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The US commercial real estate market is looking very cheap to foreign investors, who find their currency hedging costs aligning nicely with the direction of interest rates.

Currency hedging costs are driven by interest rate differentials between two currencies. Low US rates translate to lower costs for foreign investors looking to hedge the currency risk of their US investments. Here is why this dynamic is expected to continue.

 “Short-term and medium-term rates drive hedging costs,” Ciccy Yang, director of Global Markets for Hudson Advisors told listeners in CBRE’s weekly podcast. “And on that front, the Fed’s been giving very strong hints that more fiscal stimulus is needed to keep the economic recovery on track.”

If the stimulus is less than what the Fed prefers, Yang thinks it may have a more significant role in spurring the recovery. Its tools include more quantitative easing for an extended period and a further delay on the next Fed hike.

“The Fed currently forecasts that they’re going to be on hold until the end of their forecast horizon at year-end 2023 as per their dot plots,” Yang says. “In other words, they’re already forecasting short term rates will be bound to zero for quite a long time. Now, we already saw significant hedging cost declines from the beginning of this year when US rates fell significantly in the flight to quality and Fed easing on the back of the onset of COVID-19.”

The five-year annual hedging cost for Euro-based investors in the US has fallen 100 basis points this year to 1.2% today, according to Yang. In the same period, it has fallen 50 basis points to 2.6% for South Korean investors.

“There probably isn’t that much more room for these levels to fall further,” Yang says. “But given the likely expectation of accommodative Fed policy, it does feel like the lower currency hedging costs are generally here to stay in the near term.”

So far though, foreign investors are, for the most part, not biting.

In Q3, cross-border investment fell 71% year over year to $3.5 billion, according to Real Capital Analytics. This is still better than the low of $0.5 billion seen in the depths of the Global Financial Crisis.

The drop-off in cross-border investment might be partially the result of the types of properties being sold. Cross-border groups find it easier to purchase larger properties. Sales for assets priced greater than $50 million fell 61% year-over-year in the third quarter, while properties priced $5 million and below fell 39%, according to RCA.

Some foreign CRE investors, however, are stepping up their US  allocations. In the first nine months of the year, Korean investors accounted for 8.6% of all overseas investment in U.S. commercial real estate, up from 3.7% a year earlier, accordingto the Wall Street Journal,  citing Real Capital Analytics numbers.

South Koreans invested $1.56 billion, up from $1.24 billion a year earlier, trailing only Canadian and German investors, the WSJ said. A year ago, South Koreans ranked 10th among foreign investors in U.S. real estate.

 

Source: GlobeSt

banner in the form of an abstract American flag with text of EB-5 Visa

The EB-5 immigrant investor program, which has been used to fund major development projects throughout the United States, has been limping along for the past few years, and some have even predicted its demise after rules were tightened last summer.

How might the program, which awards U.S. green cards and visas to foreigners who put a minimum of $900K into a U.S.-based project that creates or retains at least 10 U.S. jobs, fare under a Biden presidency vs. a second Trump administration? That’s a question on the minds of wealthy would-be immigrants, as well as U.S.-based developers happy to borrow money from them cheaply.

The answer, though, is fraught with politics.

“This program is an economic development program, but it’s painted with the brush of immigration,” said Aaron L. Grau, executive director of Invest in the USA, a trade group.

“Immigration is really not being touched, because it’s politically a time bomb,” said Ronald Fieldstone, a partner with the law firm Saul Ewing Arnstein & Lehr in Miami.

EB-5 has been pitched as a win-win-win-win program: the investor gets visas for him or herself and family members, plus his or her money back with a little interest; developers get access to cheap capital; and American workers are employed. An entire industry of EB-5 regional centers, which pool and loan out the investments and facilitate the visa process, sprang up as well.

While EB-5 was a lifeline of capital for developers when banks curtailed lending during and after the Great Recession, the program has been beset by ongoing allegations of fraud. It has been continually reauthorized by Congress, but only for short periods of time. It is currently reauthorized through Dec. 11, after which any new administration will likely re-examine it, potentially through a foreign investment lens.

Generally speaking, President Donald Trump has cut immigration to a trickle, though he’s spared people immigrating via EB-5. Former Vice President Joe Biden‘s platform is more open to immigration, but both politicians are wary of political backlash, Grau and Fieldstone said.

“The Obama administration was relatively neutral about EB-5,” Fieldstone said. “There are also other factors at play, such as who wins the Senate control of the Judiciary Committee, which oversees Homeland Security, which oversees USCIS,” the U.S. Citizenship and Immigration Services, which runs the EB-5 program.

Fieldstone said that legislators don’t always support EB-5 along party lines, but instead because of rural/urban concerns since most of the program dollars get invested in urban areas. Sen. Chuck Grassley of Iowa and Democratic Sen. Patrick Leahy from Vermont have led the charge calling for reform of the program to stem fraud and abuse.

“There’s a good chance one of them could come to chair the Senate Judiciary Committee and set the tone for EB-5’s future,” Fieldstone said.

Grau pointed out that significant changes were made to the program last year, most notably that the minimum investment went up from $500K to $900K.

But interest in the program has dropped precipitously since the coronavirus began, as stricter rules and additional factors have dampened enthusiasm. Sharing an analysis of USCIS data, Lee Y. Li, director of policy research and data analytics for IIUSA, noted that 4,285 EB-5 investors filed petitions for immigrating in the first half of fiscal year 2020, but most of those probably invested funds before the new regulations took place.

“And only 21 I-526 petitions were filed in Q2 FY 2020, when the new regulations fully went into effect,” Li said.

The USCIS website shows that more than 100 regional centers have closed this year. But developers would still love to have cheap EB-5 loans as part of their capital stack.

“Developers will still be interested in using EB-5 funds due to the extremely low rate of approximately 1%,” said J.C. de Ona, Southeast Florida Division president of Centennial Bank. “With banks lending more conservatively nowadays, EB-5 funds can be used to bridge the capital gap required by a senior lender. If done correctly, it can be a win-win for everyone.”

Going forward, Grau said that industry leaders would be happy to find common ground to assuage concerns about the program.

“Senior staff at USCIS, Sen. Grassley’s office, Sen. Leahy’s office, the Judiciary Committee staff on the House side all agree that any reauthorization of the program needs to include integrity measures,” Grau said. “There will be material changes regardless of who is president. Right now, the law does not require that annual reports be provided to investors. The devil is always in details, but the industry is behind integrity measures. There’s no requirement that there be third-party evaluations or audits. We support that.”

Families that pursued visas so that young people could attend college in the U.S. have been put off. In April, Trump issued a temporary ban on immigration that has since been extended through the end of 2020 (though it spared people using EB-5).

Rohit Kapuria, counsel in Saul’s Chicago office said. “There is a sentiment globally that the U.S. under this administration is not immigrant-friendly,” which has led to a drop in demand from would-be foreign investors.

The administration has fought legal battles over whether students stuck abroad during the pandemic would meet their visa requirements, and over wages for workers on H-1B visas. Furthermore, the State Department now recognizes Hong Kong as a part of mainland China, which will result in longer backlogs for applicants.

“It’s those types of restrictions under this administration that have had a very negative effect on EB-5, because the bottom line is: The U.S. is no longer an immigration-friendly jurisdiction,” Kapuria said. “So EB-5, by default, obviously, take the hits. Other countries are now capitalizing on investment-based immigration services, such as New Zealand, Portugal, Australia, Cyprus. These are all immigrant-friendly jurisdictions. In Canada, people are basically saying, ‘Why go to the U.S. if there’s a certainty of more anti-immigrant flavor?’ They’d rather go elsewhere. That’s been something that we are concerned about, at least in the immigration world. What would happen if we have four more years?”

“For now, the focus of the market will be on who wins the general election, as investors try to price in risk under each possible administration,” Fieldstone said. “No. 1, getting the election over is good. It doesn’t matter who wins. It’s good to get the election over so the uncertainties in positions taken by the politicians and the parties will become much more clear.”

 

Source: Bisnow

Midsection of businessman with true and false wooden blocks on seesaw at desk

Panelists representing the industrial, office, retail and multifamily sectors of commercial real estate made the case for investment in their respective sectors at NAIOP’s CRE.CONVERGE, the virtual conference recently taking place.

In a real-time audience poll, the attendees cited industrial as the sector they would be most likely to invest in.  However, much of the discussion pointed to the upsides in what, so far in 2020, has been mostly seen as a negative story for the other sectors.

“Retail may be the sector everyone loves to hate, but all that means is that it’s at the bottom of a cycle that is going to rebound,” said Wade Achenbach, executive vice president, Portfolio Management at Kite Realty Group. “The strip sector and the mall business were struggling for a lot of reasons, and COVID has dramatically made them the hardest hit. If you just look at that trend alone, that’s going to be short lived. You have to be very careful of what you’re looking at. There is no online-only retailer that’s making money today, nor has there ever been. What’s really happening when somebody says e-commerce?  It’s more of an omnichannel. Even Amazon realizes the value of stores with its purchase of Whole Foods.”

The old adage, buy low and sell high, applies.

“I think there is more of an opportunity (in retail) than any of the other sectors,” Achenbach said.

Speaking on behalf of the office sector, which many are questioning in light of the shift to work from home, George Hasenecz, senior vice president, Investments at Brandywine Realty Trust, said its demise has been incorrectly predicted in the past — just as it is now.

“When you think about all the economic events and social trends that have occurred, the dot com bust, September 11, the densification of the office and COVID, people have always said that office is dead. Office has always reinvented itself,” said Hasenecz. “Work from home has been successful in response to the crisis, but it’s very difficult to work in a collaborative environment. How do you maintain your culture, bring new employees on and recruit? Work from home really does go against people’s needs and desires to come together. We think that Class A office is going to be in high demand. Companies want to make sure their employees and their talent feel safe. There still is the competition for talent and office space will be used as a recruiting tool.”

A similar story is playing out in the multifamily sector, said John Drachman, co-founder at Waterford Property Company. The pandemic has driven many people out of dense urban areas and into suburban multifamily units. The turnaround has been sharp in large markets such as New York, San Francisco, Los Angeles and Chicago, where vacancies are increasing and rents are falling. One year ago, the main story line in these markets was a lack of affordable housing.

“As with retail and office, a wider perspective will benefit investors,” Drachman said. “People will move back to urban areas. If you can stomach a little bit of pain, over the long term there could be great buying opportunities for urban apartments.”

Rene Circ, senior managing director and COO at GID Industrial and GID Investment Advisors LLC, spoke on behalf of the industrial sector, which to no one’s surprise seems to be strong. He said there are essentially very few people who are not buying things online.

“I would argue that too much capital is allocated to multifamily and way too much is allocated to retail,” Circ said. “Investors will need to invest in industrial.”

The panel was moderated by Will McIntosh, head of Research at USAA Real Estate.

 

Source: GlobeSt.

American dollars grow from the ground

As the Covid pandemic begins to taper off, the CRE industry is ready to get back to work and take advantage of the underlying strong economy.

There are of course distressed real estate sectors caused by the pandemic like hotels, struggling malls and blue city apartments and office buildings. However, this is an excellent time to invest in these and other areas of CRE to take advantage of the distressed assets with historically low prices and the potential for significant increases in occupancy, revenue, and cash flow.

Here are five post Covid investment strategies:

1. Acquire Deeply Discounted Hotels In Suburban Markets

The hotel market has been hurt more than any other property type, by the pandemic with significant declines in occupancy, RevPAR, and cash flow. Most hotels are operating at 40% occupancy and for an asset that has high fixed costs, this is unsustainable for long periods of time. Many hotels will close permanently like the New York Hilton in Times Square, while the majority will limp along or be foreclosed by the lender until the economy recovers. However, this represents a great opportunity for hotel owner/operators to acquire these hotels at deep discounts. It is recommended that investors focus on hotels in suburban markets with national franchises and close to airports that will benefit from the return of business travel. At 40% occupancy most hotels lose money, but, as the economy improves and the deferred demand from business and leisure travel kicks in, the properties should see tremendous increases in net operating income and cash flow.

2. Sell CRE Apartments And Office Buildings In Blue Cities; Reinvest In Red Cities

It is recommended that investors sell apartments and office buildings in these markets and reinvest the proceeds in red states and cities and in select suburban markets that surround blue cities. Per Real Capital Analytics, distressed sales of office and apartments during Q2-20 totaled 18 deals worth over $403 million. This will be just the tip of the iceberg as distressed sales will increase significantly during the next six to twelve months. It is expected that a diversified portfolio of CRE assets in red states and cities to outperform a similar portfolio in blue states during the next ten years.

3. Acquire Deeply Discounted Mall Assets For Repurposing

The distress in the retail sector has been amplified by the pandemic and many retail experts expect 15,000 stores to close in 2020. This is up from 10,000 closures in 2019. However, there is a burgeoning CRE industry in buying old, dilapidated, and distressed retail malls and repositioning them with hotels, industrial space, bowling alleys, food courts, pop-up drive inns, medical tenants (see the article on the growth of medical retail) and residential space. There have been numerous examples around the country of CRE firms acquiring old malls and power centers at deeply discounted prices of $20-$50 per square foot, closing 50% or more of the retail space and converting the vacant space to other uses as shown above. There are very few firms around the country that have the CRE investment and development expertise to complete these types of deals which require a change in the “highest and best use” of the asset. Although these projects have high risk and are difficult to finance, they can produce substantial investment returns.

4. Develop Suburban Office Buildings Around Blue Cities

The flight of individuals and businesses from blue cities is real and one of the prime beneficiaries will be suburban office markets that ring these blue urban locations. The suburban office building market nationally had been fairly anemic pre-Covid, with vacancy rates over 12% and slow rent growth. Many suburban markets are littered with 1980s and 1990s vintage office buildings that never attained an occupancy above 85%. However, in a post Covid world, this metric will turn around with a substantial increase in demand for suburban office product. Currently, the bright spot is suburban Class A office which saw an addition of 3.9 million square feet (aided largely by flight to quality and expansion into new campuses) and an increase of .3% in average rents to $32.15 per square foot. During the first half of 2020, the U.S. office market per Jones Lang Lasalle, recorded 14 million square feet of occupancy losses, bringing the net absorption to a negative 8.4 million square feet, or -0.2% of inventory. The blue cities of New York City and San Francisco, which have seen substantial out migration of companies and residents, were responsible for 26.7% of all net occupancy losses in the second quarter. Sublease space rose by 10.6% and 5.2 million square feet to a mammoth 61 million square feet nationally. Developers of office buildings should shift their focus to blue and red state suburban areas as demand for quality office space will surge.

5. Sell Urban High-Rise Apartment Buildings; Reinvest In Suburban Garden Apartments

The out-migration of renters from high priced blue cities that are technology centric is a permanent structural change for the rental markets in the U.S. According to Yardi Matrix, YoY rent growth through August 2020 has declined -5.5% in San Jose, -5.1% in San Francisco, -1.0% in Portland, -2.1% in Los Angeles and -1.8% in Washington D.C. Forecasted rent growth for these same cities for the rest of 2020 will decline further and substantially. If you are a millennial tech worker and can work from home, why would you spend $3,500 per month for a one-bedroom apartment in San Francisco, if you could rent an apartment in Lake Tahoe or Reno, NV, for $1,200 per month? Even though apartment metrics will further deteriorate in these urban wastelands, demand will surge in suburban markets that surround these areas. One of the most over-priced CRE assets during the last few years has been new urban high-rise apartments that were trading at sub-4.0% cap rates in many core markets. Owners of these assets should sell them before they fully realize a decline in net operating income and higher cap rates.

 

Source: GlobeSt.

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A key component of a successful real estate investment is choosing the right asset class to invest in within the given market.

Supply and demand is constantly changing, meaning what was a lucrative investment one, two, or 10 years ago may not be worthwhile today. See what types of real estate are in high demand right now and how investors can participate in the growing market.

Before we dive into where opportunity lies, note that just because there’s a general demand for these types of real estate doesn’t mean there’s opportunity for them in every market. Real estate is a very localized business that operates on a macro and micro level. For active investors, it’s important to identify what opportunities lie in your local market or participate in a more diversified investment portfolio specializing in these asset classes through a real estate investment trust (REIT).

1. Cold Storage

Cold storage is a type of industrial real estate responsible for the storage and transportation of cold goods, including food products. The global pandemic interrupted the food supply chain, making consumers and large grocery retailers adapt to the shift in consumer preferences for online grocery sales as well as the need for more cold storage as a whole.

This specialized niche has several barriers for entry, making it a difficult asset class to invest in outside of Americold Realty Trust (NYSE: COLD). Americold is the only industrial REIT specializing in cold storage, owning more than 1 billion cubic feet of cold storage space. The company is well positioned financially to grow with the increased demand.

2. Data Centers

We are undoubtedly in the age of technology, with more people and products becoming reliant on the efficiency, ease, and convenience of technology. Data centers are responsible for safely storing and computing data for the government, large corporations, cloud companies, and even data used from phones.

Demand for data centers has been on the rise over the past decade, but COVID-19-related work-from-home orders have put even more pressure on this growing sector. While demand as a whole is up, certain markets are leading the sector, including northern Virginia and Atlanta.

Data centers are another unique sector to invest in with large barriers for entry, making any of the top data center REITs a wonderful way to participate in this industry.

3. Residential Housing, With Emphasis On Affordable Housing

A study conducted by Freddie Mac found that the U.S. is short 2.5 million to 3.3 million housing units in 29 states, with states like Oregon, California, Texas, Minnesota, Florida, and Colorado the leaders in the housing shortage. These states, among others, are also home to some top-tier markets, where housing prices far outpace wages for the area, putting affordable housing in serious demand.

This means multifamily properties, single-family homes, and new construction can potentially be good investments in the right markets. This asset class is the easiest point of entry for investors, with dozens of options available to participate in actively, like fix-and-flip or rental properties, or passively through residential REITs.

However, it’s important to note that with current eviction moratoriums and a record number of tenants being unable to pay rent, the rental industry is facing tough times, making this a volatile market to participate in right now as a smaller investor. However, this industry is fairly resilient, and while it’s currently facing unique challenges, this market clearly has long-term demand and should bounce back in time.

 

Source: The Motley Fool

Neon - Vacancy 2354

The pandemic is expected to drastically reshape commercial real estate, leaving thousands of vacant and underused spaces nationwide. But some developers and investors are keen to seize the chance to convert those properties into other uses.

Lord & Taylor’s flagship department store in Manhattan, for example, will soon house office workers for Amazon, and a tourist destination in the heart of Hollywood is getting a $100 million face-lift that includes converting underused retail spaces into offices.

“Nobody ever lets a crisis get in the way of creating opportunity,” said Sheila Botting of Avison Young, a commercial real estate services firm in Toronto, where she is president of the professional services practice for the Americas.

Conversion waves in the past were often localized. For instance, more than 13.8 million square feet in lower Manhattan changed over after the Sept. 11 terrorist attacks in 2001, according to the Alliance for Downtown New York. But those shifts were nothing on the scale that is expected in the next 18 to 24 months, experts say.

In retail alone, at least 7,700 stores totaling 115 million square feet were expected to close this year as of early August, according to data provided by CoStar Advisory Services. Most of these closures will be in malls, which were struggling long before the pandemic pushed department stores like JCPenney and Neiman Marcus into bankruptcy.

At the same time, 172.7 million square feet of Class A office space, typically the highest quality, is expected to come online this year and next. Only 59% of it has been leased, below the average of 74%, according to the CoStar data. And nearly 1 in 4 hotels nationwide faces possible foreclosure as owners fall behind at least a month on loans, the American Hotels & Lodging Association said. Simply put, a lot more space is going to be available out there.

“If there was a sudden drop in demand for Cheerios, General Mills would just pull the Cheerios,” said Victor Calanog, head of commercial real estate economics at Moody’s Analytics. “Then there’s going to be less, and prices won’t have to fall as much. But once you’ve built an office building, you can’t exactly take it off the market.”

Some of the causes of the national oversupply in commercial real estate predate the pandemic. For example, the shift to e-commerce has hastened many stores to the grave in recent years — more than 10,200 stores closed in 2019, according to CoStar.

Also, businesses that use offices have been pulling back on space amid rising digitization and other efficiencies as well as demographic shifts — younger generations in general are comfortable with less office space. The commercial real estate industry’s rule of thumb in the 1980s was 200 to 300 square feet per employee, according to Moody’s Analytics. By 2019, the average had fallen to 126.5.

And industries as diverse as real estate, media, technology and banking have been flirting with more telecommuting for decades. Moreover, a sizable chunk of leased space goes largely unused during the workday anyway — estimates place it at 30% to 40% — as people are out of the office for various reasons. But the crisis has created a chance for some developers to reassess their strategy.

“I think for the real estate community, this represents a moment in time to think about current assets, how they’re being used and what future options might be,” Botting said.

The starkest example yet of this approach might be Amazon’s possible plans to convert JCPenney and Sears stores in shopping centers owned by mall operator Simon Property Group into distribution warehouses, which was reported earlier by The Wall Street Journal. The e-commerce giant is also behind the overhaul of the shuttered Lord & Taylor store on Fifth Avenue, turning 676,000 square feet into office space for about 2,000 employees by 2023. Amazon declined to comment for this article.

Last month, DJM Capital Partners, a real estate services firm, and private equity firm Gaw Capital Partners revealed plans to overhaul the Hollywood & Highland, a Hollywood entertainment complex on the same block as the Dolby Theater, which hosts the Academy Awards. Those plans call for carving nearly 100,000 square feet of creative office space out of existing retail.

“When the firms bought the complex last year, they had a low opinion of the future of traditional brick-and-mortar retail,” said Stenn Parton, chief retail officer of DJM. “Then the coronavirus shut down thousands of businesses across the country. If anything, I think it’s solidified our business plan as we’ve seen the record store closures as a result of the pandemic.”

Most conversions won’t be as grand; instead, they’ll involve smaller and less heralded properties. Still, a wide variety of conversion projects is expected.

“Developers see an opportunity in converting hotels into continuing care retirement communities,” said David Reis, chief executive of Senior Care Development in Harrison, New York. “It’s less expensive to convert a property than build from the ground up, especially in expensive markets such as New York. If you can buy space for the equivalent of 50 cents on the dollar less than new construction, then clearly you’re going to be fine when you do a conversion.”

Nationally, new residential construction generally average $225 to $350 a square foot, compared with $150 to $200 for an office-to-residential conversion, according to a report provided by project management firm Cumming. For industrial construction, the average new project costs $125 to $250 a square foot, but that can fall to $75 to $175 for a retail-to-industrial switch.

Despite the potential for lower costs and the emerging universe of options, commercial real estate conversions do pose challenges. Zoning and technical design can stymie some changeovers. And it can be more difficult to draw financing for conversions during the pandemic, when lenders are more averse to risk.

“Core and stabilized assets are drawing financing opportunities,” said Eric Rosenthal, a co-founder of Machine Investment Group, a real estate investment firm. “Transition stories, or when there’s an element of execution beyond just buying it and managing the property, the environment to finance those assets is very challenging.”

Traditionally, the best conversions have increasingly been obsolete properties.

“Typically, if they’re older and they’ve gone beyond their useful life — reduced occupancy, reduced cash flow — they are ripe for transformation,” Botting of Avison Young said.

In an undated image from Related Companies, a rendering of what an office conversion could look like in the Neiman Marcus space at Hudson Yards in New York. (IMAGE CREDIT: Related Companies via The New York Times)

But even newer properties are on the table. Neiman Marcus opened a 188,000-square-foot flagship store at Manhattan’s Hudson Yards just last year as the anchor retail tenant in the nation’s largest private real estate development. Now the Related Cos., owner of Hudson Yards, is pivoting. Philippe Visser, president of Related Office Development, said by email that the store would become “the most exciting office opportunity in New York City.”

The move harks to previous crises that forced a metamorphosis in commercial real estate. In the 1990s, lower Manhattan was racked by high office vacancies and population drain, and William C. Rudin, president of New York landlord Rudin Management, helped lead efforts to rejuvenate the area. More than 4.6 million square feet was converted from 1995 to 2001 — including glassy office buildings no one thought would make decent apartments.

“When things get bad enough,” Rudin said, “it forces people to come together and come up with ideas.”

 

Source: SFBJ

46089472 - cash dollars lying on the plane.

Industrial prices could set to increase as a result of increased activity and rents during the pandemic.

According to a recent survey from RCM/LightBox, industrial players expect rents to increase from 4% to 7%. The asset class has already proven to be resilient during the worst months of the pandemic. As a result, many investors have flocked to the asset class.

“Experts in the industry—brokers, investors and developers—shared with us their expectations that by the end of the year we’d see pricing and rents increasing from 4-7 percent. Those expectations were expressed for many primary and a number of secondary markets, in key population areas, across the country,” Tina Lichens, SVP of broker operations at LightBox, tells GlobeSt.com.

Not all industrial assets are created equal. Manufacturing, for example, has not performed well during the pandemic. Investors as focused on ecommerce-related uses, pharmaceutical-related uses and any industrial supporting essential uses.

“Among the industrial properties to watch are those tied to consumer goods, pharmaceuticals, and other essential services, along with last mile facilities that support growing population bases with quick delivery options,” says Lichens. “Not to be overlooked are mission critical facilities, such as data centers and corporate food products facilities. Data centers, for example, have become increasingly important because so many people are working from home.”

Manufacturing and outdated industrial—which could pose a higher risk in a down market—are the least popular.

“Those subcategories that face the greatest exposure could be older, obsolete facilities along with smaller multi-tenant facilities, particularly those not in strong and established metro corridors,” says Lichens. “Given some of the uncertainties that exist in the overall economy, particularly for small businesses, it may be difficult to underwrite the acquisition of these facilities without predictable cash flow.”

The increased demand for ecommerce and the expectation of increased pricing has created enthusiasm for the asset class, but Lichens says that there is no reason to think that investors are being overly positive.

“Various reports point to growing consumer demand for online shopping and significant increases in store and online activity from Target, Walmart and others. Even before the pandemic, the experts pointed to the increase in ecommerce activity as reason to be bullish on the industrial market,” Lichens says. “The pandemic has truly emphasized our reliance on ecommerce and caused certain areas to experience tremendous growth. With more people in the U.S. accustom to and now embracing ecommerce, it has become a new way of life that has changed our entire consumer culture. It is difficult to envision a shift in the other direction.”

 

Source: GlobeSt.

As shopping centre and high street landlords survey the wreckage left by coronavirus, warehouse owners are facing a different problem: how to deal with record demand.

The pandemic has pushed more consumers online, prompting a rush for warehouse space, from small “last-mile” delivery sites near city centres to cavernous “big-box” distribution centres

Amazon has led the charge. The company, which has added an eye-watering $600bn to its market capitalisation this year as sales have jumped, is inking lease agreements on mammoth warehouses around the world. It has committed to opening 33 “fulfilment centres” in the US this year, an additional 35m square feet spread from Atlanta to Arizona.

The US ecommerce giant is also the incoming tenant of a 2.3m square foot warehouse on London’s outskirts, according to people with knowledge of that deal. Amazon’s sprawling expansion is one reason why investors are sensing opportunity.

The take-up of UK logistics space hit record levels in the second quarter of the year, according to property group CBRE — despite the lockdown.

“Following a quiet few months after coronavirus hit, investors are back with a vengeance”, said David Sleath, chief executive of Segro, the dominant logistics company in the UK and a sizeable participant in Europe which last week said it had lifted first-half profit. “If you are a global institutional investor and you want exposure to commercial real estate, this is an attractive place to be.”

A decade ago, ecommerce accounted for 6.7 per cent of all retail sales in the UK, according to the Office for National Statistics. By February, the month before the outbreak, the figure was 19 per cent. By May it had hit 33 per cent. In April, 27 per cent of purchases were made online in the US, according to the commerce department and Bank of America.

Until recently, the most desirable property to own was a traditional mall. Malls had a natural moat, being difficult to develop and serving a catchment area

“That share was likely to diminish as stores reopened,” cautioned Mr Sleath, “but incoming tenants were looking to crystallise that temporary spike into increased capacity”.

“There’s a wall of cash coming into our sector,” said Marcus de Minckwitz, an investment adviser on European logistics at Savills property.

Every extra £1bn spent online means the addition of almost 900,000 square feet of logistics space, according to CBRE. New York-listed Prologis, the world’s largest warehouse company, estimates that 1.2m sq ft of space is needed for every $1bn in ecommerce sales in the US.

Gains from ecommerce tenants far outweigh the losses from bricks-and-mortar retailers, according to CBRE, one reason why Blackstone, the world’s largest private property owner, has described logistics as its “highest conviction” sector.

“Until recently, the most desirable property to own was a traditional mall. Malls had a natural moat, being difficult to develop and serving a catchment area . . . Logistics for a long time was viewed as the other end of the spectrum: not so exciting and more easily replicable,” said Ken Caplan, global co-head of Blackstone Real Estate. The rise of ecommerce had shifted that whole dynamic.”

In June 2010, Segro’s market capitalisation was less than £2bn, according to data from S&P Global. Now at £11.8bn, it is comfortably the UK’s largest listed property group; UK shopping centre owner Intu, meanwhile, has collapsed. The value of US peer Prologis has climbed a fifth this year to roughly $77.5bn.

Dozens of shopping centres in the US are being turned into industrial sites, according to CBRE, which says Covid-19 will accelerate the trend. This week, the Wall Street Journal reported that Amazon was in talks with mall owner Simon Property to repurpose department stores as distribution hubs.

Thanks to the ecommerce boom, CBRE predicts there will be demand for 333m sq ft of new space in the US by 2022 — treble its previous estimate — and expects rents to grow by about 6 per cent a year. Amazon is not the only eager tenant. Fashion retailers with a limited online presence have desperately sought space to park stock they could not shift in the pandemic.

“They already have warehouses full of clothes, then next season’s come in and they can’t stack it,” according to one UK property agent.

“But while some warehouse owners had suffered hits to rental income from retail tenants in particular, investors bidding for new sites were achieving few discounts,” said Mr de Minckwitz.

“Some indiscriminate investors were likely to get caught out, warned Mr Sleath. “There will be more retail fatalities, that will mean empty warehousing as well as shopping centres. It’s very important to think about where you place your money.”

Asset manager PGIM bought five German logistics sites last month and said it was optimistic that demand would only grow. Private equity firms are piling in too: as well as Blackstone, Meyer Bergman plans to raise €750m to invest in Europe.

“Investors needing long and strong sources of income, such as sovereign wealth funds and European pension funds, were also attracted by the sector,” said James Dunlop, a fund manager at Tritax Big Box.

“But some might come unstuck,” cautioned Adrian Benedict, head of real estate solutions at Fidelity. “There’s a flood of capital from retail to logistics. Inevitably, with every crisis, you see those poorly considered deals at the end of the cycle are the ones you really regret.”

 

 

Source: SFBJ

Looking for a safe place to put your money to wait out the coronavirus pandemic?

Healthcare stocks and real estate investment trusts in the sector aren’t a bad idea.

REITs and companies that own hospitals, medical offices, and medical science research facilities are expected to weather the pandemic and are considered safe bets even outside of health crises, according to CNN.

Kenneth Leon, an analyst with CFRA Research recommends three entities in particular: Alexandria Real Estate Equities, Healthcare Trust of America, and Medical Properties Trust.

They are each paying dividend yields of between 2.7 percent and 5 percent, making them attractive alternatives to bonds as the Federal Reserve slashes interest rates.

Companies that own senior living centers, however, probably aren’t the best bet. Leon said senior living centers will have trouble safely showing prospective new residents their facilities, pointing out that many underwent lockdowns during the flu seasons of 2018 and 2017.

The spread of Covid-19 is putting pressure on most other real estate sectors, particularly residential markets in areas with numerous cases of the virus. Home sales are down in Milan and Italy’s Lombardy region, for example. Daily deals in Seoul are down 90 percent.

Miami-Dade County has suspended all eviction activities as part of its declaration of a state of emergency.

New York landlords are stockpiling soaps and hand sanitizers and ramping up cleaning of their buildings. After an employee tested positive for the virus, Newmark Knight Frank stationed nurses at its Park Avenue office to screen clients and employees.

 

Source:  The Real Deal

Will the potential economic slowdown have a significant effect on the commercial real estate market in South Florida? Not really, says Nathan Perlmutter, vice president in commercial lending at TD Bank, in this podcast.

Listen to the podcast for more insights on:

  • Projections for the multifamily sector.
  • Miami office sector trends that CRE experts are watching in 2020.
  • The impact of the global trade war on the industrial sector’s growth.
  • How landlords are adjusting to major changes in the retail landscape.
  • The effect millennial preferences are having on the multifamily market.
  • The biggest CRE trend in South Florida in 2020.

 

 

Source:  SFBJ

Slashing taxes and taking a hands-off approach to governance attracted thousands of residents to places like in Lake Wylie, South Carolina. But politicians neglected to spend money on critical infrastructure, and now the Republican-led county council has placed a 16-month moratorium on all new development.

The York County Council said that the town, where the population has tripled since 2000, needs to get a better handle on growth, the Wall Street Journal reported. Several years of outsized development has strained Lake Wylie’s water system, schools, and roads.

The moratorium affects commercial and residential rezoning requests as well as considerations of new apartment complexes and subdivisions.

“New development in the town isn’t of the kind the town needs,” said Council member Allison Love. “For example, there are seven car washes and six self-storage facilities on the town’s main drag but few restaurants and doctors’ offices. Many residential subdivisions look almost identical.”

Love and her colleagues said they gathered thousands of signatures supporting the moratorium from residents of the town who are tired of overly long commutes caused by clogged roadways and water main breaks. Three mile drives across town can take up to 45 minutes in some cases and residents have seen a dozen boil-water advisories in the last two years.

Other towns in the Sunbelt region have struggled with similar issues related to development. Development firms like the Related Group have expanded into small towns across the region in search of returns.

The moratorium may be too late to relieve near-term pressure on Lake Wylie, though — there are currently around 3,000 new homes and apartments approved and in various stages of construction in the town.

 

Source: The Real Deal

Florida state sign

Florida‘s state legislature just convened for its 2020 session, charged with passing laws and an estimated $91.4B state budget over the course of the next 60 days.

In his annual State of the State speech to kick off the legislative session, Gov. Ron DeSantis touched on everything from raising teacher pay to reducing barriers for occupational licensing. DeSantis said he would like to see people who pollute water be penalized and that $1B in mitigation funds would soon be distributed to areas affected by hurricanes. The first-term Republican said the state had a chance to correct some environmental wrongs and brace for sea-level rise.

Real estate professionals from around the state talked to Bisnow about other measures the legislature will be considering that could affect the industry. Of the 3,000+ bills that get filed each session, fewer than 10% pass.

Florida NAIOP President Darcie Lunsford said her group will continue its years-long fight against the state charging sales tax on commercial rents — something that only Florida does. Some critics argue this amounts to double taxation in many cases, since tenants already pay for certain real estate taxes when they sign triple-net leases.

“It’s an onerous tax that is unique to Florida and makes us less competitive,” said Lunsford, an executive vice president at Butters Construction.

She said a bill hasn’t yet been filed, but probably will be in February. For three years in a row, the rate has been reduced by a fraction of a percentage point — it is now at 5.5%. Lunsford said that rolling back the tax is challenging because Florida doesn’t have a state income tax, so it relies on such measures to fund state government functions. She estimates the tax brings in about $1.8B per year. The recent reductions have resulted in about $156M less being paid to the state.

“NAIOP is pushing for legislation that would tax internet retailers the same way as brick-and-mortar retailers, which could bring in $300M to $400M annually,” Lunsford said. “It’s a way to shift some of the tax burden off the commercial real estate sector.”

NAIOP also hopes to revive the FAST Act, a measure that was proposed last year, which would require local governments to offer expedited permitting processes, cap fees, and establish timelines for issuing and replying to permits. Lunsford said that state law now requires permits to be issued within 120 days.

“But there’s no teeth in the law as cities struggle to keep up with demand,” Lunsford said. “Another proposal, HB469/SB1224, would drop the requirement that two witnesses sign leases, which is not necessary in the modern era, when people sign electronically.”

NAIOP will be hosting events at the Capitol Jan. 21 and 22 in Tallahassee.

The nonprofit 1000 Friends of Florida called for smart growth management, lest unbridled sprawl ruin the things that make the state an attractive place to live and visit. Water quality and traffic congestion are top concerns.

The organization has outlined its legislative priorities for 2020. These include repealing an amendment that passed last year that could make citizens pay a developer’s legal fees in certain cases — such as when a developer seeks an exemption to a local comprehensive plan, citizens oppose it, but the developer prevails.

“That amendment was tacked onto HB7103 on the last day [of the] legislative session. It never got vetted by the public, by committee, by subcommittee. There was no staff analysis,” 1000 Friends Policy & Planning Director Jane West said. “It was a dirty move — and it’s had massive repercussions in the state. People are dismissing cases that have been pending for years. People are opting not to challenge new projects.”

SB250, introduced by Sen. Lori Berman (D-Palm Beach), would repeal that amendment. 1000 Friends is also fighting the amendment in the courts, hoping to have it deemed unconstitutional.

Lunsford said that the CRE industry would see a repeal as “going backwards,” and that the law as it stands could benefit not just developers, but either party that prevails.

The legislature last year also authorized three new highways. 1000 Friends is hoping to see that decision reversed, but it would require a repeal, plus de-authorizing related funding that passed. Instead, the group is calling for generous funding for land acquisition efforts, such as Florida Forever, the Rural and Families Lands Program, Florida Communities Trust and other land protection programs.

“Our environmental tragedy is the destruction of our raw lands,” West said. “You see it in every part of the state you go to … sprawl after sprawl after sprawl.”

The only sure way to save Florida‘s green space is to buy it and protect it in perpetuity, she said. The Florida Forever program is set up to acquire recreation and conservation lands. It is funded by doc stamps, a fee paid when people buy and sell property. It had been popular with both the left and right, including Gov. Jeb Bush, back to the early 2000s, but was essentially wiped out under eight years of Gov. Rick Scott. The current budget includes $33M for Florida Forever; DeSantis is asking that figure to be bumped to $100M in 2020-2021.

“We’d like to see it back to historic funding levels, over $300M,” West said. “But this is a nice start.”

Florida Realtors are also paying attention to Tallahassee. The group’s top legislative priorities for 2020 include environmental protection and full funding of housing trust funds, according to its website. For more than a decade, state money that is supposed to be in a trust fund to create affordable housing has instead been diverted for other uses, steering away some $2B.

Florida Realtors is also lobbying for a reduction in the business rent tax and will support initiatives that allow owners to rent out their private properties more freely on Airbnb, which was in a heated legal battle with the city of Miami Beach before settling in August.

Former Florida Speaker of the House Dean Cannon, the president and CEO of law firm Gray Robinson, now oversees lobbyists who closely monitor the state legislature. He said the commercial rent tax could likely get cut a bit more, and that water quality and environmental funding will loom large, especially because DeSantis has been vocal about those issues.

“The House and Senate will want to deliver a good environmental message because it’s an election year,” Cannon said. “I think they have the collective political will to get something done.”

Appropriations decisions — such as which projects get funding, and whether the affordable housing trust gets raided again — are likely be influenced by economic forecasts that legislators receive in February.

“That’s the last one we get before voting on the budget. It’s always sort of a question mark,” Cannon said.  “All budgeting is balancing an infinite number of priorities against a finite number of dollar. There’s no perfect policy — just a best effort at balancing the interests.”

 

Source: Bisnow