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CRE shattered performance records in the third quarter, driven by household wealth and record demand.

“Some of the results are shocking,” Marcus & Millichap’s John Chang says. “I anticipated strong commercial real estate momentum in the third quarter as the lockdowns had pretty much ended, new households were being formed, spending had increased and companies were shifting their positioning toward stronger growth⁠—but I was still surprised. At the start of Q3, many companies were taking a wait-and-see approach, and leasing was soft.

But despite that, about 26 million square feet of space was leased in Q3, on par with the quarterly pace of demand from 2018 and 2019. That brought vacancy down 10 basis points to 16.1%.

“Expectations for retail were positive going into Q3, but I don’t think they were very optimistic,” Chang says.

But the sector outperformed, filling 28 million square feet of space in the quarter and posting the best quarterly absorption numbers since 2017. Total occupied retail square footage is now officially back above pre-COVID levels, and vacancy fell by 20 basis points. Average rents also rose 2% year-over-year.

“I wouldn’t say the retail real estate sector is crushing it, but compared to most people’s perception, retail is outperforming expectations and also surprised to the upside,” Chang says.

As for apartments, 273,700 units were filled in the quarter, a record absorption number for the sector. Developers are on pace to deliver a record 400,000 units this year, and the national vacancy rate hit 2.8% for the quarter. Rents are also up 11.2% year-over-year.

“I don’t think anyone was expecting an all-time low vacancy rate and double-digit rent growth,” Chang says.

And in the industrial sector, rent growth was up 3% quarter-over-quarter and 8% year-over-year, in alignment with most forecasts. The surprise? Absorption: 157 million square feet were absorbed in the quarter, bringing the annual total to 364 million square feet so far.  That shatters 2016 highs.

“The third quarter delivered better than expected results with some record-breaking space demand numbers,” Chang says. This will likely add more fuel to investor optimism, especially in the office and retail sectors where expectations have been more modest.”

Chang has said he expects the momentum continue into the end of 2021. Supply and demand trends remain favorable, and active investors continue to price strong growth into their underwriting, particularly for industrial, self-storage and apartment properties.

 

Source: GlobeSt.

 

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

Tom Robertson and Michael Rauch

Tom Robertson and Michael Rauch

Michael Rauch and Tom Robertson, Senior Managing Partners with CRE Florida Partners, closed over 603,110 square feet of office, industrial and land sale and lease transactions valued at $25,162,500 in 2015.

Noteworthy deals that CRE Florida Partners closed include:

  • Nashville, Tennessee-based Hospital Corporation of America (HCA) (NYSE: HCA), a for-profit operator of health care facilities and largest such operator in the world, leased 22,700 square feet in a new, state-of-the-art, medical buildings at Lake Whitney Medical and Professional Park, located at 291 NW Peacock Blvd. in Port St. Lucie West, within Lake Whitney Medical and Professional Campus. The deal closed in June 2015. Tom Robertson represented the landlord in the deal.
  • Brookdale Corp. (NYSE: BKD), which merged with “Nurse On Call,” provides home healthcare solutions through skilled nursing and rehabilitation, leased 11,351 square feet at Lake Whitney Medical and Professional Park, representing an expansion of its facilities. Brookdale Corp., with nearly 50,000 associates and more than 600 retirement communities, is the largest owner and operator of senior living communities throughout the United States. The deal closed in June 2015. Tom Robertson represented the landlord in the deal.
  • Sand & Steel Properties LLC purchased an industrial property located at 3411 SW 11th Street in Deerfield Beach, FL. for $1,840,000 or $86.94 per square foot. The 21,165-square-foot facility, which is situated on 1.3 acres, was built in 1987 and fronts on both 10th and 11th Street. Robertson, who represented the leasing interests for the property on behalf of the seller, 3411 Building LLC, since 2002, represented the seller in the transaction. The deal closed in October 2015.
  • Rauch and Robertson represented the seller in the sale of an industrial property located at 2150 NW 33rd Street in Pompano Beach, FL. The 1988-built, 15,656-square-foot facility, which is situated on 1.02 acres, is located within the Whispering Lakes Industrial Park near Sample Road and Powerline Road in Pompano. Allied Bingo Supplies of Florida, Inc. purchased the property from ACE Investment Holdings, LLC for $1,430,000, or $91.34 per square foot. The deal closed in December 2015.

“We anticipate this level of activity of lease and sale transactions to continue in 2016 within Broward and Palm Beach County markets – and certainly within the Pompano Beach area,” commented Rauch.

“As a result of the limited supply of investment product in the area and overpriced assets in Miami, Broward and Palm Beach continue to see steady demand and explosive growth and we expect it to outperform other markets across the U.S.,” added Robertson.

CRE Florida Partners is seeking leasing and investment sales professionals for its growing commercial real estate expansion in Dade, Broward and Palm Beach counties.

Multiple positions are available within these and other Florida markets that offer a unique ground floor career opportunity to work closely with the firms Founder’s Tom Robertson and Michael Rauch to move their vision for the CRE Florida Partners brand forward.

Commission and benefits are commensurate with experience. Florida Real Estate License and Commercial Real Estate experience a must! Only qualified candidates should apply.

Interested parties should send resumes to mail@crefloridapartners.com.

Links:  CRE Florida Partners 2015 Transactions and Subject Property Photos