Philadelphia. In that market, it operates up to 17 percent of entertainment theme concepts.

“If you look at Philadelphia, for instance, Cherry Hill, which is an eastern suburb affluent trade area, is doing very well,” Aristone said, whose firm operates the Cherry Hill Mall.

While he added that urban retail has been a “little softer,” – but he thinks the demand will “come back eventually.”

More about the current state of retail and malls
When speaking about malls in general, Aristone has been seeing higher-quality malls thrive the most.

“I think you’re going to see that the top-tier malls are going to continue to do well, continue to dominate,” he said.

But it’s a different story for lower-tier malls that are classified as C or Ds. He believes those properties might “become obsolete at some point.”

Another thing is, that in Philadelphia, Aristone has noticed that mall retailers are starting to downsize.

“We probably had 18 or so malls that were operating in the (Philadelphia) marketplace. And now we’re down to about, eight or nine,” he noted.

“What’s happening is that tenants are realizing that they don’t need to have a store, eight miles or seven miles away. They can kind of operate more efficiently out of one store.”

Eventually, Aristone thinks its mall portfolio in Philadephia will dwindle to five or six.

Overall, it’s been a strong first half for the retail sector in general, as vacancies in the second quarter hit a 20-year low. However, recently there have been growing concerns about the economy. For the fourth straight month, the unemployment rate has increased and the stock market has taken a hit.

PREIT has been tracking sales from its reported retailers and noticed the demand from those in the fashion space has been “softening.” JCPenney is namely seeing less demand too, according to the firm.

While Aristone sees a “mixed bag” with consumer confidence, he isn’t too concerned right now. He stated the trend is “nothing earth-shattering or alarming to the point where there’s a panic button.”

“I think enough strong enough sales is coming out of enough other categories that we can absorb these trend lines, and it’ll be fine.”

Source: “Inside the Growing Trend of Retailtainment”