Industry News

Adam Neumann to Step Down As WeWork Chief Executive

 

SEptember 24, 2019

By Randyl Drummer

Move Comes After Reports of Pressure by Top Investor SoftBank

 
Adam Neumann speaks during TechCrunch Disrupt NY in 2015. (Noam Galai/Getty Images for TechCrunch)

Adam Neumann speaks during TechCrunch Disrupt NY in 2015. (Noam Galai/Getty Images for TechCrunch)

 

Adam Neumann has stepped down as chief executive of WeWork as the shared office space provider works to save an initial public offering that has been postponed following weeks of criticism and concerns from top investors and analysts skeptical about the company's governance and future.

Neumann will serve as nonexecutive chairman of WeWork’s parent, the We Company, according to a WeWork statement. He has been under pressure from board members and investors for days to leave the top post of the company he cofounded in 2010, according to media reports.

He is being replaced by Artie Minson, formerly the company's co-president and chief financial officer, and Sebastian Gunningham, formerly the company's co-vice chairman and chief automation officer, who have assumed positions as interim co-chief executives, the company said. The New York City-based business is expected launch a search for a permanent chief executive, according to the New York Times.

"While our business has never been stronger, in recent weeks, the scrutiny directed toward me has become a significant distraction, and I have decided that it is in the best interest of the company to step down as chief executive," Neumann said in the statement. "Thank you to my colleagues, our members, our landlord partners and our investors for continuing to believe in this great business."

 Related News: Ivanhoé Cambridge Stands Behind $1 Billion We Company Investment

 Related News: WeWork Challenges May Just Be Starting As Neumann Leaves CEO Post

The decision follows the company's efforts to address an almost daily barrage of revelations about its charismatic cofounder and its drop in valuation in the wake of its IPO registration filing last month that revealed billions of dollars in losses and no path to profitability. The company previously filed two amended registrations that weakened Neumann's control of the firm to address criticism from potential investors.

Minson and Gunningham, who sought to reassure the company's investors and employees in the wake of the announcement, said in a statement that they plan to take "clear actions to balance WeWork’s high growth, profitability and unique member experience while also evaluating the optimal timing for an IPO."

SoftBank, which has pumped more than $11 billion into WeWork as the company's top investor, reportedly pressured Neumann to step down and for the board of directors to postpone its IPO until at least the end of the year.

"Privately, we have been saying he will likely be pushed aside," said Bradley Tisdahl, a New York City-based tenant credit analyst who has been critical of WeWork's leases since before the company announced its IPO plans on Aug. 14. "We expect that boards will hold managers accountable to be good corporate citizens and stewards of their companies. WeWork's board failed to keep its CEO in check, and that has made investors nervous."

The corporate changes come after more than a dozen of WeWork's top officials have left the company in recent months. Among them are Wendy Silverstein, former chief executive of ARK, We's real estate investment fund; Sarah Pontius, who headed the company's real estate partnerships and Julie Rice, former chief brand officer. Jennifer Skyler, the company's first communications hire, and Dom McMullan, head of corporate communications, both left over the summer.

A news report from the Information on Tuesday said the company is also considering employee layoffs as part of a bigger plan to cut costs.

Source: CoStar Realty Information, Inc.


Coworking Is 'New Type of Potential Financial Stability Risk,' Boston Fed President Says

 

SEptember 20, 2019

By Jacquelyn Ryan


Firms Seen Raising Risk of High Office Vacancy, Greater Defaults in Any Recession

 
Boston Federal Reserve Bank President Eric Rosengren expressed concern about the shared office provider industry. (The Boston Globe/Getty Images)

Boston Federal Reserve Bank President Eric Rosengren expressed concern about the shared office provider industry. (The Boston Globe/Getty Images)

 

The president of the Boston Federal Reserve Bank is warning that coworking creates a new type of financial risk to the commercial real estate market in major urban office markets.

Boston Federal Reserve Bank President Eric Rosengren said Friday the coworking business model of leasing direct space long-term and then subleasing that space on short-term leases exposes coworking companies to a higher risk of failing to make enough income to cover their rent. That problem is compounded by the common practice of some coworking firms that sign leases using limited liability companies that protect the parent company from any repercussions resulting from prematurely leaving a lease such as a bankruptcy, he said.

"The fact that the shared office model relies on small-company tenants with short-term leases, combined with the potential lack of recourse for the property owner, is potentially problematic in a recession," he said in prepared remarks at an event in New York. "This also raises the issue of whether bank loans to property owners in cities with major penetration by coworking models could experience a higher incidence of default and greater loss-given-defaults than we have seen historically."

The statement comes just two days after the Federal Reserve dropped interest rates by a quarter-percentage point, in a move that officials said is aimed at keeping U.S. economic figures steady in the face of trade wars and global political uncertainty. The cut is the second since July, and Rosengren has publicly criticized both, arguing the move is unnecessary in a "robust economy" with a low unemployment rate.

"I will also point out that evolving market models, along with low interest rates, are creating a new type of potential financial stability risk in commercial real estate," he said. "One such market model is the development of co-working spaces in many major urban office markets."

The warning follows weeks of high-profile scrutiny of WeWork, one of the world's largest coworking firms, as it sought to go public. The New York City-based company is postponing its initial public offering after investors and analysts expressed concern about its business model and billions of dollars in losses disclosed ahead of the public share sale.

Coworking has taken off across the country and grown an average of at least 26% each year since 2010, according to brokerage CBRE Group's 2019 flexible workspace report. More than 70 million square feet of U.S. office space is now dedicated to flexible use, compared to 9.5 million in 2010, according to CBRE. WeWork accounts for 33% of all U.S. flexible workspace.

Rosengren's concern comes after some critics, including veteran real estate executive Sam Zell, have said coworking is a fad that could suffer during an economic downturn.

Some lenders have said they assign a lower value to an office building that has a significant amount of space taken by shared office space providers given their leasing model. The short-term leases that shared office space providers offer mean in an economic downturn tenants could simply move to lower-priced real estate elsewhere, according to some lenders and analysts. WeWork has commissioned a study that says some buildings have been valued more highly because of WeWork's presence.

While coworking space accounts for just under 2% of the overall U.S. office market, CBRE predicts the percentage of coworking space in that market could grow to 6.6% by 2030 in a recession and up to 22% under the most aggressive scenarios by 2030. The city with the highest percentage of coworking space making up its overall market is San Francisco at 4%, which is still below the 6% in global cities such as London and Shanghai.

Rosengren said the rush toward coworking may be further fueled by low capitalization rates, the projected rate of return on a property, in the nation's most expensive cities "as low rates potentially lead to a reach for yield."

He added that "the owner of the building may be willing to take on this added risk because shared office space often pays higher rent, which is particularly attractive in a low-interest-rate environment," he said.

As a result, he said, coworking has the "potential for a run on commercial real estate as revenues decline" should small tenants decide not to renew leases. "This segment of the economy is likely to be particularly susceptible to an economic downturn, potentially resulting in office vacancies rising more quickly than they have historically," he said. That, combined with property owners' "reaching-for-yield behavior," may spur them to sign more deals with coworking firms.

"It will not be until a recession that this evolving model will be truly tested," he said.

CoStar reporter Marissa Luck contributed to this story.

Source: CoStar Realty Information, Inc.


Suburban Shopping Malls Get Investor Makeover for Second Act

 

SEptember 16, 2019

By Cara Smith-Tenta

Patient Money Targets Transformation of Former Shopping Meccas, Says Analyst

 
San Jacinto Mall, named after the 1836 battle that led to Texas winning its independence from Mexico, is getting transformed into an open-air district in Baytown, Texas, outside Houston. (Fidelis Realty Partners)

San Jacinto Mall, named after the 1836 battle that led to Texas winning its independence from Mexico, is getting transformed into an open-air district in Baytown, Texas, outside Houston. (Fidelis Realty Partners)

 

The future of the American mall may be playing out in a retail center that was almost a vestige of shopping's past.

Once the home to stores like Sears and Montgomery Ward, the San Jacinto Mall outside Houston would rather have a lot of empty air than retail space. Developers are creating two football fields worth of open space to hold events that lure crowds that stores can no longer guarantee.

Old school enclosed malls, often 1 million square feet of retail space that are trying to adapt to changing consumer behavior, are focusing on their one common strength: they were built on real estate with access to large population centers. Now those still prime locations are getting redeveloped by private investors and institutional developers into the newest incarnation: added offices and green space that can double as a concert venue to draw visitors who don't live far away.

Several projects such as San Jacinto in Baytown, Texas, Collin Creek Mall in Plano, Texas, Westfield Garden State Plaza in New Jersey and MainPlace Mall in California are being transformed as clothing stores have been hit hard by shoppers looking for convenience and lower costs from online shopping. Landlords, in turn, are increasingly replacing sluggish retailers with tenants that feature entertainment or other experiences you can’t get online like yoga studios, trampoline parks, gyms and restaurants.

"Collin Creek Mall, if not all malls, possess truly great real estate, which is defacto why the mall was built there in the first place," said Bob Young, executive managing director at Weitzman, a Texas retail brokerage, in an interview.

San Jacinto Mall is in Harris County, which added more residents than any other county in the United States in the past decade and covers enough space to fit the cities of Austin, Texas, Boston, Chicago, Dallas, New York City and Seattle with room to spare. The developer, Fidelis Realty Partners, is betting on all those potential spenders with the transformation of the 38-year-old mall into San Jacinto Marketplace, an open air district.

“The idea is to re-envision them into a mix of uses where the retail is significantly cut down as a percentage of the overall property mix,” said Justin Boyar, CoStar's director of market analytics in Houston, in an interview.

Fidelis Realty Partners bought the 107-acre mall that was in a state of disrepair in 2015 but long-term leases to tenants such as Sears, which didn't close its store at the mall until 2018, halted immediate redevelopment plans. Now, Fidelis Realty Partners has recently started demolishing the main structure of the 1.2 million-square-foot mall at the southwest corner of Interstate 10 and Garth Road in Baytown, which is about 24 miles east of downtown Houston.

The rebranding of San Jacinto Mall into San Jacinto Marketplace "will continue to be a long process," said Alan Hassenflu, president of Fidelis Realty Partners, in a statement, with the first phase expected to be completed around Christmas 2020. The project includes incentives from the city of Baytown and keeps the iconic "San Jacinto" name after the 1836 battle that resulted in Texas winning its independence from Mexico.

An outdoor mall can benefit from Houston's lack of snow and frost in the winter, but it could face challenges in the summer because the area averages about 92% humidity on any given day.

Given the sheer size of shopping malls, the players involved in the redevelopments are typically either institutional investors or wealthy individuals. Major institutional players are betting on the solvency of mixed-use malls. Brookfield, one of the nation’s largest commercial real estate developers and investors, acquired Chicago-based GGP Inc., one of the largest owners of U.S. malls, for $9.25 billion last year.

“They require patient capital,” Boyar said. “Brookfield’s acquisition of GGP is a major indicator that this is what the smart money is doing."

Another example includes San Antonio, Texas-based USAA Real Estate Co.'s investment with Dallas-based Centennial Real Estate on a $300 million redevelopment of MainPlace Mall in Santa Ana, California, at the busy southeast corner of Interstate 5 and the Garden Grove Freeway, which is one of the strongest and densest trade areas in the country. The underutilized mall, which had declining business for years, will drop from 100% retail to 35% retail, with the balance a mix of office, apartments and a hotel.

And the nation's newest indoor mega mall, American Dream in northern New Jersey, will have about 55% non-retail space such as entertainment, and 45% retail. That mall is being watched across the country for how it performs after its scheduled opening this fall on whether it verifies the theory that malls need to be less than 50% retail in the era of online shopping, in which experiences are considered more effective than the traditional store visit in drawing foot traffic.

 
An aerial image of the partially demolished San Jacinto Mall in Baytown, Texas. (Fidelis Realty Partners)

An aerial image of the partially demolished San Jacinto Mall
in Baytown, Texas. (Fidelis Realty Partners)

 

But there is still a future for malls that's single use. Unconventional players are also looking to lay claim to America’s indoor malls. Amazon, the e-commerce company that some say is responsible for the demise of shopping malls, has started buying former malls across the country to redevelop them into warehouses and fulfillment centers. The company has plans in the works for the former Rolling Acres Mall in Akron, Ohio, which at its peak had as many as 140 stores.

Shopping malls were built near large population centers that are precisely the same demographics that fulfillment centers target. But transforming a shopping mall into an industrial hub isn’t as easy as plug-and-play. Converting a retail space into an industrial space means facing permitting and zoning challenges, as well as steep costs of converting the structure into a warehouse, according to CBRE’s Trading Places: Retail Properties Converted to Industrial Use report, which it released earlier this year.

“This trend will continue to grow as the balance between brick-and-mortar retail and e-commerce shifts to necessitate more logistics space and less physical retail space,” the report states.

Still, not all indoor shopping malls are suffering in the age of e-commerce. Luxury offerings such as Houston’s Galleria Mall, Hudson Yards in New York City and Miami’s Dadeland Mall are strong performers in the retail sector, Boyar said. But those malls offer a commodity that not every shopping mall can offer: a mixture of traditional retailers and high-end, luxury offerings that cater to wealthy shoppers.

Even so, those malls are diversifying with experimental retailers. For example, Toys R Us, the iconic retailer that liquidated all its assets over the past year, chose Galleria Mall in Houston as one of two cities to open its revived concept called Tru Kids Brands, which will be interactive and feature new events and activities every day.

“Not all malls are doomed to extinction,” Boyar said. “The highest luxury malls in the wealthiest areas in the U.S. are still performing exceptionally well. If you have strong enough demographics and disposable income in that area, then the indoor malls are still viable.”

For the Record:

Boucher Design Group is the architect for the San Jacinto Marketplace, which is being built by LaGrone Services.

Source: CoStar Realty Information, Inc.


Commercial Real Estate Loan Growth Slows

 

SEptember 09, 2019

By Mark Herschmeyer


Multifamily Lending Marks One Bright Spot

 
Commercial real estate deal volume is getting fueled by lending for the construction of apartments across the country. Pictured are new condos in the Pearl District of San Antonio, Texas. (iStock)

Commercial real estate deal volume is getting fueled by lending for the construction of apartments across the country. Pictured are new condos in the Pearl District of San Antonio, Texas. (iStock)

 

Overall growth in commercial real estate loans on the books at U.S. banks slowed again in the second quarter, with multifamily lending marking the only bright spot.

The 1.2% growth in overall commercial real estate lending in the second quarter was the lowest rate for that quarter in the past five years. But apartments and other multifamily properties are a different story as that segment of loans rebounded up from the year-earlier quarter.

Record multifamily sales and a burgeoning demand for affordable rental housing this year have pushed lenders to return to boosting their holdings in apartment deal financing. The capital flow is expected to continue despite Trump administration proposals to limit the exposure of the Federal National Mortgage Association, known as Fannie Mae, and the Federal Home Loan Mortgage Corp., known as Freddie Mac, two of the largest U.S. lenders.

The apartment sector logged record-breaking deal activity in the first half of 2019. The $82.1 billion in executed sales in the first half of the year was up 2% from $80.6 billion in the first half of last year, according to CoStar data. Multifamily sales accounted for 28.4% of all deals in the first half, which fueled apartment lending and propped up the total growth figure for all commercial real estate loans.

Banks boosted the amount of multifamily loan holdings to $445.18 billion at the end of the second quarter, according to numbers released by the Federal Deposit Insurance Corp. That is 2% more than in the first quarter and was the fastest quarterly loan growth in two years.

Lending on multifamily sales, a category that spans apartments, student and senior housing, and mobile homes, has become concentrated among about 10 bank and nonbank lenders, according to a new tally by CoStar. Those lenders on multifamily property sales in the first half of the year closed about 51% of the loan volume on those deals.

The top multifamily lenders, according to CoStar data, were Berkadia Commercial Capital at $3.07 billion, CBRE Capital Markets at $2.58 billion, Walker & Dunlop at $2.04 billion, Federal Home Loan Mortgage Corp at $1.1 billion, Capital One at $1.09 billion, Deutsche Bank AG New York branch at $1.01 billion, Greystone Funding with $949 million, Berkeley Point Capital at $934 million, KeyBank with $887 million, and Wells Fargo Bank at $811 million.

Potential Lending Limits

This past week, the dominance of multifamily lending tied to Fannie Mae and Freddie Mac, known as government-sponsored enterprises, or GSEs, prompted the Trump administration to put forth housing finance proposals designed to limit the federal government's risk in lending to the sector.

Six of the top 10 largest lenders named on first mortgages on multifamily sales primarily originate deals that are sold to Fannie Mae and Freddie Mac.

More than 80% of mortgage bankers expect GSEs to be the primary lending source for the second half of the year, according to Berkadia's proprietary survey of its investment sales brokers and mortgage bankers. The same number of respondents also agreed that potential limits on GSEs would have a big impact on the way they do business this year.

"While we’re always keeping an eye on changes that could come from [Capitol Hill], we continue to be impressed with the amount of capital flow that’s gone into the commercial real estate market so far this year," Ernie Katai, executive vice president and head of production at Berkadia said in releasing the survey results.

Despite regulatory uncertainties, Berkadia indicated confidence in the industry. About 60% of survey respondents anticipate the amount of capital available for deals to remain the same throughout the rest of the year, and 29% expect capital on the table would increase.

"After sustaining four interest rate hikes last year, the industry is continuing full steam ahead and preparing to adjust for regulatory changes as they come," Katai said.

With single family home prices and construction costs rising, affordable housing has jumped to the forefront of many commercial real estate conversations, Katai said.

"As individuals and families in metros and suburbs across the country continue to struggle with rising rent costs, investors are no longer focused solely on Class A housing," Katai said. "Many are diversifying their portfolios by adding affordable properties to the mix. We expect tax incentives and other strategies that encourage the growth of this asset class to continue to evolve on a federal, state and local government level."

Any potential federal legislative or administrative changes to housing finance could be troublesome to multifamily lenders given how dominant the Fannie Mae and Freddie Mac are in financing affordable housing, which is in short supply in the country.

The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, annually caps the amount of loans the two GSEs can acquire from originators, with the 2019 caps limiting each GSE to $35 billion in multifamily acquisitions. However, affordable housing loans are exempt from those caps.

In part because of the exemptions, the caps have not been effective in limiting the GSEs’ multifamily footprint. Fannie Mae and Freddie Mac have grown from owning or guaranteeing 25% of outstanding multifamily debt in early 2008 to approximately 50% of recent multifamily originations, according to the Department of Treasury.

Treasury’s proposal in particular recommends that Congress implement a framework to limit the size of Fannie Mae and Freddie Mac and cap the amount of affordable housing lending.

The goal of that proposal, and another from the Department of Housing and Urban Development, is to limit the amount of federal support the government would have to provide as a backstop to the GSEs in the event of another major financial crisis. In the last recession of 2008, the federal government covered GSE losses of about $190 billion.

Source: CoStar Realty Information, Inc.


WeWork's Growth Plan May Follow Amazon's Cloud Computing Strategy

 

August 30, 2019

By Paul Owers


Analyst Says CoWorking Company Could Be Successful as an Outsourcing Service Provider

 
New York-based WeWork says it has a business model to withstand a recession. (WeWork)

New York-based WeWork says it has a business model to withstand a recession. (WeWork)

 

While coworking company WeWork has been criticized for being vulnerable to tenant cancellations in any economic downturn, another argument is being made that the shared workspace provider embarking on an initial stock sale may be well-positioned to serve businesses that want to outsource their real estate.

The company has grown in the past nine years to more than 528 locations globally, a scale WeWork says allows it to develop a concentration of offices that create flexibility and reduce costs for businesses seeking alternatives to long-term leases with traditional landlords.

As one of the world's largest coworking firms, WeWork could become to office users what Amazon Web Services is to companies in need of computer servers: a convenient way to hand off to someone else the running of a non-core business operation, Ben Thompson, a business, technology and media analyst based in Taiwan, wrote in a post on his Stratechery blog.

That comparison is key because it moves the argument for WeWork's success beyond the company's defense of its business model by providing a proven business case of the success for a similar strategy. Thompson notes that in March 2006, retail giant Amazon launched Amazon Web Services, a subsidiary that offers cloud computing on an as-needed basis. Managing the computer hardware for other companies and individuals led to cost savings and other advantages, such as allowing firms to focus on their core businesses without having to worry about overseeing server installations, Thompson wrote.

AWS "leveraged the commoditization of hardware into a business with operating margins of around 30%," reads his argument. "It turned out having one company manage that commodity hardware for everyone else had several important advantages that more than justified those margins."

Thompson adds that, "WeWork has also developed an expertise in utilizing office space efficiently, and while some of this is simply a willingness to cram more people into less space, opening triple-digit locations a year means that the company is by definition learning and iterating on what works for office space far faster than anyone else, and that is before the promised application of sensors and machine learning to the challenge."

Of course, some critics, including real estate mogul Sam Zell, have said the shared work space concept has not been tested during a recession, when coworking providers might abandon their leases as clients retreat to less high-end office space or their home offices to save money. The company acknowledges its model could be at-risk of losing members or declining rental rates in a bear market.

The company also is already facing losses on the business that could be exacerbated by a recession. The We Co., the holding company for WeWork, filed paperwork in the past month for its initial public offering, reporting its net loss for the first half of the year widened to $904.7 million from the loss of $722.9 million in the same time period in 2018, on revenue of $1.54 billion.

With that criticism and WeWork's financial losses as a backdrop, Thompson’s analysis provides a case for why the company and its backers expect regular investors to be interested in its stock. The analysis also shows an independent way to support WeWork’s argument that it could thrive if the economy softens because of the flexibility it offers its members.

Short-Term Leases

"In a downturn, we expect that businesses will search for more flexible and lower-cost alternatives," reads the WeWork prospectus. The company argues its short-term, flexible agreements offer businesses alternatives to long-term leases and said its offices can provide "up to 66% cost savings per employee," a figure it says it derived from an analysis of 10 unspecified global cities where it operates.

WeWork, which uses a membership model where clients pay a fee like dues instead of a direct lease, allows businesses to move long-term lease obligations off their balance sheets. That allows those companies to reap a tax benefit, following changes to lease accounting rules in the past year.

The New York-based company also has the capability to create conveniences for its members similar to those offered to clients of the Amazon affiliate, according to Thompson.

“Within a single location, common space, by virtue of being shared by all WeWork members, can be built out much more than any one member could build out on their own,” he writes. “Similarly, WeWork’s network of locations around the world provide options that accrue to all members.”

In its 383-page filing to become publicly traded, WeWork's holding company said it has a “durable business model” that can perform in any type of economy, noting the average commitment term in its membership agreements has nearly doubled from about eight months at year-end 2017 to more than 15 months as of June 1, 2019. That resulted in committed revenue backlog increasing from $500 million to $4 billion in the same time, the filing states.

WeWork added that a recession “may provide us an opportunity to further scale our platform at more attractive unit economies.”

What’s more, WeWork leases are standard, so clients don’t have to juggle different terms and conditions that those companies with multiple landlords face in traditional office leases, said Peter Reed, a principal with Commercial Florida Realty Services in Boca Raton, Florida.

In traditional office buildings, “everybody’s got a different lease form, and it can become problematic managing that,” Reed said. “WeWork offers an alternative for the right niche. But it’s not for everybody.”

Source: CoStar Realty Information, Inc.


Hudson Yards Hotel Refinances in Bet on Future New York Foot Traffic Ahead of Opening

 

August 19, 2019

By Diana Bell

Mack Real Estate Credit Strategies Provides $199 Million Loan for Owners Endeavor Hospitality, Marx Development

 
The 399-key Courtyard by Marriott Hudson Yards hotel is slated to open in September. (Endeavor Hospitality Group, Marx Development)

The 399-key Courtyard by Marriott Hudson Yards hotel is slated to open in September. (Endeavor Hospitality Group, Marx Development)

 

New York City landlords Endeavor Hospitality Group and Marx Development are teeing up a new round of funding ahead of next month’s planned opening of their Courtyard by Marriott Hudson Yards, the newest select-service hotel looking to benefit from future foot traffic on Manhattan’s Far West Side.

Commercial lender Mack Real Estate Credit Strategies said it provided a $199 million loan to refinance construction costs for 461 W. 34th St., a 399-room, 29-story hotel. The property includes a restaurant, fitness center, meeting room and ground-floor retail space that will house a Chase bank branch. The hotel sits adjacent to the entry for the 34th Street - Hudson Yards stop on the 7 subway line.

The Courtyard by Marriott sits within Penn Plaza, the second-largest office submarket in New York behind the Plaza District, according to CoStar data. Penn Plaza measures 76 million square feet of office space and currently has 13 million square feet under construction, an amount larger than the pipeline for both Los Angeles and Washington, D.C., CoStar analysts wrote in a recent report on the area.

Just one block west, Related Cos. is expected to spend $25 billion on Hudson Yards, the largest U.S. real estate development. It plans to finish with about 8.5 million square feet of office space and 2 million square feet of residential space. A 1 million-square-foot retail mall is already completed.

Within the same area, Brookfield Property Partners is developing its 7 million-square-foot Manhattan West campus. Tishman Speyer’s 2.8 million-square foot office tower, The Spiral, is underway.

Source: CoStar Realty Information, Inc.


Shortage of Studio Space Drives Productions to Far-Flung Parts of Los Angeles County

 

August 16, 2019

By Randyl Drummer

Warehouses, Airplane Hangars, Even a Former Psych Hospital Converted Into Studios

 
Google transformed the 1940s-era wooden hangar that once housed pioneer aviator Howard Hughes' Spruce Goose airplane into high-tech creative offices and YouTube sound stages in West L.A.'s Playa Vista. (Google images by Connie Zhou)

Google transformed the 1940s-era wooden hangar that once housed pioneer aviator Howard Hughes' Spruce Goose airplane into high-tech creative offices and YouTube sound stages in West L.A.'s Playa Vista. (Google images by Connie Zhou)

 

YouTube opened sound stages inside the historic Spruce Goose hangar in Los Angeles that was once home to Howard Hughes' giant wooden airplane. A company called Big Door Stage bought a former apartment building built in 1946 on the fringes of an El Segundo industrial area and turned it into sound stages and production facilities where Google and other businesses film commercials and other productions. And the Netflix film "Rim of the World" relied on a a former state mental hospital an hour east of Hollywood in Pomona. to create a fight scene involving alien monsters.

An explosion in the number of movie and TV productions now underway across Los Angeles is turning almost any available space into studios and sound stages. Demand is so great that entertainment productions are popping up beyond the sprawl of L.A. to suburbs as far north as Santa Clarita Valley near Ventura County.

"There’s a waiting list four or five deep on just about every stage," said Triscenic Production Services owner Vince Gervasi, a 33-year veteran of the Hollywood set and prop storage business. Robust demand from Netflix, Google, Amazon and others inspired Gervasi to open his own studio this year in the suburban city of Valencia. "I’m building seven stages up here, and I'm renting them out faster than I can build them."

Entertainment leasing is one of the largest real estate demand drivers in greater Los Angeles, but it is largely restricted by what's called the traditional "30-mile zone," a radius used by union film projects to determine per diem rates and driving distances for crew members. The zone extends out from the intersection of West Beverly and North La Cienega boulevards, once the headquarters of the Association of Motion Picture and Television Producers.

Development in that circle is almost at full capacity, creating a bottleneck in the fast-paced world of entertainment production. L.A. studio and stage occupancy already ranges from 90% to 96%, according to new data from FilmLA, the production permitting agency for Los Angeles.

The lack of space prompted Quixote Studios, a West Hollywood company that provides facilities, trailers and equipment for the entertainment industry, to recently unveil a new $30 million stage facility in Pacoima, a blue-collar neighborhood in the San Fernando Valley that is more known for its industrial space than Hollywood glitz.

"We’re going to develop Pacoima into a production hub," Quixote Studios CEO Mikel Elliott told the Los Angeles Times.

Race for Space

Demand isn't likely to ease any time soon. The production of new content by internet streaming companies as well as traditional studios is only expected to accelerate as tech companies like Apple begin rolling out their anticipated on-demand services. Filmmakers are scrambling for a piece of the almost $23 billion streaming entertainment industry, which is forecast to grow to more than $30 billion by 2022, according to PricewaterhouseCoopers.

The studio crunch is already having an impact on the entertainment industry, a key component of the city's creative economy, generating $3.1 billion in tax revenue and employing 141,000 workers in 2017, according to a recent report from Otis College of Art and Design. Lack of space has partially caused a decline this year in on-location filming hours and has become the main obstacle to growth in the city's feature film industry, despite state incentives to bring productions back to California, according to FilmLA.

On-location filming slipped almost 4% at midyear in all categories, from commercials to reality television, following a 9% decline in the first three months. Earlier this year, FilmLA expected the numbers to be on par with last year’s record highs as internet streaming companies, such as Netflix, and the major studios, which are getting into the streaming wars, rapidly push out new content.

“All the streaming services have changed the world,” said brokerage CBRE Executive Vice President Craig Peters. “When I was a kid, there were eight distribution points for content, the movie theaters and seven TV channels. Today, there are millions of distribution points. Every kid has the TV going while watching their computer screen and watching something else on their smart phone, every studio is full and every production company is running around looking for more locations for content creators.”

The business of setting up shop on location while filming a movie, mini-series or series has not changed much; for instance, a sand quarry north of the city doubled as the planet Torfa in the film "Captain Marvel." What has been transformed is the creation of permanent sound stages and other production-related real estate, Los Angeles film industry and real estate experts say.

These days, studios are spilling into old converted warehouses and other types of properties in and around Hollywood. Take, for example, Lin Pictures, which produced the "Lego" movies. The company couldn't find the space it needed in Hollywood, so it built its own production studio in a quiet industrial area outside of downtown Los Angeles.

 
An abandoned pool at the Lanterman Development Center facility in Pomona, California, and the same pool in Netflix's "Rim of The World." (Courtesy of RSI Locations, Netflix)

An abandoned pool at the Lanterman Development Center facility in Pomona, California, and the same pool in Netflix's "Rim of The World." (Courtesy of RSI Locations, Netflix)

 

Others, citing lower production costs, are pushing out into newly built industrial space on the fringes of Los Angeles County at the very limits of the 30-mile zone such as Santa Clarita, where sound stages have more than doubled in past years, or even moving into other states like Louisiana and Georgia, suggesting that studio and stage construction isn't keeping up with demand.

Netflix, with a large slate of productions ranging from the supernatural hit series "Stranger Things" to feature films like the Sandra Bullock post-apocalyptic thriller "Birdbox" and the Academy Away-winning "Roma," has disrupted the industry by snapping up sound stages all over Los Angeles County, Gervasi said. The Los Gatos-based streaming company occupies about a 1.5 million square feet in Hollywood, making it the largest private occupier of office space in that neighborhood, according to CoStar.

The firm has boosted spending on property and equipment by more than a third in the first half of the year as it aggressively expands its real estate footprint across North America, setting up production hubs in New Mexico, New York and even Canada.

In Los Angeles, "Netflix is pretty much coming in and taking everything, renting entire studios and deciding later what they’re going to do with them," Gervasi said. "Then, if Netflix decides not to do a particular show and another production calls and want to rent a stage, [rivals] now have to go through Netflix to get access."

Across the street from his set-and-prop business, Gervasi is building Triscenic Studios in a 142,392-square-foot leased warehouse that formerly housed vitamin maker Pharmalite's warehouse in Valencia. He launched the studio this year with his business partner, real estate investor and former Kennedy Wilson executive John Prabhu.

Gervasi said he has no interest in one company leasing and tying up his entire studio for seven years, the typical duration of a commercial property lease.

"That's not something we want to do," he said. "What we're doing here is unprecedented. Our facilities are going to be the first certified stages to be built in the Santa Clarita Valley since 1989."

Netflix did not respond to requests for comment on its lead role in grabbing L.A. studio space.

Industrial Competition

The entertainment industry is not the only sector seeking industrial space. Demand from e-commerce, aerospace and defense contractors, and even a fast-growing new crop of cannabis-growing and -distribution firms, has driven Los Angeles' industrial vacancy rate below 3%, leaving developers with few choice other than to build, according to CoStar.

For example, Illumination Dynamics, which provides lighting, grip, generators and power distribution for film and TV projects, recently leased 67,639 square feet in the newly built Center at Needham Ranch, a business park in Santa Clarita under development by Trammell Crow Co. and Clarion Partners LLC.

The first 1 million square feet of the project is under construction, and Peters said he expects it to generate "a lot of entertainment interest" because it's just within the borders of the 30-mile zone. The warehouses are built 36-feet tall, a height that is rare in San Fernando and Santa Clarita valleys.

"That’s as good as it gets for production companies,” said Peters, who is the leasing agent on the project.

The number of sound stages in Santa Clarita has jumped from 24 to almost 40 in just the past year, and every one of them is full.

Riverfront Stages rents stage space in Atwater Village, a neighborhood between Los Feliz and Glendale near the epicenter of L.A. production and the homes of Hollywood's coveted studio workforce.

“We’re five minutes from a lot of crew members’ houses,” said Joseph Mulcrone, Riverfront Stages vice president of operations. That's a big selling point for crew members who might otherwise have to drive up to two hours each way on congested freeways to Santa Clarita, Long Beach or Pomona.

Parking in car-focused L.A. is also a major issue in finding a suitable studio, Mulcrone said.

“Where are we going to put 100 people and the trucks and trailers? We’ve 100,000 square of stage and support space here, plus almost 500 parking sports,” he said.

The principals of Riverfront Stages in 2015 launched RSI Locations, which acts as a broker or booking agent for property owners for filming locations. RSI’s largest and busiest property for film, TV and commercial shoots is the former Lanterman Development Center, which includes a closed psychiatric hospital and care facility in Pomona now owned by the California State Polytechnic University. The site has about 100 different structures on more than 300 acres — a sprawling city within a city that once housed almost 14,000 people and is now being marketed by the university for reuse, including multiple filming locations.

“There are single-family homes, apartments, secure roads, a hospital, industrial basements, warehouses, a power plant, an elementary school and a ton of other locations," Mulcrone said of the property built in 1927.

Institutionalizing Studio Property

Large publicly traded real estate companies and other institutional investors also are capitalizing on the demand. Privately held Hackman Capital Partners purchased three Los Angeles area studios in the past five years, including its recent $650 million purchase of MBS Media Campus in Manhattan Beach,

Brentwood-based real estate investment trust Hudson Pacific Properties, meanwhile, has built a thriving niche buying and managing studio real estate. Now, it is the largest independent owner of studios in the United States.

Studio investments have become popular with both lenders and developers, who are building projects with high-demand and well-financed tenants in tow, Hudson CEO Victor Coleman told investors during an earnings presentation in May.

Netflix, a major Hudson Pacific tenant, is expected to spend a staggering $15 billion on new content this year alone.

"We expect aggregate spend among all content players to more than double in the next 10 years," Coleman said. “In turn, as major studios like Warner Bros., Paramount and NBCUniversal push to generate more content, those stages will no longer be available to competitors. This will directly benefit our studios, particularly as we have long-standing relationship with two largest players, Netflix and ABC/Disney.”

Over the past three quarters, occupancy at Hudson Pacific’s leased studio properties increased more than four percentage points to 92.5% as of the first quarter of 2019, with average rents rising nearly 2%, Coleman said. Year-over-year occupancy at Hollywood's Sunset Las Palmas studio complex, bought by Hudson Pacific in mid-2017, increased to 89% in the first quarter from 77.6% a year earlier.

"The demand is not just in Los Angeles or in Vancouver or in New York, but it is all around the world. It’s not talent in front of the camera only. It's also talent behind the camera," Coleman said.

Hudson Pacific's studio business has made a good impression on Wall Street analysts covering the publicly traded company, which "increasingly looks attractive to institutional capital” given its presence in Los Angeles, San Francisco and other cities and its status as one of the largest independent owners of studio space, Alexander Goldfarb, a Sandler O’Neill Partners equity analyst that tracks Hudson Pacific and other real estate investment trusts, said in a research note.

Hudson Pacific is looking at other studio opportunities in Los Angeles and the Seattle area, including Vancouver, where the company hopes to establish a beachhead through a joint venture with Blackstone Property Partners to buy and renovate the 1.4 million-square-foot Bentall Centre. The company has also looked at buying studios in Atlanta and New York City.

Coleman acknowledged that critics once labeled Hudson's purchases of three historic Hollywood studios — Sunset Gower, Sunset Las Palmas and Sunset Bronson — as an "albatross" for the company.

"They've proven out to be a pretty good business strategy,” Coleman said.

Source: CoStar Realty Information, Inc.


WeWork Files Paperwork for Highly Anticipated IPO

 

August 14, 2019

By Mark Heschmeyer

Coworking Giant Offers First Detailed Look at Financials

 
The We Co. files to take WeWork public (Phillip Pessar via Flickr)

The We Co. files to take WeWork public (Phillip Pessar via Flickr)

 

The We Co. has filed its highly anticipated paperwork for an initial public stock offering, providing the first detailed look at its financials and business plans.

The filing for the holding company for coworking giant WeWork does not yet identify the amount to be raised or expected share price.

The company lists assets as of June 30, 2019, of $27 billion. It is reporting a net loss for the first half of this year at $904.7 million, up from a loss of $722.9 million in the first half a year ago, on revenues of $1.54 billion.

The company would trade under the ticker symbol WE.

The company listed its current lease obligations at $536 million.

The New York City based company announced April 29 that it had confidentially submitted an amended draft registration statement with the SEC for initial public offering of its common stock. The company said it first submitted its registration form in December 2018.

An IPO enables WeWork to tap public markets to fuel a U.S. and global expansion. The company has raised more than $10 billion in a combination of debt and equity and venture capital funding since it was founded by Adam Neumann and Miguel McKelvey in 2010. WeWork also is seeking to raise up to $6 billion in debt for future cash needs in loans that remain contingent on the company’s ability to push through the IPO.

A representative for WeWork declined to comment.

The company’s valuation has skyrocketed to as much as $47 billion as of last January, more than 10 times that of its larger rival, Switzerland-based IWG Plc, formerly Regus, a multinational company that provides workspaces to more than 2.5 million people in more than 3,300 locations.

From 2016 through the first half of this year, WeWork said it has signed leases totaling 37.9 million square feet of space that accommodates 1.9 million workstations – approximately 20 square feet per workstation.

No single landlord represents more than 2% of its usable square feet.

We Co. uses the term member to refer to the number of users that have signed agreements to use its spaces. It lists current membership at 527,000.

Throughout the filing, We Co. spells out its future growth. The company has signed leases for space it does not yet occupy that could accommodate another 327,000 workstations, or roughly 6.5 million square feet.

In addition, as of June 1, the company said it had a potential location pipeline that included approximately 40 million usable square feet, which it estimates could accommodate approximately 724,000 workstations.

"Expanding our operations into markets outside the United States has been an important part of our growth strategy. For the six months ended June 30, 2019, 56% of our revenue was attributable to our operations in the United States and 44% of our revenue was attributable to our operations elsewhere, compared with 62% and 38% for the six months ended June 30, 2018. We expect to continue to expand our operations in markets outside the United States in the coming years," the company stated in the filing.

This is a developing story and will be updated throughout the day.

Staff writer Randyl Drummer contributed.

Source: CoStar Realty Information, Inc.


Barneys Gets Extension to Oct. 24 to Avoid Liquidation

 

August 08, 2019

By Jennifer Waters


Higher Loan Offer Gives Storied Luxury Retailer More Time to Find a Buyer

 
Barneys New York is unloading all but seven stores as part of its bankruptcy reorganization petition. (Scottb211/Flickr)

Barneys New York is unloading all but seven stores as part of its bankruptcy reorganization petition. (Scottb211/Flickr)

 

Barneys New York got a last-minute respite in bankruptcy court with new lenders stepping in with a bigger debtor-in-possession loan that gives the famed department store chain more time, now until Oct. 24, to find a buyer.

A $218 million financing package came from Brigade Capital Management, a hedge fund focused on capital restructuring and bankruptcy reorganization, and B. Riley Financial, an investment bank that also owns the Great American Group liquidation business. It will replace the $75 million package that Barneys had secured from liquidators Hilco Global and Gordon Brothers ahead of the retailer’s filing for Chapter 11 bankruptcy protection.

Barneys joined a growing line of retailers filing bankruptcy or closing stores as consumers shift their spending habits, many moving to e-commerce over bricks-and-mortar purchases. The store's position as a luxury brand, with expensive high-profile locations, and its struggle as the U.S. economic expansion reached a record stretch last month, has attracted attention to the difficulties of retailers.

When Barneys filed earlier this week for Chapter 11 protection from creditors, Chief Executive Daniella Vitale cited the “challenging retail environment and rent structures that are excessively high.”

As part of its petition, Barneys said it will close all but seven of its stores, five of them flagships, as it shores up finances to stay in business.

The later Oct. 24 deadline to find a new owner gives Barneys some breathing room with more time than the Oct. 1 deadline Hilco and Gordon Brothers had on its financing package, according to court documents. If an agreement can’t be reached with a new buyer, the business will be forced into total liquidation.

The new financing allows Barneys to pay existing loans that total $190 million from Wells Fargo and TPG Sixth Street Partners, according to The Wall Street Journal, quoting a person familiar with the matter. That leaves the retailer with about $28 million in new money to stay in business while it seeks a new owner.

Probably more important, the last-minute attention from Brigade and B. Riley also lends credence to the potential value of the storied luxury retailer in a post-bankruptcy environment. The bigger financial package, coupled with a longer deadline, implies that Barneys is still considered a big hitter in the challenging retail environment.

The partners offered the loan “because we think there will be significant interest for Barneys’ core business,” Perry Mandarino, senior managing director at B. Riley, told financial news network CNBC.

But B. Riley is taking some risk off the table through Great American. If Barneys is forced into liquidation, Great American would probably handle that process. Great American oversaw the liquidation of Payless ShoeSource and the Gymboree and Crazy8 stores earlier this year.

Barneys had tried to sell the business in lieu of filing for bankruptcy protection and said bidders had surfaced, though it didn’t name them.

Source: CoStar Realty Information, Inc.


San Francisco Hits Office Building Limit for First Time Since 2000

 

August 07, 2019

By Molly Armbrister


Development Cap Means Demand From Tech Firms May Spill Into Nearby Oakland

 
Kilroy Realty's Flower Mart project is one of three the San Francisco Planning Commission approved this year. (CoStar)

Kilroy Realty's Flower Mart project is one of three the San Francisco Planning Commission approved this year. (CoStar)

 

The massive growth of the tech industry in San Francisco is facing its biggest office space hurdle in almost two decades, and that could mean more demand and higher prices for the nearby city of Oakland.

The city of San Francisco has effectively cut off construction on any new office space for the rest of the year, following the city planning commission’s approval of three projects that use all the office space allocation under the city’s limit on the amount of offices that can be built. It's the first time since 2000 that the allotment has been used up.

The three office projects approved by the San Francisco Planning Commission total almost 2.9 million square feet, taking almost all of the capacity for new offices under the city’s cap, imposed by a decades-old ballot measure known as Proposition M. About 20,000 square feet remain unallocated under the cap, according to Corey Teague, zoning administrator for the city of San Francisco. That space will be rolled over into 2020's total allocation.

That's a sudden change of pace for a city that expects more than 4 million square feet of completed development this year, according to CoStar. It could make Oakland, across the San Francisco Bay, the biggest beneficiary of spillover demand from the booming tech industry as expanding companies seek more space.

In San Francisco, the office development annual limitation program dictates that for buildings larger than 25,000 square feet, a total of 875,000 square feet can be developed in a given year. In times when development is slower, unused allocations can be rolled over to the next year. Since the end of the recession, the city has been working its way through a large pool of unused square footage built up from when there were few, if any, requests for development.

This year, that bank of space finally ran dry, and the planning commission granted only about one-third of the office space developers requested, leaving demand for office space development far outpacing supply.

"Office demand in San Francisco continues to be as strong as ever," Christopher Roeder, international director at brokerage JLL in San Francisco, said in an email. "Companies of all sizes, start ups, Silicon Valley-based or what we call 'new age SF headquarter companies' continue to expand, hire, and increase their presence in the city to differentiate themselves from other employers and recruit and retain talent."

Almost 9 million square feet of new office projects are in various stages of the development planning pipeline, but only about 2.9 million square feet were available for city approval. Developers of those projects not selected can either wait for next year’s allocation, and hope for a better outcome, or try to seek rezoning to develop land they own for another use, though doing so is difficult and rare. In 2020, the allocation will be about 895,000 square feet, including the yearly allowance and 20,000 square feet remaining from this year.

The projects that have been selected are The Flower Mart, a 2.3 million-square-foot project by developer Kilroy Realty, with an initial phase totaling 1.4 million square feet; 88 Bluxome St., a mixed-use building with 775,000 square feet of office space planned by developers Alexandria Real Estate Equities and TMG Partners; and 598 Brannan St., a mixed-use project with 711,136 square feet of office space by developer Tishman Speyer.

All three projects are located in the city’s South of Market neighborhood, where average annual rents top out at about $80 per square foot, according to CoStar data.

Building Boom

In 2015, San Francisco had more than 5 million square feet of construction underway, according to CoStar data. Among those projects are skyline-altering buildings, such as the 61-story, 1.4 million-square-foot Salesforce Tower that opened last year at 415 Mission St. and is mostly occupied by the tech company that shares its name.

The amount of new construction in the city has dropped off this year, which is expected to exacerbate the supply-demand balance that exists in the city as tech companies grow and snap up what new real estate that is developed as soon as its completed, and sometimes even sooner.

Competition for new space has reached such an intensity that social media company Pinterest signed on for one of San Francisco’s largest leases in its history at 88 Bluxome St. before the project was even approved.

The level of demand is illustrated by the fact that vacancies in the city fell even as new developments took root, with the vacancy rate in San Francisco dropping to 5.5% today from 8.3% in the third quarter of 2013 before the building boom began in earnest.

"In total, roughly 76% of the market's under-construction inventory has been pre-leased, ahead of the US national average and ranking San Francisco among the strongest markets in the country for preleasing," reads a CoStar Market Analytics report about San Francisco. "Less than 2 million square feet of office space currently under construction throughout the metro is available for lease."

While the change in development isn't expected to stop companies from expanding or moving in to the city, or trying to at least, companies seeking ample new space are left only a few options. Some are looking to buy buildings, such as e-cigarette marker Juul, which acquired 123 Mission St. this year, while others may wait until next year in hopes of scooping up newly allocated developments.

"We're seeing tenants employ a variety of tactics to ensure their ability to grow in the city amid tightening market conditions," said Roeder.

But now that the allocation is used up, developers may start looking east, further boosting the profile of Oakland, which has already benefited from the slow creep of San Francisco’s real estate activity across the Bay Bridge.

A Train Ride Away

“The outflow based on demand is going to be to the Oakland central business district rather than Silicon Valley, mainly because it’s a 15-minute [Bay Area Rapid Transit] ride and Silicon Valley is harder to get to,” said Jesse Gundersheim, CoStar’s director of market analytics for the San Francisco Bay Area.

Colin Yasukochi, director of western region research at Los Angeles-based commercial real estate firm CBRE, agreed.

“Oakland is the biggest beneficiary of lack of capacity in San Francisco,” he said in an interview. And increasingly companies that are heading to Oakland are tech companies, he said, such as Square, the digital payment company that said in January it would lease a 350,000-square-foot building in downtown Oakland.

And while some may look to Silicon Valley south of San Francisco as an alternative to develop, most of the projects underway there are a result of organic growth from companies and developers who want to be in the smaller cities that make up the nation's tech capital rather than those that simply can't find a way into San Francisco, Yasukochi said.

Development in Oakland has been more measured than in San Francisco.

Office building development in the greater East Bay area today is equivalent to about 1.5% of the market's total existing inventory at about 1.4 million square feet, according to CoStar. About half of that has been preleased. It's helping developers feel optimistic about building in cities such as Oakland, which only had about 18 downtown properties listing space to accommodate a tenant seeking 20,000 square feet in April.

"The majority of this space under construction speculatively is concentrated in downtown Oakland, where two new skyscraper office buildings are helping redefine the city’s skyline, along with a multitude of multifamily buildings," reads a CoStar Market Analytics report. "The office buildings under development secured anchor tenants prior to breaking ground, but still contain available space as delivery approaches. Several buildings in Oakland have been completely renovated into creative office spaces, breathing new life into the growing city."

Source: CoStar Realty Information, Inc.


Google's New Second Home Shows How Tech Giants Shape US Property Demand

 

July 11, 2019

By Diana Bell


Search Engine Provider Signs Lease for 1.3 Million Square Feet at Hudson Square

 
190717_Google 550washington1-cookfox.jpg
 

Search engine provider Google is making New York City home to its biggest office space outside its native San Francisco suburbs, marking another technology company grabbing up significant amounts of commercial real estate across the United States as online businesses increase their cultural and financial influence.

Google completed its lease assuming all 1.3 million square feet of 550 Washington St. as it works toward assembling a second Manhattan campus in Hudson Square, a burgeoning West Side neighborhood. The deal brings the Mountain View, California-based company’s total footprint in Manhattan to roughly 3 million square feet, in what's expected to be its largest space in the United States outside California, according to CoStar data.

The surge in popularity of social media provider Facebook, Google and streaming entertainment provider Apple in the past decade has swelled their stock prices and their commercial real estate space needs. The tech firms' expansion outside Silicon Valley has also helped shape the commercial real estate growth of the United States in the decade since the Great Recession that's coincided with key advancements in wireless technology.

Apple, which is mainly known for its iPhones and Mac computers, in recent years has placed its biggest property holdings outside its hometown of Cupertino, California, in Austin, Texas. Today, Austin leads the country in office rent growth, a key indicator of demand for commercial real estate in a market.

"One thing is clear: Technology is now the dominant sector in the U.S. office market," said Ken McCarthy, an economist with real estate services firm Cushman & Wakefield, in a report on tech leasing.

Nationally, Google occupies about 30 million square feet of office space, according to CoStar data. In comparison to New York, the firm's biggest occupancies are its 5.2 million-square-foot world headquarters in Mountain View, California, and in three other cities in that state: Sunnyvale at 4.5 million square feet; San Francisco at 1.6 million square feet; and San Jose with 1.6 million square feet.

Outside California, Google holds about 1 million square feet in Seattle and in Austin, which is seen as a large provider of graduates with technology skills.

In New York, the search engine and cloud computing developer now occupies the most space of any tech firm, according to CoStar data. It has been nearly a decade since Google first entered the Manhattan market with its 2010 acquisition of 111 Eighth St., a 2.9 million-square-foot Chelsea office building, for nearly $1.78 billion. The company uses 615,000 square feet there.

Since then, rents for the highest-rated office properties within the Chelsea office market have jumped about 75%, according to Victor Rodriguez, associate director of analytics covering the New York region for CoStar Market Analytics. Meanwhile, Class A office rents in Hudson Square have spiked 83%.

Competing for Workers

As in Austin with Google and Apple, it isn't unusual for technology companies to place large campuses or offices in the same area when there's a significant amount of trained workers.

“All of the heavyweights have now made a significant investment in Austin and put a workforce here,” Kevin Fincher of tax and consulting service RSM told the Austin American-Statesman when Apple decided last year to invest $1 billion in a new Austin campus.

As a result, the Hudson Square area in Manhattan is developing into a major tech hub as companies follow Google’s footsteps, CoStar analysts noted in a recent office report.

Also known as St. John’s Terminal, the four-story building at 550 Washington housed a former rail terminal and is being repurposed into creative office space by developer Oxford Properties Group and its joint venture partner, the Canada Pension Plan Investment Board. Global design firm CookFox Architects is leading the adaptive reuse project. The building is expected to be ready for occupancy by Google in 2022.

“Google is confident that 550 Washington will be a great location for our growing New York City workforce,” William Floyd, director of public policy for Google, said in a statement. “We look forward to working with Oxford and the local community to ensure this iconic building continues adding to the vibrancy of the neighborhood.”

Later this month, Oxford expects to finish the first phase of work, which entails removing the overpass covering Houston Street on the building’s north side. Oxford declined to comment on terms of the deal. Google did not respond to a request for further comment.

Google is fleshing out a Hudson Square campus as it looks to double its Manhattan employee count to roughly 15,000 people by 2028.

The campus includes 280,000 square feet of leased space at 315 Hudson St., a turn-of-the-century, 10-story building by local landlord Jack Resnick & Sons. Google has also signed for 180,000 square feet at 345 Hudson St., a 17-story corner tower owned by a joint venture of Trinity Real Estate, Norway-based Norges Bank Real Estate Management and Hines.

Source: CoStar Realty Information, Inc.


Tech Companies Place Big Bets on Offices That Don't Exist Yet

 

June 17, 2019

By Molly Armbrister

Two Tech Giants Play Long Game in Leasing Projects Before Construction Approval

 
Pinterest has signed on for 490,000 square feet at 88 Bluxome St. in San Francisco. Rendering: Alexandria Real Estate Equities

Pinterest has signed on for 490,000 square feet at 88 Bluxome St. in San Francisco. Rendering: Alexandria Real Estate Equities

 

San Francisco tech companies are solving the city's office scarcity problem in a way that perhaps only they can: signing gigantic leases at towers that haven’t even been approved yet for development.

In unprecedented moves, two of the most recognizable companies in San Francisco, customer relationship management software maker Salesforce and social media company Pinterest, signed on for hundreds of thousands of square feet of real estate that are still under consideration by planning officials.

“The tech industry is confident in their growth and they need to think longer-term about what their growth is going to be in the next five to 10 years,” said Colin Yasukochi, director of research for the western region at commercial real estate firm CBRE Group Inc. “They don’t want their growth constrained by insufficient space.”

In all, the deals not only signify the tech companies' confidence in their growth, they indicate just how tight the San Francisco market is for office space as the nation's economic expansion is poised to reach record territory. Companies from Salesforce and Facebook to Uber and Slack have taken millions of square feet in the past five years and turned the city into the nation's most expensive metropolis for office space. Fueled by billions in venture capital, the industry is expected to expand further with new investor dollars from high-profile initial public offerings.

Relatively speaking, real estate is a small cost for tech companies, Yasukochi said, and the office market in San Francisco has very few large blocks of office space available, something that isn’t expected to change in the next few years.

It’s common for companies to prelease space that hasn’t broken ground yet or is still under development, but leasing space that hasn’t even been given the go-ahead by the city is a new phenomenon in San Francisco, Yasukochi said.

The office vacancy rate in the South Financial District of San Francisco is about 5.7%, according to CoStar data, which is low, but the availability of the huge chunks of contiguous space that tech companies usually need to accommodate their growth is even less than the vacancy rate implies.

“It exemplifies how large block availability is in extremely high demand,” said Jesse Gundersheim, director of market analytics for CoStar in the San Francisco Bay area.

Salesforce in November said it plans to lease all 325,000 square feet of the office space in a proposed tower at 542 Howard St., a project planned by Houston developer Hines that would include residences, hotel rooms and retail in addition to the office space. Hines owns the land for the project, but plans are still working their way through San Francisco’s planning apparatus.

Development Complications

Pinterest’s building, at 88 Bluxome St., has even more complications. The project sits within San Francisco’s Central South of Market plan area, which in January was the target of a lawsuit by nonprofit housing group Todco’s legal branch, the Yerba Buena Neighborhood Consortium. The lawsuit alleges that an environmental study conducted in that area did not adequately determine what the proposed development would mean for public services.

The case is winding its way through the San Francisco Superior Court, most recently receiving orders to go to a hearing with a city board that handles issues under the California Environmental Quality Act, which requires state and local governments to identify environmental impacts of projects.

If it's built as anticipated, the project, by developers Alexandria Real Estate Equities Inc. and TMG Partners, will include more than 1 million square feet of space, with Pinterest taking 490,000 square feet, one of the largest leases in San Francisco history.

Both developments also must contend with San Francisco’s Proposition M, which caps the amount of large-format office space that can be built in the city in a given year. A total of 950,000 square feet of new office development allowance becomes available every year on Oct. 17, and any remaining allowance rolls over from year to year. Of that, 75,000 square feet are reserved for projects that are between 25,000 and 50,000 square feet.

Pinterest, which held an IPO in April, is one of the many tech companies that has gone public so far this year, something that many expect will accelerate the already rapid growth being experienced by these companies. Salesforce has been public since 2004 but has been rapidly expanding in recent years.

Signing these leases so far out from the buildings’ potential completion comes with risks, of course, but there are likely clauses in the leases that protect landlords in the event that the tenants back out of the commitment, Gundersheim said.

On the tenant side, the risk potential is somewhat greater, because they may ultimately not have the growth they expected.

“They’ve committed to pay for additional space that they may not have the capacity to fill, if business plans do not proceed as expected,” Gundersheim said. “Also, on the flip side, if they are now expecting to occupy the space at a point in time, if the building does not receive approval and deliver as they anticipate, they could be forced to return to the market to seek alternative space to use in the meantime, or as an alternative.”

And alternatives may be difficult to find. With available office space so difficult to come by in San Francisco, some companies are opting instead for other cities in the Bay Area, migrating south through Silicon Valley or into East Bay cities like Oakland where more blocks of space are already built and available for lease.

But even with those risks, the upside of securing space in downtown San Francisco, and close to other company locations and all of the worker talent they compete for, is significant, Yasukochi said.

It’s likely not the last time the market will see this extra-early leasing activity, Yasukochi said.

“Given the lack of supply and the demand from large tech users, I wouldn’t be surprised if other leases like this occur,” he said.

Source: CoStar Realty Information, Inc.


Temasek Adds Real Estate Services Firm Eastdil to Its Expanding US Holdings

 

June 11, 2019

By Mark Heschmeyer

Singapore-based Purchaser Lets Eastdil Grab a Broader Global Footprint

 
Eastdil Secured's headquarters at 40 W. 75th St. in New York. Photo: CoStar

Eastdil Secured's headquarters at 40 W. 75th St. in New York. Photo: CoStar

 

Temasek, the Singapore-based sovereign wealth fund, is expanding from investing in U.S. real estate to also offering property services in the country by agreeing to lead the purchase of Eastdil Secured, the private real estate investment banking company known for high-priced deals, from Wells Fargo & Co.

Eastdil is embarking on a management buyout in partnership with Temasek and some institutional clients of Guggenheim Investments. Following the sale, which is expected to be completed by the fourth quarter of 2019, the firm will be privately held. Wells Fargo will retain a minority ownership interest and maintain the public market investment bankers. Terms weren’t disclosed.

In partnership with Guggenheim Investments and Temasek, Eastdil Secured said it will be positioned to bolster its a leading role in the U.S. commercial real estate capital markets, while also strengthening its growing presence in both Europe and Asia. The firm plans to keep its name and leaders, Benjamin V. Lambert as chairman and Roy Hilton March as chief executive. March had negotiated for months with Temasek to sell the company, hoping to have a deal with the Singapore sovereign wealth fund by the end of 2018.

"With our new long-term partners, we will continue to be the leader in our industry by providing our clients with a unique combination of real estate and capital markets expertise," Lambert said in a prepared statement.

While Wells Fargo is a publicly traded company, it discloses little about Eastdil’s financial performance, so revenue is clear to most investors. Brokerage insiders have estimated Eastdil’s value at about $500 million last year.

With a record of successfully advising clients on the largest, most relevant real estate transactions, Eastdil Secured claims to hold the top market share for 2018 and year-to-date 2019 for real estate deals greater than $100 million across all property types in the United States. In 2018, Eastdil Secured advised on 827 transactions for $243.5 billion.

Eastdil arranged financing on a deal announced Monday for an $800 million loan for the development team behind the Wharf in Washington, D.C., according to news reports. The group, Hoffman-Madison Waterfront, is involved in developing hotels, offices, condos, apartments, restaurants, retailers and a concert venue.

Since last fall, Temasek-led entities have made major property portfolio purchases in the U.S.

Prologis Inc., the world's largest owner and developer of warehouses, sold a $1.1 billion portfolio of U.S. and European properties to Singapore-based property developer, asset manager and Temasek-owned business, Mapletree, for $1.1 billion.

Mapletree said the acquisition advances its strategy since 2014 of venturing beyond Asia into the United States and Europe and increase its global footprint as a logistics real estate provider.

In September 2018, investment firm Starwood Capital Group sold 33 prime office properties totaling 3.3 million square feet in San Diego; Portland, Oregon; and Raleigh, North Carolina, to a Singapore-based Ascendas-Singbridge Group in its first foray into U.S. real estate investment. Temasek owns 51% of Ascendas-Singbridge. Eastdil brokered the deal for Starwood.

Of the deal with Temasek, Eastdil's March said, "through this transaction, we will be better able to serve our clients with investments in enhanced technology, a broader footprint and deeper global relationships."

The firm plans to keep its U.S. headquarters in New York City and Los Angeles and its Europe headquarters in London, with additional domestic offices in Atlanta, Boston, Chicago, Dallas, Orange County, San Francisco, Seattle, Silicon Valley and Washington, D.C., and additional international offices in Dubai, Frankfurt, Hong Kong and Tokyo.

Source: CoStar Realty Information, Inc.


Life Science Industry Elbows Its Way Into Tight Bay Area Property Market

 

June 10, 2019

By Molly Armbrister

Rock-Bottom Vacancy Rates Pervade the San Francisco Peninsula

 
Genesis Towers in South San Francisco provide an unusual opportunity for life science companies. Photo: CoStar

Genesis Towers in South San Francisco provide an unusual opportunity for life science companies. Photo: CoStar

 

Like the organisms it studies, the life science industry in the San Francisco Bay is adapting to its changing surroundings.

Stiff competition from well-heeled tech giants such as Salesforce and Uber in areas such as downtown San Francisco is preventing the life sciences industry, which has had a foothold in the region for decades, from elbowing its way into commercial real estate around the city. So the life science industry has begun looking south, where developers are planning unprecedented ways to accommodate the industry, one of the fastest-growing in the United States, with the area's first high-rise for science firms.

“There’s a confluence of industries that are booming all at the same time,” said Marc Pope, executive director at commercial real estate firm Cushman & Wakefield. “Life science, technology, automotive technology. In some ways, they’re competing for space. Elsewhere, traditional office is being bought and converted to lab space.”

The life science industry combines health care and technology into a field that seems in some ways recession-proof and requires large amounts of specialized real estate. Life science employment grew nationwide by 4.5% between 2010 and 2018, compared with total employment growth of 1.7%, according to the U.S. Bureau of Labor Statistics. Since 2000, the life science sector has grown nearly five times as fast as the rest of the economy, adding 85,000 jobs, according to a Cushman report.

Organic growth stemming from an aging population that wants and needs new treatments for ailments, and expansion enabled by technological advances in the field, resulted in a growing share of life science space needed in several of the country’s biggest markets. The way different south Bay Area cities are dealing with the region's industry growth could provide a window into how other top industry cities such as Boston and San Diego deal with the space crunch in coming years.

While San Francisco and the city of South San Francisco are both almost fully occupied, the cities are each handling the sector's growth differently. Life science companies aren't receiving much assistance in their competition with the major tech companies in San Francisco, but they are being welcomed with open arms by the adjacent city of South San Francisco and others eager to capture the spillover demand with new development, which could spur even more expansion in the future.

According to CoStar data, San Francisco’s Mission Bay neighborhood property market, for example, is about as tight as it can get: The overall office vacancy rate in that neighborhood is 0.3%.

Mission Bay is part of an area in San Francisco that was targeted for life science companies by a 2008 plan passed by the City and County of San Francisco that created a life sciences and medical special use district.

But that overlay didn’t exclude other uses, and 10 years after it was put in place, the development capacity there is largely maxed out by the tech giants that have given the city its reputation, Pope said.

Among the biggest new tenants in Mission Bay is ride-hailing app maker Uber, which is planning to take up 1 million square feet of new development adjacent to Chase Center Arena, the $1.4 billion multi-purpose stadium and future home of the NBA's Golden State Warriors that is scheduled to open before the 2019-2020 season.

It reflects the way new development in San Francisco is getting scooped up by these major tech companies, who offer a cache -- and sometimes a rental rate -- that many life science companies don't have, forcing the firms to look elsewhere if they want to expand.

Going Vertical

Contrast that with the city of South San Francisco, which in 1976 was dubbed the “Birthplace of Biotechnology” by Genentech, the bioscience company that was acquired by Roche Pharmaceuticals in 2009. There, developers are doing something unprecedented to find a home for life science companies: They’re going vertical.

A 20-story development called Genesis Towers has been taken over by life science companies looking for space. The two-building property was originally designed as office space and was supposed to be completed during the recession, but the economy got in the way, Pope said.

Now, it has been developed into two life science towers with a third planned. Shortly after the conversion was finished, the space was fully leased, according to Cole Speers, research analyst for Cushman & Wakefield in the Bay Area.

Going vertical on life science space is rare, as the properties have historically been low-slung, sprawling developments akin to industrial space.

Life science real estate, though, can include more than just office space, sometimes branching out into flex industrial and converted office spaces. Cushman’s numbers for Mission Bay life science property specifically show there is no vacancy in that neighborhood for life science real estate.

And because of its connection to the health care industry, which is largely viewed as a mostly recession-proof field because people will always need health care regardless of the economic outlook, life science is seen as a safe place to invest capital, whether that’s in new businesses or in real estate to house them.

Boston remains the U.S. life science capital, with companies there attracting $15.5 billion worth of venture capital funding from 2010 to 2018, but San Francisco and the peninsula are right behind, with $15 billion, according to venture capital tracking website PitchBook.

And while Boston has the lowest vacancy rate for life science of any market in the country at 0.7%, the biggest drop off in vacancy rate occurred in San Francisco, falling to 6.2% fourth quarter last year from 18.3% in the same quarter of 2008, according to data from Cushman.

The development activity and need for space is not expected to recede any time soon, either. And with the percentage of people aged 65 and older projected to rise to more than 20% by 2030, the industry is expected to grow even more, further increasing the need for real estate.

Source: CoStar Realty Information, Inc.


Looking for the Risks and Rewards of America's Malls? Check Israeli Bond Returns

 

June 07, 2019

By Mark Heschmeyer

As Starwood Retail Struggles to Stabilize Income, Namdar Realty Grows Profits

Starwood Retail's Parkway Plaza in El Cajon, California. Photo: CoStar

Starwood Retail's Parkway Plaza in El Cajon, California. Photo: CoStar

 

The uneven state of American shopping centers is spotlighted in the results of two Israeli bond deals that show how small and nimble retail centers can sometimes outperform larger entities.

One bond offering is backed by seven super-sized regional malls acquired in a $1.64 billion portfolio sale from Unibail-Rodamco-Westfield to Starwood Retail, an affiliate of private equity powerhouse Barry Sternlicht and Starwood Capital. The portfolio is losing money and the bonds are trading about 60% less than their issuance price in March 2018.

Backing another bond offering is a portfolio of individually acquired leftover properties that were no longer wanted by U.S. real estate investment trusts and commercial mortgage-backed securities servicers, owned by a group far less well-known than Starwood, Namdar Realty. The portfolio has grown since its bonds were issued in December 2016, with the bonds rising in value as the portfolio makes good money.

American malls are suffering as some retailers struggle to adapt to more U.S. shoppers choosing to buy online, with some suffering worse than others. Chains like Sears that are often found at malls have filed for bankruptcy protection and reduced traffic at their host retail centers, while other shopping centers are adapting by bringing in a mix of non-retail businesses.

Looking at the state of U.S. retail from the prism of overseas bond offerings provides a rare inside look for Americans at the state of their shopping centers. Starwood Retail, based in Chicago, and Namdar Realty on New York's Long Island are privately held companies and are not required to make financial disclosures in the United States. Executives from both firms did not respond to requests for interviews.

However, by raising capital through bond sales in Israel, they are required to file financial reports there. CoStar reviewed those filings and bondholder presentation materials filed in Hebrew, translated using Google, and listened to an English language recording of Starwood's bondholders earnings conference call held this week.

The filings outline Starwood's struggles of trying to turn around a $1.6 billion portfolio of super regional malls for the long-term over Namdar's more nimble approach of turning around far less valuable properties one at a time for the short- and medium-term.

Starwood West

Starwood Retail Partners completed a private bond offering in Israel a year ago raising about $287 million. The bonds were sold under a newly formed entity called Starwood West Ltd.

Starwood West's Israeli bond offering is backed by seven mall properties: Plaza West Covina Mall in West Covina, California, valued then at $341million; Southlake Mall, Merrillville, Indiana, $302 million; Franklin Park Mall, Toledo, Ohio, $278 million; Parkway Plaza, El Cajon, California, $256 million; Belden Village Mall,Canton, Ohio, $226 million; Capital Mall, Olympia, Washington, $199 million; and Great Northern Mall, North Olmsted, Ohio, $141 million.

For the quarter ended March 31, Starwood West reported revenue of $42.07 million down from $45.82 million for the same quarter a year ago. Operating expenses increased from $17.19 million to $22.97 million. And Starwood West reported a loss of $26.07 million for the quarter compared to a profit of $3.5 million a year ago.

In September 2017, Starwood Capital appointed Michael Glimcher as chief executive to run Starwood Retail. Glimcher began his career with Glimcher Realty Trust from 2005 to 2017. After Glimcher Realty merged with Washington Prime in 2015 to create WP Glimcher, he served as chief executive and vice chairman for a while.

Glimcher held an earnings conference call this week with Israeli analysts and bondholders: "This quarter was challenging from a few different perspectives," Glimcher said. "We continue to fight to stabilize our" net operating income. "We have continued to experience pressure on revenue from tenants who have vacated, or whose rents have decreased."

That being said, Glimcher said the portfolio continues to be well-occupied at 95.9% and year-over-year sales grew 2%, finishing the quarter at $449 per square foot.

Glimcher said the company is looking at each asset strategically to determine how to ensure it is properly positioned to thrive long term.

"As the industry continues to try to regain its footing, we are proactively planning for the future and pursuing developments, retailers and uses that we believe will create value over time," he said. "These products don't happen overnight, but they take a lot of preparation and planning to ensure a successful implementation."

As part of that plan Starwood West expects to begin selling off out parcels and adjacent strip centers beginning next year either as individual properties or combined into larger portfolios.

"I do think it will be an important tool to create some additional liquidity and or to delever this portfolio," Glimcher said. "There's no question that our business is difficult right now. All of our peers in the U.S. regardless of the quality of their portfolios would echo a similar sentiment."

Starwood West's bond prices were trading this week at values about 60% less than their issuance price. Glimcher said the company has held discussions internally and externally with its institutional investors about buying back some of those bonds as an investment opportunity.

"We view the bonds as compelling, particularly at the levels where they are now trading," he said.

Namdar Realty

While using an inherently risky strategy, Namdar Realty won Israeli investor backing in the fall of 2016 when it raised about $115 million in bond offering under a new entity called Namco Realty Ltd. And it has proved a successful strategy so far.

Namco Realty currently owns 60 properties scattered across 23 U.S. states.

The group specializes in the purchase of malls and centers from REITs that have become difficult because of faulty management, or that require physical improvement, or that are no longer at the core of the sellers' business. It focuses on buying properties on the cheap.

As an example, in March 2016, Namdar acquired the St. Louis Outlet Mall, a 1.2 million-square-foot enclosed regional mall in Hazelwood, Missouri, for $4.4 million. In 2007, the mall had been valued at $78 million.

Most of the group's purchases are characterized by paying primarily with cash and buying at prices that still allow the property to generate cash flows, according to its first quarter 2019 presentation materials. It buys properties one at a time, giving them individual treatment, a tactic that does not lend itself to large portfolio transactions.

Its strategy for turning around properties includes physical improvements to the property, renting up vacant space, reducing operating expenses and appealing for real estate tax reductions.

It also sells out parcels and adjacent properties that help it reduce its debt leverage but without losing any significant amount of revenue.

Namco continues to acquire additional assets, a strategy that Israeli bond-rating company S&P Maalot has reported "is expected to lead to continued improvement in the dispersal of tenants and assets and to continue to increase the current cash flow, which is high compared to debt service needs."

"The positive rating outlook reflects our expectations that in the next 12 months the company will successfully implement the business strategy," S&P said.

For the quarter ended March 31, 2019, Namco Realty reported revenue of $49.45 million, up from $42.11 million for the same quarter a year ago. Net profits increased to $32.25 million for the quarter, up from $17.19 million a year ago.

Source: CoStar Realty Information, Inc.


Renting Gains Momentum As Analysts Seek Signs of a US Home Price Peak

 

June 05, 2019

By Paul Owen


Need for Apartments Grows Across the Country

 
190607_south-florida-skyline.png
 

A U.S. housing market that some analysts say could be closing in on a pricing peak may keep more renters from becoming homeowners, bolstering demand in the already-booming rental property and apartment sectors in the next three to five years.

The latest results from a second-quarter housing study show buying did not become any more favorable than it was in the past year. In fact, renting picked up more steam in many major markets across the country.

Renting beats owning in most of the 23 metropolitan areas surveyed by the Beracha, Hardin & Johnson Buy vs. Rent Index. Buying is the better option only in Cleveland, Chicago, New York City and Detroit, but even those four cities are pushing closer to rent territory as home prices keep rising, said Ken Johnson, a co-creator of the index and a professor at Florida Atlantic University in Boca Raton, Florida.

“It appears evident to us that we are approaching the peak of the most recent homeownership cycle,” Johnson said in an interview. “There will be an increase in need for quality rental properties.”

The index measures homeownership demand while analyzing whether it makes more sense to buy a home or rent one and invest the savings that would have been spent on owning. With the U.S. economy approaching the longest growth stretch in the nation's history, analysts and the real estate industry are focusing on the effects on prices and demand.

Buyers build equity, but renters may generate wealth as fast or faster if they invest the money they would have spent on insurance, taxes, maintenance and other costs, according to Johnson and his co-creators. They track home prices, rental rates and investment streams in the markets.

The index shows renting and investing the savings still remains the faster way to wealth creation in these 19 markets: Atlanta; Boston; Cincinnati; Dallas; Denver; Honolulu, Hawaii; Houston; Kansas City; Los Angeles; Miami; Milwaukee, Wisconsin; Minneapolis; Philadelphia; Pittsburgh; Portland, Oregon; San Diego; San Francisco; Seattle and St. Louis.

Dallas , Denver and Houston remain the most overpriced markets for ownership, Johnson said.

“The opportunity to generate greater wealth by renting and reinvesting puts downward pressure on the demand for homeownership and prices should follow sooner rather than later,” index co-creator Eli Beracha said in a statement.

Still, in any area of the country, renters who don’t plan to invest are better off buying a home and staying in it several years because that amounts to a forced savings plan, Johnson said.

“Spending the money on beer and cookies is the biggest mistake you can make,” he said.

Source: CoStar Realty Information, Inc.


Blackstone to Buy GLP Warehouse Portfolio for $18.7 Billion

 

June 03, 2019

By Jacqueline Ryan

Private Equity Firm to Become One of Nation's Largest Industrial Owners as Online Shopping Grows

 
Demand for logistics property is growing as online shopping grows. Photo: iStock

Demand for logistics property is growing as online shopping grows. Photo: iStock

 

Blackstone agreed to pay $18.7 billion to Singapore investment manager Global Logistics Properties for a real estate portfolio that would almost double its U.S. industrial footprint, a transaction that could amount to one of the largest private real estate deals on record.

The New York private equity giant said it plans to acquire 179 million square feet of urban, infill logistic properties from three of GLP’s U.S. funds. The company said Blackstone Real Estate’s global opportunistic BREP strategy is scheduled to acquire 115 million square feet for $13.4 billion while its income-oriented non-listed real estate investment trust, Blackstone Real Estate Income Trust, plans to acquire 64 million square feet for $5.3 billion.

“Logistics is our highest conviction global investment theme today, and we look forward to building on our existing portfolio to meet the growing e-commerce demand," said Ken Caplan, Global Co-Head of Blackstone Real Estate, in a statement announcing the deal Sunday night.

The transaction comes as commercial real estate investors scramble to grab sites for delivery distribution centers amid record online shopping. Retail giants such as Amazon and Walmart as well as other e-commerce companies are competing to shorten shipping times to 24 hours or less, requiring more space in more locations with easy access to disparate populations.

Amazon is GLP's largest industrial tenant, according to multiple news reports.

GLP said it is the second-largest owner of logistics property in the United States and one of the largest in the world. Globally, it is believed to have about $64 billion assets under management in real estate and private equity funds in a portfolio that span 785 million square feet.

Blackstone reportedly outbid the nation's largest owner of logistics property, real estate company Prologis, as well as other firms for the portfolio, according to the Wall Street Journal. That newspaper also reported that the sale price includes about $8 billion of debt that Blackstone plans to refinance.

Blackstone said its real estate business has about $140 billion in investor capital under management and that it has acquired over 930 million square feet of logistics globally since 2010. The deal would help it become one of the largest holders of industrial property in the nation.

The company has been aggressively adding to its U.S. industrial portfolio. Last year it completed a $952 million deal for industrial property portfolio of 14 million square feet spread out across the U.S. Southeast.

Blackstone and GLP did not immediately return requests for comment.

Source: CoStar Realty Information, Inc.


WeWork's Leasing Practices May Draw Attention From Wall Street

 

May 06, 2019

By Randyl Dummer

Coworking Company Says Chief Executive's Holdings Are Involved With Some Leases

 
WeWork and The Meridian Group bought 1333 New Hampshire Ave. in Washington, D.C., in November 2018 for $136.5 million. Photo: CoStar

WeWork and The Meridian Group bought 1333 New Hampshire Ave. in Washington, D.C., in November 2018 for $136.5 million. Photo: CoStar

 

WeWork, should it go public, may need to convince investors not only that the shared office provider can grow profitably but meet the stringent requirements faced by publicly traded companies for disclosing potential conflicts of interest.

The New York City -based coworking company's well-defined strategy of building out office space with trendy designs and the latest millennial perks then subletting its desks to clients, which it likes to call members, obscures lease arrangements, confirmed by the company, that could be seen as effectively making the company its own landlord.

The model of creating limited liability companies to sign leases with landlords, including several ventures involving holdings of the chief executive of WeWork parent the We Co., Adam Neumann, isn't unusual among privately held companies. However, the practice has raised questions about how the fast-growing company valued by some estimates at more than $45 billion may deal with Wall Street's disclosure and corporate governance rules if it decides to go public. The company said last week it's considering an initial public offering.

“Conflict-of-interest transactions are frowned upon by large investors,” Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, said in an interview. “Going public with those sorts of deals on the books will attract quite a lot of questioning and scrutiny by investors, and not in a flattering way.”

WeWork is not required to disclose its lease terms, so specifics of its numerous deals are not publicly available for analysis. A company spokesman said WeWork uses single-purpose entity or related-party transactions to sign its leases, including WeWork leases in a handful of buildings purchased by Neumann and his partners.

“WeWork has a review process in place for related party transactions, and those transactions are disclosed to the board and investors," according to a statement WeWork gave to CoStar News.

The company made appropriate disclosures to the board and investors and sought approvals where necessary, the spokesman said. Only six of WeWork's 700 leases, constituting less than 1% of the coworking company's locations, involve properties where Neumann has an investment interest, and the chief executive was not involved in negotiating those leases, the spokesman said.

Several office brokers have confirmed to CoStar that WeWork typically in their experience sets up single-purpose entities registered as limited liability corporations to sign leases of up to 15 years after WeWork plunks down hefty security deposits to help landlords justify the cost of renovations that create WeWork's trendy and hip workspaces. The WeWork spokesman said the company has appropriately disclosed to its investors the existence of lease agreements that are related-party or single-purpose entity transactions.

In several cases, WeWork guarantees the leases for a portion of the term, after which the limited liability company becomes liable for the lease, protecting the parent company if it is forced to break the lease agreement and vacate the site, according to brokers familiar with some of the leases.

Private Equity Partnerships

Since early 2017, WeWork has pursued partnerships with private-equity firm Rhône Group, one of WeWork's earliest investors, to raise hundreds of millions of dollars in funds to buy office buildings. The Wall Street Journal first reported last year that a fund co-managed by WeWork and Rhône swooped in to buy one of New York City's most iconic buildings, the century-old Lord & Taylor Building at 424-434 Fifth Ave. in mid-2017.

The fund snatched the deal from Brookfield Property Partners LP, which was in the late stages of buying the building for about $700 million, according to sources cited by the Journal.

A limited liability entity, called 424 Fifth Avenue LLC, closed the deal in February for $850 million, a price 21% higher than Brookfield's offer. The fund aims to invest billions of dollars to buy buildings where WeWork would become a tenant, effectively making the coworking company its own landlord using other investors’ money.

The Wall Street Journal reported last January that WeWork's Neumann has an ownership stake in multiple buildings leased back to WeWork, raising concerns among some of the company's investors about potential conflicts of interest in which Neumann could personally benefit from leases by his own company.

Such relationships have raised alarm from legal and corporate governance experts. Ownership and partnership interests need to be publicly disclosed in order for WeWork to enter public markets, said Andrew Raines, real estate and corporate finance attorney and partner in the Los Angeles headquarters of law firm Raines Feldman LLP.

'Disclosure Issue'

"In an IPO, it's all really a tax and disclosure issue," Raines said. "Any bad news needs to be delivered early and often. For example, we’re representing a lot of clients that do private placements and if they have any ownership interests in the tenant that occupies their building, they need to disclose. Sometimes that creates a problem, but you need to act according to what you've promised your investors."

While forming single-purpose entities isn't unusual in real estate deals such as joint ventures, complications may arise in a dispute where the tenant suddenly stops paying rent and the landlord may not want to enforce a default because it has a separate relationship with the tenant, Raines said.

"The landlord may find themselves in a conflicted position because they also own the tenant," Raines said. "That misalignment can cause some of the landlord’s investors to claim breach of fiduciary duty because they're protecting a tenant in which the landlord has a significant finance interest."

Elson said the rules change when a company accepts public market capital, such as after conducting an IPO.

"It’s like leasing a plane or any other property to your company," Elson said. "It’s considered a self-dealing transaction. Legally, it’s very tough to take a company public that’s engaged in those sorts of deals. They have to be fair to the company and frankly, human nature being what it is, it’s not going to be fair because you’re on both sides. Human nature dictates that you protect your own interest over the company’s interest.”

Such arrangements also potentially violate the corporate opportunity doctrine, which is the legal principle that directors, officers, and controlling shareholders of a corporation must not take business opportunities for themselves that could benefit the corporation, Elson said.

“This situation is potentially a classic conflict of interest and could be viewed as self-dealing,” Elson said.

Companies can still move forward with an IPO under such circumstances. But the arrangements could cut into the price that investors would be willing to pay for the shares and reduce proceeds when WeWork launches the offering to account for the heightened risk, Elson added.

"Investing in someone that’s taking personal upside should bring some real concern," Elson said. "The real issue here is really, do you feel comfortable dealing with an operator that operates in this manner?"

Source: CoStar Realty Information, Inc.


From Donald Trump to Giorgio Armani: Miami Condo Developer Deals in Celebrity Brands

 

APRIL 29, 2019

By Paul Owers


Dezer Development Building Oceanfront Tower in Sunny Isles Beach, Florida

 
Prices at the 56-story Residences by Armani/Casa range from $3 million to $17 million. Illustration: Dezer Development and The Related Group

Prices at the 56-story Residences by Armani/Casa range from $3 million to $17 million. Illustration: Dezer Development and The Related Group

 

A Miami-area developer who once built luxury condominiums branded by Donald Trump now is working on another celebrity-driven project: an oceanfront glass tower named for Italian fashion designer Giorgio Armani.

The Residences by Armani/Casa in the seaside city of Sunny Isles Beach, Florida, is the designer’s first U.S. residential real estate project, said Gil Dezer, president of Dezer Development. The 56-story condo, valued at nearly $1 billion, is due to be complete by November, with prices ranging from $3 million to $17 million.

If you buy the most expensive unit, a 7,000-square-foot penthouse, you’ll even get a meet-and-greet with Armani himself.

Dezer, in partnership with The Related Group, said he has presold 260 of the 308 units for more than $800 million. Still, analysts worry about the effects of a recession and insist that Miami’s luxury condo market is overbuilt, providing a sign of potential trouble for other parts of the country.

High-profile projects like The Residences by Armani/Casa boost the stakes in the debate whether investors should be concerned. Miami was the first major market to signal the start of the Great Recession more than a decade ago, so it’s looked at as an economic bellwether as the U.S. economy enjoys a stretch of prosperity that would set a record in July for the longest ever.

Through a licensing agreement with the developers, Armani’s Armani/Casa Interior Design Studio is designing the condo’s common areas, according to Dezer. The studio also will design individual units for buyers at $250 a square foot.

The project at 18975 Collins Ave. features floor-to-ceiling windows, a 24-seat movie theater, heated swimming pool, spa and oceanfront fitness center. The architect is Pelli Clarke Pelli.

“We put together, really, a hell of a product,” Dezer said in an interview.

 
Amenities include a heated pool, a spa and a 24-seat movie theater. Illustration: Dezer Development and The Related Group

Amenities include a heated pool, a spa and a 24-seat movie theater. Illustration: Dezer Development and The Related Group

 

The firm also used licensing agreements with Trump years before he became U.S. president for six condos in Sunny Isles Beach, an enclave just north of Miami.

In another Sunny Isles project, this one involving a licensing deal with Porsche Design Group of Germany, Dezer built the 132-unit Porsche Design Tower, where the units come with “sky garages” that allow owners to park their cars outside their front doors. The project was finished in 2017, and five developer-owned units remain, according to Dezer.

“It’s about people knowing what to expect,” he said of the licensing deals. “Having a brand tells buyers what a building is going to look and feel like.”

Dezer Development, founded in 1970 in New York by Dezer’s father Michael, has been a major player in oceanfront real estate across South Florida, particularly in Sunny Isles Beach. The city was incorporated in 1997 and later changed zoning laws to allow for high-rise construction.

The Residences by Armani/Casa is attracting a mix of buyers, both domestically and abroad, according to Dezer, adding that more than a third of the buyers so far have said they intend to live there full time.

But South Florida’s condo market is on the decline, and Sunny Isles Beach in particular is flush with for-sale units priced at $1 million or more, according to Cranespotters.com, a database operated by Condo Vultures Realty, a consulting firm in Miami.

A market balanced equally between buyers and sellers has about six months’ worth of inventory for sale, brokers say. In Sunny Isles, the supply of luxury condos is just more than 60 months, or 10 times the ideal level, meaning it would take five years to sell all the units if no more came on the market, the Cranespotters data shows.

The oversupply is leading to price declines and concessions from some developers, but Dezer’s chances for success are good because buyers already have put down 50% of the purchase prices, said Peter Zalewski , a principal with Condo Vultures.

Those who don’t have plans to keep their condos long term could suffer the most, according to Zalewski.

“We’re set up for some real struggles ahead for individual buyers,” he said.

 
The project is expected to be complete by November. Illustration: Dezer Development and The Related Group

The project is expected to be complete by November. Illustration: Dezer Development and The Related Group

 

Another analyst, Miami economist Ken Thomas, said he expects a recession before the end of 2020. What’s more, consumers and business leaders are concerned about the uncertainty of the next election and wonder whether the Trump tax cuts would survive a change in power, Thomas explained.

“I see it from the point of view of the bankers and financiers,” he said. “A lot of them are definitely expressing concerns. What we’re seeing now are a lot of warning signs and flashing lights. These good times can’t go on forever.”

Dezer remains undaunted.

“The market has definitely slowed,” he said. “But it has not stopped.”

Dezer noted that the firm still owns five beachfront lots and two parcels on the Intracoastal Waterway in Sunny Isles Beach and plans to strategically roll out more condo developments in the years ahead.

“We don’t want to be our own competitors,” Dezer said. “But we have enough land to build for the next 25 years without buying another piece.”

Source: CoStar Realty Information, Inc.


In Leap Into Experiential Retail, Macy's Debuts STORY Concept in 36 Stores Across Nation

 

APRIL 16, 2019

By Linda Moss

'Narrative-Driven' Merchandising Comes to These Locations. See the List.

 
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Macy's Inc., in what some say marks the retailer's boldest foray into experiential retail to date, has opened STORY shops within 36 of it stores across the nation.

The Manhattan-based department store giant described STORY as a "narrative-driven, retail-concept shop" that will have changing themes, curated products, special participating vendors, and select events and classes. STORY is kicking off with "color" as its theme, grouping and displaying pieces of merchandise by their individual colors, which span the rainbow, at Macy's locations. That inaugural theme will be in place at STORY until June 26, when it will be replaced by a new one.

“The discovery-led, narrative experience of STORY gives new customers a fresh reason to visit our stores and gives the current Macy’s customer even more reason to come back again and again throughout the year,” Macy's Chairman and Chief Executive Jeff Gennette said in a statement.

 
Color is the theme of Macy's STORY, as shown here in Herald Square. Photo: Diana Bell for CoStar

Color is the theme of Macy's STORY, as shown here in Herald Square. Photo: Diana Bell for CoStar

 

Some real estate experts lauded Macy's for finally undertaking a substantial experiential retail initiative, with the trade paper WWD dubbing STORY one of Macy's "most innovative maneuvers to date." Brick-and-mortar retailers have been scrambling to add elements to their stores that will generate foot traffic, by featuring interactive offerings or experiences that can't be had with online shopping. J.C. Penney Co. has added stores-within-stores, including Sephora, at some of its locations to boost traffic. But Macy's hadn't ventured much into such initiatives.

“It’s positive that Macy’s is trying something new and very different," said Edward Dittmer, a senior vice president at DBRS, a credit rating agency in New York City. "It has great potential in terms of something that can not only bring in shoppers but get them to look at your brand in a different way. The consumer when they talk about experiential retail they want something that is very different,k something that they can touch and really get involved with. The younger folks like something they can Instagram out to their friends…Those are things that can generate a lot of positive buzz for Macy’s.”

STORY's space within Macy’s stores averages 1,500 square feet, totaling more than 55,000 square feet of main-floor retail space across the 36 stores where it launched, according to the retailer. The STORY at Macy's Herald Square at 151 West 34th St. , Manhattan, serves as the flagship location for the new concept, where it has more than 7,500 square feet of space on the main floor and mezzanine levels.

 
Curated merchandise is displayed by color, here a group of orange wares, at the STORY at the Macy's at the Willowbrook Mall in Wayne, one of four of the new in-store shops located in New Jersey. Photo: Linda Moss for CoStar

Curated merchandise is displayed by color, here a group of orange wares, at the STORY at the Macy's at the Willowbrook Mall in Wayne, one of four of the new in-store shops located in New Jersey. Photo: Linda Moss for CoStar

 

“This idea with STORY seems like a really cool way to kind of curate some products and get people in the doors for more than just browsing the racks,” said David Townes, senior director of retail services at Cushman & Wakefield in East Rutherford, New Jersey.

Mac Cosmetics, Crayola, Levi’s Kids and more than 70 small businesses have partnered with Macy’s on Color STORY, bringing more than 400 products together for that rainbow theme. In Mac's case, at 30 select STORY locations customers will have access to “make-your-own” makeup palette stations, where they can try on and take home samples of cosmetics like eye shadows. Shoppers will also have the opportunity to take beauty classes on-site from makeup artists.

 
Shoppers can create their own Mac makeup palette at 30 STORY locations, including this one at the Herald Square Macy's. Photo: Diana Bell for CoStar

Shoppers can create their own Mac makeup palette at 30 STORY locations, including this one at the Herald Square Macy's. Photo: Diana Bell for CoStar

 

Crayola will be offering workshops featuring its Create it Yourself Network crafting videos, as well as sponsoring events at the STORY venues. For example, there will be "Melted Crayon Canvas" classes that teach how to make custom patches to decorate classic Levi’s Kid’s Denim jackets and T-Shirts with fabric markers.

And at STORY Levi's Kids will preview a selection of pieces from its Levi’s x Crayola collaboration, which will be available before the full line officially launches mid-June at select Macy’s stores nationwide.

The STORY at Macy’s experience feels a lot like a real-life version of scrolling through Instagram," Rachel Shechtman, founder of STORY and Macy’s brand experience officer, said in a statement.

Before the launch, more than 270 dedicated STORY Managers and STORYtellers were hired and participated in “Know + Tell,” an "experiential retail training program that immerses staff with integrated roles on everything from building fixtures to customer engagement and event production," Macy's said in a statement. Whether STORY meets Macy's expectations for experiential depends in large part on its execution, according to Dittmer.

 
The STORY at the Willowbook Mall in Wayne, New Jersey. Photo: Linda Moss for CoStar

The STORY at the Willowbook Mall in Wayne, New Jersey. Photo: Linda Moss for CoStar

 

“The way I’ve always talked about experiential retail is it does one of two things," he said. "One is it brings in a customer that wouldn’t normally come to your store or it brings in a customer and gets them to spend more money than they normally would have spent there. It [STORY] might be able to meet the latter because if you’re already shopping at Macy’s, and then you see this bright colorful display, then we walk over and walk over and see what they’re doing and take advantage of that. But will it necessarily bring in customers that weren’t normally coming to a Macy’s? I think whether or not it succeeds will be about the presentation by Macy’s to the public.”

Herald Square's expanded STORY space showcases more partners and interactive experiences than other sites, Macy's said, including a giant Lite-Brite "experience" produced by LiteZilla and an illuminated rainbow tunnel featuring Tetra Contour technology from Current by GE.

STORY has launched at:

  • Macy’s South Coast Plaza – Costa Mesa, California

  • Macy’s Newport Fashion Island – Newport Beach, California

  • Macy’s Stoneridge – Pleasanton, California

  • Macy’s Union Square – San Francisco, California

  • Macy’s Westfield Valley Fair – Santa Clara, California

  • Macy’s Boca Raton Town Center – Boca Raton, Florida

  • Macy’s Dadeland – Miami, Florida

  • Macy’s Orlando Millenia – Orlando, Florida

  • Macy’s Lenox Square- Atlanta

  • Macy’s Perimeter – Atlanta

  • Macy’s State Street – Chicago

  • Macy’s Woodfield – Schaumburg, Illinois

  • Macy’s Castleton Square – Indianapolis

  • Macy’s Fayette – Lexington, Kentucky

  • Macy’s Ridgedale – Minnetonka, Minnesota

  • Macy’s Las Vegas Fashion Show – Las Vegas

  • Macy’s Bridgewater – Bridgewater Township, New Jersey

  • Macy’s Freehold – Freehold Township, New Jersey

  • Macy’s Short Hills – Short Hills, New Jersey

  • Macy’s Willowbrook – Wayne, New Jersey

  • Macy’s Brooklyn – Brooklyn, New York

  • Macy’s Roosevelt Field – Long Island, New York

  • Macy’s Herald Square – Manhattan, New York

  • Macy’s Queens Center – Queens, New York

  • Macy’s Cross County – Yonkers, New York

  • Macy’s Kenwood Towne Centre – Cincinnati, Ohio

  • Macy’s Easton – Columbus, Ohio

  • Macy’s Polaris – Columbus, Ohio

  • Macy’s Center City – Philadelphia

  • Macy’s Ross Park – Pittsburgh

  • Macy’s Northpark Center – Dallas

  • Macy’s Houston Galleria – Houston

  • Macy’s Memorial City – Houston

  • Macy’s Bellevue – Bellevue, Washington

  • Macy’s Alderwood – Lynnwood, Washington

  • Macy’s Metro Center – Washington, D.C.


Source: CoStar Realty Information, Inc.


Warner Bros. Reveals $1 Billion Expansion Project in US Media Capital

 

APRIL 15, 2019

By Lou Hirsh

Development, Building Sales Mark Studios’ Latest Quest to Boost Content

 
Warner Bros. plans a new office complex called Second Century in Burbank, California.

Warner Bros. plans a new office complex called Second Century in Burbank, California.

 

Entertainment giant Warner Bros. plans a $1 billion expansion in Burbank, California, that includes new development and buying studio property that once housed late night hosts Johnny Carson and Jay Leno, marking a key real estate deal amid surging demand for production space in the nation's entertainment capital.

Warner Bros., recently acquired by telecom giant AT&T, said Monday it plans to expand as the sole tenant into two office buildings designed by architect Frank Gehry that are to be developed by Worthe Real Estate Group and Stockbridge Real Estate Fund near its main production lot in Burbank’s media district. The project, to be called Second Century, is planned to be completed in 2023, for the 100th anniversary of Warner Bros.’ founding as one of the original Hollywood movie studios.

Warner said it intends to purchase much of The Burbank Studios at 3000 W. Alameda Blvd. – the former home of numerous NBC programs including The Tonight Show. The acquisition, which does not include the land where the two Gehry towers are planned, provides Warner Bros. with additional production office space, eight soundstages, as well as a mill building and a commissary.

“This is an opportunity to reimagine not only our workplace but our future,” said Kim Williams, Warner Bros.’ executive vice president and chief financial officer, in a statement. “Along with our historic lot, the newly expanded campus will fuel increased creativity, facilitate collaboration, and help us attract and retain the world’s best and most diverse talent. It will also better position our company for the future and provide for more production capacity."

Warner Bros.'s Burbank production lot sits near Universal Studios' famous North Hollywood production studios and just blocks from the headquarters of Walt Disney Co., which recently acquired most of competitor Fox. All of which are located on the other side of the hill from Hollywood where online entertainment provider Netflix has expanded into more than 1 million square feet in recent months and just miles from Culver City, where Amazon and Apple are rapidly ramping up their entertainment production division.

Jeff Worthe, president of Los Angeles-based Worthe Real Estate Group, said his company’s relationships with Warner date back more than 30 years, and the new buildings will add to Worthe’s existing office portfolio that already spans more than 4 million square feet.

Noted architect Gehry, who heads Gehry Partners LLP in Los Angeles, said in a statement the new Burbank project has been designed to “recapture that feeling of old Hollywood splendor.” It is designed to include large, open floorplates, with the buildings to be composed “as one long sculptural glass façade that creates a single identity like icebergs floating along the freeway.”

Developers said the two-building, 800,000-square-foot new office complex near the 134 Freeway is expected to have its groundbreaking this fall, pending city approvals.

As part of the arrangements with Warner, Worthe and Stockbridge agreed to purchase the 30-acre Warner Bros. Ranch production site on Hollywood Way as well as three office buildings currently owned by Warner – the Triangle Building at 4001 West Olive Ave., the Glass Building at 3903 West Olive Ave. and the Wood Building at 111 N. Hollywood Way. Warner Bros. plans to lease back those offices until its new buildings are ready.

In all, Warner Bros. deals are expected to total roughly $1 billion.

According to CoStar Market Analytics, strong office demand has recently helped push Burbank office vacancies to their lowest levels in recent years, currently 6.7 percent. “Media and entertainment tenants are heavily concentrated in the area, which acts as a lower-priced alternative to Hollywood, Santa Monica, and other premier submarkets that cater to the entertainment industry,” CoStar analysts said.

Warner Bros. and rival Walt Disney Co. are both based in Burbank, and numerous other media entities such as Nickelodeon, Cartoon Network and Blizzard Entertainments also have sizable operations there.

Disney significantly raised the stakes for media production demand when it recently detailed plans for its new streaming media service launching Nov. 12, called Disney +, for which the company plans to release more than 25 original series and 10 original films among other productions in just the first year, spending more than $1 billion in the process.

Source: CoStar Realty Information, Inc.


Convene to Open Flagship Event Space at Brookfield Property in Manhattan

 

MARCH 25, 2019

By Diana Bell


Coworking Firm Plans Conversion of Former Saks Fifth Avenue Store

 
Convene has differentiated itself from other firms in the flexible workspace industry by functioning as concierge and property manager while hosting full-service, high-end conferences and events. Photo: Craig von Wiederhold

Convene has differentiated itself from other firms in the flexible workspace industry by functioning as concierge and property manager while hosting full-service, high-end conferences and events. Photo: Craig von Wiederhold

 

Convene, a provider of meeting and flexible office space, is deepening its relationship with global real estate manager Brookfield Property Partners with plans to open Convene's largest event venue in New York City at Brookfield Place in lower Manhattan.

The move comes as coworking has had a cascading effect on office markets in major U.S. cities, leading to open floor plans and an increase in employee amenities including gatherings with live jazz bands, champagne towers or a massive charcuterie board – sometimes basked in pink mood lighting.

Convene's new 73,000-square-foot space is set to open within Brookfield’s flagship New York retail property during the fourth quarter. Plans call for the conversion of a former Saks Fifth Avenue retail location into two large auditoriums seating 500 people each as well as rooms for smaller meetings and events. Convene is beginning demolition on the two floors immediately, according to Mark Kostic, vice president of asset management at Brookfield.

Convene and Brookfield are betting the downtown office market, which CoStar tracks at about 49 million square feet, will feed demand for conference and event space.

“Downtown doesn’t really have a venue of this magnitude, so we can benefit as well from the radius of people around us who need event space. There is a uniqueness to the venue in terms of size,” Kostic said.

According to CoStar’s latest downtown office report, technology, media and creative tenants are increasingly looking downtown for space, which has pushed vacancy to 9.2 percent. Similar tenants have accounted for 40 percent of office space signed since 2014, according to CoStar Market Analytics.

Kostic noted that the partnership with Convene, and the bringing its event and conference services to Brookfield Place, evolved from a need it noticed on a national scale.

Convene is beginning to demolish and redo the former Saks Fifth Avenue space at 230 Vesey St. in New York City for a new event venue. Photo: CoStar

Convene is beginning to demolish and redo the former Saks Fifth Avenue space at 230 Vesey St. in New York City for a new event venue. Photo: CoStar

 

“What we are seeing in the office market for demand is this emphasis on more efficient use of space, and technology is part of that, so if conferences and meeting services can be handled outside of their floor, that is a benefit to leasing costs and space utilization,” Kostic said. “This agreement for us is the evolution of office space and the placemaking effect – having a conferencing solution, retail and restaurants nearby is holistically how we think of office buildings.”

The new deal brings Convene’s footprint within New York to just over half a million square feet, per CoStar data. It is pursuing a growth target of 1.7 million square feet of space by the end of 2019. Aside from Chicago and London, Convene will seek to add three to four new markets and keep expanding where it's already established in Boston, Los Angeles, New York, Philadelphia and Washington, D.C.

In an email, Convene Chief Executive Ryan Simonetti said the firm was on track to meet that goal this year.

“We opened our first location in Chicago at the Citadel Center in February, and we’re on track to open another 185,000 square feet this year in Fulton Market and the Loop. We are planning to expand into our existing cities, and eventually reach other major meetings markets including Seattle, San Francisco, Denver, Dallas, Austin, Atlanta, Houston and Miami by 2022,” he wrote.

Convene is known for its suite of managed services and emphasis on bringing a hotel vibe to the workplace experience. Full catering and live bands are common at their hosted events. They fully manage the booking of conference rooms and other business services for members. They also run retail cafes within some spaces and plan to bring one to Brookfield Place.

In addition to the on-demand meeting and event services it will offer to Brookfield tenants and outside users, Convene plans to roll out in-building vertical catering of locally sourced meals. This component is another example of its strategy of sewing hospitality elements into the corporate experience.

Its service-centric, amenity-heavy business model has worked to attract enterprise business clients.

“Our customer base for events and conference services includes enterprise companies, which are companies that do $1 billion in annual revenue and/or have more than 1,000 employees,” Simonetti said, adding that clients include Barclays, Comcast and Ernst & Young. 

 
It's not uncommon for Convene events to include champagne towers, jazz bands and full catering. Photo: Craig von Wiederhold

It's not uncommon for Convene events to include champagne towers, jazz bands and full catering. Photo: Craig von Wiederhold

 

At Brookfield Place, Kostic said that Convene will also play a leading role in event planning for Brookfield’s arts program, which features various community and cultural events at properties throughout the year.

"While Convene offers flex space and coworking at other locations, at Brookfield Place they are operating purely an event venue. It’s part of how we are trying to be on the cutting edge of amenitization and holistically round out the nature of Brookfield Place," Kostic said.

This isn’t Convene’s first location within a Brookfield property, but it will be its largest solely as an event space. The largest location that Convene operates within its portfolio, at RXR Realty’s 530 Fifth Ave., is readying to open in June as a mix of flexible office and meeting space.

Convene has differentiated itself from other flexible space operators in the country by teaming with larger developers of high-end buildings, such as those owned by RXR and The Durst Organization. As a result of that landlord partnership, Convene will take four full floors at 530 Fifth totaling 116,000 square feet, effectively anchoring the 560,000-square-foot, Times Square-area building. Brookfield is also part owner in the property.

Brookfield’s partnership with Convene stretches back to at least 2016, and it has infused capital into the company through prior equity funding rounds. It last invested as part of a Series D round that raised $152 million to fuel what Convene has called its global expansion and launch of new service offerings. But Brookfield also anchored Convene’s Series C funding round in 2017, during which it raised $68 million, and was a part of its Series B round in 2016.

Convene has raised $260 million to date. Its backers include Declaration Capital, QuadReal Property Group, Revolution Growth, RXR, CVC2, Durst and Elysium Management.

As part of the partnership, Convene is also focusing on Brookfield’s Los Angeles portfolio, with plans to expand its services to seven Class A office buildings that Brookfield owns in that city.

Source: CoStar Realty Information, Inc.


Brookfield to Buy Most of Oaktree Capital, Boosting Its Credit Capability

 

MARCH 13, 2019

By Mark Heschmeyer

Stock-and-Cash Deal Calls for Businesses to Keep Operating Separately

 
Brookfield's holdings include the New York Times building in Times Square. Photo: CoStar

Brookfield's holdings include the New York Times building in Times Square. Photo: CoStar

 
 

Brookfield Asset Management Inc. agreed to acquire most of global money manager Oaktree Capital Group for about $4.8 billion to add credit capability to its real estate focus amid an increasing concentration of institutional investment in bigger firms.

The stock-and-cash purchase of about 62 percent of Oaktree creates one of the world’s leading alternative asset managers, with about $475 billion under management and $2.5 billion of annual fee-related revenue. Brookfield and Oaktree plan to operate their businesses independently.

"This transaction enables us to broaden our product offering to include one of the finest credit platforms in the world,” Bruce Flatt, chief executive of Toronto-based Brookfield, said in a statement on the deal.

The move combines Canada’s biggest alternative investment firm, a backer of commercial property and renewable power, with Oaktree, the Los Angeles-based manager of distressed debt, private equity and real estate investments.

The announcement Wednesday drove Oaktree's stock price up 12 percent, with other publicly traded asset managers rising to a lesser extent. Brookfield has made no secret about its intent to grow, expanding its investor base 75 percent in the past three years to more than 600 to compete with rival Blackstone.

In its fourth-quarter earnings conference call last month, Leo van den Thillart, Brookfield's head of client relationship management, said diversification and growth of its investor base remains a key priority for the firm this year.

"Looking ahead to 2019, we see potential for another year of robust fundraising across our products,” van den Thillart said at the time. “We also see a continuing trend of investors pooling capital into larger asset managers, and we think that Brookfield will be a beneficiary of this continued consolidation."

There’s a growing divide between the ability of the top and bottom ends of private equity firms and asset managers in raising funds for real estate investment. In PricewaterhouseCoopers' year-end report, Tim Bodner, U.S. real estate deals leader for the global professional services firm, said the trend toward bigger funds capturing the bulk of the capital really took off last year.

The 2018 fundraising totals highlighted the consolidation of investment management relationships among real estate investors. The average fund size increased more than 20 percent as investors flocked to a smaller number of asset managers to control costs in the face of rising asset prices putting pressure on yields, PwC noted.

Brookfield has capitalized on that trend. Just weeks ago, Brookfield closed its latest flagship global private real estate fund, Brookfield Strategic Real Estate Partners III, at $15 billion, its largest to date. It significantly exceeded its original fundraising target of $10 billion.

Also last month, Oaktree Capital launched its eighth opportunistic real estate fund without disclosing a target amount to be raised. Oaktree's seventh opportunistic fund closed its capital raising at about $2.9 billion, while the one before that raised $2.7 billion.

Howard Marks, co-chairman of Oaktree, added in the statement on the deal that the combination will allow it to extend that growth because “our businesses mesh without overlapping or conflicting."

Brookfield agreed to acquire all outstanding Oaktree Class A units for either $49 in cash or 1.0770 Class A shares of Brookfield per unit.

Source: CoStar Realty Information, Inc.


WeWork Rolls into Manhattan's Seaport District, a Popular Spot for Commercial Investors

 

FEBRUARY 27, 2019

By Diana Bell

Coworking Firm to Open Downtown Location Just Six Blocks North of its Biggest Manhattan Site

 
WeWork plans to open a location at 199 Water Street, which landlord Jack Resnick & Sons has recently renovated. Photo: Jack Resnick & Sons

WeWork plans to open a location at 199 Water Street, which landlord Jack Resnick & Sons has recently renovated. Photo: Jack Resnick & Sons

 
 

WeWork, the nation’s largest provider of shared office space, is preparing to open its seventh location in New York City's financial district in lower Manhattan as the company targets the Seaport district, an area surging with commercial investment.

The firm, already the largest occupier of office space, has signed a new 15-year lease for 201,231 square feet at 199 Water St., a 1.16 million-square-foot office tower also known as One Seaport Plaza in Manhattan.

When the new location opens this summer, it will be one of the largest WeWork sites in Manhattan, according to WeWork Chief Real Estate Development Officer Granit Gjonbalaj, as well as the company’s seventh in the Financial District. The company has taken five floors for what will be a core location accessible to all WeWork members.

According to landlord Jack Resnick & Sons, the 30th through 35th floors offer sweeping views of downtown Manhattan, New York Harbor and the Brooklyn Bridge.

This deal would create its sixth-largest location within Manhattan, located just one block from its largest Manhattan location at 85 Broad St., where it occupies about 488,000 square feet, according to CoStar data. WeWork has about 5.13 million square feet of office space in Manhattan, according to CoStar.

WeWork chooses its locations based on the level of demand it receives, the company said. But the downtown market has much more available space to accommodate growing firms compared to other areas of Manhattan. It is marked by an office vacancy rate of 9.3 percent, according to CoStar data, compared to about 8 percent for all of the city.

Asked about the popularity of the downtown market for growing tenants, Cushman & Wakefield Managing Principal Lou D’Avanzo said, "If you just run out of space, you’re going to be forced to look downtown because there’s a larger amount of large-block opportunity. There are also smaller boutique office buildings with advantageously priced rents.” said D’Avanzo, an experienced Manhattan office leasing executive who was not involved in the WeWork deal.

WeWork is not the only firm that will set up shop at One Seaport Plaza this summer. The American Foundation for Suicide Prevention, a non-profit, is relocating into 24,495 square feet on the 11th floor of the building when it relocates in June from nearby 120 Water St., where it occupies nearly 12,000 square feet, per CoStar data.

Concurrently, marketing firm W2O Group has signed for 58,852 square feet in a long-term renewal that also expands its presence from about 35,000 square feet it already has on the 14th floor to new space on the 12th floor of the building.

Resnick & Sons President Jonathan Resnick said 199 Water Street has had a “swift lease-up” following a recent major renovation that upgraded lighting and other critical building systems, including a detachable floodgate system for flood protection. It has gut renovated the lobby to feature oil paintings by artist Frank Stella and installed glass security turnstiles and new elevators.

The 35-story tower, developed in 1984 by Jack Resnick & Sons and owned by the company since, is once again fully leased following the recent transactions. Other tenants in the building include Allied Wold Assurance Company, The Legal Aid Society, and BGC Financial LP.

The Financial District, and particularly the Seaport area, has been undergoing a wave of capital investments, both from public and private spheres. The city has invested about $15 million in the past four years into lower Manhattan, including the seaport, for infrastructure improvements, including flood protection measures.

The Howard Hughes Corp., a Dallas-based developer, is spending $1.7 billion to redevelop a swath of parcels into a neighborhood dubbed The Seaport District, which is opening in phases to create 500,000 square feet of commercial, entertainment and dining spaces. As part of those efforts, Howard Hughes paid $180 million in June for a parcel at 250 Water St. to round out its holdings. One of the Seaport District’s properties, called Pier 17, is already open with 19,000 square feet of space leased to sports network ESPN for its television studios.

Other investors are also entering the area, including Irvine, California-based hotel operator Atlas Hospitality Group and New York-based developer Fortuna Realty Group. In January, they secured $40 million from Bank of America Merrill Lynch to begin building a 26-story hotel with retail space nearby at 120-122 Water St.,which is expected to open in 2020.

“With billions having been invested in infrastructure here, Financial District commercial landlords are poised to capitalize on the area’s convenience to the increasing [and increasingly affluent] residential populations in Lower Manhattan, Brooklyn, Long Island City and along the Jersey Gold Coast,” CoStar analysts wrote in their most recent Financial District office report. “Also encouraging for Financial District commercial landlords are recent and forthcoming projects like Westfield’s World Trade Center mall and the South Street Seaport redevelopment.”

For the Record: Adam Rappaport and Brett Greenberg with Jack Resnick & Sons, Inc. represented the landlord in-house along with a Cushman & Wakefield team of John Cefaly, Myles Fennon, Ethan Silverstein, Stephen Bellwood and Robert Constable. WeWork handled lease negotiations in-house.

Source: CoStar Realty Information, Inc.


Payless Files for Chapter 11 Bankruptcy Protection; All 2,500 US Stores to Go Dark

 

FEBRUARY 19, 2019

By Jennifer Waters

Retail Chain Plans to Keep the Majority of the Stores Open Until May

 
Payless ShoeSource began liquidation sales at its U.S. stores over the weekend before filing for Chapter 11 bankruptcy protection for the second time. Photo: Wikimedia Commons

Payless ShoeSource began liquidation sales at its U.S. stores over the weekend before filing for Chapter 11 bankruptcy protection for the second time. Photo: Wikimedia Commons

 
 

Payless ShoeSource filed for Chapter 11 bankruptcy protection in what could be the largest such filing in the nation's history, with the chain planning to close all 2,500 of its U.S. corporate stores and its online business amid a shift in consumer shopping behavior that's upending retailers nationwide.

The Topeka, Kansas-based seller of discount shoes for men, women and children began going-out-of business sales Sunday in anticipation of this week’s bankruptcy filing.

“We expect all stores to remain open until at least the end of March and the majority will remain open until May,” the company said in a statement.

The notice alone almost doubles the number of closings that all U.S. retailers announced in the first six weeks of this year, according to Coresight Research. The global market research firm reported last week that 2,187 stores were scheduled to go dark this year, up 23 percent from the year-earlier period, and noted that “there was no light at the end of the tunnel.”

The Payless move, which does not affect its franchise operations or international business, comes barely 18 months after Payless emerged from a Chapter 11 bankruptcy filing, a process that is still unfolding in court. Some 1,200 stores will remain open in Latin America, the company said.

Founded by two cousins in 1956 as a no-frills, self-service retail model, the shoe seller had already closed almost 900 stores during the 2017 bankruptcy filing, which wiped out more than $435 million of its $838 million in debt and left it with 3,500 stores throughout the world.

In this week’s filing, Payless said it had about $470 million in outstanding debt, much of it owed to Chinese-based footwear makers.

“The challenges facing retailers today are well-documented, and unfortunately Payless emerged from its prior reorganization ill-equipped to survive in today’s retail environment,” Chief Restructuring Officer Stephen Marotta said in a statement. “The prior proceedings left the company with too much remaining debt, too large a store footprint and a yet-to-be realized systems and corporate overhead structure consolidation.”

Owned by a private-equity partnership, Payless restructured almost half its debt in the 2017 filing through a credit bid that gave lenders equity stakes in the company in exchange for debt forgiveness. That is similar to the Sears Holdings bankruptcy exit structure. When Payless emerged from Chapter 11 on Aug. 10, 2017, its future looked bright, according to the company.

Unfounded Optimism

"In a year where so many major retail companies have filed for Chapter 11 restructurings, Payless is the first to successfully emerge as a stronger and healthier enterprise for the benefit of its customers, employees, suppliers, business partners and lenders," Chief Executive Paul Jones said in a statement at the time. He also announced then that he was retiring.

"Our new owners believe wholeheartedly in the future of Payless,” he added, “and I am confident that they will identify a new leader who will complement our outstanding and deeply committed management team, while sparking new ideas and approaches.”

That never happened. Martin Wade, Payless’ chairman, has served as interim chief executive since then. The company struggled with inconsistent pricing, a mixed message to consumers and what Coresight Research called “the relentless share gains” of e-commerce disruptors.

Like a number of merchants, Payless has faced the challenges of what is amounting to a revolution in retail. Consumers have a number of choices both in-store and online at a variety of prices. That has forced retailers to rethink their selling strategy as well as their delivery. As the landscaped shifted, many retailers have closed shop, leaving a number of malls and shopping centers in dire straits even during a period of high consumer spending and demand.

As a no-frills, self-service model, Payless may have struck out on the “experience” so many consumers search for when shopping. It also probably didn’t help that many Payless stores were in strip malls or smaller Class B shopping centers, neighbors of other struggling retailers like Sears, Kmart and J.C. Penney.

Payless also was likely to have found itself in a grim position with the January bankruptcy filing of Shopko , the Green Bay, Wisconsin-based regional discount retailer. Since 1999, Shopko has leased the floor space to Payless as the discounter’s shoe department. Shopko said it would close 38 stores this year; last year it shut 45 stores.

A second bankruptcy filing – what attorneys refer to as Chapter 22 – underscores how difficult it is in this milieu for retailers to maintain solid footing even after they’ve restructured debt and lightened the store load.

Just last month, Gymboree Group made its second appearance in bankruptcy court in less than two years. Gymboree is shutting down 809 apparel stores focused on children, mostly because “today’s changing retail environment has proven to be our greatest challenge,” Chief Executive Shaz Kahng said in a letter to employees and customers.

Besides Gymboree, Charlotte Russe and FullBeauty Brands have filed for bankruptcy this year.

Coresight Research warns of more big bankruptcies ahead. Since 2013, there have been 72 bankruptcy filings in the consumer discretionary sector, moving into double digits in 2017, when there were 20.

And this has happened during what is considered “peak retail,” when high employment, rising wages and strong GDP growth spur consumer spending. U.S. retail sales grew 4.6 percent last year, according to the National Retail Federation.

“Surprisingly, extreme disruption continues in the retail sector amid a time of bounty,” according to Coresight. Researchers also noted “the annualized number of filings year-to-date in 2019 [is] already outpacing the number in 2018,” which was 18.

Source: CoStar Realty Information, Inc.


Norway's $1 Trillion Pension Fund Adjusts Real Estate Investment Strategy to Buy More Securities

 

FEBRUARY 12, 2019

By Mark Heschmeyer


Government Has Been An Active Buyer and Seller of US Properties

 
121 Seaport Blvd. in Boston Photo: Norges Bank Real Estate Management

121 Seaport Blvd. in Boston Photo: Norges Bank Real Estate Management

 
 

The government of Norway, an active buyer and seller of U.S. commercial property, is shifting its strategy to focus more on stocks, bonds and other securities as a way of diversifying its holdings.

A new investment mandate calls for the country's Government Pension Fund Global, known as GPFG, to move more toward securities of companies and investment funds instead of properties. It has more than $1 trillion in assets and is the world's second-largest pension fund behind Japan's Government Pension Investment, according to global insurance brokerage and advisory firm Willis Towers Watson.

To characterize the mandate as abandoning property investments would be wrong, Egil Matsen, deputy governor of Norges Bank, the investment manager for Norway's pension fund, said in a statement.

"We would like to emphasize that real estate will continue to be an important part of the bank’s investment strategy for the GPFG, and the fund will be a major player in the real estate markets in the years to come," Matsen said.

The objective is to have a real estate portfolio in the range of 3 percent to 5 percent of the fund's investment, he said. Properties, which are identified as unlisted investments, now make up about 2.7 percent of the fund's investment, with real estate securities, bonds and stocks, identified as listed investments, at about 1 percent.

The difference going forward will be that there will be no specific limit as to how much listed real estate the fund may hold. In recent years, the listed real estate market has grown rapidly, and the restrictions on the portion of the voting share in listed real estate companies that GFPG may own have been changed so that the GPFG can hold larger stakes. This may facilitate better diversification of the real estate portfolio across real estate sectors.

The significance of the change is evident in the fact that Norges Bank has decided to discontinue Norges Bank Real Estate Management, which has overseen its property investment strategy, as a separate organization. Going forward the property real estate organization will be integrated into Norges Bank Investment Management and report to a new chief executive.

"The real estate organization has been built up as a professional organization that has made investments that will benefit generations to come. Their competence is something that Norges Bank wants to benefit from going forward," Matsen said.

Behind the change is the fact that real estate has not been that strong of performer for the fund of late.

Investments in property real estate returned 1.9 percent in the third quarter of 2018, the latest reported. Investments in listed real estate returned just 0.1 percent.

The return on unlisted real estate investments depends on rental income, operating expenses, changes in the value of properties and debt, movements in exchange rates, and transaction costs for property acquisitions and disposals.

However, the fund has experienced other uncertainty in producing returns – unforeseen costs.

In a letter to Norway's Ministry of Finance, Norges Bank officials said, "recent years' experience with unlisted real estate investments shows that such investments may be complex and resource-intensive."

Going forward, Norges Bank management said, the fund should be characterized by cost efficiency.

"The real estate portfolio shall be broadly diversified, and the strategy shall be simple, with weight given to cost-efficiency and investments that require limited resources," Norges Bank officials said.

In January, a partnership between Norges Bank Real Estate Management and Prologis acquired six logistics properties in Chicago, Nashville in Tennessee and Orlando, Florida, containing 2.8 million square feet. Norges Bank paid $87.7 million for its 45 percent interest.

A month earlier, a partnership between Norges Bank Real Estate Management and TH Real Estate sold the office property at 470 Park Ave. South in New York. Norges Bank received $122 million for its 49.9 percent ownership interest.

In the month before that, Norges Bank Real Estate Management acquired a 45 percent interest in an office property at 121 Seaport Blvd . in Boston, in a joint venture with a new partner, American Realty Advisors. Norges paid $204.8 million for its 45 percent ownership interest, valuing the property at $455 million.

Source: CoStar Realty Information, Inc.


Facebook's Reach Felt in Office Design Nationwide

 

FEBRUARY 06, 2019

By Molly Armbrister

Open Floor Plans, Super-Sized Amenities Incorporated to Help Lure Potential Hires

 
A scale model of one of the buildings on Facebook's Menlo Park campus gives a bird's-eye view of the open floor plan concept used in the company's offices. Photo: Gregory Cowley

A scale model of one of the buildings on Facebook's Menlo Park campus gives a bird's-eye view of the open floor plan concept used in the company's offices. Photo: Gregory Cowley

 
 

Just as Facebook has seeped into daily life for billions of users, elements of its strategically designed headquarters in Menlo Park, California, are influencing offices across the country. As a result, a financial firm in the U.S. Southeast can look a lot like a Silicon Valley startup.

Amped-up amenities at Facebook headquarters such as pastry chefs, laundry service and Wi-Fi enabled rooftops with lush landscaping serve two purposes: They help the company squeeze as much time at work as possible out of its employees. And they provide highly desirable perks to attract and retain workers in a competitive job market.

The social media company, as well as other Silicon Valley tech giants such as Google and Apple, began incorporating these ideas into their workspace years ago as a way to compete for the skilled workers they needed -- and keep them at work for long stretches. As the companies' prominence has grown, competitors across the country followed suit, hoping to keep pace with the industry’s standard bearers and attract top-shelf talent. Today, in tech-heavy markets everywhere, it’s difficult to walk into a tech company’s office without seeing a ping-pong table or a keg of beer waiting for happy hour.

 

But those elements have reached out even further to become of the gold standard for office space development and renovation in buildings nationwide. Companies across industries are vying for the same workers, who have become more amenable to long office hours when they are in locations they enjoy.

“It has proliferated out all the way to financial companies in Atlanta,” said Ryne Raymond, West Coast lead of workplace strategy for Los Angeles-based commercial real estate firm CBRE Group Inc.’s workplace strategy division. “In this economy at the moment, you see these companies being hyper-competitive for talent, and they want to get the best work out of their employees."

It's not just tech workers these businesses are seeking. It's everyone from advertising and sales workers to accountants and lawyers, all of whom could get hired by Facebook as easily as they could by accounting firm Deloitte.

Among the biggest areas of focus in Facebook's offices is developing connection, which is of the utmost importance at Facebook, said Ryan Patterson, strategic initiatives manager for the social networking company founded 15 years ago this week. Employees sit in large pools of desks, just an arm’s reach from their co-workers and gather for lunch in the campus’s many eateries. Through its rooftop garden winds a path where workers are encouraged to hold “walking meetings.”

Kay Sargent, senior principal and director of workplace at Washington, D.C.-based architecture and design firm HOK, said "a lot of companies are looking to be more like tech, because more companies consider themselves to be tech. Such a huge portion of their business is driven by tech. They're all trying to hire people who are tech savvy, so they have to be able to compete for that talent."

Countless studies by architects and designers have demonstrated a link between these new-age workplaces and employee innovation, including a 2016 study by global architecture firm Gensler that shows that the employees with the highest levels of workplace effectiveness have access to twice as many amenities as their less effective counterparts.

Open Space Distractions

But as these new trends have become more popular, they have also garnered critics who say open floor plans breed distraction and degrade worker privacy. Companies now designing offices are encouraged to use a more nuanced approach, Raymond said.

“It’s about finding the right balance,” he said.

A good sweet spot is having between 30 percent and 40 percent of the office space enclosed, Raymond said, but with that space more evenly distributed than in older offices designs where individual offices are the norm.

Some companies find that allowing employees to make use of "activity-based" space, rather than tethering employees to a specific desk, is more effective, Sargent said. Activity-based workspaces create task-oriented spaces that workers can choose based on what job they're trying to carry out at the moment.

Activity-based workspace "environments are typically designed to be an ecosystem of spaces, primarily grouped to serve four major work functions: Solo work, collaboration, learning and socialization and rejuvenation," Sargent wrote in a 2017 article about new workplace design concepts for Work Design Magazine.

Companies are also trying to cater to workers who differ vastly in age, workplace preferences and life stages, so it makes sense to include a variety of different options within one office, Sargent said.

Facebook, for its part, is committed to the open floor plan idea, though it did provide some quieter spaces in its new building, and many aspects of its huge campus could be classified as activity-based workspaces.

“In this building, we made some design updates. We added some mezzanine space into this building,” Patterson said, sitting in MPK 21, the second phase of the company’s three-building headquarters expansion in Menlo Park.

“It's sort of a balcony-level type space that has lower ceilings and sort tucks in the sides of the building and it works for groups that need a little bit more focused workspace and don't work as well in sort of the open concept," he said. "But we believe that the benefits of the open concept really outweigh any of the negatives.”

Source: CoStar Realty Information, Inc.


Brookfield-Forest City Merger Drives January's Commercial Mortgage Bond Market

 

JANUARY 30, 2019

By Mark Heschmeyer

Three Deals Totaling $2.43 Billion Tied to the Merger

Philadelphia is home to the One Franklin Town complex, the largest apartment project supporting a new Brookfield-related bond offering. Photo: Bob Snyder, Flickr

Philadelphia is home to the One Franklin Town complex, the largest apartment project supporting a new Brookfield-related bond offering. Photo: Bob Snyder, Flickr

 

The single-borrower market for commercial mortgage-backed securities is off to a strong start this year due largely to a major real estate investment trust merger as investors turn to more secure deals.

Brookfield Asset Management completed the $11.4 billion acquisition of Forest City Realty Trust in December. The purchase consisted of 6.3 million square feet of high-quality office space, 2.2 million square feet of retail space, 18,500 multifamily units, and five large-scale development projects.

Now this month, lenders on that deal have dominated the market, rolling up $2.43 billion of those loans into three bond offerings. Those three deals along with a fourth single-borrower deal has pushed the January single-borrower total so far to $3.07 billion.

That's ahead of the pace at this time last year of $2.29 billion. Last year's activity through the same time included nine smaller deals.

Two other single-borrower deals are in the pipeline for issuance, which should keep the pace ahead of last year.

As the commercial mortgage bond market has shown in the past two years, there is a shift toward single-asset, or single-borrower, deals.

The 335-unit One Franklin Town complex in Philadelphia  is the largest multifamily project supporting a new  Brookfield-related bond offering. Photo: Brookfield Properties

The 335-unit One Franklin Town complex in Philadelphia
is the largest multifamily project supporting a new
Brookfield-related bond offering. Photo: Brookfield Properties

 

Single-borrower bond offerings have become popular with investors partly because on an overall basis, institutional borrowers with higher quality assets are a large part of the sector. That means the bonds historically have lower default rates.

In addition, single-borrower deals have a higher percentage of financing with loan-to-value ratios greater than 60 percent, which is an enticement for borrowers. Such deals also offer borrowers longer terms with more extension options.

Multiple lenders on the Brookfield and Forest City deal contributed loans to the three offerings this year. Citigroup, Barclays Bank, Bank of America, and Deutsche Bank contributed office loans to two deals.

The collateral for the CAMB 2019-LIFE bond offering is a $1.17 billion mortgage loan secured by eight life science properties totaling 1.3 million square feet of Class A office and laboratory space on the campus of the Massachusetts Institute of Technology. The capital includes debt of $130 million subordinate to, and held outside, properties that were initially developed by Forest City.

The collateral for NYT 2019-NYT bond offering is a $515 million loan on the office and retail condominiums of the New York Times Building in Manhattan. The office condominium consists of floors 28 through 50, while the ground-floor retail condominium is 738,385 square feet.

The third bond offering this month tied to the merger is a $745.86 million pool of mortgages offered through Freddie Mac. Wells Fargo contributed to loans secured by 23 multifamily properties.

Source: CoStar Realty Information, Inc.


Millennials Now Pushing a Wider Group of Cities Toward Transit-Based Transformation

 

JANUARY 15, 2019

By Lou Hirsh


Lifestyle Priorities Change Urban, Suburban Centers

A new trolley station under construction in San Diego will link riders to the next-door Westfield UTC mall. Illustration: San Diego Association of Governments

A new trolley station under construction in San Diego will link riders to the next-door Westfield UTC mall. Illustration: San Diego Association of Governments

 

They may not yet be cities that never sleep but San Diego and other metropolises across the country are building centers around train and bus lines in an effort to transform central business districts from after-work ghost towns into magnets for millennials.

Developers and planners are seeking to create areas where people can spend at least 18 hours a day at home, work and in stores, restaurants and venues in hopes of building a critical mass that attracts more jobs, entertainment, shops, eateries, apartments and the millennial demographic with its disposable income, analysts and executives say.

The rise of millennials, a generation of more than 80 million adults ages 22 to 37, in the workforce is spurring investors’ increasing confidence in the emergence of these all-day cities as a driver of future development, according to a 2019 real estate trends report from development research organization Urban Land Institute and consulting firm Pricewaterhouse Coopers. They largely focus on generally urban and suburban markets outside of the largest U.S. coastal cities, long considered "gateway" markets by national and global investors.

Among the top changes in these smaller markets, stretching from California to Florida, developers are considering how to put vehicle-centric elements such as streets and parking lots to better use over the long haul as bike and scooter lanes, ride-hailing apps and self-driving technologies overtake car ownership as the preferred transit modes.

San Diego in particular is working on a $2 billion expansion of its light-rail trolley system that when completed in 2022 will connect one of its most vibrant employment hubs -– University Town Center, known as UTC, and the next-door University of California San Diego campus -– directly with neighborhoods in the region’s South Bay area, currently home to the largest supplies of relatively affordable housing.

New stops along that northward extension of the trolley’s Blue Line should, in theory at least, alleviate chronic traffic congestion and provide opportunities to form new 18-hour clusters of activity spurred by new housing and commercial elements, provided local neighborhood objections to higher-density projects can be overcome.

"I don’t think San Diego understands yet how important the Blue Line extension is to our urban future," said developer Andrew Malick, a director at San Diego-based Malick Infill Development, during a recent trends forum presented by the local chapter of the Urban Land Institute, a Washington, D.C.-based research organization focused on urban planning and development issues.

"Anybody who has driven from the Chula Vista-South Bay market up to the work centers in Sorrento Mesa and UTC, knows that if there was another option to sitting in that traffic, they’d take it," Malick said.

Paul Jablonski, chief executive of the San Diego Metropolitan Transit System, which oversees the trolley, said he’s already hearing enthusiasm from hospital employers in the University Town Center-University of California San Diego area about the coming trolley extension completion.

"Their demand for technical professionals is so high," Jablonski said, adding those hospitals and other employers in northern San Diego see the chance to better retain and recruit workers who now commute across crowded freeways from areas to the south where housing is more affordable.

Suburban Demand

Ed McMahon, a senior fellow in the Washington office of the Urban Land Institute who's focused on sustainable development and environmental policy, noted that nine of this year’s top 10 U.S. cities viewed by investors as markets to watch in 2019, and 17 of the top 20, are considered likely to become 18-hour cities if they haven’t already reached that status.

The list includes Dallas and Austin in Texas, Orlando and Tampa in Florida, the Raleigh/Durham area of North Carolina, and Nashville, Tennessee.

Millennials shaped many of the urban core development priorities of the past decade, and their influence is expected to shift to the suburbs as that age group marries and raises children. One result, said Silvergate Development Principal Ian Gill, is that he would "love to be doing more transit-oriented development," especially in suburban areas where land and other costs are often lower than in urban core neighborhoods.

Larger U.S. multifamily developers, like South Carolina-based Greystar, are finding that transit orientation is not only a priority among tenants, but it also helps in garnering city and lender approvals for projects.

"It's really tough to get a deal done these days that isn't transit-oriented," said Jim Ivory, senior development director at Greystar, which is now under construction on a high-end University Town Center apartment complex and is currently leasing its recently opened Park 12 in downtown San Diego’s burgeoning East Village, near a major trolley stop.

"It only makes sense to locate your housing next to transit," Ivory said, even in the case of luxury projects. "Residents will use transit if it works for their life."

To become smoother-operating hubs of activity, these 18-hour cities will need to deal with some of the downsides of consumer trends like e-commerce. McMahon said he thinks that “free shipping” is actually a misnomer when it comes to urban functioning because items ordered online are now clogging streets with package delivery trucks at all hours of the day in many major cities.

He said shipping firms will need to adjust, making more deliveries at night and using more cargo-carrying bicycles for short-hop deliveries within urban centers. Also, McMahon said cities and developers will need to plan for the day when many parking lots and garages become obsolete as more people eschew driving cars in favor of ride-hailing services like Lyft and Uber, and eventually self-driving vehicles.

Many developers, he said, have already begun planning new projects so parking garages can be easily converted later to other uses, like offices, apartments and retail. New parking decks, for instance, need to minimize elements like slanted surfaces that could make future conversions difficult.

"Joni Mitchell sang about how we took paradise and put up a parking lot,” McMahon said. “One of the big opportunities is taking those parking lots and turning them back into paradise."

Source: CoStar Realty Information, Inc.


Hotel-Residential Project May Transform the Viper Room Nightclub on Sunset Strip

 

JANUARY 14, 2019

By Karen Jordan

Plan Calls for Structure Unlike Others in West Hollywood, California

A mixed-use project would be built on the site of the live music venue the Viper Room on Sunset Boulevard in West Hollywood, California. Illustration: Morphosis Architects.

A mixed-use project would be built on the site of the live music venue the Viper Room on Sunset Boulevard in West Hollywood, California. Illustration: Morphosis Architects.

 

The site of the Viper Room nightclub, popular for its celebrity owners, performers and visitors, may soon be known for another reason: a developer plans to build a D-shaped structure partially covered in greenery with a hole in the middle that's unlike any other building on the famous Sunset Strip in West Hollywood, California.

Developer Silver Creek Development Co. submitted a proposal to the City of West Hollywood that includes a 15-story building with a 115-room hotel and 31 market rate condominiums plus 10 affordable apartments, according to city records. The project would make space for a new iteration of the Viper Room with a 3,300 square-foot space on the ground floor that has an entrance on Sunset Boulevard, according to the proposal filed with the city.

The club, which opened in the early 1990s at 8852 W. Sunset Blvd. , is now an unassuming single-story structure with stucco exterior walls painted solid black that is identifiable by small white letters on a black canopy over its front door. But the Viper Room, just blocks from other prominent Sunset Strip clubs such as the Roxy and Whiskey a Go Go, developed a dedicated following of Hollywood's A-listers in its hey day, included actor Johnny Depp as an owner, and its stage has been graced by some of the music industry's chart-topping talent, from Johnny Cash to the Pussycat Dolls. It's also the site where actor River Phoenix died in 1993.

Renderings of the proposed project show the D-shaped structure will be made out of two towers, one covered in greenery at the bottom of the opening in the middle. The development, which could total 240,000 square feet, calls for restaurants on the ground floor, a banquet hall on the second floor and a gym, spa and terraces, and at least one swimming pool, according to the application.

The proposal is already getting mixed reviews from observers and residents.

“It is great that they intend to keep a club and call it the Viper Room, but it is unlikely to have the same vibe as the original,” Elyse Eisenberg, chair of the West Hollywood Heights Neighborhood Association, said in an email, adding that she would prefer to see more creative office space on the Sunset Strip than another hotel.

But others feel the project could also bring some much-needed amenities to the area.

“If they could go up 15 stories and take advantage of the amazing views on Sunset Boulevard, I think a hotel on the Viper Room site would be fantastic,” said Bob Sonnenblick, principal at Brentwood-based Sonnenblick Development LLC, who is not involved in the deal.

Sonnenblick said hotels in the area, popular with tourists, are doing very well. However, he cautioned that more development could increase traffic on Sunset which “is already bad,” he said.

“Traffic up there is going to become horrible,” he said. “It will be probably with anything that is built up there,” and not just at this particular site.

The project is now under an initial 30-day review after which the City of West Hollywood will hold a neighborhood meeting for those who live within 500 feet of the project site, according to John Keho, interim director of the planning department at the City of West Hollywood.

The developer has requested to amend the Sunset Specific Plan, demolition permits, development permits and two conditional use permits to sell alcohol on site.

“It’s going to be a long process,” Keho said.

Beverly Hills-based real estate investor 5th Gear LLC sold the property , at 8852 Sunset Blvd. in West Hollywood, for $80 million last June to Scottsdale, Arizona-based real estate investor 8850 Sunset LLC, which is represented by Scottsdale, Arizona-based real estate investment company REM Finance Inc., according to CoStar data. It was sold as part of a four-property portfolio that includes 8850 to 8860 Sunset Blvd.

The storefront building dates back to 1921, according to CoStar data. Current businesses on site, which include Aahs! The Ultimate Gift Store, Terner’s Liquor and Sun Bee Liquor and Deli, would be demolished for the proposed development.

Morphosis, an architect in Culver City, California, is working on the project. West Hollywood-based real estate company Plus Development Group is the project manager, according to Mick Unwin, director at Plus Development.

Source: CoStar Realty Information, Inc.


Opportunity Zone Designation Boosts the Prospects of Vacated Department Stores

 

JANUARY 07, 2019

By Mark Herschmeyer

Buildings in Investor-Friendly Tax Incentive Areas May Benefit From Redevelopment, Downtown Revitalization

Vacated property in St. Paul, Minnesota, is among the commercial real estate benefiting from the federal Opportunity Zone program. Photo: Doug Wallick, flickr

Vacated property in St. Paul, Minnesota, is among the commercial real estate benefiting from the federal Opportunity Zone program. Photo: Doug Wallick, flickr

 

The federal Opportunity Zone tax break initiative designed to boost distressed areas is giving a boost to some vacated department stores across the United States.

Sales of vacant department stores in opportunity zones spiked almost 50 percent in 2018 from 2017, when the program became law. The increase stems partly from tax incentives doubling the value of properties in distressed areas through construction or redevelopment. Sales of this type of property that's not eligible for the tax incentives fell 20 percent, according to CoStar Group data.

The incentives and the subsequent sales trends have increased the prospects for the sale of other empty anchor stores in federally designated opportunity zones, according to real estate executives.

"We're seeing massive interest in these incentives among high-net-worth investors and diverse real estate funds alike," said Emilio Amendola, co-president of A&G Realty Partners, a firm that specializes in advising retailers going through bankruptcy reorganizations. "They offer capital gains tax reductions of as high as 15 percent, and holding for a full 10 years can yield a capital gains tax deduction of 100 percent. On top of that, many Opportunity Zones nationwide are in gentrifying areas with strong growth potential."

A&G Realty is auctioning 10 department store properties formerly owned by The Bon-Ton Stores, on Jan. 28 in New York. With stores ranging in square footage from 45,000 to 165,000, the available assets include stores in Iowa, Pennsylvania, Michigan, Minnesota, Indiana and Illinois.

Three of the properties are in the new qualified opportunity zones, which were created by the Tax Cut and Jobs Act of 2017. The first, Herberger's in downtown St. Cloud, Minnesota, spans 93,900 square feet among two stories on a 1.33-acre lot. "Finding a new use for this space is a top priority for St. Cloud economic development officials, which highlights the potential for public-private collaboration," said Michael Jerbich, a Chicago-based principal at A&G Realty.

Another qualifying property is Herberger's at Midway Marketplace in St. Paul, Minnesota, on 124,136 square feet spread among two stories on a 6.65-acre lot. "This property has light rail directly behind it and is a quarter mile from the $250 million Allianz Field soccer stadium now under development," Jerbich said. "The consensus in the market is that Midway represents a tremendous redevelopment opportunity."

The third site is Younkers at Coral Ridge Mall in Coralville, Iowa, with 98,458 square feet across one story on a 9.1-acre lot. Located in the Iowa City market, this Brookfield-owned property draws on the more than 80,000 students and employees at the University of Iowa.

Younkers at Coral Ridge Mall in Coralville, Iowa. Photo: CoStar

Younkers at Coral Ridge Mall in Coralville, Iowa. Photo: CoStar

 

"The large-format spaces on auction here are rife for reinvention and repurposing, and the sale also represents a tremendous opportunity for market penetration in these areas," Jerbich said.

In May 2018, A&G Realty was retained to dispose all real estate assets of The Bon-Ton Stores on behalf of a joint venture between Great American Group, Tiger Capital Group, and Bon-Ton's Second Lien Noteholders.

The assets included seven ground leases, 194 leased locations and 23 fee-owned properties.

"To date, 13 fee-owned and seven leased properties have been successfully sold to storage users, developers/investors, fitness centers, a casino, home furnishings retailers, and health care users, to name a few," Jerbich said.

So far, however, none of the 20 completed deals was for properties in opportunity zones.

"Considering the contraction of the department store sector, the overall results of our sale efforts for Bon-Ton's properties to date have been in line with our expectations," A&G Realty's Amendola said. "Most of Bon-Ton's sites were leased and, with economic terms that largely failed to resonate with the marketplace the overwhelming majority of these leases were ultimately rejected and returned to the landlords."

Amendola added that "we knew that this was going to be a challenging project and, based on the uses we've seen for the 20 locations that were sold thus far, it's clear that forward-thinking developers and investors largely view this as an opportunity to introduce different concepts to their properties."

As 2018 ended, the U.S. Bankruptcy Court overseeing the restructuring of Sears Holdings approved the hiring of A&G Realty to oversee that retailer's lease restructuring and property sales.

A&G Realty said they are not at liberty to discuss what they are working on regarding the Sears real estate at this time or which of the Sears properties are in opportunity zones.

According to CoStar data, Sears currently has more than 100 Sears or Kmart stores in opportunity zones, including eight that were among the 80 stores Sears announced at year-end they were closing by March.

Sears stores in opportunity zones have already sparked some interest from investors.

Last May, Northwood Investors, a privately held real estate investment adviser founded by John Z. Kukral, the former president and CEO of Blackstone Real Estate Advisors, acquired a 181,000-square-foot Sears store in Gaithersburg, Maryland, for $4 million.

In the following month, Capri Investment Group, a Chicago-based real estate investment management firm, acquired a 157,000-square-foot Sears store in Los Angeles for $23 million. Capri plans to redevelop property along with a neighboring center into a mixed-use project including housing.

Source: CoStar Realty Information, Inc.


Federal Opportunity Zones Fail in Key Areas, Groups Say

 

DECEMBER 17, 2018

By Mark Herschmeyer

Activists Argue Only Two in 100 Zones Can Deliver Results as Billions of Dollars Flow To Distressed Areas

 
President Trump signs an executive order setting up a White House Opportunity and Revitalization Council. (White House photo by Tia Dufour)

President Trump signs an executive order setting up a White House Opportunity and Revitalization Council. (White House photo by Tia Dufour)

 
 

Just as President Donald Trump signed an executive order designed to add muscle to the federal Opportunity Zones tax break initiative, an analysis emerged showing only two in 100 of the economically distressed areas targeted for property investment meet community activist goals for financial success.

A new report by Smart Growth America, a coalition of community advocacy organizations, ranked the nation's nearly 8,700 zones for their potential to deliver on benefits for communities, the environment, and investors, or what it calls the triple bottom line. The initiative was part of the tax law Congress passed late last year to give tax breaks on capital gains investors reap through investments in real estate in areas the government labels economically distressed.

Based on the group's analysis, only 2 percent of the zones can deliver on that triple bottom line. The report notes that there is enormous concern among local policymakers and community groups concerned the tax incentive will fund disruptive gentrification, displacement and accelerate climate change.

The importance of the initiative's success is growing as increased investment pours into real estate through the program. A closer look at the commercial property investment sales activity and pricing in the zones in the neighboring Washington, D.C., and Baltimore markets, for example, shows that as in other areas, there has been a huge surge in deal volume in those areas this year after the program took effect compared to 2017, according to CoStar data.

It is unclear whether that surge has produced tangible improvement in property values to this point. Sales volume of commercial, multifamily and land properties has skyrocketed in 2018 to $1.39 billion from $855 million last year. Even so, the data show mixed results on what has been happening to property values in those deals.

The average sale price paid per square foot or unit were lower this year for land, retail and multifamily deals, specifically 40 percent less for land; an 11 percent reduction for retail; and a 5 percent drop for multifamily.

One of the primary goals of the initiative is to improve the access to affordable housing in these zones in economically distressed communities. To this point at least, the property types benefiting most from the surge of investment in the Washington and Baltimore zones were nonresidential properties. Industrial property pricing was up 28 percent and office property prices gained 11 percent.

At a White House executive order signing ceremony establishing the White House Opportunity and Revitalization Council on Dec. 12, Trump said "the resources of the whole federal government will be leveraged to rebuild low-income and impoverished neighborhoods that have been ignored by Washington in years past. Our goal is to ensure that America's great new prosperity is broadly shared by all of our citizens."

Disparity Concerns

Housing and Urban Development Secretary Ben Carson will lead the new council.

Also at the signing ceremony was Darrell Scott, a pastor and member of Trump's executive transition team.

"For decades, job growth and investment have been concentrated in a few major metropolitan areas. This has created a geographic disparity — a very big one, in many cases — where some cities have thrived, while others have suffered chronic economic and social hardship," Scott said. "With opportunity zones, we are drawing investment into neglected and underserved communities of America so that all Americans, regardless of zip code, have access to the American Dream."

It will probably take a longer track record before a consensus is reached on whether the new tax initiative narrows that disparity. Not all of the zones are created equally for new business or real estate investments, according to the Smart Growth America report.

The majority of the designated zones could be described as low density, drivable suburban areas with significantly higher housing and transportation costs, higher greenhouse emissions and lower quality of life, according to the report.

Despite this, 98 percent of the designated zones failed to reach the minimum score of 10 to be determined a Smart Growth potential opportunity zone.

The 2 percent that scored 10 or higher represent fewer than 700,000 people who currently live in zones that are walkable urban places with smart growth investment potential, according to the report.

By comparison, the country's designated zones are home to about 35 million Americans.

"History has repeatedly demonstrated that investment without protective equitable policy and process mechanisms lead to gentrification, displacement and a lack of access to benefits in many low-income and communities of color," the report stated. "Without any guidance from authorizing legislation or proposed Treasury regulations, investors, local policymakers and stakeholders are asking which opportunity zones have the greatest potential to create vibrant, inclusive" walkable communities.

Cities Ranked

Among the top 30 U.S. metropolitan areas, Smart Growth America said New York, Los Angeles, Philadelphia, and Chicago earned the top scores for zones with the most smart growth potential. Charlotte, San Antonio, Orlando, and Dallas received the lowest scores.

Some skepticism is also emerging in the commercial real estate industry whether the initiative will produce desired results. Skip Dolan, principal of Dolan Commercial Real Estate Services in northern New Jersey, delved into studying the real estate benefits of the initiative when word of the program first began circulating widely earlier this year.

"We became diligent students of the opportunity zones and have attended several high-level seminars to learn more, especially about what we do not know," Dolan said. "Additionally we made investments in technology to better gather information on properties in the OZ across multiple asset classes."

The bottom line: Dolan said his customers see it as an alternative to doing 1031 exchanges but are not that excited about jumping on the program's bandwagon. Under tax rules, a 1031 exchange allows an investor to sell a property to reinvest the proceeds in a new site and to defer capital gain taxes.

"We do not see compelling economic or deal making benefits for our customers to participate in the OZ outside of the treatment of reinvested proceeds," he said. "Which begs the question, if someone has a good income producing asset with a low cost basis whether a stock or real estate why would they sell and take the development risk?"

Opportunity zone tracts were picked based upon input from local mayors to the governor and as a result, there was no consistent application for a particular asset class or area, Dolan said.

"Remarkably we have seen wide swaths of unproductive, 'environmentally sensitive' wetlands and large cemeteries included in designated zones -- in a word: crazy," he said. "OZ designation will not increase rents, returns, lower interest rates on financing or improve a property's location. OZ might be the one that started out as a bang and ends as a whimper."

It is still in the early days of the initiative and it will take a while to see tangible results, HUD Secretary Carson said.

"Too often, new investments into distressed communities are here today and gone tomorrow," Carson said. "By offering incentives that encourage investors to think in terms of decades instead of days, opportunity zones ensure that development is here today and here to stay.

Source: CoStar Realty Information, Inc.


Apple To Build $1 Billion Campus in Austin; Add Thousands of Jobs in Other U.S. Cities

 

DECEMBER 13, 2018

By Mark Heschmeyer

New Sites Planned in Seattle, San Diego and Culver City, California

Apple's data center under construction in Reno, Nevada, is one of several the company is expanding over the next five years. Credit: Apple.

Apple's data center under construction in Reno, Nevada, is one of several the company is expanding over the next five years. Credit: Apple.

 

Apple Inc. announced Thursday a major expansion of its operations in Austin, including an investment of $1 billion to build a new campus in North Austin.

The company also said it would establish new sites in Seattle, San Diego and Culver City and expand in cities across the United States including Pittsburgh, New York and Boulder, Colorado over the next three years, with the potential for additional expansion elsewhere in the U.S. over time.

The announcement caps a year of continued job creation. Apple added 6,000 jobs to its American workforce in 2018 and now employs 90,000 people in all 50 states. The company has said it is on track to create 20,000 jobs in the U.S. by 2023.

"Talent, creativity and tomorrow's breakthrough ideas aren't limited by region or Zip code, and, with this new expansion, we're redoubling our commitment to cultivating the high-tech sector and workforce nationwide," Tim Cook, Apple's CEO, said in a statement.

Apple's newest Austin campus will be located less than a mile from its existing facilities . The 133-acre campus will initially accommodate 5,000 additional employees, with the capacity to grow to 15,000, and is projected to make Apple the largest private employer in the Texas state capital.

Jobs created at the new campus are to include a broad range of functions including engineering, research and development, operations, finance, sales and customer support. At 6,200 people, Austin already is home to the largest population of Apple employees outside Cupertino, California.

The new campus will include 50 acres of preserved open space and, like most Apple facilities worldwide, its workspaces are to be powered by 100 percent renewable energy.

Apple also plans to grow its employee base in other regions across the country over the next three years, expanding to more than 1,000 employees in Seattle, San Diego and Culver City each, and adding hundreds of new jobs in Pittsburgh, New York, Boulder, Boston and Portland, Oregon.

The company recently opened its newest office in Nashville, Tennessee and Apple's Miami office is projected to double in size.

Apple plans to invest $10 billion in US data centers over the next five years, including $4.5 billion this year and next. Apple's data centers in North Carolina, Arizona and Nevada are currently being expanded. In Iowa, preparations are underway for the company's newest data center in Waukee.

Source: CoStar Realty Information, Inc.


Cohen Media Group Buys Arthouse Landmark Theatres Chain

 

DECEMBER 10, 2018

By Kyle Hagerty

Before Work in Film Distribution and Production, New Owner Made a Fortune in Real Estate

The River Oaks Theatre in Houston. Via Flickr.

The River Oaks Theatre in Houston. Via Flickr.

 

Arthouse cinema chain Landmark Theatres, once the source of speculation to be a target of multiple buyers including online retailer Amazon and streaming entertainment provider Netflix, has been sold to Cohen Media Group, a film distribution and production company whose billionaire chairman has amassed a national portfolio in commercial real estate.

Landmark is the nation's largest specialized theater chain dedicated to independent cinema with 252 screens in 27 markets across the country. Its openness to showing digital features produced by streaming platforms like Amazon and Netflix spawned interest from several groups.

Several of Landmark’s theaters are high-profile cinemas in their local markets, like the Landmark in Los Angeles and the Landmark at 57 West in New York, which is often used to host award-season events and screenings. Other theaters include the E Street Cinema and the Landmark Atlantic Plumbing Cinema in Washington, D.C., and the River Oaks Theatre in Houston. Cohen will retain the senior management team of all Landmark theaters.

Small cinemas are often being used to anchor developments or revitalize aged urban areas in older downtowns across the United States. From Minneapolis to Baltimore, Maryland, restored architecturally distinctive cinemas have attracted investors and developers to refurbish space for nearby restaurants, which in turn has led to added retail areas. New ownership of the arthouse theaters sends a signal to investors and owners across the country near Landmark properties that the anchor destination in those areas may not be changing for some time.

In the end, cinema fans may be satisfied with the new owner, which purchased Landmark from Mark Cuban and Todd Wagner’s 2929 Entertainment for an undisclosed price. Cohen Media is expected to maintain Landmark’s mission to promote independent and classic movies. The group also restores and re-releases films.

“I have been in the arthouse business for a long time as both a distributor and a producer, and I know better than most that these films need a special home and require the utmost care,” said Charles Cohen, the group’s chairman, in announcing the deal. “This is a phenomenal fit with our other businesses, and this deal will be welcome news to the filmmakers we do business with or plan to work with in the arthouse arena in the years ahead.”

Cohen founded his media group in 2008 after making a fortune as a real estate developer. As owner, president and chief executive of Cohen Brothers Realty Corp., he has built a portfolio of over 12 million square feet of prime properties located in New York, Texas, Florida and southern California. As a film producer, Cohen Media is known for “Frozen River,” which garnered two 2009 Academy Award nominations. The group distributed “The Salesman,” which won an Oscar for best foreign language film in 2017.

Landmark was purchased by 2929 Entertainment from Oaktree Capital in 2003. Under the ownership of Cuban and Wagner, Landmark has grown to become the pre-eminent flagship brand in sophisticated arthouse exhibition. Seven years ago, Landmark was put up for sale but later pulled back after failing to garner an estimated $200 million price tag.

“It’s a great day for the industry,” Landmark president and CEO Ted Mundorff told Variety. “You have a film lover who bought a theater company … and he’s going to keep the ship running the way it has been going.”

Source: CoStar Realty Information, Inc.


Google's $1 Billion Deal Gives It Record for the Two Most Expensive US Office Purchases in 2018

 

NOVEMBER 28, 2018

By Molly Armbrister

Search Engine Giant Buys Technology Park Blocks from Googleplex Headquarters

 
Google’s headquarters neighborhood, above, is expanding after it bought an 11-building office park nearby in Mountain View, California.

Google’s headquarters neighborhood, above, is expanding after it bought an 11-building office park nearby in Mountain View, California.

 

Google's $1 billion acquisition of the Britannia Shoreline Technology Park in its hometown of Mountain View, California, gives the search engine giant the record for the two most expensive U.S. office deals this year, coming on the heels of its $2.4 billion purchase of the Chelsea Market retail and office building in New York.

The company, part of Alphabet Inc., occupies about 92 percent of the Britannia Shoreline, a 795,000-square-foot, 11-building office campus at 2011-2091 Stierlin Court, a few blocks from Google’s headquarters known as the Googleplex. The campus, in the heart of Silicon Valley, is a past home to business networking website LinkedIn and currently houses offices of Alexza Pharmaceuticals.

Google purchased the property for about $1,275 a square foot from Irvine, California-based real estate investment trust HCP Inc., which expected to make a profit of $700 million upon closing, according to a filing with the Securities and Exchange Commission.

Google's spending on just two deals this year of about $3.4 billion, which its search engine shows is roughly the gross domestic product of the East African nation of Burundi, reflects the dominance of technology companies in U.S. real estate over the past decade. The tech industry accounts for about one-fifth of all office leasing completed across the country this year, according to brokerage CBRE Group Inc.

HCP, which is focused more on life science and medical offices and less on tech and traditional offices, said it plans to use the proceeds to repay debt and fund acquisition and development activity.

“At the time that we purchased it, there were more life-science tenants within the campus,” HCP Chief Financial Officer Peter Scott told investors on a conference call last month. “Over time, Google has taken over more and more of the space."

He added that "it became more of a non-core suburban office asset for us that was a great piece of real estate to own, but to get the pricing that we got and to be able to recycle that capital into more of the core markets that we’re in, made sense to us.”

The company acquired the property about 11 years ago as part of its $3 billion purchase of European property investor Slough Estates USA. Slough had purchased the Shoreline property for about $200 million in 2005 from Equity Office, according to news reports.

Google does not have plans to move any employees or redevelop the property, according to someone familiar with the property but unauthorized to speak publicly about it.

Chelsea Market Deal

The sale is the second-largest office deal in the country by dollar volume in 2018, behind Google's purchase earlier this year of New York City’s Chelsea Market for $2.4 billion as it plots its expansion in that city.

Chelsea Market, a former Nabisco factory, is home to a food hall and retail center on the ground floor with offices above. The 1.2 million-square-foot property sits across the street from the company's Manhattan beachhead at 111 Eighth Ave., a 2.9 million-square-foot office building that takes up a full city block.

Google has not revealed its plans for the property, which is occupied by companies including Major League Baseball, but the site is entitled for an additional 300,000 square feet, or about eight stories. The company reportedly has plans for a major expansion in New York City by adding about 12,000 workers for a total of roughly 20,000, according to news reports.

Google and other technology giants have been gobbling up real estate in their backyards in Silicon Valley and across the country. Google has made two major leasing moves in the past few months, signing a lease for 300,000 square feet in San Francisco’s Landmark at One Market building this month and moving into 319,000 square feet in a renovated historic airplane hangar once owned by Howard Hughes in Los Angeles in October.

Google has also been amassing properties in downtown San Jose, California, for the development of a massive mixed-use project near the city’s Diridon Station, a major transit hub.

Meanwhile, the world's biggest online retailer, Amazon, recently completed its year-long search for a major real estate expansion with plans to open major office hubs in the Queens borough of New York and in Arlington, Virginia.

Social media website provider Facebook has been busy expanding its headquarters in Menlo Park, California, which will total 1.4 million square feet upon the completion of the project’s third phase, and cloud-based software maker Salesforce recently said it has signed a lease for the entire office portion of a proposed tower at 542 Howard St. in downtown San Francisco.

Streaming entertainment service Netflix has expanded by more than 700,000 square feet in Los Angeles in the past few months. And Apple is on the hunt for another major campus somewhere in the country.

“With unemployment at 4 percent or lower in each of these markets, tech companies of all sizes are in a war for talent and must do their utmost to hold on to and recruit employees -- and that means the best salaries, the best incentives, the best space and the best location," said Robert Sammons, senior director of Northern California research for brokerage Cushman & Wakefield, in a statement. "That last point has generally meant an urban or even suburban location that is mixed-use, walkable, bikeable and near mass transit."

Source: CoStar Realty Information, Inc.


Apple Takes Opposite Approach to Amazon in Its Second Headquarters Search

 

NOVEMBER 20, 2018

By Molly Armbrister

Apple's Quest Is Quiet, Unlike Amazon's Contest Atmosphere

Apple Park, the current headquarters of Apple, in Cupertino, California. Credit: Norman Foster via Flickr.

Apple Park, the current headquarters of Apple, in Cupertino, California. Credit: Norman Foster via Flickr.

 

Amazon hasn't been the only major technology company searching for a second headquarters this year, but few would know that from just reading the headlines. And that has been intentional.

Apple, the iPhone and device maker with a $1 trillion market value, is next in line for an HQ2 all its own. But the company is taking a vastly different approach than that of Amazon, the world's largest online retailer that played out its search for a second headquarters at full volume and in full view.

The quiet approach may end up helping Apple avoid the negative publicity and backlash Amazon faced, while the sheer size and power of the company still gives it plenty of leverage when searching for a campus under the radar.

“Ninety-nine percent of projects are done in a confidential manner because companies want executives and senior management not to be preoccupied with a search in the news,” said John Boyd, founder and principal at The Boyd Co., a Princeton, New Jersey-based site selection consulting company. “Amazon is a very unique company. Few companies have the swagger and wherewithal to pull off a head office site selection search in the in-your-face way they have.”

Apple’s search has been almost secret. The company kicked off a quiet hunt in January for a significant real estate presence outside of California -- where all 2.8 million square feet of its ring-shaped headquarters sits in Silicon Valley's Cupertino -- by announcing a general contribution to the larger U.S. economy of $350 billion in the five years, creating some 20,000 jobs in the process.

"The company plans to establish an Apple campus in a new location, which will initially house technical support for customers," the company said in January. "The location of this new facility will be announced later in the year."

Apple officials have said very little about the process publicly since then, and it's unclear whether the company still intends to make any announcements before year's end. Apple did not return a request for comment.

In contrast, Amazon promised $5 billion and 50,000 jobs for its second headquarters alone and publicly requested proposals from cities across North America that became a frenzied competition of incentives, gifts and YouTube videos from 238 cities. The Seattle retailer's search ended very publicly last week in a split headquarters decision among New York City and Arlington, Virginia, as sites for major new hubs and Nashville, Tennessee, for an operations center.

Avoiding Distractions

While Amazon's search made headlines almost weekly, the quiet search has kept Apple's name largely out of the real estate press this year.

“It’s the much more traditional way to do it quietly,” said Bert Sperling, an Oregon-based author and analyst who specializes in cities and site selection.

By going about the process quietly, Apple can keep prying eyes off its potential deals and negotiations, avoid distractions and go at its own pace, Sperling said.

The company also may avoid high-profile backlash from the cities it passes over. Amazon has fielded a number of criticisms from officials and companies who say they have felt heartbroken, fooled or slighted by the entire public process.

In fact, Apple Chief Executive Tim Cook said his company has been specifically avoiding any kind of competitive bids for its second campus.

"We’ve narrowed the list [of potential cities] a lot,” Cook told ABC News in January. “We wanted to narrow it so we prevent this kind of auction process that we want to stay out of.”

For Apple, North Carolina’s Research Triangle, which includes Raleigh , Durham and Chapel Hill, emerged as a favorite for a new campus, according to news reports. But reports since August have suggested that some in the region were resistant to Apple’s new campus.

Raleigh courted Amazon, which added the city to a short list of 20 finalists for its HQ2.

As a result of the search and its final decision, Amazon is now spreading out tens of thousands of jobs among the three chosen cities -- and collecting close to $3 billion in incentives from state and local governments.

Incentives Offer

While Apple has not publicly solicited incentives for its real estate project, Wake County, North Carolina, offered Amazon its largest incentive package of up to $277 million if it had agreed to move its HQ2 to Raleigh, according to a letter from the county manager in February.

It's unclear whether Apple is negotiating for incentives for its second campus. But companies like Apple and Amazon are likely to get incentives from city and state governments no matter what tactic they employ to select a site, Sperling said.

"They will get incentives because what politician wants to say 'No, I’m the one who said no to Apple and all these jobs' because they played hardball,” Sperling said.

And even though incentives are an important part of the site-selection equation, there’s something that’s more important, and it’s real estate’s oldest adage: location, location, location.

“All of these places that dangle large incentives are kind of making a mistake,” Sperling said. “If a place is really excellent, and is the winner as far as a place to locate, that means more to the company than any sort of incentives.”

In the case of Amazon, which has a cloud computing division that has started competing for federal contracts, locating in the Washington, D.C. area made perfect sense, Sperling said, without the $573 million in direct incentives Amazon received from the City of Arlington and a workforce cash grant worth up to $550 million from the Commonwealth of Virginia.

Take, for example, Google. The search engine giant is reportedly making plans to massively expand in New York, without any individualized incentive. The company could grow by as many as 12,000 additional workers to a total of about 20,000 in the city, only about 5,000 fewer jobs than Amazon has promised New York in its new headquarters hub.

Sperling compared the quest for a new campus to searching for a place to live.

“If you can find a good place to live and can afford it, are you going to live in a place that is subpar because you got a really good deal? If you can afford it, you’ll get a nicer place," he said. "Apple can afford anything.”

Source: CoStar Realty Information, Inc.


For Apartment Owners in Arlington, Virginia, and Queens, New York, Amazon HQ2 Means Decision Time

 

NOVEMBER 16, 2018

By John Doherty


Do They Sell or Do They Hold?

Interest in the 140-unit Key Towers in Arlington has exploded since the Amazon HQ2 announcement.

Interest in the 140-unit Key Towers in Arlington has exploded since the Amazon HQ2 announcement.

 

Most owners, developers and brokers say they don’t expect a flood of new big, apartment offerings to hit the market in the wake of the Amazon announcement. Most will hang on and see if rents and values actually increase as Amazon moves into their markets.

Even so, some report the interest, at least, from potential buyers is already high.

Al Cissel, an apartment broker for Newmark Knight Frank in the company's office in McLean, Virginia, started shopping Key Towers in Arlington a few weeks ago. The 140-unit complex is a prime target for investors that like to fix up units to let them boost rents and improve the management to maximize profits. It's a fixer-upper built in 1964, so he expected the usual 80 to 100 interested investors would sign confidentiality agreements to see the property’s finances, the first step before making a bid. He originally expected pricing to be about $30 million.

Instead, as word leaked that Amazon would probably end up in Northern Virginia, interest exploded. So far, almost twice as many investors -- 160 -- have signed confidentiality agreements, he said. Pricing for Key Towers could be a litmus test for the market with Amazon in the calculations.

“We’re seeing a pretty immediate escalation in interest,” said Cissel, an executive managing director. “But it’s hard to say what will happen. Some owners are deciding to sell now. But there’s mixed feelings.”

Amazon’s announcement presented Geoff Glazer with just that dilemma.

His firm, Kimco Realty, is close to finishing The Witmer , a 26-story, 440-apartment tower in Arlington’s Crystal City, right across South Fern Street from where Amazon is headed. The swank apartments and the amenities -- there’s a rooftop pool and a spa for dogs -- are part of Kimco’s larger Pentagon Centre mixed-use project. The apartments are designed to appeal to exactly the type of young, well-paid urban professionals Amazon is expected to hire in the thousands.

Should the New York firm look to cash out now? Or should it plow the money into future phases of their Pentagon Centre development? Will buyers pay a premium to be close to Amazon?

“No, I think our desire is to hold on to that property a good long time,” said Glazer, Kimco’s senior vice president of development. “I look at the players now who own major properties in the area, and I don’t think a lot of them are looking to sell. I think people are going to watch what happens and count on some decent [rent] bumps.”

In Queens, Amazon’s announcement came in the midst of a complete makeover for the Long Island City neighborhood the company selected for half of its second headquarters, or HQ2, split with Arlington. The former warehouse district across the East River from Manhattan is being redeveloped on a major scale.

Six new high-rise apartment properties are expected to be finished by year-end. Before 2017, Long Island City had only 10 total, according to CoStar data. One, a pair of towers with nearly 1,200 units known as 5Pointz, is nearing completion this month.

Chase, of B6, says 17,000 new units were completed there since 2010, and another 11,000 are under construction. For the owners of those projects -- mostly local shops backed by outside money -- there will be pressure to sell.

“Those owners’ phones are ringing off the hook,” said James Nelson, a principal at brokerage Avison Young in New York. “How many investors who were not looking at Queens, or Long Island City, are now?”

The Amazon agreement with the city immediately changed the apartment market in Long Island City, too. As part of the agreement, Amazon will take over the bulk of a 15-acre site, called Anabel Basin, for its headquarters. The owner of the site, family-run plastics company and long-time Long Island City real estate investor Plaxall, had last year submitted a mixed-use redevelopment plan that would have brought 5,000 new apartments to Long Island City. Now it will be Amazon office space.

In both markets, the ripple effect may be where the investment action goes. Neighboring parts of Queens and Brooklyn may see more listings for apartments -– not for the Amazon employees who will average $150,000 salaries, according to the company, but for residents priced out of their current apartments as the Amazon effect drives rents up.

And not all Amazon employees will want to live in Crystal City, acknowledges Glazer. Properties in surrounding Northern Virginia towns and even across the river in Washington, D.C., may end up with falling vacancy rates and rising rents –- a trend investors are likely to follow.

Source: CoStar Realty Information, Inc.

WeWork Secures Another $3 Billion from Softbank as Loss Widens, Reports Say

 

NOVEMBER 14, 2018

By Jennifer Waters

Coworking Provider Would Rank Among Most Valuable Startups Behind Uber

The rapid expansion of WeWork is expected to continue with another $3 billion cash infusion from Softbank next year.

The rapid expansion of WeWork is expected to continue with another $3 billion cash infusion from Softbank next year.

 

WeWork’s widening loss could be offset with a $3 billion investment from Softbank Group, according to reports.

At a presentation to bond investors, WeWork disclosed that the Japanese conglomerate, already a big investor of the flexible-office space provider, would inject the funds in the form of warrants early next year, according to a number of published reports. The presentation is not public.

The warrants give Softbank an opportunity to convert its investment into WeWork shares by the end of September 2019, jacking the valuation on the 8-year-old company to $42 billion to $45 billion, according to news outlets that have viewed the presentation.

By Dow Jones VentureSource’s calculations, that vaults the New York-based firm’s valuation to No. 2 in the startup category, behind only ride-sharing firm Uber Technologies and ahead of online lodging marketplace Airbnb.

The funding comes from Softbank’s corporate balance sheet, not the Vision Fund that has already injected $4.4 billion into WeWork, reports noted. The earlier financial support from the Vision Fund became controversial when it was noted that some $45 billion of that fund’s financing source is from Saudi Arabian investors.

The death of journalist Jamal Khashoggi has prompted calls on companies to rebuff Saudi investments. Saudi Arabia has said its agents strangled Khashoggi in October during a fight inside the Saudi Consulate in Istanbul, according to news reports. During the presentation, Artie Minson, WeWork’s president and chief financial officer, said such requests were “irrelevant” because the funds are coming from the corporation.

SoftBank is expected to fork over $1.5 billion on Jan. 15 with another $1.5 billion coming on April 15, according to the reports. If the company is sold or goes public on or before Sept. 30, those warrants are converted into stock valued at $110 a share. That is what supports the high valuation, which last year stood at about $20 billion, according to the reports.

Minson called the funding “opportunistic” at a time when WeWork is plowing billions into its breakneck growth, which is touching more than just the office sector as the company tests brokerage, information technology, architectural, meeting space, retail and even child-care services.

“The way we work with SoftBank emphasizes speed and getting it done quickly … that speaks to overall momentum in the business,” Minson was quoted in the reports as saying at the presentation.

That velocity also comes with hefty losses, which now carry a roughly $2 billion annual run rate, according to the reports. WeWork said its third-quarter losses expanded to $415 million from $108 million in the year-earlier period. Its first-half losses totaled $723 million, reports said.

WeWork and SoftBank did not respond to requests for comment from CoStar News.

Revenue nearly doubled to $1.2 billion from $603 million at this time last year. At the same time, spending zipped ahead nearly threefold to $244 million in the first nine months from $84 million a year ago. WeWork attributed that to higher outlays for upfront costs to build out space and sign longer tenant leases. WeWork also has been aggressive in courting tenants, even for entire buildings, at discounts.

The company has no intention of putting the brakes on growth, according to Minson, or of turning the losses into positive earnings before interest, tax, depreciation and amortization, a key financial metric known as EBITDA, a move he said would be irresponsible, according to reports.

In the coming months, WeWork plans to add two new Manhattan properties to its HQ by WeWork portfolio, which targets tenants with up to 250 employees. With those two deals in place, the company has breached 700,000 square feet in HQ by WeWork locations nationally. This year, it announced a target of 1 million square feet within major markets by next summer.

“We could massively slow down the growth and turn EBITDA-positive, but that would be shortsighted,” Minson was quoted as saying during the presentation.

Source: CoStar Realty Information, Inc.


What's An HQ Worth? New York, Virginia and Tennessee Pledge More than $2 Billion to Amazon

 

NOVEMBER 14, 2018

By Lou Hirsch

Online Giant Eligible For Tax Rebates, Credits, Even Help With Helipads.

 
Arlington, Virginia, across the river from Washington, D.C., will be home to another Amazon headquarters

Arlington, Virginia, across the river from Washington, D.C., will be home to another Amazon headquarters

 
 

In return for locating major office hubs in New York's Long Island City and in Arlington, Virginia, online retailer Amazon will receive hundreds of millions of dollars in direct grants, and get the benefits of new public investments in infrastructure and university programs. It will even get help securing the right to use helipads in restricted airspace and have government officials notify the company two business days before disclosing public information.

The incentives awarded to the world's largest retailer, disclosed as part of its site selection announcement Tuesday, raise questions whether the cities -- along with Nashville, Tennessee, where the company said it plans to open an operations hub -- ever needed to pay so much. Virginia and New York alone pledged more than $2 billion, but other states offered far more.

Amazon said it plans to invest more than $5 billion in capital spending and create at least 55,000 new jobs with an annual salary of at least $150,000 among the three cities when it said it would split its long-anticipated second headquarters into two major office hubs and an operations center. The company expects the two new office hub sites to eventually equal the 8.1 million square feet in 33 buildings at Amazon's Seattle headquarters, generating heightened real estate demand in both markets.

But the incentives that range from tax credit and rebates to customized transportation projects have been one of the most talked about pieces of the announcement, following months of offers from 20 finalist cities nationwide and in Canada that reached as high as $8.5 billion.

Some analysts consider the incentives a worthy cause to win a nationwide competition that may have been the largest single economic development opportunity in a lifetime, drawing proposals from 238 cities. Others wonder why the world’s largest online retailer and one of the most valuable publicly traded companies needed a public financing boost.

John Boyd, principal in the location consulting firm Boyd Co. Inc. in Princeton, New Jersey, said incentives have always been considered a "necessary evil" in the world of economic development. But he contends the incentives Amazon has been offered were justified and will ultimately pay off for the chosen cities.

"In terms of incentives though, in suburban D.C and New York City, both sides agreed that was the cost of doing business," Boyd said, because both cities are also among the nation's most expensive for companies in general to cover worker and other costs.

Even among the states that won, the totals varied widely. Virginia and the city of Arlington agreed to a total of $575 million in direct incentives to Amazon; the state and city of New York agreed to $1.525 billion in direct incentives; and $102 million in direct incentives from Nashville, according to Amazon's announcement. There are further incentives in all three cities over the next several years, from state and city programs, tied to job creation and Amazon's application to various programs geared to employment, relocation, and growth in overall tax revenue.

Among the most unusual of the incentives provided to Amazon, New York and Virginia both offered assistance to the company that plans to add dedicated helipads to Amazon’s proposed spaces in each region. Each locale exists in restricted airspace that would require seeking approval from the Federal Aviation Administration. In its New York agreement, the city is expected to help Amazon find another location for a helipad nearby if it can’t get approval at its building.

Amazon is also seeking control over the public’s right to information. In its memo of understanding with Virginia, officials agreed to give Amazon “prior written notice sufficient (in no event less than 2 business days) to allow the company to seek a protective order or other appropriate remedy” in response to any request for public records related to the company.

Greg LeRoy, director of Good Jobs First, a Washington, D.C.-based organization that tracks corporate subsidies, said he was surprised by the fact that Amazon, which in the past has kept details about its incentives hidden, provided the amounts of incentives offered by state and local governments in materials released to the media as part of Tuesday’s announcement.

LeRoy raised questions about whether all the incentives were being disclosed, explaining that in deals such as this, there are usually two types of incentives involved. The first kind are “discretionary” incentives, which are formulated and directed to specific projects. These kinds of incentives are usually fully disclosed to the public and given in full view.

Other incentives, though, are called “as-of-right” incentives and include certain tax breaks and other provisions to which companies are legally entitled, LeRoy said. A project the size of Amazon’s should qualify for such incentives, he said. These are the incentives LeRoy is concerned migth be missing from the materials Amazon released.

"What else belongs in that denominator beyond what they've said?" he asked.

While the company is expected to rake in a number of benefits, Amazon said incentives weren’t the driving factor in its decision, talent was.

"Some of the proposals that were put forward, you can find out very quickly that incentives did not drive this process for us,” Jay Carney, Amazon’s senior vice president of worldwide corporate affairs, told cable financial news channel CNBC. “The incentives that we’re getting are performance based…we don’t get the job, we don’t get the incentives… Also if you look at the Memo of Understanding and the revenue projects that will accrue to the cities and states of each location, [it's] billions of dollar that will far outweigh the incentive packages.”

The company has also said that, in addition to jobs and capital spending, it plans to provide community benefits such as donating land for a school or holding hiring fairs in lower-income areas.

Amazon did not immediately respond to requests for comment.

Richard Green, chairman of the University of Southern California's Lusk Center for Real Estate and its Department of Policy and Analysis and Real Estate, said he sees the incentives from two cities with some of the world's most robust economies as taking money from low-income city residents and handing it over to Amazon shareholders.

"I don't understand how cities let themselves be looted like this," Green said. For Amazon to receive financial incentives, it "means that all the other businesses that are there are going to bear the burden of providing those subsidies to Amazon. And if I'm a competitor to Amazon in any capacity, I’m pretty upset about it."

Gerald Gordon, president and chief executive of the Fairfax County Economic Development Authority in Virginia, contends that local incentives -- a total of $20 million in property-related tax breaks offered by Fairfax and neighboring Loudon counties, on top of "several hundred million more" by the state -- are quite justified, noting 25,000 jobs are likely to translate to at least 50,000 more, based on traditionally recognized multiplier effects.

The incentive package Arlington offered Amazon is in line with other recent packages in the area.

In February 2017, the City of Arlington and the Commonwealth of Virginia offered Nestlé USA, the maker of Häagen-Dazs, Baby Ruth and Lean Cuisine, a total of about $16 million in incentives to move its U.S. headquarters to Arlington’s Rosslyn area, bringing roughly 750 jobs. That works out to about $21,333 per job.

Local communities near Crystal City are expecting spillover effects from Amazon in the form of heightened demand for offices and other commercial real estate, generating additional property taxes that will ultimately outpace the incentives granted to Amazon, Gordon said.

The shot in the arm for Northern Virginia, he said, is on par with the results of what happened in the mid-1980s, when Mobil Oil, years before its eventual merger with Exxon, moved its headquarters from New York City to Fairfax, Virginia. That relocation spurred other large companies to consider Northern Virginia.

While some incentives may have played a role, Gordon said access to a trained workforce was the key factor that helped Northern Virginia beat out suburban Connecticut, Dallas and Denver for the Mobil headquarters, and the same factor probably aided the landing of Amazon.

Real estate economist Alan Nevin, director of economic and market research for consulting firm Xpera Group in San Diego, largely agrees with the idea that the workforce was a critical factor.

"It's not as if they'll need to import new workers," Nevin said of Amazon. "They're more likely to poach them from other companies."

The Northern Virginia and New York City markets spread well beyond the exact planned property locations for Amazon's new operations, and both have a wide existing supply of high-end housing that will be acquired by new workers who will be making up to $150,000 annually in their new Amazon jobs.

In all, Nevin said he thinks cities and the companies mutually benefit from the incentive agreements.

"It's a fair trade, plus the cities get the prestige of being selected," he said. "Also, you get these highly paid professionals who will be buying expensive homes, expensive cars and all sorts of other things."

Incentives by Location:

Long Island City, New York
Amazon is set to receive performance-based direct incentives of $1.525 billion based on the company creating 25,000 jobs in Long Island City. This includes a refundable tax credit through New York State’s Excelsior Program of up to $1.2 billion calculated as a percentage of the salaries Amazon expects to pay employees over the next 10 years, which equates to $48,000 per job for 25,000 jobs with an average wage of over $150,000; and a cash grant from Empire State Development of $325 million based on the square footage of buildings occupied in the next 10 years.

Amazon is expected to receive these incentives over the next decade based on the incremental jobs it creates each year and as it reaches building occupancy targets. The company plans to separately apply for as-of-right incentives including New York City’s Industrial & Commercial Abatement Program (ICAP) and New York City’s Relocation and Employment Assistance Program (REAP).

New York City plans to provide funding through a Payment In Lieu Of Tax (PILOT) program based on Amazon’s property taxes on a portion of the development site to fund community infrastructure improvements developed through input from residents during the planning process. Amazon has agreed to donate space on its campus for a tech startup incubator and for use by artists and industrial businesses, and Amazon expects to donate a site for a new primary or intermediary public school. The company plans to also invest in infrastructure improvements and new green spaces.

Crystal City, Virginia

In Crystal City, Amazon is set to receive performance-based direct incentives of $573 million based on the company creating 25,000 jobs with an average wage of over $150,000. This includes a workforce cash grant from the Commonwealth of Virginia of up to $550 million based on $22,000 for each job created over the next 12 years, if it creates the expected high-paying jobs. The company is set to also receive a cash grant from Arlington of $23 million over 15 years based on the incremental growth of the existing local transient occupancy tax, a tax on hotel rooms.

The Commonwealth of Virginia agreed to invest $195 million in infrastructure in the neighborhood, including improvements to the Crystal City and the Potomac Yards Metro stations; a pedestrian bridge connecting National Landing and Reagan National Airport; and work to improve safety, accessibility, and the pedestrian experience crossing Route 1 over the next 10 years.

Arlington plans to also dedicate an estimated $28 million based on 12 percent of future property tax revenues earned from an existing tax increment financing (TIF) district for on-site infrastructure and open space in National Landing.

In a related move, Virginia Tech said it would build a $1 billion "innovation" campus for graduate students near Amazon’s new headquarters in Northern Virginia; that state has committed $250 million in funding. Northern Virginia's George Mason University said it too would create an institute to focus on digital innovation, and establish a new school of computing.

Nashville, Tennessee

Amazon is set to receive performance-based direct incentives of up to $102 million based on the company creating 5,000 jobs with an average wage of over $150,000 in Nashville. This includes a cash grant for capital expenditures from the state of Tennessee of $65 million based on the company creating 5,000 jobs over the next seven years, which is equivalent to $13,000 per job; a cash grant from the city of Nashville of up to $15 million based on $500 for each job created over the next seven years; and a job tax credit to offset franchise and excise taxes from the state of Tennessee of $21.7 million based on $4,500 per new job over the next seven years.

Additional reporting by Molly Armbrister, Jennifer Waters and Mark Heschmeyer

Source: CoStar Realty Information, Inc.


Amazon Chooses New York City, Virginia for New HQ Sites as Nashville Gets Operations Center

 

NOVEMBER 13, 2018

By Lou Hirsch

Online Retailer's Decision Ends Year-Long Search

 
Queens, New York will be the site of an Amazon headquarters.

Queens, New York will be the site of an Amazon headquarters.

 
 

Amazon selected New York City and Arlington, Virginia, as sites for the online retailer’s second and apparently third headquarters, ending a year-long search for a project the company says will produce 50,000 jobs and more than $5 billion in capital spending. In a twist, the company said it is also putting an operations center in Nashville, Tennessee.

The Seattle-based company, the world’s biggest online retailer, said it chose the Long Island City neighborhood in New York and the Crystal City section of Arlington, across the river from Washington, D.C., to gain access to a skilled workforce.

“These two locations will allow us to attract world-class talent that will help us to continue inventing for customers for years to come," Jeff Bezos, founder and CEO of Amazon, said in a statement.

The decision forces officials in the 17 finalist cities that were passed over for a major facility to decide how they can use development plans they created to woo Amazon to lure other businesses. The effect on all 20 major markets in one fell swoop makes the decision one of the most significant events in recent U.S. commercial real estate history. Amazon, which occupies almost 8 million square feet in 33 buildings in Seattle, said last year the size and scope of the area it selects would be a full equal of its Seattle footprint in 10 to 15 years.

The announcement follows more than a week of news stories saying that Amazon was in discussions with officials in the two cities about splitting what was initially supposed to be only one site the company has been calling HQ2.

The decision to split the headquarters between Crystal City and Long Island City suggests that each area may get about half the expected employees and capital spending but Amazon has not outlined publicly how it plans to divvy up the operations.

Read More CoStar Amazon HQ2 Coverage 

The selection of Crystal City is within roughly six miles of founder and Chief Executive Jeffrey P. Bezos’ $23 million mansion in Washington, D.C., which he purchased in the Kalorama section of D.C. in October 2017. It’s also in the same area as The Washington Post Co., which Bezos purchased for $250 million in 2013. That region was the only area with three of the 20 finalists.

Previous reports said Amazon was in late-stage talks to locate HQ2 in the Crystal City neighborhood of Arlington, in the area next to Ronald Reagan National Airport across the Potomac River from Washington, D.C.

Amazon said its operations center in Nashville will have 5,000 full-time, high-paying jobs; $230 million in investments; 1 million square feet of office space; and an estimated incremental tax revenue of more than $1 billion over the next 10 years.

The retailer said it will receive performance-based direct incentives of up to $102 million based on the company creating 5,000 jobs with an average wage of more than $150,000 in Nashville. This includes a cash grant for capital expenditures from the state of Tennessee of $65 million based on the company creating 5,000 jobs over the next seven years, which is equivalent to $13,000 per job; a cash grant from the city of Nashville of up to $15 million based on $500 for each job created over the next seven years; and a job tax credit to offset franchise and excise taxes from the state of Tennessee of $21.7 million based on $4,500 per new job over the next seven years.

Crystal City Space

Crystal City makes sense for Amazon’s HQ2 because it has office space that's immediately available, several new residential developments and is adjacent to the airport, said Nicholas Mills, a CoStar analyst. “Amazon wants to take space right away and slowly build out a campus,” Mills said. “With Crystal City, they only have to negotiate with one landlord, JBG Smith,” referring to a development company that owns significant amounts of property in the area.

Plus, Crystal City earned some cache recently when coworking giant WeWork converted a 1964 office building -- owned by JBG Smith -- to one of its first coliving properties under the name WeLive. The business model involves renting furnished living space with shared gathering areas.

It's key that Crystal City is served by the Crystal City and Pentagon City Metro stations, Mills said. Amazon has placed high priority on accessibility and public transportation availability in its HQ2 search. JBG Smith points out in several places on its website that 98 percent of its properties are near a Metro stop.

Amazon said Virginia and Arlington will get more than 25,000 full-time high-paying jobs; about $2.5 billion in Amazon investment; 4 million square feet of energy-efficient office space with the opportunity to expand to 8 million square feet; and an estimated incremental tax revenue of $3.2 billion over the next 20 years as a result of Amazon’s investment and job creation.

The retailer said it will receive performance-based direct incentives of $573 million based on the company creating 25,000 jobs with an average wage of over $150,000 in Arlington. This includes a workforce cash grant from the Commonwealth of Virginia of up to $550 million based on $22,000 for each job created over the next 12 years. Amazon will only receive this incentive if it creates the high-paying jobs. The company will also receive a cash grant from Arlington of $23 million over 15 years based on the incremental growth of the existing local Transient Occupancy Tax, a tax on hotel rooms.

Virginia plans to invest $195 million in infrastructure in the neighborhood, including improvements to the Crystal City and the Potomac Yards Metro stations; a pedestrian bridge connecting National Landing and Reagan National Airport; and work to improve safety, accessibility, and the pedestrian experience crossing Route 1 over the next 10 years, Amazon said. Arlington will also use about $28 million based on 12 percent of future property tax revenue from an existing Tax Increment Financing district for on-site infrastructure and open space in the area, which Amazon is now calling "National Landing."

Northern Virginia, a region that long has been considered one of a handful of favorites to win HQ2, already is home to a corporate campus of Amazon Web Services, known as AWS. This division, which houses its biggest data centers in the area, provides on-demand cloud services for large enterprises.

Amazon Web Services is in the running to win a $10 billion contract from the U.S. Department of Defense to provide services to its Joint Enterprise Defense Initiative, or JEDI program. Crystal City is about a mile from the entrance to the Pentagon, home of the Defense Department.

Amazon is expected to move employees into two aging office buildings -- Crystal Square 3 at 1770 Crystal Drive and Crystal Mall Office 3 at 1851 S. Bell St. -- that used to house government agencies, the Post said. JBG Smith owns both buildings and currently is renovating Crystal Square 3, a 13-story, 242,100-square-foot building, according to CoStar data.

Crystal City, located on the Potomac River just across the George Washington Memorial Parkway from Reagan National, initially was an industrial area housing brickyards, warehouses, junk yards and several motels as well as a drive-in theater, according to a history of the area on the city of Arlington’s website.

Amazon could turn the neighborhood into a sought-after place to live and work, CoStar's Mills said. "It's going to create a lot of buzz," he said. "People will want to move there so they can say they live where Amazon is."

Long Island City's Office Vacancies

Long Island City, part of New York City's Queens borough, is enticing because it is close to air and highway transportation, has millions of square feet of available land, and more than 15 percent of its office space is now empty, say brokers, developers and analysts. It's also about four miles from Bezos' luxury condos at 25 Central Park West in Manhattan.

Amazon said New York and its Long Island City neighborhood will benefit from more than 25,000 full-time jobs; about $2.5 billion in Amazon investment; 4 million square feet of office space with an opportunity to expand to 8 million square feet; and an estimated incremental tax revenue of more than $10 billion over the next 20 years as a result of Amazon’s investment and job creation.

The company said it will receive performance-based direct incentives of $1.525 billion based on Amazon creating 25,000 jobs in Long Island City. This includes a refundable tax credit through New York State’s Excelsior Program of up to $1.2 billion calculated as a percentage of the salaries Amazon expects to pay employees over the next 10 years, which equates to $48,000 per job for 25,000 jobs with an average wage of over $150,000; and a cash grant from Empire State Development of $325 million based on the square footage of buildings occupied in the next 10 years.

The neighborhood offers various options for Amazon's expansion, whether it builds, buys or rents, brokers and developers said. Of four neighborhood sites submitted to Amazon, they explained, Long Island City edges out the other three proposed New York sites -- Midtown West, Manhattan's financial district and downtown Brooklyn -- because it's closer to New York airports and major transportation thoroughfares and has less commercial property density.

Among drawbacks cited before the selection of Long Island City, analysts had said New York could have trouble competing with other cities that have lower costs of living and a lower-paid, non-union construction labor force.

CoStar Market Analytics shows why Long Island City may have edged out the other three sites in New York City, with that neighborhood having about 660 million square feet of available development land. That would be plenty of room for the online retailer, which had initially sought space for one 500,000-square-foot corporate campus with as much as 8 million square feet of expansion potential. Now, Amazon appears to be splitting that requirement among two cities.

Long Island City has a healthy amount of availability compared to the broader New York City area. Office inventory within the area totals 16.3 million square feet, with a vacancy rate of 16.3 percent, according to CoStar data. The New York Metro area has a 8.7 percent vacancy rate.

Adding to its options are 14 additional properties under construction that are larger than 250,000 square feet, according to CoStar data. Currently, two buildings have more than 250,000 square feet available, while another under construction will have more than 250,000 square feet available.

Amazon has said after the selection was announced it would soon begin hiring for a number of positions, primarily executive and management roles, software development engineers, and legal, accounting and administrative personnel. The average salary will exceed $100,000 per year, according to the company.

Amazon hasn’t said publicly how many employees will be dispatched to HQ2, and HQ3, immediately. But an undetermined number of senior executives and mid-level managers -- perhaps hundreds -- will probably come from the current headquarters in Seattle, at least for a while to aid in the transition and transferring its corporate culture. Amazon has said it expects the bulk of employees will be hired locally.

The national competition for Amazon’s second headquarters began in September 2017, generating intense scrutiny and prompting 238 cities across the U.S. to court the company. Maryland Gov. Larry Hogan in February called Amazon HQ2 “the greatest economic development opportunity in a generation.”

The competition galvanized efforts around economic development in each of the cities, sending officials scrambling to rezone potential sites and create incentives packages to attract Amazon’s attention. At $8.5 billion in Maryland and $7 billion in the state of New Jersey, those two states are among the cities that offered the most. The company announced its short list of finalists in January.

For those snubbed cities, “it’s kind of like being a silver or bronze medalist in the Olympics,” said Jim Beatty, president of NCS International, which provides site selection and real estate services to corporations, but has not worked with Amazon. “They didn’t win, but they got a lot of exposure. Any corporation of any size looking at expansion is probably taking some type of look at these cities.”

In its request for proposals for its so-called HQ2, Amazon stressed access to public transportation -- existing infrastructure and proposed improvements -- as part of its wish list. Bike lanes, bus routes, light rail, subways, walkability and uncongested roads could sweeten proposals, company officials said. Amazon representatives surprised some local officials during their onsite visits by quizzing them more about regional transportation and housing issues than financial incentives, according to several reports.

That push to improve public transit could help the locations that aren't picked focus on improving their transportation infrastructure the next time a big corporation looks for a new home, Beatty said.

The opportunity in New York and Virginia is huge, but there are pitfalls. In Seattle, Amazon drove unprecedented job growth, completely revitalized neighborhoods around its campus, sparked an urban residential development boom and created a talent pool that helped convince companies such as Facebook, Google, Go Daddy and Twitter to open satellite offices there.

However, its rapid growth also strained the housing market, contributed to already festering traffic congestion and placed pressure on an underbuilt public transportation system.

Additional reporting by Tony Wilbert, Diana Bell and Jennifer Waters

Source: CoStar Realty Information, Inc.


Splitting Amazon HQ2 Would Mute Effects on Both Winning Cities, Fitch Says

 

NOVEMBER 08, 2018

By Tony Wilbert

Arlington, Virginia, New York Would Benefit Modestly

The supply of office buildings in Crystal City makes it a potential site for Amazon HQ2.

The supply of office buildings in Crystal City makes it a potential site for Amazon HQ2.

 

If Amazon splits its second headquarters project between two cities, the winners would get only "muted upside" to their economies and credit ratings, especially if the online retail giant selects locations in New York City and near Washington, D.C., according to Fitch Ratings.

Landing half of an additional Amazon headquarters also would not greatly affect either area's housing market, Fitch said in a report.

The addition of 25,000 new jobs each to the two well-established major metropolitan areas "would have at most a muted impact on the economies and credit quality of Arlington County and New York City," said Fitch, a company that rates the credit and ability to repay debt of municipalities. Arlington County has a AAA/Stable bond rating and New York City holds a AA/Stable rating from Fitch, signifying that both municipalities are creditworthy and can meet their financial obligations.

The potential selection of two cities with strong economies even further reduces the expected impact of landing Amazon's second headquarters, known as HQ2. "Given the large size of the locations remaining in contention, any impact would be modest, particularly if HQ2 is split," Fitch said. "The direct impact on local government revenues from Amazon will be reduced not only by splitting HQ2 but also by anticipated state and local incentives."

When Amazon issued the request for proposals (RFP) for a second headquarters in September 2017, the company said it would "be a full equal to our current campus in Seattle." The company also said it would hire as many as 50,000 new full-time employees over the following decade to 15 years and invest more than $5 billion in capital expenditures over 15 to 17 years to build out its second campus.

The request for proposals created unprecedented economic development excitement among cities and counties, 238 of which submitted proposals. In January, Amazon released its somewhat short list of 20 candidate locations to win HQ2 and visited those cities and counties, even returning to some this summer.

The Washington Post, owned by Amazon founder and Chief Executive Jeff Bezos, reported on Saturday the company was in advanced talks to locate its second headquarters in the Crystal City area of Arlington, Virginia, and the Wall Street Journal reported Amazon plans to split the project between two cities, with Crystal City, Long Island City in New York and Dallas in the running to get half the second headquarters.

The overall impact of 25,000 new jobs in the Washington and New York metro areas would be modest because that number represents a small percentage of their existing workforces, Fitch said. Even if Washington wins the entire second headquarters and all 50,000 new jobs, it would represent "a modest 1.5 percent of the labor force in the metro area. In the New York area, 50,000 jobs only represents 0.5 percent of its labor force, according to a Fitch analysis.

"New York City and Arlington in the D.C. metro area already have very vast resources" and residents with high income levels, said Amy Laskey, managing director of Fitch Ratings' U.S. Public Finance Group. "It would be an addition of more of the same."

As for the metropolitan area's housing market, the new jobs would not greatly impact either one, according to the Fitch report. "We do not expect much change in home prices in either location as healthy economic dynamics are already pushing up prices and supply should be sufficient to absorb the needs," the Fitch report said. "The Washington, D.C., area is more likely to benefit than New York City as it has slower growth in rents and home prices."

Although the immediate impact of winning half of Amazon's second headquarters would be muted, it still would benefit the economy of the winning cities and their surrounding areas because they "will see some indirect benefit from increased tax revenues generated by employees and related businesses," Fitch said.

"The one wrinkle in that is the level of incentives the governments give," Laskey said. If a winning city offered a large incentives package, the payoff might not be realized for years.

Though Amazon has given no definitive date for announcing the city or cities that will win HQ2, Bezos has said the decision will be made by the end of the year. In its report, Fitch said the announcement "may come as early as later this week."

Source: CoStar Realty Information, Inc.


Lowe's Joins Ranks of Big-Box Retailers That Are Closing Stores

 

NOVEMBER 05, 2018

By Jennifer Waters

Home Improvement Giant Says 47 Stores and 4 Other Facilities to Go Dark by February

 
The home improvement chain joins the growing ranks of dark big-box stores in the U.S. and Canada.

The home improvement chain joins the growing ranks of dark big-box stores in the U.S. and Canada.

 

Lowe’s Companies said it will close 51 locations in North America, the latest big-box retailer to try to better balance its brick-and-mortar and e-commerce resources as more consumers shop online.

Facing pressure from shareholder activists and increased competition, the home-improvement giant is closing 20 underperforming stores in the United States and 27 in Canada, as well as four offices and specialty plants. Of the Canadian sites, 24 were part of the $2.3 billion acquisition of Quebec-based Rona in 2016.

“The store closures are a necessary step in our strategic reassessment as we focus on building a stronger business,” Marvin Ellison, Lowe’s chief executive, said in a statement.

The stores, which average 112,000 square feet for a typical Lowe’s site, join a ballooning cluster of big-box stores that have gone dark in recent months, including Sears and Kmart locations, Toys “R” Us sites and the group of department stores that fell under the Bon-Ton Stores Inc. umbrella.

Craig Patterson, editor of Retail Insider, a Canadian retail industry publication, said it's clear Lowe's was worried about competing with itself in some Canadian markets.

"If you look at the list of stores here, it looks like they didn't want to cannibalize its Canadian sales," he said.

When Lowe's acquired Rona, it had committed at the time to maintaining Rona's multiple retail store banners.

"There is just so much retail space that has come to Canada in the last three years. Target closed its doors releasing millions of square feet, and it was the same thing again with Sears Canada in 2018," he said.

The Lowe’s move comes fewer than three months after Ellison announced plans to board up all 99 of its Orchard Supply Hardware stores, which were purchased out of bankruptcy five years ago. It was part of an effort to “simplify the business to produce better results and more consistent results,” he said on the second-quarter conference call in August.

He might not be finished cutting: “The company’s strategic reassessment is ongoing as we will evaluate the productivity of our real estate portfolio and our non-retail business investments. Going forward, our goal is simple. We plan to deploy both human and capital resources to their highest and best use,” Ellison added.

Ellison joined Lowe’s in July after an almost three-year stint at J.C. Penney’s. Before that, he had spent a dozen years at Home Depot and is widely credited with helping turn that business around. He replaced Robert Niblock, who retired after activist shareholders fought to get three members appointed to the board to push an agenda to step up sales and profits.

Lowe’s, which had more stores than Home Depot at the end of the second quarter, has grown amid a sharp increase in home remodeling and home building in recent years. But it hasn’t held pace with Home Depot.

In the second quarter, Lowe’s reported total sales of $20.88 billion, up 7.1 percent from the same time a year earlier, most from sales at its 2,390 stores. Home Depot’s total sales reached $30.46 billion, an 8.4 percent jump over the prior year, also mostly from its 2,286 stores.

Lowe’s said the wind down of the North American sites will subtract $300 million to $350 million in related costs. Some of the locations will be closed down immediately, with the rest by February. Lowe’s booked a $230 million noncash pre-tax charge in the second quarter tied to the reassessment of the Orchard Supply chain, and said it expects to take from $390 million to $475 million in writedowns in the second half also linked to Orchard Supply.

Here are the Lowe’s and Rona stores to be closed:

U.S.

Alabama
Lowe’s of Graysville

California
Lowe’s of Aliso Viejo
Lowe’s of Irvine
Lowe’s of South San Francisco
Lowe’s of Central San Jose, CA (Store 2842)

Connecticut
Lowe’s of Orange

Illinois
Lowe’s of Granite City
Lowe’s of Gurnee

Indiana
Lowe’s of Portage

Louisiana
Lowe’s of E. New Orleans

Massachusetts
Lowe’s of Quincy

Michigan
Lowe’s of Burton
Lowe’s of Flint

Minnesota
Lowe’s of Mankato

Missouri
Lowe’s of Bridgeton
Lowe’s of Florissant

New York
Lowe’s of Manhattan – Upper West Side 
Lowe’s of Manhattan – Chelsea

Pennsylvania
Lowe’s of Shippensburg

Texas
Lowe’s of Irving

Canada

British Columbia
Rona Columbia Square, New Westminister

Alberta
Rona Calgary, Douglasdale,
Reno-Depot Calgary West

Newfoundland
Rona Conception Bay South
Rona Goulds
Rona St. John’s, Topsail Road
Rona St. John’s, O’Leary Avenue
Rona St. John’s, Torbay Road
Rona, Bay Roberts

Ontario
Rona Mississauga, Westdale Mall
Rona Mississauga, Lakeshore
Rona Sault Ste. Marie, Black Road
Rona Sudbury
Rona Peterborough
Rona Kingston, Bath Road
Rona Lakefield 
Lowe’s North York, Centerpoint
Lowe’s Sault Ste. Marie, Northern Avenue

Québec
Rona Sainte-Clotilde-de-Chateauguay
Rona Iberville, Saint-Jean-sur-Richelieu
Rona L’Assomption
Rona Granby
Rona Sainte-Rose, Laval
Rona Rivière-des-Prairies, Montréal
Rona Rouyn-Noranda
Rona Ange-Gardien
Rona Saint-Elzéar

Source: CoStar Realty Information, Inc.


Amazon Exec Responds To HQ2 Rumors on Twitter

 

NOVEMBER 03, 2018

By Jaquelyn Ryan

Report Says Online Giant Negotiating With Northern Virginia Officials

Amazon headquarters in Seattle.

Amazon headquarters in Seattle.

 

The tweet followed a Washington Post article headlined " Amazon in advanced talks about HQ2 in Northern Virginia, those close to the process say " on Saturday morning that suggested the firm is closing in on a decision to locate to the area. The Wall Street Journal reported that late-stage talks have continued in cities such as Dallas and New York as well. Some have decried the lack of transparency in a process that could lead to promises of millions of dollars in public funding and other inducements. Grella, who works for Amazon's web services unit, is not involved in the search and is not part of internal discussions on the subject, according to one source who commented on the condition they not be named. Grella did not immediately respond to a request for comment. An Amazon media representative declined to comment, as did a representative for the Crystal City developer JBG Smith.

Amazon began a national competition as part of its search for a second headquarters last year, prompting 238 cities across the nation and Canada to court the company. It announced a short-list of 20 contenders this year that includes three Washington, D.C., areas. The company has said the second headquarters could bring 50,000 jobs and $5 billion in capital spending that could boost real estate and economic growth in the city where it lands.

Northern Virginia has largely been the leading choice among site selection experts, executives familiar with the company and even gamblers on betting sites. The company has been revisiting a number of sites such as Miami and Chicago in recent weeks that are on its short-list of final contenders.

On Thursday, Amazon Chief Executive Jeffrey P. Bezos told a crowd at a New York conference that he has not made a final decision yet. "Ultimately, the decision will be made with intuition after gathering and studying a lot of data. For a decision like that, as far as I know, the best way to make it is you collect as much data as you can, you immerse yourself in the that data but then you make the decision with your heart," he said.

Many observers and real estate executives speculate the company will not announce a final decision about its HQ2 location until after the mid-term elections on Nov. 6.

Source: CoStar Realty Information, Inc.


Houston Rethinks the Spread of Parking Lots

 

NOVEMBER 01, 2018

By Kyle Hagerty

End of Requirements in Two Neighborhoods Could Benefit Developers

Parking requirements in Houston have shaped the city by forcing buildings to be built further apart, which critics say has led to sprawl.

Parking requirements in Houston have shaped the city by forcing buildings to be built further apart, which critics say has led to sprawl.

 

After decades of building, Houston may be coming together to tackle a rule that irks developers and leads to an abundance of one amenity that builders argue isn't needed: parking.

America's fourth-largest city is considering a proposal that would exempt two up-and-coming neighborhoods adjacent to downtown from minimum requirements for off-street parking. If adopted, developers will be able to expand where they can build lucrative, higher-density projects.

"One of the most difficult things for post-World War II cities to deal with, Houston in particular, is having parking requirements that are too large. It pushes apart the projects and creates sprawl," said Peter Merwin, principal who helps lead mixed-use projects at architecture and design firm Gensler. "Currently over 50 percent of land use [in Houston] is dedicated to parking or roadways. That has a tremendous impact on the look of the city, usability and quality of life."

Midtown and East Downtown, known as Eado, two areas with robust development in the past decade, have been proposed as extensions of downtown, allowing new projects to be built without requiring a large amount of off-street parking, or any off-street parking at all. With close to 15,000 people in the neighborhoods living alongside dozens of popular entertainment and dining destinations, the move would be a game changer for developers in Houston.

"We're having to accommodate this giant elephant in the room, the gray parking structure," said Merwin.

Houston's current code outside of downtown requires 1.66 parking spaces for each two-bedroom apartment. Office buildings must provide 2.5 spaces for every 1,000 square feet. Hospitals are required to provide 2.2 spots for each bed, and golf courses need five spots for each green.

Even Houston’s bars have parking requirements, the highest of any use: 10 spots per 1,000 square feet.

"It's idiocy if the city is trying to protect the health of citizens, and a bar has minimum parking requirements," Merwin said. "Encouraging ease to get to and from a bar by offering parking sounds like asking for trouble to me."

Often thought of as bureaucratic red tape between the city and developers, Houston’s parking minimums have fundamentally shaped the city, contributing to its iconic sprawl now stretching 627 square miles.

Despite boasts about being a low-regulation city, the parking requirements remain fairly high by national standards, according to Streetsblog USA, a website that reports on sustainable transportation and livable communities.

Making matters more complicated for business and development, the rules are based on gross floor area, not net floor area, meaning mechanical rooms, bathrooms, hallways and storage areas factor in to the number of spots that must be provided.

It would be one thing if the spots were being used, but there’s evidence they are not, as transportation analysts forecast people will be driving less in the future.

Granite Properties, a real estate services firm based in Plano, Texas, conducted a study of 23 Class A buildings in Houston totaling 7 million square feet, revealing that 37.7 percent of parking spots sit unused on an average day, with the peak hour of a peak day used as a measuring point. Granite picked weeks without holidays, and the study ended in May before summer vacation season started.

The value of those unused spots combined is more than $100 million, Granite said.

"We know we're using fewer and fewer spaces because of flex time, working from home, traveling and all the other means of working," said David Cunningham, Granite's director of development and construction. "Plus people have alternative means of getting to work."

By 2030, private car ownership will drop 80 percent, and the cost of electric ride-sharing will be four to 10 times cheaper than owning a car, according to a Transwestern report on the rise of autonomous vehicles.

Fewer cars on the road would mean a dramatic reduction in parking needs. In estimates of autonomous vehicle technology are correct, the demand for parking across the United States may decrease 70 percent to 90 percent, cutting the need for parking spaces by about 60 billion square feet, according to conference on the subject sponsored by NAIOP, a commercial real estate trade group.

Architects and developers are already designing parking structures that can easily be converted to other uses, such as office space, retail or storage. Gensler’s Merwin has been a leader in the global firm’s practice on parking conversion.

“I can tell you, every project I’m working on, I talk about the future of garages in the development,” Merwin said.

If you look at Houston as a grid, the ratio of private space to public space is roughly 57 percent to 43 percent. That 43 percent of public land use is dedicated mostly to roads. When you build additional roadways and lots on private land, that 43 percent tips closer to 60 percent, according to Merwin. In other words, almost 60 percent of Houston’s land use is dedicated to cars.

"There's this latent capacity for underutilized or misused land, that if we can convert to more productive real estate, will be huge." Merwin said.

Central Houston President Bob Eury, whose group of business leaders promotes the downtown, told Houston Public Media this year that there are still at least 30 surface parking lots in downtown alone that could be developed.

"The upside is reduced cost of projects, so it makes it more feasible to get projects done. You could take the wasted investment in parking and build better buildings, more efficient buildings, with more amenities," Cunningham said.

Developments under the current regulations look like Australia-based Caydon’s 26-story mixed-use residential tower , Midtown’s first high-rise in decades, which will have almost 500 parking spots for 347 units. With more work from Caydon to come on adjacent lots, the city's new parking amendments could open up more options for the developer.

Directly across Main Street from Caydon’s project is the Midtown Park 400-space underground parking garage owned by the city of Houston. Despite the affordable rates, the garage is rarely close to full, even on busy weekends, according to Cunningham.

"The city is begging people to use that garage," he said.

That lack of inter-connected development driven by parking requirements is a major part of the problem. Parking requirements promote "silo-style" development, Merwin said. Each property has its own separate usage and parking, eliminating any space-saving synergy. When Caydon pursues its additional developments, under the current requirements it would need to also build parking on-site. Caydon Chief Operations Officer Derrek LeRouax has been vocal at public meetings in support of the parking changes.

"Having the ability to not be required to build is an important move, then you can leave it up to the free market," Cunningham said. "You won’t have to do it simply because of some outdated code saying you have to do it. If you can allow developers to build less, they will."

Tied up in the debate over parking and sprawl are concerns around flooding. Houston's abundance of impermeable concrete surface parking lots came under fire last year in the wake of Hurricane Harvey. The national news media questioned how developers could be allowed to build in flood zones.

"Density is our destiny," Merwin said. "By stacking density, you’re going to reduce flooding issues."

Local officials in Midtown and East Downtown say they support the proposed change to parking rules. A 30-day public comment period is currently in place before the City Council gets final say in a vote that could take place before the end of the year.

The proposal came out of the Walkable Places Committee, a task force established by Mayor Sylvester Turner to consider revisions to the city code to encourage more walkable neighborhoods. The committee has also looked at changing building codes to allow new construction to be closer together and to allow for wider sidewalks, but Houston’s lack of zoning would make applying those policy changes difficult.

"I hate wastefulness, wastefulness is a sin. When we're spending time and resources to finance building all these parking spots that could be used on other things, that's wasteful," Cunningham said.

Source: CoStar Realty Information, Inc.


New Opportunity Zone Tax Guidance Expands Borrowing, Other Benefits for Real Estate Investors

 

OCTOBER 22, 2018

By Mark Heschmeyer

Incentives Aim to Spur Investment in Distressed Areas

The Internal Revenue Service will be examining new guidance on the Opportunity Zone real estate tax incentive program.

The Internal Revenue Service will be examining new guidance on the Opportunity Zone real estate tax incentive program.

 

Accountants poring over the Treasury Department's newly issued guidelines for Opportunity Zone tax incentives say they are uncovering additional benefits for commercial real estate investors such as allowing borrowed funds to be used for improvements.

The incentives created by the 2017 Tax Cuts and Jobs Act are designed to spur development and job creation by encouraging long-term investments in economically distressed areas and is under review by the Internal Revenue Service. The proposed regulations are designed to help investors and fund managers put billions of dollars in capital gains earnings to work by clarifying what can be deferred, which taxpayers and investments are eligible and how to invest the money.

Analysis from the law firm of Polsinelli PC notes that the guidance released on Friday clarifies the treatment of land in opportunity zones. Land is excluded from the requirement of original use, alleviating fears that land could only be a "bad" asset. If a qualified fund purchases an existing building and the underlying land, the fund is only required to substantially improve the building. The cost of the land is disregarded for this purpose.

Polsinelli's analysis also indicates the proposed regulations provide for the borrowing of funds for investment and improvements. There had been concern that the proportion of the investment relating to money borrowed by a qualified fund would result in a non-qualifying investment.

The law firm of Stroock & Stroock & Lavan said the regulations probably permit investments from limited liability corporations and not just individuals. The proposed regulations state that qualified opportunity funds may include entities treated as partnerships for federal income tax purposes, which would presumably permit the use of limited liability companies.

The proposed regulations also indicate that partners in opportunity zone funds do get outside basis for amounts borrowed by the fund, thereby potentially permitting the investors to take advantage of any potential fund losses in the investments, according Polsinelli analysis.

In issuing the guidelines, the Treasury said it expects to issue additional guidance before the end of 2018, and the IRS has requested comments on a number of provisions in the proposed regulations.

Issues expected to be addressed in the next round include: the meaning of the law's use of the phrase "substantially all;" the transactions that may trigger the inclusion of gain that has been deferred; the "reasonable period" for a qualified opportunity fund to reinvest proceeds from the sale of qualifying assets without paying a penalty; and what happens when a qualified fund fails to maintain the required 90 percent investment standard.

Key among the first round of regulations is that it extends the length of the benefits of the program that offers capital gains tax relief to investors for new investment in designated areas.

Investment benefits include deferral of tax on prior gains as late as 2026 if the amount of the gain is invested in an Opportunity Fund, and tax forgiveness on gains on that investment if the investor holds the investment for at least 10 years. Now, the Treasury says investors can hold onto their investments in Qualified Opportunity Funds through 2047 without losing tax benefits.

The additional hold period is provided to avoid the potential that a flood of property investments would have hit the market shortly after completion of the required 10-year holding period.

Source: CoStar Realty Information, Inc.


To Create the Offices of Tomorrow, This Design Director Scrapped the Cubicle

 

OCTOBER 19, 2018

By Diana Bell

Ware Malcomb's Heather Groff Steers L'Oreal, Bionic Office Workers Away From the Lonely Desk

L'Oreal workspace designed to boost collaboration gives a glimpse of the office of the future.

L'Oreal workspace designed to boost collaboration gives a glimpse of the office of the future.

 

To catch a glimpse of the workplace of the future, Ware Malcomb Interior Architecture & Design Director Heather Groff suggests looking at the headquarters she worked on for cosmetics and perfume maker L'Oréal. The 66,000-square-foot office in Clark, New Jersey, which the company dubbed "The Hub," banishes a staple of traditional office life: the cubicle.

Because its workforce is entirely mobile, L'Oréal wanted an activity-based environment, meaning there is no traditional cubicle space. Instead, a flex-space concept converts usable space from private offices and desks to unassigned open work areas designed to emphasize collaboration and social interaction.

"Each department had a distinct theme or 'neighborhood' designed into the new workplace," said Groff.

Alternative work areas replaced most of the enclosed offices, Groff said, adding that, "This is a big trend in commercial interiors: creating that community and coffee shop- or living room-like environment. It’s not just computer desks."

Groff's design ideas may affect the offices that many U.S. workers use in a decade or two. More than 80 percent of companies in the United States are considering moving toward an open, flexible concept with a variety of work areas, according to a 2014 report on workplace redesigns by research firm Deloitte. In a 2015 office worker survey conducted by the Dublin Institute of Technology, respondents aged 20 to 34 were shown to have less difficulty concentrating while working within an open office plan than respondents in the age groups of 35 to 44 and 45 to 54. Almost 50 percent of respondents said a more open design had a positive effect on productivity.

Groff’s 20-year career has taken her to both coasts. Shortly after graduating with a bachelor’s degree in interior design from Boston’s Wentworth Institute of Technology, she moved to San Francisco and later to New York, where she joined architecture and design firm Ware Malcomb in 2014 as a studio manager. Ware Malcomb promoted Groff this year to lead its Design Studio and essentially run its New York operations.

Her work for startup consulting company Bionic took a similar approach to L'Oreal, but to a lesser extent, in building a 10,000-square-foot office at 4 Columbus Circle in New York City. 

To catch a glimpse of the workplace of the future, Ware Malcomb Interior Architecture & Design Director Heather Groff suggests looking at the headquarters she worked on for cosmetics and perfume maker L'Oréal. The 66,000-square-foot office in Clark, New Jersey, which the company dubbed "The Hub," banishes a staple of traditional office life: the cubicle.

Because its workforce is entirely mobile, L'Oréal wanted an activity-based environment, meaning there is no traditional cubicle space. Instead, a flex-space concept converts usable space from private offices and desks to unassigned open work areas designed to emphasize collaboration and social interaction.

"Each department had a distinct theme or 'neighborhood' designed into the new workplace," said Groff.

Alternative work areas replaced most of the enclosed offices, Groff said, adding that, "This is a big trend in commercial interiors: creating that community and coffee shop- or living room-like environment. It’s not just computer desks."

Groff's design ideas may affect the offices that many U.S. workers use in a decade or two. More than 80 percent of companies in the United States are considering moving toward an open, flexible concept with a variety of work areas, according to a 2014 report on workplace redesigns by research firm Deloitte. In a 2015 office worker survey conducted by the Dublin Institute of Technology, respondents aged 20 to 34 were shown to have less difficulty concentrating while working within an open office plan than respondents in the age groups of 35 to 44 and 45 to 54. Almost 50 percent of respondents said a more open design had a positive effect on productivity.

Groff’s 20-year career has taken her to both coasts. Shortly after graduating with a bachelor’s degree in interior design from Boston’s Wentworth Institute of Technology, she moved to San Francisco and later to New York, where she joined architecture and design firm Ware Malcomb in 2014 as a studio manager. Ware Malcomb promoted Groff this year to lead its Design Studio and essentially run its New York operations.

Her work for startup consulting company Bionic took a similar approach to L'Oreal, but to a lesser extent, in building a 10,000-square-foot office at 4 Columbus Circle in New York City. 

Heather Groff

Heather Groff

 

"The plan for Bionic is to transition to an activity-based workstyle," Groff said. "They have bench desk areas and other collaborative areas that are alternative environments for a change of scenery. As they grow, they will shift to unassigned workplaces."

Through her work on these projects, Groff developed the concept of an activity-based work spectrum. "Companies fall along a spectrum of traditional on one end, to really what L'Oréal has done on the other end. Lots of companies fit in the middle along different gradients," she said.

Groff said she is building workplace experiences into Ware Malcomb’s Workplace Strategy group, which collects information on what clients want and organizes it into more cohesive styles.

"In the past, office redesigns were driven by an expansion or a lease expiration and need for space. The process was very cut and dry. You collected the number of people, their role, and they would get a predefined workspace. Workspace Strategy takes into account the other goals that the company wants to achieve within their physical environment," Groff said.

Corporate interiors have significantly changed in the past several years, according to Groff, who tracks trends for Ware Malcomb. Her research has shown that while the overarching themes in interior architecture remain relatively stable, nuances within them have changed, creating different design approaches.

Take technology, for example. Five years ago, worker mobility throughout an office was the major emerging trend in technology affecting workplace design, according to Groff, but mobility is now expected.

"The shift in the technology conversation is now that you are mobile, you have new barriers to overcome," she said.

Desk reservation systems are now key to a mobile, modern workforce.

"So at L'Oréal, the workforce is entirely mobile," Groff explained. "The desk reservation system really helps to make their workday seamless, make sure employees going in and out always have a place to work and can easily locate coworkers."

There's a movement toward collecting data on how the workplace is used. It's no longer enough to design an office and move on to the next project. In coming years, it will be increasingly important to catalogue how many people are in the space, how long they were there and what they were doing, Groff explains.

Source: CoStar Realty Information, Inc.


Hurricane Michael Imperiled More Than $25 Billion in Florida Commercial Property

 

OCTOBER 11, 2018

By Randyl Drummer

Florida Beach Towns Hammered By Most Powerful Panhandle Hurricane on Record

The commercial property in the area struck by Hurricane Michael spans the Florida panhandle along the Gulf of Mexico.

The commercial property in the area struck by Hurricane Michael spans the Florida panhandle along the Gulf of Mexico.

 

Hurricane Michael smashed into beach resorts, shopping centers, apartments and office buildings with 155-mile-per-hour winds and rising seas, threatening more than $25 billion in commercial property along the Florida Panhandle.

The 500-mile stretch of coastline includes about 18,000 commercial buildings valued at $25.5 billion at risk of flooding by surging storm water up to six feet above ground level when the largest hurricane on record to hit the Panhandle reached land near Panama City, Florida, late Wednesday, according to a CoStar Group analysis of property data and recent sales information.

Initial reports suggest the hurricane largely spared the major population centers of Pensacola and St. Petersburg, which bookended the storm's landfall. However, local news reports and social media showed widespread flooding, massive debris fields and numerous destroyed or heavily damaged buildings in Panama City, Mexico Beach, Port St. Joe and other white-sand resort getaways. Early reports said at least two people were killed.

More than 331,000 homes and businesses lost power and up to 375,000 people along the Gulf Coast in 22 Florida counties were ordered or strongly urged to evacuate. Wind and heavy rain from the Category 4 storm, only the third hurricane to hit the Panhandle since 1950, also caused major damage as it moved inland into Georgia and Alabama.

Research firm CoreLogic estimated that the hurricane could affect 57,000 single-family homes valued at $13.4 billion. Ratings agency Moody’s Investor Service flagged 539 commercial mortgage loans totaling $4.4 billion secured by 543 properties located in counties under hurricane or tropical storm watches and warnings. 

Retail and multifamily properties were the largest groups of properties in the loan pools exposed to damage, with retail accounting for about 40 percent and multifamily at 20.5 percent of the total, Moody's Vice President Matthew Halpern said.

Hurricane Michael when it made landfall on Wednesday. Credit: NOAA/CIRA/RAMMB

Hurricane Michael when it made landfall on Wednesday. Credit: NOAA/CIRA/RAMMB

 

One of the towns hit the hardest by the hurricane, Panama City Beach, which is southwest of the state capital of Tallahassee, is a resort town known for its emerald-green waters and white-sand beaches. It’s a popular wedding venue with gazebos along the shoreline.

The town also attracts budget-conscious spring breakers who frequent the area’s relatively inexpensive hotels within walking distance of bars and clubs. Live beach cams showed precariously bending palm trees, pelting rain and scattered debris as the hurricane made landfall.

News reports said at least two people were killed, including a child in a mobile home park, with the death toll expected to rise as rescue workers search for bodies during the rubble.

Michael was downgraded to a tropical storm early Thursday as it trekked across the U.S. Southeast, bringing more rain to areas that can ill afford it. North Carolina still is recovering from Hurricane Florence, which roared ashore last month in Wilmington, causing major flooding.

Some Florida residents are concerned about an increasing frequency of hurricanes after Hurricane Irma slammed the state last year as a Category 4 storm. But while Irma and Michael have hit Florida in consecutive years, the prior 10 years were relatively quiet, said Michael Peltier, spokesman for state-run Citizens Property Insurance Corp., the No. 2 insurer in Florida with about 442,100 policies. Universal Property & Casualty Insurance Co. ranks first with more than 631,000 policies, according to the Florida Office of Insurance Regulation. 

“Florida continues to have a lot of development along the coast,” Peltier told CoStar News. “In that sense, we will always be vulnerable to severe weather.”

Source: CoStar Realty Information, Inc.


Cannabis 'Green Rush' Fuels Growing Demand for Large-Scale Agri-Campuses

 

OCTOBER 02, 2018

By Randyl Drummer

With Fresh Capital, Developers Combine Marijuana Operations Under One Roof

AmeriCann Inc. is building a planned 987,000-square-foot cannabis campus 30 miles northeast of Providence, Rhode Island.

AmeriCann Inc. is building a planned 987,000-square-foot cannabis campus 30 miles northeast of Providence, Rhode Island.

 

Entrepreneurs are building modern cannabis campuses in response to what some real estate brokers call a green rush that's driving up occupancy rates and prices of property suited to cultivating and making products in California, Colorado and other marijuana-friendly states.

A new crop of capital providers has cautiously stepped forward to provide financing for cannabis real estate ventures, cognizant the nascent industry's legal and regulatory status remains murky. The federal government classifies marijuana as a Schedule 1 illegal drug even as 29 states have legalized medical cannabis use. Recreational use is now permitted by state governments in Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, Vermont, Washington and the District of Columbia.

Since Colorado in 2012 became the first state to legalize the use of marijuana on a recreational basis, the other states have followed, driving up demand for pot beyond medical uses and spawning new businesses. In response to regulations limiting the size and location of cannabis cultivation, entrepreneurs are adopting a mixed-use development approach, combining the operations of growers, manufacturers, sellers and other tenants in campus-style projects of as many as 1 million square feet.

In the latest project to break ground, Denver-based AmeriCann Inc., a publicly traded designer, builder and financier of projects for marijuana businesses, broke ground in the past week on the first phase of the Massachusetts Medical Cannabis Center, a 987,000-square-foot cannabis campus on 52 acres in Freetown, Massachusetts, that will lease to as many as eight growers and processors.

The initial project in Freetown, located 30 miles northwest of Providence, Rhode Island, is planned as a 30,000-square-foot cultivation and research center scheduled to open next spring. Over the next couple of years, the operation is expected to reach nearly 1 million square feet across three buildings, according to AmeriCann Chief Executive Tim Keogh.

"One of the biggest problems for the cannabis business is finding suitable commercial properties," Keogh said in an interview. "The campus format solves two big problems: how and where are companies going to grow and process the product. We've spent several years de-risking this type of asset and creating a platform for bringing efficient, low-cost cannabis buildings and infrastructure to the market."

The new facility will use greenhouses flooded with natural sunlight, which Keogh said is superior to the converted warehouses with artificial light traditionally used by growers, which incur high energy and other utility costs.

In the Coachella Valley community of Cathedral City, California, Canada-based Sunniva has started construction on two buildings totaling almost 500,000 square feet. The company plans to employ 100 people in the Coachella Valley, home to hundreds of small cannabis sellers and growers as well as the famous Coachella Valley Music and Arts Festival. 

A couple hundred miles north, Canna-Hub, a Roseville, California-based developer, broke ground in July on a 16-acre facility in Mendota aspiring to be what Chief Executive Tim McGraw describes as the "cannabis center of the Central Valley."

Foreign investment and a small but increasing stream of institutional capital are helping fund the developments as cannabis makes a steady but uneven maturation into an industry embraced by mainstream financial markets.

Many of the California cannabis-related projects are fueled by foreign capital, according to Hilary Bricken, an attorney at Los Angeles-based law firm Harris Bricken PLLC, which represents marijuana businesses of all sizes in several states.

Bracken said she’s fielding inquiries from foreign investors in Israel, Canada, Spain, South America, The Netherlands, the United Kingdom and Germany interested in cannabis-related manufacturing and growing operations, especially in the Coachella Valley cities in Riverside County.

"We've seen large amounts of foreign money come in for cannabis real estate projects, especially in the Coachella Valley and certain desert cities," Bracken said. "In addition to buying the real estate, the foreign investors put money into greenhouses, grow lights, storage facilities and more to offer turnkey cultivation and processing facilities for lease to local businesses."

Other real estate investors are also looking to fill the void left by conventional lenders unwilling to take a chance on the uncertain legal status of the nascent industry. 

Newport Beach, California-based Pelorus Equity Group on Sept. 18 launched a $100 million fund offering loans for acquisition, construction and improvement of commercial and industrial buildings to established cannabis businesses. Pelorus just closed a $25 million fund raised from wealthy investors and their advisory firms, allocating all the proceeds to 13 real estate projects throughout California. 

"As demand for cannabis products soars, large-scale cultivation, production and delivery systems will be required,” said Kelly Oliver, senior analyst at market research firm IBISWorld. “As a result, the next five years are expected to be defined by the increased involvement of large corporations and heavy merger and acquisition activity.”

Keogh said his company is getting in on the ground floor before large institutional money floods into the sector.

"If it's all institutional capital, all the opportunities are taken advantage of and there's no arbitrage," Keogh said. "We're in that sweet spot where there's an opportunity to build the infrastructure and expand our footprint. Then, as institutional capital really warms up to cannabis, we're in a very exciting spot to take advantage of that."

Source: CoStar Realty Information, Inc.


Female-Focused Coworking on The Rise

 

OCTOBER 02, 2018

By Molly Armbrister

Women-Centric Spaces Pop Up Coast to Coast

As social and professional lives blur, female-centric coworking companies are quickly expanding across the country.

As social and professional lives blur, female-centric coworking companies are quickly expanding across the country.

 

Stacey Taubman is working to open a second location of her almost two-year-old women-centric coworking company called Rise Collaborative, one of a fast-growing number of female-focused shared office space providers across the United States. 

Taubman, a former high school math teacher in St. Louis, said she discovered a need for female-focused office space several years ago. The revelation came as she interviewed more than 300 women to be part of a tutoring and mentorship company for teen girls that she developed following the suicide of one of her female students. 

The result was Rise Collaborative, a shared workspace provider aimed at women-led businesses that opened its first location in St. Louis in February 2017. Now, she’s planned another location to open in Denver next year. 

Stacy Taubman will open a second Rise Collaborative location in Denver; Photo credit: Rise Collaborative

Stacy Taubman will open a second Rise Collaborative location in Denver; Photo credit: Rise Collaborative

 

"It’s common for women in business to crave connections with other women who inspire and understand them," she said of the St. Louis office. "These ambitious and successful women are also looking for opportunities to grow personally and professionally."

Women-centric co-working companies are in vogue in tech-friendly markets across the country right now, though they have sparked some concern whether it's fair to favor one sex in creating workplaces. The Wing, perhaps the best-known of these, opened its first location at roughly the same time as Rise and has been on a growth tear ever since, completing a round of funding in fall 2017 led by international co-working giant WeWork that raised $32 million.

Reliable data on female-centric coworking spaces is hard to come by, but the number of these companies is growing, as is the list of cities where they can be found.

The Riveter, The Hivery and Hera Hub are a few of the other female-oriented coworking spaces that have opened in markets such as Southern California, Washington, D.C., Seattle and New York City as the co-working trend has grown in recent years.

Taubman said she plans to open her second location, at 730 Colorado Blvd. in Denver, because the pool of women who could benefit from a female-centric coworking space is even larger in Denver than it is in St. Louis.

St. Louis has 72,000 women business owners with no employees, Taubman said. Denver has 88,000. 

The 10,000-square-foot space in Denver is expected to include 14 private offices, free parking, three conference rooms and other amenities. Applications for the space can be submitted beginning Oct. 1.

Taubman said she considered as many as 10 other cities when looking for a second spot to open one of her coworking spaces. She plans to open the Denver office and immediately get to work fundraising to roll out in other markets she had considered.

In general, female-focused coworking offices cater to women who fall into two camps, said Kay Sargent, senior principal and director of workplace at HOK, the St. Louis-based engineering and architecture firm. Generally, there are some coworking spaces that cater to working moms and others that cater to women who either don’t have children or for whom childcare is not a concern, Sargent said.

"Some women in fields that tend to be male-centric don’t like the pressure of that," Sargent said. "There’s camaraderie. They want to be able to relate to people with the same challenges. They can support each other."

Finding ways to make the workplace more female-friendly has tremendous potential in a national economy where the unemployment rate is less than 4 percent and companies are struggling to find workers, Sargent said.

"They’re supporting lifestyle choices that women want to make," she said. "There’s a workforce shortage, and there are a lot of highly educated women who want to work. They’re trying to find alternatives. Women want more options, more choices, more things that are responsive to needs and changes."

On the other hand, Sargent said, diverse workplaces are often catalysts for better ideas and more productive staffs.

"It’s the idea of ‘if you want to be included, don’t segregate yourself,’" Sargent said. "If you’re doing it to avoid something, you’re not addressing what the core problem is."

But, if the idea is to create a like-minded community where ideas can flow and work and life can blend together, Sargent said, gender-specific co-working spaces have a place. They can help women find their circle.

"We used to be able to find community outside of work," Sargent said. "There is a huge blending between our personal and professional lives. We’re working more and that’s infiltrated our personal lives. For people who want to blend work and personal, female-centric can be a great solution to that." 

But the concerns about gender-specific workspaces can go beyond social and professional realms into the legal arena.

The New York City Commission on Human Rights began investigating The Wing earlier this year over its women-only policy. Rules vary by state, but in New York, The Wing argues that as a private club, it is not subject to public accommodation laws.

Most female-focused co-working spaces don’t disallow men, Rise Collaborative included.

"Our spaces are female-friendly, but men are allowed," Taubman said. Some of the companies in the St. Louis Rise have male employees, she said, but the companies are run by women.

And still, perhaps the most important piece of what goes on at Rise focuses on young women and helping them discover their paths in life.

Rise Collaborative’s nonprofit arm, Rise Society, enrolls high school girls in a mentorship program that matches them with an adult member of Rise Collaborative who can provide advice and support about career and personal interests.

"We believe that you can’t be what you can’t see," Taubman said. "We are creating a pipeline for success by providing a collaborative space for teen girls to engage with smart, strong, successful women who want to give back to the next generation.

Source: CoStar Realty Information, Inc.


World Growth Forecast Cut on U.S.-China Trade Battle

 

SEPTEMBER 27, 2018

By Mark Heschmeyer

Trade War Is Becoming a Reality, Economists Say

181009_US-China trade battle.jpg
 

With the latest and largest round of tariffs on imported Chinese goods taking effect this week, economists say U.S. trade policies are likely to materially affect residential and commercial real estate markets as well as what remains of a strong global growth outlook.

The U.S.-China trade battle prompted Fitch Ratings this week to downgrade its 2019 global gross domestic product forecast.

"The trade war is now a reality," said Brian Coulton, Fitch's chief economist.

Coulton's forecasts encompass this week's significant escalation in U.S.-China trade restrictions.

The U.S. this week imposed another $200 billion in tariffs on about 5,750 Chinese-made goods for a total, so far this year, of $250 billion.

This round hits families more directly than previous actions this year, economists say. The new round covers such products such as meat, fish, fruit, vegetables, refrigerators, freezers, heaters, air conditioners; microwave ovens, lawnmowers, high chairs, booster seats, bicycles and vacuum cleaners.

"This latest round of tariffs pulls consumers' homes into the middle of an international trade dispute," said Jennifer Cleary, vice president of regulatory affairs for the Association of Home Appliance Manufacturers. "These tariffs, in addition to the tariffs on imported steel and aluminum upon which home appliance manufacturers in the U.S. rely, are taxes. And higher prices for American consumers is the likely result of increased costs to import home appliances and the parts and materials needed to make and service them in America. American manufacturing jobs could also be lost."

The rate of additional duty is initially 10 percent. On Jan. 1, 2019, the rate of additional duty will increase to 25 percent.

Housing costs will only go up, according to Randy Noel, chairman of the National Association of Home Builders and a custom home builder from LaPlace, Louisiana.

"President Trump's decision to impose 10 percent tariffs on $200 billion worth of Chinese imports, including $10 billion of goods used by the residential construction sector, could have major ramifications for the housing industry," Noel said in a statement. "Further, this tax increase is coming on top of the current 20 percent tariffs on softwood lumber imports from Canada. The lumber tariffs have already added thousands of dollars to the price of a typical single-family home."

Other economists agree that the escalating trade dispute is slowing growth. The UCLA Anderson Forecast for the third-quarter report released Wednesday questions whether even slowing growth is sustainable.

The national economic forecast over the near term remains strong, with a broad-based 3 percent growth track, according to David Shulman, UCLA Anderson Forecast senior economist. However, it is expected to slow to 2 percent next year and to a near-recession level of 1 percent in 2020.

Looming over the forecast is the uncertainty of what affect tariffs will have on business investment, Shulman wrote.

"However, one thing remains clear. The trade deficit is going to explode," Shulman wrote. "What the administration doesn't understand is that the trade deficit is largely a result of macroeconomic policies caused by the lack of domestic savings and the ever-growing budget deficit."

The auto industry is already taking a hit from earlier tariffs, according to industry officials testifying Wednesday at a U.S. Senate Finance Committee Hearing on the impact of tariffs on the U.S. automotive industry.

Next year will mark two key milestones in Honda North America's history in the United States. It will be the 60th anniversary of Honda's business in America and the 40th anniversary of the first product it built in America. There are two critical factors that have helped it reach those milestones: stability and maintaining a welcoming business environment that supports manufacturing, Rick Schostek, executive vice president of Honda North America, said in his testimony on Wednesday.

Stability is where unanticipated disruptions like new taxes in the form of tariffs come in, he said.

"These added costs will either be passed on to our customers or borne by manufacturers, which then diverts money intended for other critical purposes, including investment in future technologies, or capital improvements to our operations that secure jobs, provide compensation for our workforce, and fulfill our social responsibility to the community," Schostek said. "The key point is that tariffs, no matter how short-lived, are enormously disruptive to the stability of a business."

Regarding a business-friendly environment, America is now experiencing a fundamental change in the philosophy of open markets, he said.

"While we're paying relatively little in the way of tariffs on steel, the price of domestic steel has increased as a result of the tariff, saddling us with hundreds of millions of dollars in new, unplanned costs," he said.

While the full price effects of the tariffs have yet to hit consumers, they are slowly beginning to have an effect on business decisions being made in the commercial real estate industry, too.

This week, Forest City Realty sent out proxy voting materials to its shareholders to approve its planned $11.4 billion merger with Brookfield Asset Management. Those materials spelled out all the reasons why Forest City Realty's board approved the merger. The top reason listed was this:

"Our board's knowledge of our business, operations, financial condition, earnings and prospects, as well as our board's knowledge of our operating environment, including current and prospective economic and market conditions at that time (including expectations regarding the impact of tariffs or other trade protection measures that could be implemented by the current administration)."

Forest City officials said they could not elaborate what the specific negative impacts were expected and had to let the language in the voting materials stand as written.

Source: CoStar Realty Information, Inc.


Amazon HQ2: Site-Selection Pros Predict Northern Virginia, DC, Atlanta

 

SEPTEMBER 10, 2018

By Rob Smith

Survey Finds Other Companies May Follow Amazon’s Lead and Make Cities Vie for Their Facilities

A new survey says Amazon will locate its second headquarters in Northern Virginia. Pictured is Amazon's Seattle campus.

A new survey says Amazon will locate its second headquarters in Northern Virginia. Pictured is Amazon's Seattle campus.

 

Most experts who advise companies on real estate strategies say online retailer Amazon will choose Northern Virginia, Washington, D.C., or Atlanta for the location of its second headquarters from among 20 finalist cities vying for the estimated $5 billion project. 

A survey by New York City-based Development Counsellors International, an economic development and marketing organization, found that 60 percent of respondents predicted Northern Virginia would be Amazon's top choice, though it added that "current wisdom is that the online retail giant will make a further cut to four to six finalists cities" before choosing a winner. Washington, D.C., was No. 2, with 53 percent, followed by Atlanta at No. 3, with 51 percent. 

The rest of the candidates received less than 50 percent of the responses. Boston and Toronto tied for No. 4, Dallas was No. 5, and Montgomery County, Maryland, Newark, Chicago and Austin, Texas, rounded out the top 10.

Amazon, the world’s largest online retailer, has said its second headquarters will employ 50,000 people within about 10 years and produce $5 billion in capital spending. The company started out with bids from 238 cities and it narrowed the list to 20 finalists, and its announcement of the final city could come anytime before Jan. 1.

The study found that 47 percent of site-selection consultants across the country predicted that other companies would like Amazon's approach so much they would copy the strategy and ask regions to submit bids for any key relocations or new facilities.

If Amazon chooses Northern Virginia, its offices would be located at Data Center Alley, near Dulles National Airport. According to CoStar data, new transportation systems are already in the works, and Google recently purchased 91 acres in the area, where it plans to build a data center. The area is dominated by technology and data center companies, CoStar said.

The survey said the benefits of Northern Virginia included proximity to the federal government, the airport and a highly trained technology workforce. The negatives include a lack of infrastructure, traffic congestion and "lack of an urban core."

Jim Beatty, president of NCS International -- which provides site selection and real estate services to corporations, but has not worked with Amazon -- agreed with the findings, except that Toronto wasn’t on his list.

"I don’t see Amazon going to Canada," he said, adding that the company would most likely stick within the United States.

Here are the results:

1) Northern Virginia, 60 percent.

2) Washington, D.C., 53 percent.

3) Atlanta, 51 percent.

4) Boston, Toronto, tied at 40 percent.

5) Dallas, 32 percent.

6) Montgomery County, Maryland, 28 percent.

7) Newark, New Jersey, 26 percent.

8) Chicago, 23 percent.

9) Austin, Texas, and Raleigh, North Carolina, tied at 21 percent.

10) New York City, 15 percent.

11) Denver, 13 percent.

12) Nashville, Tennessee, 13 percent.

13) Indianapolis, 9 percent.

14) Philadelphia, 9 percent.

15) Columbus, Ohio, 8 percent.

16) Pittsburgh, 8 percent.

17) Miami, 6 percent

18) Los Angeles, 4 percent.

Source: CoStar Realty Information, Inc.


Why Brookfield Embraces Airbnb: It Wants $1 of Every $4 in Rent Tenants Earn

 

SEPTEMBER 06, 2018

By Gary Marr

World's Largest Real Estate Investor Bets Tenant Sublets Can Be Profitable

The Olmsted apartments in Nashville, Tennessee, purchased by Newgard Development Group last month and rebranded as an Airbnb rental building.

The Olmsted apartments in Nashville, Tennessee, purchased by Newgard Development Group last month and rebranded as an Airbnb rental building.

 

Some landlords across the U.S. and Canada may discourage tenants from subletting on Airbnb. But not Toronto-based Brookfield Asset Management, which figures it can reap as much as an extra 3 percentage points in return, taking a share of the extra cash tenants earn.

Jonathan Moore, managing director of Brookfield's real estate group with responsibility for multifamily investments, told the Canadian Apartment Investment Conference this week his company will encourage the activity in two apartment buildings in Nashville, Tennessee, and Kissimmee, Florida.

It may seem incongruous that Brookfield, the world's largest real estate investment company with assets of $196 billion in U.S. dollars, is trying to take a share of some extra cash from apartment dwellers. But as a multinational corporation, those fees can add up. 

"It's a bit of what some of my colleagues call a science experiment," said Moore about the partnership agreement that has seen Brookfield invest US$200 million in a joint venture with Niido, the multifamily development venture of Airbnb. "Not only will we not forbid it like most landlords out there, we are going to encourage it. We are actually going to attract that consumer by way of programming, technology and something called a master host."

The Niido investment is targeting millennials, and Brookfield's research shows on average millennials are only in their apartments 22 of 30 days a month. "Jobs take them somewhere," says Moore. "They are never in their apartments 30 days a month."

The incentive for renters is that if they sublet out their house for just five of those empty days a month and get the average daily rate of a hotel, they can cut their rent in half. The landlord receives the other 25 percent, and Airbnb receives a fee on top of it all.

Moore said it's hard to buy multifamily real estate with a projected rate of return of more than 4 percent and "everybody is looking for extra yield," which sharing profits with tenants delivers. "Our 25 percent scrape of that home-sharing income, if you do the math, creates an increase in the levered internal rate of return" of 2 percentage points to 3 percentage points, he said.

The move by Brookfield to invest in Niido comes as the company reconsiders investments in the multifamily sector, which it started buying in 2010, creating a portfolio of about US$11 billion mostly in the United States.

"Out of the financial crisis in the U.S. people needed to rent apartments," said Moore, noting U.S. rental growth has been climbing at 4 percent to 6 percent annually while wages have only climbed 2 percent to 3 percent since the company started buying multifamily units.

"A lot of institutional money has been chasing the sector," said Moore.

With returns at historical lows, Brookfield decided it was no longer a buyer of multifamily property in 2016 and started selling. Moore conceded he probably called the peak of the sector too soon, but Brookfield nevertheless has sold US$4.5 billion in assets.

"It just feels like the end is coming," he said to the audience filled with apartment investors. "It's just not sustainable, something will break, but we don’t know what will break it."

The issue for Brookfield was what to do with the US$4.5 billion. One of the benefactors of the recycling of capital was Miami-based Niido, a subsidary of Newgard Development Group that Moore called a "small startup" with about 15 people.

The first two assets are owned by Newgard and were both rebranded Niido Powered by Airbnb. The 324-unit Florida apartment building, previously called Domain, was bought six months ago. The purchase of the 328-unit Nashville location, originally developed as Olmsted apartments, closed last month. The two cities were chosen because Airbnb users heavily desire them as tourist destinations.

"These two locations were off the charts," said Moore on the demand for Airbnb product because of a lack of supply.

The downside risk for Brookfield is limited at both locations with rents locked down by tenants, who bear the burden if they are not successful at attracting Airbnb customers.

Moore ultimately said even if the "science experiment" to encourage tenants to sublet their units and give Brookfield a piece of the action, the company has a fallback plan.

"We'll just rip it up, kick Niido out, and I’ll have a great apartment building," said Moore, adding it's not something he expects to happen. "The sharing economy is here, and it's real."

Source: CoStar Realty Information, Inc.


Moody's Withdraws WeWork's Credit Ratings for Lack of Sufficient Information

 

AUGUST 30, 2018

By Mark Heschmeyer

$702 Million of Unsecured Notes No Longer Rated by Moody's

A WeWork site at 1372 Peachtree St. NE in Atlanta. Credit: Lincoln Property Co.

A WeWork site at 1372 Peachtree St. NE in Atlanta. Credit: Lincoln Property Co.

 

Moody's Investors Service withdrew its credit ratings on coworking space provider WeWork Companies Inc., citing inadequate data to analyze the company.

Withdrawn by Moody's were WeWork's B3 Corporate Family rating, its B3-PD Probability of Default rating and a Caa1 senior unsecured rating assigned this spring. At that time, Moody's rated the firm's outlook as stable. However, the ratings were not provided at the request of New York-based WeWork, which is controlled by affiliates of SoftBank Group Corp.

WeWork was instead working with Fitch Ratings Inc. in its issuance of $702 million in unsecured notes in April and May. Fitch gave the WeWork notes a BB long-term issuer default rating, which it maintains based on additional information WeWork provided to Fitch, according to WeWork.

WeWork said that during the issuance this year it paid for Fitch to rate WeWork but didn't hire Moody's. Even so, Moody's issued a rating on WeWork because of the high profile of the note issuance. Because WeWork didn't hire Moody's, the ratings company didn't have access to the data required to maintain a credit rating and withdrew it, WeWork said.

Moody's didn't immediately respond to a request for additional information.

Moody's said its B3 CFR rating reflected WeWork's limited operating history, lack of historical profits and Moody's expectation for no free cash flow over the next few years.

"WeWork has billions in cash and deep-pocketed private equity backing, but spending on its ambitious global growth plans mean it will likely be years before there are consolidated profits or free cash flow," Moody's stated at that time.

By achieving high occupancy of its high-density office space configurations quickly through the sale of flexible memberships to a wide variety of customers, including large enterprises, small to mid-sized business and sole proprietors, WeWork has been able typically to recoup up-front building-level investments within 12 to 18 months of opening.

Although WeWork has had high member growth and retention over the past few years, its operations are concentrated in only a few markets, such as New York City, where its office-space-as-a-service business model has proven successful.

Moody's said in the spring its B3 rating reflects concern WeWork may not achieve similarly rapid lease ups and high retention in new markets. Additional credit concerns include a lack of clear competitive differentiators from other existing and potential office-space-as-a-service providers.

The stable ratings outlook reflected Moody's anticipation that if WeWork achieved its financial plans, it would generate free cash flow by 2022.

Source: CoStar Realty Information, Inc.


Cosmetics Retailers Ramp Up Plans to Open Stores, Distribution Hubs as Amazon Sparks Battle for Beauty

 

AUGUST 22, 2018

By Rob Smith

 

Specialty Retailers Ulta, Sephora, Bluemercury Expand to Challenge Online Retailer

Ulta Beauty plans to open 100 stores this year.

Ulta Beauty plans to open 100 stores this year.

 

Three specialty cosmetics retailers have ambitious brick-and-mortar expansion plans for two reasons: Many consumers want to try on makeup before they buy, and e-commerce revenue, while growing, still constitutes a fraction of overall sales.

Ulta Beauty Inc., Sephora USA and Bluemercury are all in the market for enormous amounts of physical space as they fend off increasingly aggressive competitors for a share of a global cosmetics market to be worth $805 billion by 2023, according to Orbis Research.

Ulta plans to open 100 stores by the end of the year after opening 100 last year. Rival Bluemercury, which was purchased by Macy’s in 2015, plans 25 freestanding outlets this year and another 30 within Macy’s department stores. 

Sephora this summer broke ground in July on a 714,000-square-foot e-commerce and fulfillment center in North Las Vegas. It added three new brick-and-mortar stores in May and will open another this fall, and is adding stores inside JC Penney’s locations.

The companies are competing with mass-market retailers such as Amazon, Walmart and Target, companies that are grabbing a larger share of the growing cosmetics market. Amazon’s total beauty product sales increased 30 percent to $900 million between the first quarter of 2017 and 2018, according to One Click Retail.

Though consumers are increasingly buying beauty products online -- e-commerce sales increased by $1.6 billion in 2017 over the previous year, while brick-and-mortar sales decreased by $168 million, according to Statista -- e-commerce still accounts for a small percentage of revenue for retailers. Online sales at Ulta Beauty in its fiscal 2018 first quarter rose 48 percent. That still constituted just 10 percent of total sales, which is typical for the retail industry.

Ulta and Sephora are targeting younger consumers in particular, said Hillary Steinberg, an adviser with real estate services firm MDL Group in Las Vegas who specializes in retail office and leasing. Her three daughters typically research products online and "then go into a Sephora or Ulta to buy them," she said, adding that the in-store experience must be experiental and entertaining.

Sephora in particular has been lauded for its in-store technology, offering facial scanning for color matching, sensory technology for fragrance testing and in-store and in-app augmented reality, according to a report by research firm CB Insights.

"The beauty category is recession-proof," Steinberg said. "People will always want to look good."

Ulta Beauty, based in Bolingbrook, Illinois, plans $375 million in capital expenditures this year and just began operating its new, 670,000-square-foot distribution center in Fresno, California, at full capacity to serve West Coast customers. 

That will help the company "achieve our goal of delivering orders in three days or less for more than 95 percent of our e-commerce sales by year-end," Chief Executive Mary Dillon said in a May conference call.

Ulta Beauty, which reports its second-quarter earnings Aug. 30, opened 34 brick-and-mortar stores in its fiscal first quarter for a total of 1,007 outlets. Sephora, which is based in Paris and maintains its U.S. headquarters in San Francisco, operates 430 freestanding stores in the U.S. and another 590 inside JC Penney stores in a smaller footprint.

Ironically, Sephora’s fulfillment center under construction in Las Vegas is adjacent to one under construction by Amazon.

"This is a real fight," Steinberg said. "The demographic is strong, and the products have good markup and profit."

Source: CoStar Realty Information, Inc.


Smaller Beach Cities From Coast to Coast Ride a Development Surge

 

AUGUST 20, 2018

By Linda Moss, Paul Owers and Jacquelyn Ryan

 

Vacation Towns Awash in Spillover Tourists From Major Resorts Now Reel in Investors

The 12-room luxury hotel known as Vespera on Ocean (pictured) in Central California’s Pismo Beach is one of a number of beach resorts being built in smaller coastal communities across the U.S. as visitors seek more affordable getaways.  Image courtesy of Nexus Development.

The 12-room luxury hotel known as Vespera on Ocean (pictured) in Central California’s Pismo Beach is one of a number of beach resorts being built in smaller coastal communities across the U.S. as visitors seek more affordable getaways. Image courtesy of Nexus Development.

 

It has been ages since hotels have been built in Pismo Beach on California’s Central Coast. The sleepy beach town about an hour north of Santa Barbara looks like a nostalgic postcard, with coastal roads lined with aging mom-and-pop shops as surfboard-toting families stroll the breezy promenade. It's also ground zero in a little-noticed nationwide development boom.

In the past year, a new luxury hotel opened and another broke ground as existing hotels undergo renovations into high-end boutiques. Hotel occupancy is climbing and hoteliers are raising rates as more visitors pour in from inland as well as the northern and southern coasts. 

"When I saw how well that market did, my jaw dropped," said Cara Leonard, senior vice president of real estate brokerage CBRE Group Inc.’s hotels division in Los Angeles.

That’s also the case with once less-popular beach markets from the West Coast to Fort Lauderdale in Florida and Asbury Park in New Jersey. As prime beach resort markets like Santa Monica and Miami hit peak pricing in a surging economy, spillover markets are booming with unprecedented numbers of visitors looking for more affordable getaways. It’s leading to renewed investment and development in these cities. 

Top hotels in prime beach cities have soaring prices, topping $700 a night in some cases, as they record historically high occupancies. 

"For the average person, you can’t afford to stay in Santa Monica or Laguna Beach" in California, Leonard said. "They are looking for other beach-front locations where you don’t have to spend $1,400 to have a weekend on the beach."

The beachside hotel rooms in Los Angeles, for example, grew to 85.5 occupancy with average daily rate of $311 for the first six months of this year, the city reported. Meanwhile, a three-hour drive north on the coast, Pismo Beach hotels had an average daily rate of $169, a 5 percent increase over the previous year but still a significant discount to Los Angeles, according to city figures. 

The affordable rates aren’t the only attractive component of the quieter markets either. 

"There are a lot of guests that don’t want to deal with Miami and the traffic there," said John Wijtenburg, vice president of Colliers International’s hotel group.

The growing demand has hoteliers looking to build in the areas they once overlooked. There’s notable resort development all along the U.S. West and East Coasts as demand grows. A Four Seasons hotel is under construction in Fort Lauderdale while a Marriott Autograph Collection hotel is underway in Pismo Beach. 

Brian Cheripka, senior vice president of real estate investor iStar, which is developing a boutique hotel and condo complex in Asbury Park, said "we’ve seen a resurgence of people coming to the beach ...people coming back to this community, but we really saw a lack of places to stay."

Of course, this growth phenomenon is driven by a strong economy, so there’s no guarantee the boom will last. In the last recession, small towns relying on discretionary income like tourism took a disproportionately large economic hit because they lack business diversity. Even so, tourism officials hope the added development will lessen that blow by letting the towns bounce back from the eventual economic downturn.

A Renaissance Market 

While Pismo Beach in San Luis Obispo County hasn’t seen the kind of improvements and development popular beaches in Northern and Southern California have experienced in this latest upswing of economic growth. that’s starting to change. 

Sandy Wirick, director of sales for Martin Resorts that owns a number of hotels in Pismo Beach and across the Central Coast, said her company saw a strengthening hospitality market and decided to reinvest in some of its older Pismo Beach properties that had been previously flagged by national hotel chain Best Western. 

She said because of the demand, her company could increase its daily rates and reinvest in two of its hotels - the Inn at the Cove and the Shore Cliff Hotel - to turn them into boutique high-end properties. 

"The area has been seeing a renaissance as far as the quality of lodging," she said. 

Outside investors are building new hotels on the coastline of Pismo Beach for the first time in years. 

Last year, developer Somera Capital Management and hotel management Pacifica Hotels opened $40 million luxury hotel called Inn at the Pier where a former parking lot once stood. The hotel added 104 rooms to the market and opened the area’s first top-tier luxury brand. 

Now, developer Nexus Development Corp., is underway on the construction of the second new hotel in Pismo Beach in years. Known as the Vespera on Ocean, the project will add 128 rooms and a pool on the coast. The hotel is part of Marriott International’s Autograph Collection, which bring independently owned hotels under the Marriott umbrella. 

Cory Adler, president of Nexus, said the acre and a half of land on the ocean was too compelling to turn down. 

"It’s hard to find an opportunity," he said. "Pismo is truly one of the last California beach towns. The downtown is a cool sleepy California beach town and it could still use some improvements to come in. But the market has been good."

Pismo officials are encouraging the tourism. The city has a million dollar ad campaign budget and is modernizing much of the downtown. It just completed an $8.5 million renovation of the pier as well as updates to its public promenades and public parking. 

In all, the hotel market’s revenue per available room, a key hotel indicator that is a multiple of a hotel's average daily room rate and its occupancy rate, is up 6.6 percent to $114.43 for the first six months of this year over last year, according to city figures.

"We are on a pretty good start here," said Gordon Jackson, executive director of Pismo Beach’s Convention and Visitors Bureau. "We are looking again to do even better next year."

The city’s transit occupancy tax, which is 10 percent charge to a visitor at a hotel, garnered more than $10 million from July of last year to June of this year, Jackson said. 

While that’s been a boon for the city, for visitors it’s still a steal compared to larger markets. 

"In L.A. that (transit occupancy tax) fee is 17 percent, not to mention the resort fee and $40 a night to park," he said. "When you get up here, they have free parking and the resort fee is nominal. And you might get a free bike rental too."

There was a short time you could get cheap rooms in luxury beachside hotels in major cities during the downturn but now they are holding their rates, according to Leonard. "They cannot lower their rate or it goes completely upside down for them," she said, noting that luxury hotels pay hefty staff salaries to accommodate visitors. "Having that person on-site is going to cost me more than that $160 a night. They are better off not renting it at a higher price than they are renting it at a lower price."

She said even when Los Angeles’ beachside hotels were suffering during the recent economic downturn, they weren’t lowering rates to rock-bottom prices. In cities like Las Vegas, hoteliers expect to offset the loss on a low nightly rate with money visitors spend in the attached casinos. There’s not an equivalent money-maker for beach resorts.

Building Boom

In South Florida, plenty of visitors want to steer clear of Miami, and that’s creating a steady demand for smaller area markets such as Fort Lauderdale and Hollywood in neighboring Broward County, said Wijtenburg.

"These markets have shown that they can create their own demand," Wijtenburg said. "They’re not relying on the primary market to fill rooms as they were in the previous cycle." 

Figures from the Greater Fort Lauderdale Convention & Visitors Bureau show hotel occupancy in June was 75.9 percent, the highest in any June since 2010. Revenue per available room was $92.13, the highest of any June in the past three years, the tourism agency said.

"I should knock wood before I say this, but it’s been a great first half of the year," said Stacy Ritter, the group's president. 

Upscale resort properties such as the Conrad Fort Lauderdale Beach and the Ritz-Carlton Fort Lauderdale are consistently busy, according to Ritter. 

The Four Seasons started construction earlier this year on a hotel and condominium at 505 N. Fort Lauderdale Beach Blvd. 

"We’ve seen a lot of developers that have never built in Fort Lauderdale move north (from Miami)," Ritter added. "The real estate is less expensive."

In Hollywood - south of Fort Lauderdale - the 349-room Margaritaville Hollywood Beach Resort opened in 2015. The property, with a theme based on singer Jimmy Buffett, has restaurants, bars, shops and a spa. 

Denver-based KSL Capital Partners bought the resort for $190 million, or more than $544,000 a room, from Starwood Capital Group and The Lojeta Group in April, according to CoStar data. At the time, Hollywood Mayor Josh Levy told CoStar News the project succeeded in improving the beach and bringing in out-of-town visitors to the city.

Colliers’ Wijtenburg said Margaritaville and other properties offering a lifestyle are doing well. 

"Guests want something that they can’t experience at home," he said. 

Northeast Demand 

The same is true for markets even further north. 

While gambling mecca Atlantic City has grabbed the headlines in terms of hotel openings at the Jersey Shore this summer, smaller and less flashy venues on the state’s beachfront have new hospitality development as well. Real estate firms are bringing the kind of hotels - in terms of design, restaurants, and amenities - that can be found in hip city neighborhoods to the Garden State’s beaches, which now have an abundance of older, family-oriented hospitality resorts, tiki bars included. 

Asbury Park, enjoying an economic revival that’s capitalizing on the seaside city’s history as a music and arts mecca, next year will welcome the Asbury Ocean Club, Surfside Resort and Residences, right off the boardwalk. Real estate investor iStar is the developer finishing up construction on the 17-story, 500,000-square-foot tower that will include a 54-room boutique hotel, 22,000-square-feet of ground-floor retail and 130 luxury condominiums.

The New York City-based developer purchased 35 acres in the city and is spending more than $300 million on projects, with a significant amount of that capital going toward the Asbury Ocean Club, said iStar's Cheripka. The company has another hotel in the city, a former Salvation Army building that it renovated and opened in 2016 as the 110-room The Asbury.

Asbury Park -- home to the Stone Pony, a venue that New Jersey native Bruce Springsteen made famous and still plays -- is now attracting not only local day-trippers but tourists from around the country and the world, according to Cheripka.

The Ocean Club’s Hotel, with its urban-boutique vibe, will be operated by David Bowd - whose resume includes overseeing the management of Chateau Marmont in Hollywood and the Mercer in New York. Dowd is also a partner in and operator of The Asbury.

In Long Branch, NJ, Kushner Cos., the real estate firm founded by the family of Jared Kushner, President Donald Trump’s adviser and son-in-law, is adding a hotel to its Pier Village mixed-use development. The firm describes the Pier Village Hotel as a property "that will satisfy the area’s shortage of luxury lodging options."

Farther south "down the shore," as New Jersey natives say, in Stone Harbor, the Reeds at Shelter Haven, a 37-room luxury boutique hotel, is expanding to accommodate more year-round business. It is constructing a building, Spa Side, that will house 22 more guest rooms and a two-story luxury spa, Salt Spa. 

Owned by Refined Hospitality, Reeds’s new hotel accommodations are slated to open this fall or winter, with the spa set to debut in winter 2019. The expansion comes in response to feedback from guests over the past five years and aims to encourage guests to come outside of the summertime, according to Managing Director Ron Gorodesky.

"The demand for accommodations at The Reeds has made it necessary to expand our footprint," he said in a statement. "Specifically, our meetings and wedding business is booming and we wanted to be able to accommodate more of these guests under our own roof while providing them with luxury spa and fitness services. We are committed to providing more year-around amenities for our guests and local residents to enjoy."

On Long Beach Island, Exit 63 of the Garden State Parkway, Chris Vernon is in the process of building a 105-room hotel at the former site of The Stateroom, a location at the island’s entrance at the foot of the Route 72 ramp in Ship Bottom, NJ. Hotel LBI, scheduled to open in 2020, will have views of the island’s bay and the ocean from its rooftop deck.

Hotel LBI and the Reeds at Shelter Haven - one with its large banquet facilities and the other with a fancy spa -- appear to be addressing the issue that hospitality facilities at the Jersey Shore have always faced, namely attracting business in the off-season. That challenge has kept some of the national chains, like Marriott, away, said Marilou Halvorsen, president of the New Jersey Restaurant & Hospitality Association. 

"The problem has always been that it’s so seasonal - It’s hard to get year-round business," she said. "And if you’re not open year-round, you can’t hire year-round employment so it becomes challenging ... So you either have to have a real small hotel or you kind of have to be a destination."

Many of New Jersey's shore towns are packed with houses that visitors rent from their owners during the summer, rather than go to a hotel. And like the rest of the Garden State, there is little vacant land left for hoteliers to build on at the coast. 

"A lot of it (the shorefront) is already existing properties, especially in our area, where you have so much residential," said Lori Pepenella, chief executive of the Southern Ocean County Chamber of Commerce, which includes Long Beach Island. "Even when hotels went up for sale in the past, they were turned into condominiums, and that has been the trend. And now we’re starting to see reinvestment in hotels. The Drifting Sands (in Ship Bottom) was just purchased last year. There’s been discussion that there’s other hotels that might be renovated or bought out, but those haven’t actually finalized."

Source: CoStar Realty Information, Inc.


Open Office Spaces Must Evolve to Compete in a WeWork World, Experts Say

 

AUGUST 16, 2018

By Lou Hirsh

 

Wall-Free Configurations Prompt Gripes Over Interruptions, Lack of Privacy

Projects like the new Ampersand, in San Diego’s Mission Valley, seek to offer office configurations and amenities to compete with providers such as WeWork. Credit: Casey Brown Co.

Projects like the new Ampersand, in San Diego’s Mission Valley, seek to offer office configurations and amenities to compete with providers such as WeWork. Credit: Casey Brown Co.

 

The long-hailed concept of “open” office plans is getting pushback amid complaints about a lack of privacy and unwanted workplace interruptions, prompting developers and designers to scramble to figure out how to provide the latest corporate perk: Alone time.

The concerns about too many workplace disruptions are circulating in corporate and academic circles as developers try to compete with a growing nationwide onslaught of non-traditional space providers such as WeWork that are serving tenants demanding flexibility well outside the hours of 9 to 5. 

For landlords trying to land tenants seeking top office space to lure the best job prospects, getting things right often means navigating differences in office cultures, many of which require more flexible, multiple-use space configurations among other elements. The answer can be as simple as providing a mix of open and private areas to fit multiple situations during the workday, according to experts at a recent San Diego forum presented by the local chapter of the Washington, D.C.-based Urban Land Institute.

Tiffany English, principal in the San Diego office of design firm Ware Malcomb, said offices are increasingly taking on hybrid setups, providing areas where teams can come together and other spaces designed for an increasing need for alone time during the workday. The exact mix is determined by factors including work schedules and the types of tasks being done.

“Not every culture is a creative, open office culture,” English said. “We can’t apply that principle to every single budget.”

Some offices have a mix of different work responsibilities and personality types, which also factor into configuration planning. 

"Not all engineers are social people,” said Pamela Fleming, human resources director for Irvine-based Fuscoe Engineering, a construction engineering firm, noting that offices can have multiple people who don’t require or desire constant interaction with supervisors or co-workers.

"If you’re going to cram all your introverts and extroverts into a wide-open space, good luck with that,” said Anne Benge, chief executive of Cultura, a San Diego-based workspace consulting and design firm.

Jeffrey Barr, principal in the locally based Schmidt Design Group, said some office building operators are seeing resistance to the concept of open floor plans, which gained in popularity in the past decade, upending cubicle-centric planning in many industries.

Recent feedback and research indicate the open concept needs more tweaking. For instance, research by Harvard Business School professor Ethan Bernstein, published last month in the British scholarly journal Philosophical Transactions of the Royal Society, suggests open office spaces can have unintended negative effects on workers.

With co-author Stephen Turban, Bernstein found that workers will often put on headphones to drown out distractions, and will frequently feel pressure to look busy in front of supervisors and co-workers. Researchers concluded that efforts made to appear focused on work actually can reduce interaction with other workers -- the exact opposite of what open offices were intended to encourage.

Offices still need to evolve beyond being open, to address larger worker needs for better work-life balances, ULI panelists agreed. 

Longtime San Diego developer Casey Brown, founder of Casey Brown Co., said his company has recently been experimenting with a mix of onsite amenities and services at its local office properties, including hosting worker breakfasts in lobbies and providing other spaces where tenants provide their own communal meals.

These are in addition to the fitness centers, outdoor meeting spaces and recreational areas that have become necessary in order to compete for office tenants.

Brown’s projects include the nearly completed Ampersand, a creative office complex consisting of renovated buildings in Mission Valley that formerly housed operations of the San Diego Union-Tribune newspaper. Brown said his firm is in talks with multiple potential tenants, many of whom are still grappling with how to weigh the costs and benefits of moving into the newer creative spaces now being offered in several San Diego County locales.

Since many offices are now used well beyond the traditional eight-hour workday, developers face a more complex calculus as they attempt to present users with per-hour costs for utilities and other expenses, as well as the time and money they’re saving from food services and other on-site amenities. 

“It’s our job to quantify that,” Brown said, adding many tenants remain unsure of what they want in a new space.

In commercial real estate terms, getting the configuration and amenity mix right has implications for the bottom line. A 2017 global report by brokerage firm Cushman & Wakefield noted that office property owners increasingly are tending to matters of employee well-being when planning new projects and competitive renovations. This includes acoustics, air quality, and the variety of workspace setups within offices.

From an investment standpoint, a survey included in the Cushman report found nearly 40 percent of respondents who reported increased property values from instituting improvements related to well-being said that rise was at least 7 percent. Nearly a third of respondents -- 28 percent -- said they were able to charge premium rents for their spaces, and 46 percent said their spaces leased more quickly.

Some worker and tenant retention matters can’t be addressed through configurations or amenities. ULI panelist Benge said workplaces can take simple steps to boost office culture and morale, like making sure multiple people have a regular say in ordering office meals and snacks, and where those items come from.

A bigger challenge facing corporate leaders is how to reconcile the need for productivity with the priority of workers, especially millennials, to have more balance and control of their lives outside the office. This can be a matter of establishing supervised programs like paid time off, or work-from-home hours, but many employers are still struggling to implement such efforts, the experts agreed.

"When you start looking at that, it’s a really interesting, mind-bending thing to think that people want to be there because they love what they do, and it’s not about you chaining them in, saying you can't take time off because I’m not going to have enough productivity,” Benge said. “And I think that’s a massive, massive shift of engagement, in how people work.”

Source: CoStar Realty Information, Inc.


 

AUGUST 10, 2018

By Rob Smith

 

Amazon’s Mere Presence in its Second Headquarters City Could Lead to an Entire Tech Eco-System

180829_Amazon.jpg
 

To measure Amazon’s impact on whatever city it selects for its second headquarters location, don't think buildings. Think people.

The draw of so many tech-savvy workers to one area can be an irresistible lure to other corporations that depend on such talent. At least 31 Fortune 500 companies now have some presence in Amazon’s home city of Seattle, up from seven in 2010, when the company moved its headquarters downtown. 

In Seattle, Google is building a 600,000-square-foot, four-building campus across the street from Amazon’s headquarters. Facebook now has 1 million square feet of office space in Seattle, according to CoStar data, and Apple is gobbling up space in a downtown skyscraper nearly as fast as it comes on the market.

Expect a similar scenario to play out in HQ2, as companies will increasingly jockey for office space near Amazon. It’s all about luring top talent to areas the Brookings Institute calls "innovation districts," or tech-centric areas with anchor institutions that attract similar companies because of their proximity to top talent. Brookings cited Seattle’s South Lake Union neighborhood-- where Amazon maintains its headquarters -- as one of the country’s top such districts because of its mix of research institutions, technology companies and startups. 

That "ripple effect" could transform Amazon’s HQ2 city as much as anything the company does directly, said Jon Scholes, chief executive and president of the Downtown Seattle Association.

Besides Google, Facebook and Apple, companies such as Twitter, Airbnb, Oracle and Best Buy are just a handful of businesses that opened satellite offices in Seattle largely because of Amazon.

"Any city that wants to be competitive needs to embrace what Amazon did for Seattle. They created a blueprint for economic development in the 21st century," said Scholes, who added that the company will "absolutely strengthen the tech eco-system" in whatever city it chooses to locate its second headquarters.

Amazon, the world’s biggest retailer, has said it would choose a region from among 20 finalists this year for its second headquarters in a project it estimates will generate 50,000 jobs and $5 billion in capital spending. The company has said its second headquarters will be a full equal of its Seattle footprint. It occupies 13.6 million square feet of office and industrial space in 45 buildings in the Seattle area, according to a report by San Francisco-based BuildZoom.

While the second headquarters is likely to have an outsized effect on smaller cities such as Columbus or Raleigh, NC, the report said Amazon could still have a "disproportional effect" on real estate markets in larger cities -- think New York or Chicago-- if it concentrates its offices in a small area, as it did in Seattle. The company both leases and owns its office buildings -- it occupies 20 percent of all office space in its South Lake Union neighborhood, according to CoStar data -- but will initially have to lease in its new city, reducing vacancies and driving up rents, BuildZoom said.

That’s exactly what happened in Seattle. At an average of $52.45 per square foot, commercial rents in Amazon’s South Lake Union neighborhood are the highest in the Puget Sound region, according to CoStar data. The influx of so many workers can strain the transportation system and send rent and housing prices skyrocketing. Kiplinger says the cost of living in Seattle is 49 percent above the U.S. average, and Case Shiller says housing prices rose 13 percent the past year.

Amazon may also spark a fierce war for tech talent and aggressively come after other companies’ star workers, said Ami Sarnowski, chief innovation officer at technology services firm Global 10. She estimates that Amazon will poach anywhere from 3 percent to 7 percent of top talent in its HQ2 city.

That can quickly escalate as more and more tech companies move to town.

Amazon hired 504 employees from Microsoft between 2001 and 2016, according to data from the career site Paysa, while Apple today is in the midst of a campaign in Seattle to recruit employees from Amazon and other tech companies. When Oracle opened its Seattle technology center it hired two former Amazon executives to run it.

Seattle has become a top destination for out-of-state tech workers to move, according to professional networking site LinkedIn, and Amazon’s HQ2 city should expect a similar influx of tech talent. Like in Seattle, that’s likely to drive development of high-end multifamily buildings near the company’s campus. Amazon says 20 percent of its workers live in the same ZIP code as their offices. The company’s request for proposal emphasized the need for housing near the proposed sites, which could create new opportunities for multifamily developers and investors. 

While Amazon has been tight-lipped about the makeup of HQ2, it did say that the average wage of employees there would be more than $100,000 annually.

Suzanne Dale Estey, former CEO of the Economic Development Commission of Seattle & King County, urges Amazon’s HQ2 city to not underestimate a once-in-a-lifetime chance to plan for extreme growth.

"This is your opportunity to plan for a 10-, 20-, or 50-year horizon in infrastructure, affordability and civic fabric," Dale Estey said. "It will completely change that city forever."

Source: CoStar Realty Information, Inc.


Mall Operators Turning to Retail Incubators to Fill Empty Space

 

AUGUST 08, 2018

By Rob Smith

 

This is Not a Trend, Says One Leasing Expert. It’s a Sign of Things to Come.

180824_Cherry Hill Mall.jpg
 

Mall operators are taking a page from the playbook of their office counterparts and setting up retail incubators in some of the space left vacant by departed department and apparel store retailers.

Offering retail and technology startups a shared space to test their concepts before live shoppers, the new retail incubators also provide mall operators with an opportunity to find tenants with the potential for growth - and a diverse variety of new retailers giving shoppers a new reason to visit the mall.

This November, several small, startup retail and e-commerce companies plan to occupy 11,000 square feet of vacant space in a retail incubation space at New Jersey’s Cherry Hill Mall near anchor tenant Nordstrom. 

Earlier this year, a 15,000-square-foot innovation center known as Cowork at the Mall opened in a former Sports Authority store at Chicago’s Water Tower Place. 

And Simon Property Group, the nation’s largest mall operator, is in the early stages of developing a retail incubation program for a number of its properties.

Beyond just space, incubators offer fledgling new retailers access to experienced operators, coaching and networking opportunities to help them get their companies off the ground. 

That could help companies and landlords alike. 

Mall operators -- especially those in Class C properties where nearby demographics are changing - are struggling to find creative ways to increase their tenant mix and drive foot traffic, said Tom Fidler, Jr., principal and executive vice president at real estate brokerage MacKenzie Retail in Columbia, MD.

"This is not a [passing] trend," he said. "It’s a sign of things to come. If you’re a mall owner right now and you’ve got some unique, vacant spaces, you’ve just got to get creative."

Cherry Hill Mall owner Pennsylvania Real Estate Investment Trust teamed with Washington, DC-based incubator network 1776, which runs small business incubators in 10 cities across the Northeast, to develop the space at that mall. 

Notably, the new incubator space will be PREIT’s first venture into startup incubation, and 1776’s first location in a mall.

"The Cherry Hill Mall location allows us to be more creative with our incubator as retail evolves and the face of work shifts," said Jennifer Maher, chief executive of 1776, in a statement announcing the agreement with PREIT.

The incubator will include showroom space where members can demo their products before establishing pop-up shops in the mall, said Heather Crowell, PREIT’s senior vice president of strategy and communications.

"It’s critical to stay relevant and creatively use space with innovative concepts," Crowell said. "We would love to be part of the discovery of the next great retail product."

Retail incubators have popped up across the U.S. the past several years. Target, Walmart and Ikea all have internal incubation programs, and other companies have created standalone retail incubator space. 

Coworking, demo and event space provider BeSpoke has been operating an incubation center in Westfield San Francisco Centre for three years. It reports it attracted more than 100,000 visitors the first year, on its website. 

Macerich Co., the third-largest U.S. real estate investment trust operator, just announced a partnership with Industrious, a company that operates co-working locations in almost 50 cities, to open co-working spaces at several of its malls across the country. The first is slated to open in January 2019 at Scottsdale Fashion Square in Arizona.

Many mall operators, though, are scrambling for unique ways to fill space, Mackenzie Retail's Fidler, Jr. said. His company is increasingly on the lookout for startup retailers, and he often scours local farmers’ markets and social media sites in search of potential tenants for his clients.

"We’re looking for anything to backfill space," he said.

Editor's Note: This story has been updated since it was originally published to include mention of Macerich today announcing plans to add coworking to some of its malls.
 

Source: CoStar Realty Information, Inc.


Hotel Sales Surge in First Half, Powered by Large Deals Involving Private Equity Funds

 

JULY 20, 2018

By Randyl Drummer

 

Blackstone, Fortress Drive Hotel Sales to Outpace Office and Retail Demand

Blackstone Group paid $1.64 billion in April for a trio of resort properties, including the Grand Wailea on the south Maui island of Hawaii (pictured).

Blackstone Group paid $1.64 billion in April for a trio of resort properties, including the Grand Wailea on the south Maui island of Hawaii (pictured).

 

Large hotel deals pushed U.S. lodging and hospitality sales ahead of all other major property types in the first half of the year, with Blackstone Group and other private-equity buyers paying top dollar for luxury and resort properties.

Hospitality investment sales surged 25 percent in the second quarter and 30 percent for the first half of 2018 from a year earlier, according to the latest CoStar data. The $18.1 billion in total first-half hospitality transactions matches the $18.1 billion for the first half of 2016 but falls short of the almost $27 billion in that portion of 2015, the height of the hotel consolidation spree. 

"Hotel fundamentals are still really strong," said Jeff Myers, managing consultant and lodging specialist for CoStar Portfolio Strategy. "Many markets across the country have occupancies at or near record-high levels." Hotel demand surged as U.S. sales of offices slid 17 percent, retail fell 18 percent and mixed-use properties declined 29 percent in the first half from a year earlier, according to recent CoStar data.

High-value hotel deals of $100 million and above fell 25 percent from 2015 through 2017 and were a big reason overall hotel sales dollar amounts slowed, Myers said.

"Big-ticket hotel deals have closed with a little more regularity this year, contributing positively to volume," Myers added.

Portfolio sales, which typically drive hospitality investment, accounted for the largest deals in the first six months, topped by Blackstone Group's $1.64 billion purchase in April of a trio of resort properties from Singapore-based GIC Real Estate. The portfolio included the Grand Wailea on the south Maui island of Hawaii; the La Quinta Resort & Golf in La Quinta, CA; and the Arizona Biltmore Resort & Spa in Phoenix.

A Hong Kong investor bought a portfolio of seven properties in six states from Baring Real Estate Advisors for $650 million in a deal that closed at the end of January. The $1.2 billion bankruptcy sale of the 35-property John Q. Hammons Hotels & Resorts chain also accounted for a sizeable share of sales in the first half.

Real estate investment trusts had a slice of the action in the first six months. Host Hotels & Resorts bought the Grand Hyatt San Francisco; the Hyatt Regency Coconut Point in Bonita Springs, FL; and the Andaz Maui at Wailea on Maui from Hyatt Hotels Corp. for a combined $1 billion on March 29. 

Hospitality deals made up at least a quarter of spending from private equity sources such as Blackstone as of the first quarter, according to CoStar data.

Debt funds are emerging as a major source of financing purchases of U.S. hotels, which are traditionally financed by banks and securitized loans, according to Kevin Davis, managing director for Jones Lang LaSalle's New York hotels and hospitality team.

"Over the course of 2018, hospitality debt markets have been exceptionally strong, which is a trend we expect to continue," Davis said.

The largest single-property lodging sale of the year to date is for the Marriott Edition in Manhattan, a hotel on Times Square at 701 Seventh Avenue that hasn't opened yet. Maefield Development and Fortress Investment Group bought out its partners in the 39-story hotel-and-retail property scheduled to open this year, including The Witkoff Group, Ian Schrager, New Valley and Winthrop Realty Trust, for $1.53 billion.

Three markets logged more than $1 billion in sales in the first half, led by New York City at $2.1 billion, compared with just $367 million in the first half of 2017, according to CoStar data.

Sales increased 60 percent from a year earlier in Washington, D.C./Northern Virginia/Maryland to about $1.1 billion, and jumped to just more than $1 billion from $237.8 million in Phoenix.

FIRST-HALF OVERALL COMMERCIAL REAL ESTATE RESULTS: U.S. Property Sales Fall 8% in the First Half of 2018

Source: CoStar Realty Information, Inc.


Greystar Books Deal To Acquire Student Housing REIT EdR for $4.6 Billion

 

JUNE 25, 2018

By Mark Heschmeyer

 

Blackstone To Team with Greystar To Own a Portfolio of Off-Campus Student Housing

Pictured: EdR's GrandMarc at Westberry Place, a 244-unit student apartment built in 2007.

Pictured: EdR's GrandMarc at Westberry Place, a 244-unit student apartment built in 2007.

 

Education Realty Trust, one of the nation's largest developers, owners and managers of collegiate housing communities, agreed to be acquired an affiliate of Greystar Real Estate Partners, in an all-cash transaction valued at $4.6 billion, including debt to be assumed or refinanced.

Memphis-based EdR (NYSE: EDR) owns or manages 79 communities with more than 42,300 beds serving 50 universities in 25 states.

In conjunction with the deal, a joint venture between an affiliate of Blackstone Real Estate Income Trust Inc. and an affiliate of Greystar would acquire a portfolio of off-campus student housing communities located adjacent to top-tier university campuses.

Under the terms of the merger agreement, which was unanimously approved by EdR's board of directors, EdR's stockholders would receive $41.50 per share in cash.

"It’s no secret that as a company, EdR is a true leader in our space. We have been, are and will continue to be a strong company, with an unparalleled reputation in student housing. And honestly, that’s why we were approached with this offer," Randy Churchey, EdR's chief executive and chairman, said in a statement to be delivered to EdR employees Monday morning.

"I realize that many of you saw the Wall Street Journal article not too long ago speculating that something like this could happen, so it may not be a complete shock to you, but allow me to reassure you: this is a great move for EdR. It will allow us to be even more competitive in the student housing space, and potentially compete in deals around the world that we haven’t been able to before."

EdR said there is a 30-day process for other companies to make a competing offer. Once that period is up, and if no compelling offer is accepted, then EdR would move forward with Greystar.

"This deal was attractive to us for so many reasons, but of course a financial reason was a driving factor," Bill Brewer, chief financial officer, said in a statement. "As a public company we have a responsibility to our stockholders to ensure they get the maximum return. You’ve heard us say many times that our stock was trading at a significant discount, so it was a great value. As recently as late April, our stock was trading below $32 per share. In comparison, Greystar is paying $41.50 per share, which represents a nearly 30% premium for our stockholders."

The newly combined Greystar/EdR team would continue to manage the assets.

The transaction is currently slated to close in the second half of 2018. It is subject to customary closing conditions, including the approval of EdR's stockholders, who will vote on the transaction at a special meeting on a date to be announced.

JPMorgan Chase Bank, N.A. has provided a commitment letter to Greystar's newly formed fund for debt financing for the transaction upon the terms and conditions set forth in such letter.

As a result of Monday's announcement, EdR said it does not expect to issue a second quarter earnings release or host a conference call to discuss its financial results for the quarter ended June 30, 2018.

Greystar is the largest operator of apartments in the United States, managing over 435,000 units in over 150 markets globally, with an aggregate estimated value of approximately $80 billion.

Earlier this month, Greystar Real Estate Partners and the Public Sector Pension Investment Board, one of Canada’s largest pension investment managers, and global asset manager Allianz Real Estate, formed a joint venture to grow Chapter, London’s leading student accommodation brand.

The new partnership supports an expansion program targeting 10,000 student beds and doubling the size of the portfolio within five years.

Source: CoStar Realty Information, Inc.


White House Backs Privatizing Fannie, Freddie as Part of Sweeping Government Reorganization Proposals

 

JUNE 22, 2018

By Mark Heschmeyer

 

Major Changes Recommended for General Services Administration, Fannie Mae, Freddie Mac

Image credit: The White House

Image credit: The White House

 

In an unexpected move yesterday, the White House released a wide-ranging set of recommendations for reorganizing several federal agencies. The 132-page report covers government-wide reorganization proposals that could have major impacts on the real estate industry as the report stakes out the administration's positions calling for more private sector involvement in managing the government's real estate.

Among other things, the report calls for the federal government to do a better job of managing its real estate assets and adjusting its property portfolio. 

Among the many proposals included in the report are moving more federal agencies and jobs outside of the Washington, DC, area, establishing a new fund to pay for property improvements, giving federal agencies better incentives to sell unnecessary assets, and establishing smarter leasing practices.

However, the portion of the report garnering the most attention in real estate circles is its position in favor of privatizing housing finance government-sponsored enterprises Fannie Mae and Freddie Mac by ending the government's conservatorship and reducing their role in the housing market, while providing an explicit but limited federal backstop in the event of a market crash. 

While housing finance reform has many supporters, the privatization of Fannie and Freddie has its backers and opponents.

David H. Stevens, president and chief executive office of the Mortgage Bankers Association (MBA) issued the following statement regarding the proposal.

"MBA applauds the administration for releasing a proposal to reform Fannie Mae and Freddie Mac which closely tracks much of the work that has been done to date by policymakers on Capitol Hill. It includes many core principles that MBA has long advocated for, such as an explicit government guarantee on MBS only as a catastrophic backstop, allowing for multiple guarantors and ensuring small lender access."

Stevens also noted in the statement that, as with any proposal of this size, the devil is in the details, but said the MBA is eager to work with Congress and government officials "to finally tackle this long overdue issue." 

Scott Olson, executive director of the Community Home Lenders Association, released the following statement.

"CHLA applauds the administration for its call to end the conservatorship of Fannie Mae and Freddie Mac and to recapitalize and re-privatize them with an explicit government guarantee."

However, CHLA said it continues to have significant concerns about adding GSE guarantors beyond the restructured versions of Fannie Mae and Freddie Mac. Most privatization proposals up until now have called for allowing private firms to set up additional operations similar to the two GSEs. 

The CHLA is worried that would allow Wall Street investment banks to use their secondary market abilities to gain an advantage in the primary market and or could turn some of the CHLA’s mortgage banker members into mere loan correspondents.

Earlier this year, the Department of Housing and Urban Development released summaries from a collection of studies it has made on privatizing Fannie Mae and Freddie Mac. One study concludes that political consensus on privatization is essential, and that in its absence, legislation would better be directed to providing a framework through which privatization could be accomplished in the future.

Another study found that some types of loan interest rates could increase without the implicit federal backing of GSE securities, while still another found the GSEs current enjoy a lower cost on their issuance of securities because of state and local tax exemptions. Those costs could increase after privatization and be passed on to consumers.

Repealing the GSEs' federal charters would further lower homeownership levels by pushing up single-family mortgage costs, another of the reports found, while only slightly affect the availability of multifamily housing financing. 

Meanwhile, the social costs of privatization would fall disproportionately on African Americans, lower income households, and those living in central cities. The researchers conclude that, as GSEs, Fannie Mae and Freddie Mac are well-structured and efficient providers of targeted social benefits.

Seeks to Give Agencies More Flexibility 

As for the numerous other real estate-related changes included in the report, the White House said it wants to allow federal agencies to sell their own unneeded property directly to buyers without first offering to other government agencies, as currently required, and allow the agencies to retain net proceeds of property sales for use without further appropriation as a financial incentive to spur property sales.

The report claims that federal agencies currently incur substantial cost and effort to dispose of excess properties, with little to no financial upside for them, reducing their incentive to go through the property disposition process.

The White House is also proposing to create a new funding mechanism for large, civilian real property projects. The proposal would establish a mandatory revolving fund for the construction or renovation of federally owned civilian real property, thus allowing agencies to budget for improvements and acquiring major assets.

The lack of such a fund has hindered the General Services Administration in financing needed renovations at existing buildings and major new construction projects, such as the replacement of the Federal Bureau of Investigation Headquarters facility in Washington, DC.

The White House also said it believes there are many lessons the government can draw from the private sector on how to apply information technology and management practices on operating its properties.

To address those issues, the White House report said the GSA would be undertaking two policy changes. First, it will move to execute longer, non-cancelable lease terms to secure lower rates. Second, it will undertake "more rigorous cost analysis" on where to house its agencies and on how much space they need.

Source: CoStar Realty Information, Inc.


What an AT&T/Time Warner Merger Could Mean for Commercial Real Estate

 

JUNE 13, 2018

By Costar News Staff

 

Stalled Deals May Regain Traction, Although Expected Downsizing Could Cause Pain for Building Owners

Image of Atlanta's AT&T Midtown Center, which AT&T already announced plans to depart. By: Jacquelyn Ryan and Tony Wilbert

Image of Atlanta's AT&T Midtown Center, which AT&T already announced plans to depart. By: Jacquelyn Ryan and Tony Wilbert

 

Building owners and investors across the country - especially those on the West Coast and Eastern Seaboard - are bracing to find out how AT&T’s acquisition of Time Warner will impact their real estate markets.

The $85 billion deal was given the greenlight by a federal judge yesterday and is now expected to close within weeks. The effect of such a massive merger is expected to be huge. Across markets, people are asking the same two questions: Will the combination result in consolidation of redundant space, or will it trigger new, bigger space requirements?

As with most corporate mergers of this size, the answer may lie somewhere in the middle. 

Now that AT&T's acquisition of Time Warner can go through it may clear out the logjam of real estate deals that had been on hold while the companies awaited for the court's decision. But it also may bring pain for the landlords and companies that could be causalities of rightsizing and streamlining by the companies as they join together. 

In Los Angles, the merger could make an AT&T-Time Warner conglomerate one of the largest private office tenants in the market with millions of square feet and thousands of employees across the county. 

Its LA real estate holdings would range from AT&T’s DirecTV, which occupies roughly half a million square feet in El Segundo, to Time Warner’s Warner Brothers studio, which owns its 62-acre lot in Burbank and occupies about half a million square feet in a nearby Douglas Emmett Inc. office building. 

"Today’s announcement is well-received within the real estate community," said Carl Muhlstein, international director at Jones Lang LaSalle Inc. in Los Angeles, and one of the most prolific brokers in the city's media and tech industries. "Uncertainty due to recent M&A and partnership activity prevented material (real estate) transactions." 

As an example, Muhlstein cited Time Warner’s premium channel HBO, which had been in negotiations last year to lease a 128,000 square feet in a Culver City building, but the deal ultimately fell through at the last minute because of uncertainty over the merger and the financial future of the parent company. Apple Inc. ended up swooping and taking that lease for its content creation division. 

With the merger back on, brokers expect HBO to be back in the market for office space after the deal closes. 

In Atlanta, AT&T’s acquisition of Time Warner could be huge. All told, CNN and Time Warner’s various Atlanta-based networks occupy 1.6 million square feet in the downtown and midtown areas alone. Each of the buildings is owner-occupied by Turner Broadcasting System (TBS).

Ted Turner founded TBS and CNN in Atlanta, and though Time Warner has relocated its weekday anchors to New York or Washington and moved much of CNN’s top talent and its chief executive position to New York, thousands of CNN employees are employed in Atlanta. Time Warner owns CNN Center, the company’s high-profile regional hub and studios in the heart of downtown Atlanta. TBS itself employees more than 5,000 in Atlanta.

Several Time Warner networks, originally part of the Turner Broadcasting System, are headquartered in Turner’s Techwood Campus at 10th Street and Techwood Drive in Midtown. Turner developed four buildings at Techwood to host the networks, each has its logo attached atop the buildings.

"I like the chances of keeping a good deal of Time Warner people that are not redundant in the bigger scheme of AT&T," said Jerry Banks, managing director of The Dilweg Cos. who owns an Atlanta building that TBS once anchored. At the same time, Banks acknowledged that "back office and support groups will be at risk here."

Indeed, the merger will inevitably create redundancy in real estate and employees that may lead to significant downsizing or reshuffling. 

Last year, AT&T announced it was moving its entertainment group and its few hundred managerial jobs from Atlanta to join its Los Angeles and Dallas offices.

AT&T already is in the process of retrenching and vacating several office towers in Atlanta. By 2020, AT&T will vacate its landmark AT&T Midtown Center and twin towers at Lindbergh, in addition to buildings at Lenox Park. As AT&T works to identify which positions to retain after the acquisition, any redundancy in staff likely will result in job cuts in metro Atlanta, where AT&T employs more than 17,000.

If AT&T decides to relocate the networks or reduce staff, it likely would result in big blocks of space hitting the market, according to brokers. Any moves could especially impact the Midtown office market where developers have started or about to start several new speculative office towers. When the developers planned those projects, they may not have considered AT&T's Techwood Campus buildings could soon be back on the market as multi-tenant rentals.

In Los Angeles, the merger could see some entities, particularly AT&T's entertainment-related groups, spread out across the city reduce, consolidate or move into owned properties. The AT&T entertainment group could further consolidate into any other of the content production entities under the new conglomerate’s umbrella. 

And that could have a serious impact across the county.

Consider E! Entertainment. Three years after Comcast acquired NBCUniversal, it moved its networks, including E! and Bravo, from their longtime locations in about 400,000 square feet on the Miracle Mile closer to its Universal Studios lot. Much of that space that it exited four years ago remains vacant today.

Moreover, with news of the future of AT&T’s acquisition, experts expect to see further consolidation on the media industry that will continue to force companies to further consider their real estate options. 

"Any consolidation resulting in fewer major studios could put into play both owned-office and real estate properties that would not otherwise be available for sale," reads a note written by Transwestern Executive Vice President Dave Rock and Research Manager Michael Soto in Los Angeles. "In addition, leased-office space, especially in the entertainment-oriented office submarkets of Century City, Beverly Hills, Santa Monica, Culver City, and Burbank, could see long-term office space consolidations that may or may not be backfilled by tech-related entertainment requirements."

The ruling surely figured prominently in today's decision by Comcast, parent company of NBCUniversal, to pull the trigger on an offer to buy a large chunk of 21st Century Fox for approximately $65 billion, setting off a potential bidding war with Walt Disney Co., which is also pursuing the company with a $52 billion all-stock offer.

Observers speculate other media companies, such as CBS, which owns studio lots across Los Angeles, and Viacom, which leases hundreds of thousands of square feet in the city, could be on their way as well. 

However, for the most part, investors are optimistic the latest round of corporate mergers is good for the future of the legacy companies. In fact, media takeover-targets have seen their shares shoot up today on speculation that more mergers could be on the horizon, according to Bloomberg. One such mentioned is Lions Gate Entertainment Corp., whose shares have seen the biggest single-day increase in the past five months today.

And legacy media firms aren't the only firms that may be put into play in these entertainment markets.

"Next up, all eyes on Hulu, Amazon and Netflix challenging traditional content creators and growing real estate needs," JLL's Muhlstein said. 

Source: CoStar Realty Information, Inc.


Will Seattle's 'Amazon Tax' Spark Copycat Proposals Aimed at Silicon Valley's Biggest Firms?

 

JUNE 08, 2018

By Randyl Drummer

 

Employee Tax Targeting Top Employers Finds Favor in California Tech Markets Struggling with High Housing Costs, Traffic Congestion

180621_Google.jpg
 

Inspired by Seattle's controversial effort to levy a 'head tax' on its largest employers, the Silicon Valley cities of Cupertino, home to Apple's new spacehip complex, and Mountain View, the location of Alphabet's sprawling Googleplex, are sprinting to qualify similar tax measures on California's Nov. 6 local ballot. 

Meanwhile, officials in Sunnyvale and several other nearby cities, are contemplating their own employee tax measures.

The recent moves in California reveal how deeply the Seattle tax measure, which passed last month despite scathing criticism and threats to halt expansion from Amazon.com, has resonated with leaders in tech markets who are struggling to address mounting concerns over traffic congestion, skyrocketing housing costs and other unwelcome byproducts of the extended tech industry boom.

The Mountain View City Council voted unanimously Tuesday to move forward with plans to approve a progressive tax measure that would raise up to $10 million a year by imposing a tax on a half-dozen of the city's largest employers, led by Google, which has 24,000 employees and would be subject to a tax of up to $6.6 million a year. The council is scheduled to take a final vote on the measure June 26 to put the measure before voters in five months.

Neighboring Cupertino commissioned a poll of residents by Voxloca which found that 71 percent of likely city voters in November support progressively increasing the business tax on the city's largest companies. Companies with over 5,000 employees would pay the highest tax, and Cupertino only has one of those, Apple, which at 26,000 employees makes up two-thirds of the employment base. Apple opened its new $5 billion, 13,000-employee Apple Park headquarters last year, and thousands more work at Apple's storied 1 Infinite Loop address and surrounding buildings.

Apple would be levied a $7.4 million annual tax under a scenario outlined by city staff this week, while a sole proprietor with a one-room office would pay about $160. A small store or average-size restaurant occupying a 2,000 square feet of commercial space would be taxed about $220 a year, while a large grocer like Safeway would pay about $1,700.

No Apple representative spoke before the council, however, and Cupertino Chamber of Commerce board member Kevin McClelland said while the chamber supports transportation improvements and he doesn't have an objection in principle to a business tax, he recommended the city proceed carefully and take its time , shooting for the 2020 ballot.

"There seems to be a lot of rush, with a lack of information," McClelland said. "There are thoughtful ways this can be done."

Other council members, including Steven Scharf and former Mayor Barry Chang, said waiting until 2020 would mean missing out on two years of potential revenue to find local solutions to the region's traffic and housing issues.

"We have a major transportation problem," Chang said. "I'd like to see us get it done this year. It will be a disaster if we don't do anything."

The council agreed to consider the measure again at its June 19 meeting and must approve legislation by July 3 to quality for inclusion on the November ballot.

THE PROS AND CONS OF TAXING TECH

Like many large employers, Amazon has long used the power of facility site selection as a bargaining chip in tax issues with states and cities, and its anger over being singled out under the Seattle law has drawn headlines across the country. 

However, a handful of cities already have some form of business tax based on employee headcount, including Denver and Pittsburgh. At least so far, Apple, Google and other large companies have not issued statements critical of the efforts in Cupertino and Mountain View. 

Tax policy analysts differ on the net effectiveness of taxes targeting large employers. Some experts argue that they indirectly hurt smaller companies that congregate around giant companies, while other analysts maintain a head tax is a reasonable option for local governments struggling to raise revenue to address growth issues associated with the tech firm's rapid growth of the tech firms.

"Clearly these proposals target the tech sector, coming as they do in the hometowns of Alphabet, Apple, and Amazon," said Jared Walczak, senior policy analyst at the Tax Foundation. "But while these taxes may target the 'As,' their impact runs from A to Z."

The impact of a head tax extends far beyond the largest employers, Walczak contends, often hitting low-margin businesses like supermarkets and smaller companies such as suppliers and smaller tech companies wanting to be located near an Amazon or Apple. Those companies could take a big hit if major employers reduce their footprint. "If revenues are tight now, imagine what they could be if employment declines," Walczak said.

While Walczak acknowledges large employers like Amazon and Google can cause added traffic congestion and strain other services, "how a city raises additional revenue matters." 

"Whatever you tax, you get less of. Levying a new tax on quite literally employing people is the wrong strategy," he said.

A head tax may be a good option to raise needed revenue given limited local fundraising alternatives, countered Steven M. Rosenthal and Richard C. Auxier, senior fellow and research associate with the Tax Policy Center of the Urban Institute and Brookings Institution.

"We agree that Seattle could design its head tax a little better. But the root question, and one that other cities might watch closely, is: how are fiscally constrained cities supposed to find revenue as their populations and services grow?" Auxier and Rosenthal said in a recent commentary. 

They further noted that other U.S. cities, such as Pittsburgh and Denver, have smaller employee tax programs that raise more modest sums from employers.

Pittsburgh’s tax is $52 a year on employees engaging in an occupation within the city while Denver imposes a $117 annual tax on employees who perform services in the city, with revenues used to fund police, fire, emergency medical and other services. 

"The cities believe the costs of these types of services are related to employment levels," Rosenthal and Auxier said.

Source: CoStar Realty Information, Inc.


What Keeps These Retail Property Executives Awake at Night?

 

MAY 22, 2018

By Randyl Drummer

 

"The thing I worry about more than interest rates is tenants’ unwillingness to understand that they're ad merchants" -- Daniel Hurwitz, president and CEO of Raider Hill Advisors.

From left: Hessam Nadji, president and CEO, Marcus & Millichap; Daniel Hurwitz, president and CEO, Raider Hill Advisors; Mike LaFerle, vice president of real estate/construction, The Home Depot; Eric Termansen, president, Western Retail Advisors; Scott Holmes, senior vice president and national director, retail, Marcus & Millichap. Courtesy: Randyl Drummer for CoStar Group Inc.

From left: Hessam Nadji, president and CEO, Marcus & Millichap; Daniel Hurwitz, president and CEO, Raider Hill Advisors; Mike LaFerle, vice president of real estate/construction, The Home Depot; Eric Termansen, president, Western Retail Advisors; Scott Holmes, senior vice president and national director, retail, Marcus & Millichap. Courtesy: Randyl Drummer for CoStar Group Inc.

 

Even the trendiest shopping center technology, 'experiential retail' and traffic-driving food and beverage uses can't always save certain retailers from becoming irrelevant to consumers, or protect landlords from poor management or changing neighborhood demographics.

Retail real estate brokers, owners, developers and advisors at Marcus & Millichap's annual Retail Trends event at the Renaissance Las Vegas Hotel at ICSC on Monday night discussed the effect of e-commerce and other changes in shopping habits that have forced high-profile retailers into bankruptcy and prompted some owners to add food, entertainment or non-retail uses such as urgent-care clinics, hotels, office buildings and multifamily to their shopping centers.

Marcus & Millichap CEO Hessam Nadji said many clients are looking for opportunities to reposition "tired" assets, often with high vacancies and located outside the best trade areas within a market. 

"They stop because they don’t know what to do with the asset," said Nadji. "With so many examples of centers repositioned with health care, urgent care, café and entertainment, how should someone in the audience look at that real estate?"

Daniel Hurwitz, the outspoken president and CEO of Raider Hill Advisors and former longtime chief executive for DDR Corp. and recent interim CEO for Brixmor Property Group, said not all ailing centers need repositioning.

"There's a big difference between value-add and distress," Hurwitz said, adding that the asset may be under-managed, under-capitalized or poorly leased by a prior owner. "There could be real opportunities if a new owner can dig in and do your due diligence."

On the other hand, smart retailers won't go near a distressed and structurally weak center with a poor mix of tenants, access issues or declining neighborhood demographics.

"Distressed assets don’t need leasing, they need a bulldozer, and that’s an opportunity, too," Hurwitz said. "You can put for-lease signs up all you want, but a lot of those assets will never be leased for retail again."

Even grocery stores, long considered reliable shopping center anchors, have struggled with competition, price deflation and other factors that will eventually cause chains to fail, noted Eric Termansen, president of Western Retail Advisors, which has advised Whole Foods Stores, Inc. and other chains.

"Aldi is really hungry and they’re aggressively growing throughout the west," Termansen said. "I don’t think they have any intention of letting up or of becoming the next Fresh and Easy."

Newer chains like Lidl and Aldi will continue to push for more locations and lower pricing that cause additional fallout for weaker traditional grocers, he added.

Scott Holmes, a senior vice president and national director for retail at Marcus & Millichap who served as panel moderator, then asked the panelists a key question, "What keeps you up at night?"

"The thing I worry about more than interest rates is tenants’ unwillingness to understand that they're ad merchants," Hurwitz said. "Experience is important, but content is more important. People come to our shopping centers not because we own it, but because we lease to the right tenants that are merchant-driven and understand how to address their consumer."

"It's easy to blame Amazon for everything, but there's been an internal examination by a lot of retailers, particularly in the department store business, where they really became lousy merchants. They lost their place in the imagination of the consumer."

Mike LaFerle, vice president of real estate/construction for The Home Depot, said his biggest challenges revolve around getting products from distribution centers to consumers.

The Home Depot's online platform now accounts for 6.5 percent of total sales, or $6.5 billion, with $1 billion annual growth over each of the last four years, with 24 percent in the last quarter alone. 

"We’re going to spend $1.5 billion doubling our distribution footprint from roughly 55 million square feet today to 110 million square feet over next five years," LaFerle said. "That’s going to be a challenge, but with our current footprint, we’ll be within 10 miles of 90 percent of the U.S. population, and we think that gives us advantage over other players."   

Source: CoStar Realty Information, Inc.


For First Time in 3 Years, Banks Ease Lending Standards for Commercial Real Estate Loans

 

MAY 16, 2018

By Mark Heschmeyer

 

The One Exception: Banks Continue to Tighten Grip on Multifamily Loans

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For the first time in nearly three years, U.S. banks are reporting that they have loosened their lending spigots for some types of commercial real estate loans during the first quarter of this year.

The Federal Reserve’s quarterly survey of senior loan officers released this week found that banks are easing standards and terms on commercial and industrial loans to large and middle-market firms, while leaving loan standards unchanged for small firms. Meanwhile, banks eased standards on nonfarm nonresidential loans and tightened standards on multifamily loans. Lending standards on construction and land development loans were left unchanged. 

The April 2018 Senior Loan Officer Opinion Survey on Bank Lending Practices also included a special set of questions intended to give policy makers more insight on changes in bank lending policies and demand for commercial real estate loans over the past year. In their responses, banks reported that they eased lending terms, including maximum loan size and the spread of loan rates over their cost of funds. 

Almost all banks that reported they had eased their credit policies cited more aggressive competition from other banks or nonbank lenders as the reason. A significant percentage of banks in the survey also mentioned increased tolerance for risk and more favorable or less uncertain outlooks for property prices, for vacancy rates or other fundamentals, and for capitalization rates on properties for easing these credit policies over the past year.

A modest number of domestic banks indicated weaker demand for loans across the three main commercial real estate categories, citing a reduced number of property acquisitions or new developments, rising interest rates, and shifts of customer borrowing to other bank or nonbank sources.

Reports of reduced loan demand coincided with the latest CBRE Lending Momentum Index, which tracks the pace of U.S. commercial loan closings. The index fell by 8.8% between December 2017 and March 2018.

"Despite an increase in financial market volatility, real estate capital markets remain in good shape and the supply/demand balance for commercial mortgage lending is favorable to borrowers," said Brian Stoffers, CBRE's global president for capital market debt and structured finance, said in a statement accompanying the index. 

"An unanticipated uptick in wage inflation may prompt the Fed to enact additional rate hikes, while the recent 3% breach of the 10-year Treasury could signal a sign of inflation that would result in a more typical yield curve. Nonetheless, all-in financing rates are likely to remain favorable near-term," Stoffers added.

Source: CoStar Realty Information, Inc.


As WeWork Grows, No Single Landlord Seen Having Excessive Leasing Exposure

 

May 02, 2018

By Jacquelyn Ryan

 

Co-working Giant has Struck Deals with a Wide Variety of Partners

WeWork leased 222,000 square feet in Boston Properties and Rudin Management's Dock 72 development (pictured above) set to open in the revitalized Brooklyn Navy Yard this summer.

WeWork leased 222,000 square feet in Boston Properties and Rudin Management's Dock 72 development (pictured above) set to open in the revitalized Brooklyn Navy Yard this summer.

 

When the much-anticipated Dock 72 office tower opens in the revitalized Brooklyn Navy Yard this summer, Boston Properties Inc. and Rudin Management Co. will become WeWork’s largest landlords by a longshot. 

WeWork’s lease for 222,000-square-feet at the joint venture’s $380 million development, part of a larger project to turn that stretch of the Hudson River on the outer borough into a hub for creative and tech firms, brings the Boston-based national real estate investment trust and New York family-real estate firm each up to about half a million square feet in lease agreements with the co-working giant. 

That’s nearly double the amount of space WeWork leases with any other landlord in the country now. And still, with all that space, WeWork’s deals with Boston Properties only make up about 0.8 percent of the real estate trust’s 50.3 million square foot portfolio, according to Boston Properties' data. For WeWork, Boston Properties holds less than 5 percent of its more than 10 million-square-foot presence.

That seems to reflect a trend. 

While WeWork is expanding at breakneck pace, doubling its footprint nationwide with about 90.5 percent year-over-year growth in 2017, the company has yet to dominate a substantial portion of any large landlord’s portfolio.

Rudin, which also owns the building where WeWork set up its first co-living WeLive concept on Wall Street, holds about 30,000-square-feet less of WeWork’s space than Boston but the co-working firm still makes up less than 5 percent of the company’s office portfolio. 

"With a veritable who’s-who of institutional owners lining up to do deals with WeWork, there is still no single owner with significant exposure," read an Eastdil Secured report about WeWork, which it counts as a client, from November. 

Dozens of landlords across the country continue to bet big on the co-working company’s success with large--and often discounted--leases. 

Among WeWork’s other top landlords is presidential son-in-law Jared Kushner’s real estate firm Kushner Cos., according to CoStar Group data. The New York firm has about 177,000 square feet with WeWork in deals ranging from nearly all of the 95,000-square-foot building at 81 Prospect St. in Brooklyn to a 14,000-square-foot lease at a mid-sized building in northeast Philadelphia. 

New York real estate firm L & L Holding Co. has done about 265,000 square-feet in deals with WeWork, including a lease for 171,000 square feet in the 776,000 square-foot building at 222 Broadway in Manhattan, according to CoStar Group data. It represents about 4 percent of that company’s 6 million square foot portfolio. 

Others include San Francisco’s Merlone Geier Management LLC, New York’s Kato International LLC and Chicago’s Callahan Capital Properties. 

In general, WeWork's model centers on leasing an office from a landlord for as little as half the asking rate at a building. The company then renovates the space into an open, creative office environment. Other businesses or individuals then rent out the updated space through a membership program at a rate that's inflated by as much as one and a half times. 

As it grows, WeWork has been expanding and branching out with new strategies that include co-managing spaces with landlords and buying its own real estate. 

WeWork’s aggressive valuation, at around $21.6 billion, outshines even that of Boston Properties, which is closer to $18 billion. Its recent bond offering garnered the company $702 million and upped its cash on hand to $3 billion. 

But the bond offering also revealed WeWork has $18 billion in rent commitments over the next several years and that its cash-heavy business model seems to be predicated upon continuing to raise funds through debt and equity offerings. 

Some have questioned whether the WeWork model is sustainable--and whether landlords should continue to be so gung-ho about a business that hasn't been tested in an economic downturn. 

Brokers say that if landlords are having second thoughts about WeWork after its latest offering, they haven't heard about it yet. 

WeWork counts large corporate tenants ranging from Amazon to IBM among its members at locations across the country. But the co-working company also curates an entrepreneurial environment for smaller firms and start-ups that may not have otherwise found office space. And that’s a huge draw for landlords. 

"Some people think that co-working environment is the way of the future," said George Crawford, a broker at Charles Dunn Co. in Los Angeles. "It’s a different way for the landlord to accommodate tenants. If you look at the way businesses are kind of growing, you have a lot more entrepreneurs and freelancers, many more small companies that are starting up, using the Internet. If you lease to WeWork--or their competitors --you can lease a bunch of space and let that operator deal with the smaller tenants. Now you can accommodate both" smaller tenants and larger ones.

The diverse economies in cities such as New York, Los Angeles and San Francisco, which together are home to more than half of WeWork’s offices, offer a bit of a security cushion for landlords, too. 

Consider that WeWork upgrades its office space--at an average of more than $100 per square foot---into desirable creative space with open layouts and glass walls and touches such as motivational sayings on the walls and beer taps in the kitchens. 

Those improvements can prove valuable to landlords even if WeWork vanished suddenly, said Bob Safai, founder of Madison Partners brokerage in Los Angeles. He pointed to the Mani Brothers’ 101,000-square-foot building in Silicon Beach’s Playa Vista where WeWork has a lease for 77,000 square feet. If WeWork moved out, "I could put 10 different tenants in there," he said. "Anything from tech to entertainment. It’s so high-end."

For now, landlords and WeWork seem satisfied in this diversified arrangement. 

"The cost savings WeWork can then pass on to corporate clients are a massive accomplishment in technical efficiency, as well as a compelling outsourced service," read a CBInsights report on WeWork, later noting that the company’s "short-term risk of default on its lease obligations seems low, but only given the strength of its balance sheet and deep-pocketed investors."

One thing is certain, with $3 billion in new capital, WeWork shows little sign of slowing down.

Source: CoStar Realty Information, Inc.


 

APRIL 27, 2018

By Randyl Drummer

 

Doubling of Loan Price Threshold to $500,000 Removes Appraisal Requirement from More Than $65 Billion in U.S. Commercial Properties

Office of the Comptroller of the Currency, Constitution Center, Washington, D.C.

Office of the Comptroller of the Currency, Constitution Center, Washington, D.C.

 

A new federal rule doubling the threshold for commercial real estate deals requiring an independent appraisal will reduce the time, cost and regulatory burden associated with processing smaller real estate deals, banking and real estate analysts say.

The Federal Reserve Board, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency adopted new rules exempting commercial property sales of $500,000 or less from the appraisal requirement. Regulators originally proposed raising the minimum from the current $250,000 to $400,000 but bumped it up to $500,000 after determining the higher threshold posed "no material loss risk to financial institutions."

Under the new rule which used CoStar's comparable sales data and repeat-sale indices to track pricing changes and other sales metrics over time, financial institutions must still perform a property evaluation for deals of $500,000 and below, but do not have to engage an independent appraiser.

"Deregulation is a major theme of the Trump Administration and this updated regulation is a smart move," according to Justin Bakst, CoStar director of capital markets. "Moving the [sale] threshold up to $500,000 creates very little additional risk to the system," he added. 
 

Comps Data Used to Track Smaller Deals

In determining the level of increase, the agencies considered the change in prices for commercial properties measured by the Federal Reserve's Commercial Real Estate Price Index (CRE Index). Since 2012, the CRE Index has been compiled using data from the CoStar Commercial Repeat Sale Index (CCRSI) as one of its data sources.

"The agencies examined data reported on the call report and data from the CoStar Comps database to estimate the volume of commercial real estate transactions covered by the existing threshold and increased thresholds," according to the final rule.

Bakst said the agencies determined the small transactions affected by the new threshold, while large in number, did not create the type of leverage and risk that contributed to the last financial crisis. Banks have healthier capital ratios today and commercial real estate leverage has largely remained well under control, he added.

Banks can perform acceptable loan evaluations in house using sources of comparable sales data like CoStar, Bakst added.

"Although the property sales total affected by this rule change is a drop in the bucket compared with overall commercial property volume, the cost savings are noteworthy," Bakst said. "For example, if we estimate appraisal costs at between $2,000 and $4,000 per transaction, this represents an aggregate savings of $300 million to $600 million."

Banking regulators carved out an exception for construction loans on one- to four-family residential properties, which will no longer be included in the same category as commercial property loans to avoid potential confusion with single-family permanent financing and as an added consumer protection for home buyers. The sale threshold for appraisals on those properties will remain unchanged at $250,000.
 

Lower Threshold Was a 1990s Relic

Financial industry analysts who commented on the rule change said that the previous commercial transaction threshold had not kept pace with the price appreciation of commercial property. 

For example, the average price of a property valued at $250,000 when regulators set the previous minimum threshold 24 years ago in 1994 has now more than tripled to $760,000. Raising the threshold to $500,000 provides a recession-resistant buffer, Bakst said.

Under the new $500,000 threshold, 31.9 percent of property sales in the CoStar database would be exempt from the appraisal requirement. In terms of dollar volume, however, the properties now exempt from appraisals comprise just 1.8% of the overall dollar volume of loans in the CoStar database.

Before the final rule was approved, there were 13 different categories of loan transactions that qualified for exemption from the appraisal requirement, including a general exemption for all real estate-related transactions with a value of $250,000 or less. The new rule adds a 14th exemption for “commercial real estate transactions” not secured by a single 1-to-4 family residential property.

“For commercial real estate transactions exempted from the appraisal requirement as a result of the revised threshold, regulated institutions must obtain an evaluation of the real property collateral that is consistent with safe and sound banking practices," the new rule states.
 

Are Small Loans Risky for Small Banks?

Some critics, namely appraisers, take issue with the agency findings. James L. Murrett, president of the Chicago-based Appraisal Institute trade association representing nearly 19,000 appraisal professionals in about 60 countries, said raising the threshold is "confounding" given concerns expressed by the same agencies about commercial property pricing and loan risk management.

The OCC and Fed have warned that rapidly appreciating property prices in some commercial property segments and rising concentrations of commercial property loans, particularly among smaller banks with $1 billion to $10 billion in assets, could heighten risk to the nation's banking system.

"Without a doubt, the final rule increases risk to the commercial real estate lending system," Murrett said. “Seen through the lens of loosening regulations, the final rule may make sense. But from a safety and soundness perspective, the final rule raises significant concerns.”

Murrett said that an increase in property evaluations without appraisers will likely cause a return to the conditions during the run-up to the financial crisis, when "appraisal and risk management were thrust aside to make more, not better, loans."

Smaller institutions, which are less likely to maintain appraisal departments, are more likely to be susceptible to breakdowns in appraisal independence with fewer controls in place, he added.

Murrett said the decision increases the importance of modernizing the regulatory structure governing appraisals, including positioning appraisers to better offer evaluation services. 

"Appraisers need to be nimbler in today’s marketplace - not only to compete, but to help maintain safety and soundness of the real estate financial system.”

Big Shops Don't Play in Small Loan Pools

Appraisal operations in the largest commercial real estate services companies likely won't be affected by the rule change since their main business is more sophisticated and involves providing valuations for complex property assets priced above $500,000, said John Busi, president of the valuation and advisory group at Newmark Knight Frank.

The appraisal world is getting faster and cheaper and this change creates efficiency for the banking regulators to be a little more nimble and relax some of the standards put in place after the financial crisis," Busi said. 

"Of course appraisers are going to be upset by it because many have had business on commercial property under $500,000," said Busi. But he added that smaller appraisal shops should be nimble enough to adapt and bring in work without suffering a large decline in fees.

"We view the recent increases in thresholds for appraisal requirements as an opportunity for lenders, borrowers, and appraisers," added Chris Roach, CEO with BBG, one of the nation's largest pure-play valuation and appraisal companies with 27 U.S. offices.

Roach said BBG's valuation specialists have evolved from a traditional appraisal practice to a more diverse valuation practice for a variety of clients.

"We stand by our high-quality valuation products, no matter the size of the loan," Roach said. "But with these revised loan amount guidelines, we are well-positioned for growth in our evaluation product."

 

Source: CoStar Realty Information, Inc.


Behind Boston Properties' Blockbuster $616 Million Deal for Santa Monica Business Park

 

APRIL 26, 2018

By Jacquelyn Ryan

 

Boston Office REIT's Snags its Second Office Property in LA, Sees Redevelopment Opportunities for 47-Acre Complex

180502_Santa Monica Business Park.jpg
 

When Boston Properties Inc. closes its record-breaking deal to buy the 1.2 million-square-foot Santa Monica Business Park for $616 million this summer, the company will take control of nearly a quarter of Santa Monica’s competitive office space and the rights to acquire the buildings' underlying land for future redevelopment of the 47-acre site. 

News of the deal caught some market observers by surprise, but to the Boston-based real estate investment firm’s executives it was the culmination of years of planning and waiting for its opportunity. 

"We have had our eye on this property for a long time," said Jon Lange, vice president in Boston Properties’ Los Angeles office, to CoStar News.

The REIT's executives became interested in the Santa Monica Business Park about three years ago, a full year before the company’s first Los Angeles acquisition in 2016, a 50 percent stake in another high-profile Santa Monica office property, the 1.1-million-square-foot Colorado Center office complex. 

The low-rise Santa Monica Business Park property has a lot going for it. In addition to being one of the largest concentrations of office space on Los Angeles’ Westside, one of the hottest and most supply-constrained office markets in the country, the office park is nearly fully occupied by a number of desirable tech and media tenants, from gaming company Activision Blizzard to messaging app maker Snap. Located on the eastern side of the city at Ocean Park Boulevard and 28th St., the property sits adjacent to the 227-acre Santa Monica Airport, which is expected to close and transform into a public space in about a decade.

The pending acquisition marks the second in Los Angeles for the publicly traded company, and represents an important step in its expansion in this market, one of just five core markets in which the firm invests. 

Boston Properties Chief Executive Owen Thomas said the specific qualities of the property reflect the ways in which the company wants to build its business going forward. 

"Unlike the myriad of 200,000-square-foot or less buildings that we have been offered in West L.A. over the last two years this is our kind of project, given its scale, its suitability to larger corporate tenants, the redevelopment opportunities that present themselves over time, and the changing positive dynamics over the next decade given the potential decommissioning of the Santa Monica Airport," he said in an earnings call Wednesday. 

When Blackstone Group hired Eastdil Secured to sell the business park last year, Lange said Boston Property was prepared to battle for it. 

"When you get the names of Blackstone and Eastdil Secured in a transaction, every major real estate firm in the market will be aware of the opportunity," said Lange. "Given Boston Properties’ presence in Santa Monica and our hands-on approach to operating properties, we felt like we were the best firm suited for this acquisition."

Blackstone acquired the site, which sits on a ground-lease owned by the original developer, as part of its $39 billion buyout of Equity Office Properties Trust in 2007. The private equity giant is seeking to sell this property as well as one in Boston and another in San Francisco as part of its final push to dispose of former EOP assets. 

Following a lengthy competitive bidding process that pumped up the sale price to the blockbuster final number, with the Boston firm besting such local rivals as Douglas Emmett Inc., Worthe Real Estate Group, Hudson Pacific Properties and Alexandria Real Estate Equities, which were also vying for the deal.

The contract sale price sets a record in the city of Santa Monica and is among the top sales ever in Los Angeles County, according to CoStar records. 

While the company has the balance sheet to pull off the acquisition, Boston Properties is likely to seek an equity partner for the property, CEO Thomas said on the call. 

"We do not want to increase the leverage of the company," he explained. 

Santa Monica office rental rates in the city can hit as much as $9 a square foot monthly near the ocean, and average $5 a square foot across the city, according to CoStar records. Despite the peak rates, vacancy in Santa Monica is only 7.8 percent. 

Following the acquisition, Boston Properties will control about 24 percent of the competitive Class A office space in the city of Santa Monica with its ownership of two of the three largest office projects in the city -- Colorado Center and the Business Park. A unit of JPMorgan Chase owns the third, the 1.3 million-square-foot The Water Garden office complex. 

The Santa Monica Business Park’s office buildings are 94 percent leased to 15 tenants including well-known tech and media firms. The majority of the project’s remaining vacancy is connected to leases that have not yet commenced rental payments, Thomas said. Others are paying below market rents that could be increased when renewals come due. Thomas expects the property to generate a 6 percent yield in about five years, he said on the earnings call.

Most of the buildings sit on land owned by original developer, TransPacific Development Co. Boston Properties hopes to purchase that underlying land when that option becomes available in 2028. The buy-out price will be linked to fair market prices at the time of the sale. It is currently estimated at around $250 million, according to a source familiar with the property but not authorized to speak on the record. 

"When the ground lease goes away, we think the yield will be enhanced," Thomas added, noting the current ground lease garners a hefty - but undisclosed - payment amount. 

In the bigger picture, with this acquisition Boston Properties has the ability to own 47 acres in one of the most supply constrained and highly sought-after office markets in the country. 

Down the road, there is likely to be redevelopment opportunity, one of its core strengths. The firm has 13 office and residential developments and redevelopments totaling 6.5 million feet for a total of about $3.5 billion in its pipeline nationwide. 

Analysts are reacting positively to the news. 

"We believe [Boston Properties] will be able to apply its development and redevelopment expertise and large balance sheet to create value over time," wrote Jeffrey Spector, a research analyst who follows the company for Bank of America.

Boston Properties executives said they expect to have conversations with the city and stakeholders about the future of site when the time is right. 

"We hope that at some point there will be a conversation about how the redevelopment of the Santa Monica Airport and the 47-acre site that we will now own (and may have purchased the ground on), how they can be reconstructed and reconfigured going forward over the next decade or so," said Doug Linde, president of Boston Properties, during the REIT's earnings call this week. "We are really excited about the long-term potential to do something here, not the short-term potential."

The company expects to close the deal July 1.

 

Source: CoStar Realty Information, Inc.


 

APRIL 18, 2018

By Randyl Drummer

 

World's Largest Industrial REIT Shrugs Off Trade War Concerns Amid Optimal Market Conditions

Prologis recently completed shell construction on a new building at Prologis Park Riverside in Phoenix.

Prologis recently completed shell construction on a new building at Prologis Park Riverside in Phoenix.

 

Warehouse giant Prologis Inc. is ramping up construction and asset sales following healthy first-quarter results powered by brisk leasing and near-double-digit rent growth in the red-hot logistics market.

Based on robust demand for modern logistics space by e-commerce and other tenants, San Francisco-based Prologis this week raised the value of planned development starts by $200 million to between $2.2 billion and $2.5 billion for 2018. Roughly half the new activity is lower-risk build-to-suit construction, Prologis Chief Financial Officer Tom Olinger told investors.

Prologis (NYSE: PLD), by tradition one of the first equity REITs to report earnings each quarter, also increased its estimate of projected building and land sales by roughly $475 million to between $1.4 billion and $1.7 billion for the year. The sell off will effectively complete the company's seven-year campaign to dispose of assets deemed "non-strategy" following Prologis's 2011 merger with AMB Property Corp. 

"Market conditions remain extremely healthy and our strategy is set," Prologis Chairman and CEO Hamid R. Moghadam told investors. "Going forward, it's all about execution."

One stock analyst summed it up even more succinctly following the earnings presentation by Prologis, a quarterly bellwether for U.S. and global logistics markets: "Industrial has never been this good."

John W. Guinee, analyst with Stifel, Nicolaus & Associates, said Prologis's extraordinary 9.2% first-quarter rent growth, steady demand from Amazon and other tenants and strong development platform "sets the stage for a strong 2018 and 2019."

The broad strength throughout the logistics sector is likely to be mirrored as Prologis's industrial REIT rivals report their results in coming days. 

U.S. warehouse rents posted another stunning quarter of 6.2% average growth, compared with office and retail rents, which each posted less than 2% rent growth last quarter, according to data presented today at CoStar's State of the Industrial Market First-Quarter 2018 Review and Forecast. Multifamily recorded 2.5% rent growth last quarter.

Total U.S. logistics construction deliveries rose 2% in the first quarter from a year ago, on par with the booming apartment market. However, analysts have few worries about a serious supply glut, as absorption continued to outstrip new supply in the first three months, edging out apartments at 2.2%, 

"We're seeing construction completions at a stronger pace than the peak of the last cycle," said CoStar Portfolio Strategy Director Rene Circ. "There's no doubt in my mind that developers will eventually overbuild the market, but the beauty of it is that when recession does come, we'll enter it from such a health prospective that the pain felt in the market will be meaningfully weaker than the last cycle."

Prologis, fueled by the strong earnings report, led all equity REITs with a 4.3% increase in its share price on Wednesday. Industrial REITs again led all property sectors with 1.8% average growth, with Prologis rivals Rexford Industrial Realty, Inc. (NYSE: REXR) and Terrano Realty (NYSE: TRNO) turning up among the top five gaining REIT stocks.

Only a handful of factors could derail the world's largest industrial REIT from another strong year, including the prospect of a long trade war between the U.S. and China, which could hurt Prologis and its industrial REIT rivals along with the rest of the economy.

"Any kind of trade war is bad for economic growth generally," Moghadam said in response to an analyst's question. "If the economy grows at 30 to 40 basis points slower than it would have otherwise, that's not good for anybody's business."

The good news is that talks, including President Donald Trump's expressed interest in possibly rejoining the Trans-Pacific Partnership (TPP) trade agreement, are still in their early stages while announced new tariffs have not yet fully gone into effect, Moghadam said.

"All of our customers that I'm aware of, basically, have their head down doing business, and they're not paying too much attention to what comes out in the tweets in the morning until there is something specific they can react to," Moghadam said.

The CEO pointed out that most of the tariffs announced to date have been imposed on raw or intermediate materials, which does not affect Prologis's main logistics and warehouse business. 

"Steel doesn't go through warehouses, aluminum doesn't go through warehouses. The simplest way of thinking about it is that while we are concerned by the talk; we are not yet concerned by the action," Moghadam added.

That said, Prologis is carefully monitoring rising construction costs which some analysts have said could be exacerbated by tariff-related increases in materials prices. In the San Francisco Bay Area, for example, costs are up 20% to 25% over last year, Moghadam said.

"[Construction costs] have been stable for many years and now it's time for the contractors and buyers to make some hay while the sun is shining," Moghadam said. "But it's getting tougher to pencil out spec development in some of these markets, and that's good news I guess for rental growth over time." 

New tariffs and trade disputes are casting a pall over sentiments across various sectors, even as all 12 regions of the Federal Reserve Bank reported continued robust job growth with few signs of overheating, according to the Beige Book, the Fed's most recent survey of U.S. businesses.
 

Source: CoStar Realty Information, Inc.


Self-Storage: A Lucrative but 'Get-Rich-Slow Business'

 

APRIL 11, 2018

By Paul Owers

 

Newer Developments May Include Ground-Floor Retail Shops

Miami City Storage

Miami City Storage

 

Jay Massirman’s specialty is self-storage, one of the more humdrum – but potentially lucrative – niches in commercial real estate.

Massirman’s Miami City Self Storage (MCSS) recently opened a 1,000-unit facility at 490 NW 36th St. in Miami, close to the emerging neighborhoods of Wynwood and the Design District.

MCSS and other developers saw opportunity following the housing bust, when demand outstripped supply. Former homeowners-turned-renters and downtown dwellers who happily eschewed white picket fences and big back yards needed places to stash their stuff.

The NW 36th St. facility is the sixth self-storage project MCSS has built in South Florida, and comes on line a month after it opened its first Broward County location, in Pembroke Park, FL. 

MCSS, one of the largest self-storage developers in Miami-Dade and Broward counties, is eyeing returns on cost in the 8 to 9 percent range over the next few years, Massirman said.

“Self-storage is very appealing to developers because you’re building a box and filling it up,” he told CoStar News. “But there are a lot of variables. It’s more of a long-term, patient business. I like to joke it’s a get-rich-slow business.” 

None of the company’s six facilities screams self-storage at first glance. The air-conditioned buildings are vertical, with colorful designs that include glass exteriors. What’s more, Massirman hopes to add ground-floor retail to future projects so that consumers can pick up a cup of coffee before squeezing that second hand couch into an 80-square-foot box, he said.

MCSS has six more projects in development across Miami-Dade and Broward counties, which would increase the company’s portfolio to more than 2 million square feet when completed. 

While the national outlook generally remains positive, the industry is facing head winds, warned Tom Gustafson, an executive with Colliers International’s Self Storage Group in Cleveland. Supply is starting to exceed demand in some local submarkets.

“That’s forced landlords to get real aggressive to drop rental rates,” Gustafson said. “Now fairly stable is 80 or 85 percent occupancy rather than 90, 92 or 95 percent.”

Nearly 800 self-storage facilities opened across the country last year, Colliers figures show. In the Miami metro, which includes Miami-Dade, Broward and Palm Beach counties, there are 480 existing self-storage facilities, with 66 more in the pipeline, according to New York-based data provider Union Realtime and MiniCo Publishing of Phoenix, AZ. 

With the market tightening in South Florida, Massirman is treading lightly on future projects. He said the development cycle is closer to the end than the beginning, with lenders not nearly as eager to provide financing as they were in 2012 and 2013.

 

Jay Massirman - CEO of MCSS

Jay Massirman - CEO of MCSS

 

“I would say the current pipeline is at equilibrium at this point,” said Massirman, a former CBRE vice chairman. “Future deals need to be really and truly (solid). Demand has to be proven out.

“The city of Miami has some extreme competition, and it’s going to be a struggle for a while before some of these buildings get leased up,” he added.

As a result, MCSS is looking at other markets, especially New York, Boston, Los Angeles and San Francisco. Its joint venture partner, Pacific Storage Partners, is considering other opportunities on the West Coast. 

The problem, according to Gustafson, is getting municipalities to approve self-storage projects. They prefer multifamily or retail developments because they’re more attractive, benefit more of the community and bring in more income tax revenue, he said.

But Massirman remains undeterred, saying there are still opportunities as long as developers find the right sites. And he believes adding ground-floor retail to self-storage facilities will go a long way toward winning over banks and elected officials.

“If we can solve those problems, it works,” he said. “You have to be creative and roll up your sleeves. That’s the challenge.”

Source: CoStar Realty Information, Inc.


Could Industrial Real Estate Get Caught in Trade War Crossfire?

 

APRIL 06, 2018

By Jacquelyn Ryan

 

Logistics Owners, Brokers and Analysts See Little Risk Now from Trump's Challenges to China, but Some Worry About a Full-Scale Trade War's Effect on the Market and Economy

Logistics real estate experts say a prolonged trade-related slowdown in container cargo traffic at the 7,500-acre Port of Los Angeles (pictured), the nearby Port of Long Beach and other major ports could eventually reduce demand for the industrial properties in LA, the Inland Empire and other tier one logistics markets.  credit: Port of Los Angeles

Logistics real estate experts say a prolonged trade-related slowdown in container cargo traffic at the 7,500-acre Port of Los Angeles (pictured), the nearby Port of Long Beach and other major ports could eventually reduce demand for the industrial properties in LA, the Inland Empire and other tier one logistics markets.

credit: Port of Los Angeles

 

Larry Callahan heads one of the largest developers of industrial real estate in the Southeast, with projects located from Tennessee to Florida.

As the chief executive of Patillo Industrial Real Estate in Georgia, Callahan leads his family-owned business in developing and managing warehouse-distribution projects for businesses as varied as compressor creator Bitzer U.S. Inc. to King’s Hawaiian Bakery. 

Like the rest of what is known as the industrial real estate market, the hottest asset class in all of commercial real estate for the past two years, Callahan’s business has been booming.

Right now, he’s not too worried about the impact of President Donald Trump’s posturing on trade.

"I do not believe that the first impact of tariffs (and retaliatory tariffs) has been fully priced into assets like industrial real estate," he said. "And I would argue that the impact of a first round of tariffs on the pricing of industrial real estate is minimal."

But late yesterday, President Trump escalated the risk of a trade war by further increasing proposed tariffs by $100 billion on a number of Chinese products as the two countries continue to exchange threats. The change from campaign rhetoric to trade policy has caught some by surprise.

This morning, Chinese officials threatened further retaliation if the U.S. moves forward with new tariffs. 

If fears of a full-scale trade war come to fruition, Callahan sees a different story unfolding. He said the risk to industrial real estate becomes worrisome if a full-scale trade war erupts and slows down the overall economy. 

"A no-growth economy hurts everyone," said Callahan.

Callahan echoes what many in the industrial real estate market are saying now about how rising protectionism and a threat of trade war are affecting the U.S. industrial real estate market.

"It would have to be a pretty massive trade war for it to impact industrial real estate directly," said Rene Circ, director of U.S. industrial research for CoStar, adding that anything that impacts the entire economy would certainly affect industrial real estate.

Conditions in the industrial real estate market remain strong - with vacancy at historically low numbers across the nation - but the threats have prompted fears of an all-out trade war between the U.S. and China have left some industrial real estate stakeholders watching events unfold with anticipation.

"If these tariffs become real, they would have an enormous impact," said Richard Green, director and chairman at the USC Lusk Center for Real Estate at the University of Southern California. "If consumer goods become more expensive, people will buy them less and that’s not good for industrial real estate and the warehouses that hold [those goods.]"

Last month, President Trump authorized increases on tariffs on steel and aluminum imports and is considering more in response to China's industrial and technology policies. China retaliated this week by proposing a 25 percent increase on 106 U.S. goods including on such items as soybeans, automobiles, aircraft and orange juice.

The tariffs on steel and aluminum imports prompted dire warnings from architects, contractors, REITs and real estate lobbying groups who said the tariffs could put more pressure on already rising building costs and cause developers and investors to postpone, cancel or steer clear of new projects. 

This week, Real Estate Roundtable President and CEO Jeffrey DeBoer said the new proposed tariffs, coupled with the earlier tariffs on steel and aluminum and the ongoing dispute with China, could have "unfortunate and unintended effects on the U.S. economy by raising construction costs and reducing jobs in real estate development."

Everything from consumer goods to physical container traffic could be hit by the tariffs and that could have a domino effect.

"It has been on investors’ minds since Trump took office because there has been discussion about trade wars and what happens if," said Mike Kendall, Western region executive managing director of Investment Services for Colliers International in Irvine, California. "There should be an impact eventually in industrial, but it hasn’t happened yet. The real estate market is not like the stock market. The stock market is real time. In real estate, it takes a lot longer to find its way into the process and pricing. Since it [threat of trade war] is so new, we haven't seen it yet."

A more immediate concern is rising construction materials and development costs, since most of our steel and aluminum is imported from Canada, Mexico and South Korea.

Jeff Givens, senior vice president at Los Angeles office and industrial developer and owner Kearny Real Estate Co., said he has colleagues who already are hitting pause on new development projects. 

"I’ve heard from others who are in the bidding process [for a new project], with their different subcontractors involved in steel and other commodities that are being discussed [for increased tariffs]," he said. "They have pulled their current bids and are reevaluating, I have a colleague who was ready to go forward on a big-box warehouse and the steel providers said the bid we gave you six months ago is no longer valid; we’ll get back to you."

That kind of uncertainty has an effect beyond just proposed projects. Bret Hardy, who focuses on institutional industrial investment sales as executive managing director of the Western region capital markets team at Newmark Knight Frank, said while it’s still too early to fully understand the result of the steel tariffs, he's heard estimates that steel costs could increase by as much as 30 percent. 

"When you are looking at the infill industrial real estate market in Los Angeles metro that is priced to perfection, any incremental cost of construction could have an equal impact on the value of the land and the value of the projects," he said. "So steel costs are a concern right now."

To be sure, industrial construction doesn’t appear to be slowing down. More than 2.3 million square feet are under construction in the Los Angeles metropolitan area alone, the largest industrial market in the country, according to CoStar Group data. In the industrial market around the Ports of L.A. and Long Beach, the vacancy rate is below 1 percent - and brokers report few signs of pullback. 

In neighboring Inland Empire, one of the nation's largest industrial and logistics markets, two deans of the industrial real estate brokerage market agreed that the current atmosphere of protectionism and the prospects of a trade war haven’t been a factor among logistics occupiers, owners and developers. At least not yet.

"There has been no real chatter among warehouse developers or investors out here," said Paul Earnhart, senior vice president with Lee & Associates, who has completed over 1,000 transactions for a combined $4 billion in deal value over more than 30 years in the Inland Empire.

A prolonged conflict with China or worse, a collapse of the current NAFTA treaty affecting two of America's strongest trade partners, Mexico and Canada, could change that over the next year.

"The possibility of a long trade war has been on the mind of most of these logisticians to some extent," acknowledged Chuck Belden, executive vice president with Cushman & Wakefield's Ontario office since 1984. 

Late last year, the possibility of a tariff on appliances, combined with fears of the demise of Sears and JCPenney during the holiday shopping season, actually created a temporary bump in demand for Inland Empire warehouse space. LG, Samsung and other appliance makers stockpiled inventory and scooped up space where they could find it in anticipation of the tariff, combined with their reluctance to ship product without prepayment to the two financially ailing department store chains, Belden said.

But recently, the prospect of new tariffs has not had the same effect.

"I haven't seen any pullback in the number of property tours or interested parties," Belden said, adding that most logistics companies and distributors are more concerned about finding available labor, especially drivers. "I've seen a slight pullback in consummated transactions, but that may be a function of a lack of available inventory."

"But if Trump blows up NAFTA, everything I just said goes out the door," Belden said.

Should a proper trade war break out, the impact among industrial real estate may vary by city. 

"Population markets have insulation versus a market that is more about serving the population elsewhere," Kendall said. "Some of these markets like Memphis that are big hubs for UPS and FedEx that service national distribution, they may feel more of an impact than primary markets."

Take Southern California, the country’s largest industrial market, for example. 

Earnhart noted that one local client, a well-known car windshield installation company, told him late last year that its Chinese supplier, which had previously shipped windshields from China to Southern California, had recently purchased a former auto manufacturing plant in his hometown of Dayton, OH.

Now, 60 percent of the local company's windshields come to its Inland Empire distribution center from Dayton.

"No matter where those windshields are made, they're being warehoused here because this is where all the people live," Earnhart said.

Not everyone is worried about tariffs. Some are optimistic that domestic production picks up where foreign production drops off. Others are betting that the threat of tariffs is just a negotiation strategy that won’t become reality. 

For now, Kendall agrees, most industrial real estate stakeholders will take a measured approach, as he recalled discussion of a trade war that never came to fruition last year.

"We have seen this enough before where there’s an overreaction to what happens," he said. "People are almost getting jaded by all this news and are thinking I just need to focus on what actually happens. Until we see an impact, we aren’t going to change our business plans."

As for Callahan, he agrees: "There are always issues to deal with, but we are optimistic about the future."

CoStar News reporters Randyl Drummer, Tony Wilbert and Mark Heschmeyer contributed to this report.

Source: CoStar Realty Information, Inc.


End of the Line for Toys R Us as Retailer Plans to Close Remaining Stores Totaling About 38M-SF

 

MARCH 28, 2018

By Mark Heschmeyer

 

Timing of Bankruptcy Filing Last Fall Before Crucial Holiday Sales Season Contributed to Sales Below "Worst-Case" Projections

180328_Toys R Us.gif
 

Beloved by kids and landlords but largely shunned by consumers this past holiday shopping season, Toys R Us officially announced this morning that it was calling it quits and would wind down operations, closing its remaining 735 stores in operation encompassing an estimate 29.3 million square feet of mostly big box retail space.

The Wayne, NJ-based toy retailer had already closed or planned to close 8.5 million square feet of its brick and mortar stores as part of the Ch. 11 bankruptcy reorganization it initiated last September. Today's move impacts nearly 33,000 employees, who were told of the company's decision yesterday.

It also wipes out about $1 billion in property value, according to Toys R Us estimates of the difference in value of 791 occupied vs unoccupied stores. The appraised value of the stores unoccupied was listed at $1.55 billion. Toys R Us owns 273 of those stores and either leases or ground leases the other locations.

"I am very disappointed with the result, but we no longer have the financial support to continue the company’s U.S. operations," said Dave Brandon, chairman and CEO of Toys R Us, in announcing an "orderly process to shutter" its U.S. operations.

Despite the closing announcement, there is still a chance that up to 200 U.S. stores could remain open. Toys R Us is negotiating a deal for its Canadian operations and the bidder is reported to be interested in a transaction that could combine up to 200 of the top performing U.S. stores with the retailer's Canadian operations.

A spokesperson for Van Nuys, CA-based toymaker MGA Entertainment Thursday confirmed that CEO Isaac Larian and affiliated investors have made a bid for the retailer's Canada operations. "If there is no Toys R Us, I don’t think there is a toy business," Larian said in a statement. "Toys R Us Canada is a good business. They run it efficiently, and have good leadership. At the right price, it makes economic sense."

While discussions continue on this potential transaction, Toys R Us is seeking court approval to implement the liquidation of inventory in all the U.S. stores, subject to a right to recall any stores included in the proposed Canadian transaction.

At least one expert said that the flood of retail space resulting from the closure doesn’t necessarily represent a catastrophe for the industry.

"Everybody who has Toys R Us in their portfolio, whether you’re managing it or you own it, has been looking for alternate uses really for the past couple of years,” said Gregory Maloney, president and CEO of Retail, the Americas, for JLL. “We didn’t anticipate a full liquidation, to be honest, but we did anticipate a lot of store closures. They announced last year that they were going to close 250 of them... We’ve been prepared for it for the most part, looking for alternate uses for that space or to fill it up with some of the people who are expanding, like Ross or TJ Maxx and so forth.”

Discount clothing retailer Ross announced earlier this week it plans to open 100 new locations this year.

"So really it’s just confirmation now that this is what’s going to happen," Maloney said. "Quite frankly, it sounds a little strange but now that we know it’s a lot easier to deal with than the unknown. The past couple of years have been, ‘well, do you think we’re going to get this back?' Now that we know what we’re up against, we can start getting to work and fill the space." 

Malls are being reimagined with other uses replacing retail - such as office, hotel and multifamily uses - which could be options for the Toys R Us space, he said. 

In addition, the giant toy retailer often took so-called endcap space, at the corner of malls, which is desirable for other commercial tenants, according to Maloney.

"Good locations are always easy to fill," he said.

And of Toys R Us’ roughly 700 stores overall, “probably half of them are great locations, where a lot of those developers want that space back anyway,” according to Maloney.

Jeff Holzmann, managing director of iintoo, a real estate investment firm in Manhattan, wasn’t quite so upbeat about the situation.

“When you think of the basic equation of supply and demand, when you think about the sheer footage that they’re going to be dumping in the market, probably within the next 12 months, that’s going to cause without a doubt a situation that we call a supply surplus,” he said. “So right off the bat that’s going to create a downward pressure on the rental prices in those submarkets. But we have to be very careful because the devil’s in the details.”

Holzmann said that some of the Toys R Us stores are not in malls, but are adjacent to them with large square footage, the kind of space that expanding fitness centers or activity gyms for kids and other national chains might be interested in. 

“The sheer size of square footage that’s being dumped into the market is going to overwhelm any potential offset demand,” Holzmann said. “There’s going to be a surplus supply without a doubt. The question now becomes what kind of chain, and to what extent, can seize the opportunity. There is certainly going to be some, because the market is always going to seek equilibrium. And there are chains that are growing in this economy specifically in and around malls. But I think the volume here and the trend here is alarming.”

Meanwhile, the liquidation process will take time, according to Maloney.

“Everybody thinks they (the Toys R Us stores) close tomorrow,” he said. “It doesn’t happen that way. It’s generally an organized closing. They need to liquidate all of the merchandise, and you can’t just send it to one store. And that will be good for the owners because it gives them time. 'OK, This store is going to be closing, this is when it’s going to close, what players are in the market and let’s go after them and get them.’”

Although Toys R Us officials said they did not foresee today's outcome when the retailer initially filed for bankruptcy reorganization last fall, the timing of the bankruptcy heading into the crucial holiday shopping season appeared to contribute to a negative perception among shoppers regarding the retailer's viability. 

The retailer reported dramatically lower than expected holiday sales, which the company had been counting on to bolster support among its creditors, the company detailed in a bankruptcy court filing yesterday.

Holiday sales came in well below its worst-case projections. The company also cited a combination of other factors, including delays and disruptions in its supply chain and increased price competition with Target, Walmart and Amazon, the company said.

Following the holiday sales season, Toys R Us projected that its cash-burn was expected to reach between $50 million to $100 million per month.

"It became clear that a significant investment of several hundred million dollars would be needed just to keep 400 stores operating before the 2018 holiday season," the company said.

As of yesterday, the retailer said it had contacted over 40 parties regarding potentially financing or purchasing any or all assets of the U.S. business, a deal that would have required a commitment of over $250 million just to cover cash-burn until the 2018 holiday season.

"Put simply," the company said, "in these circumstance, no parties were prepared to underwrite the U.S. operations as a going-concern."

Faced with those circumstances, Toys R Us determined that the best way to maximize their recoveries was to liquidate its remaining inventory and go out of business.

Editor's Note: CoStar New Jersey reporter Linda Moss contributed to this report

Source: CoStar Realty Information, Inc.


The Amazon Effect: What Would Happen to Apartment Rents if Your City is Picked for HQ2?

 

MARCH 08, 2018

By John Doherty

 

Projected Impact Varies Across 20 Finalists with Market Size and Construction Pipeline Being Major Factors

180118_Amazon hq2.gif
 

If Amazon picks your city for its new co-headquarters, what impact would it have on your local apartment market?

CoStar’s quantitative research team applied a new forecasting model that predicts how the projected 50,000 new jobs Amazon is expected to generate would affect apartment demand, rent growth and rental property values based on historical apartment demand generated by employment gains in the markets under consideration. Amazon has named 20 cities as finalists for its new co-headquarters - dubbed HQ2.

The results suggest that the smaller markets under consideration, such as Nashville, Raleigh and Columbus, would see the most disruption. By the end of 2026, when Amazon is expected to be settled in its new HQ2, Raleigh would see average apartment rents rise 9.6% due to the Amazon effect alone, according to CoStar’s forecasting model. That’s the biggest bump of any of the 20. Nashville rents would rise 6.7%, and Columbus’ would increase an additional 5.9% thanks to Amazon. 

New York, Chicago and other major markets would see Amazon have virtually no effect on rents, due to their huge inventory of rentals. Those cities would see Amazon push average apartment rents by just a single percentage point. 

Boston, one of the early favorites for HQ2, has a robust multifamily construction pipeline and CoStar predicts Amazon would add an average increase of just 2.4% to the market’s rents. Philadelphia, which has seen a steady stream of rental development during the economic recovery, would see rents rise just 2.1%

"The Amazon effect is in direct proportion to the size of the markets" says John Affleck, CoStar Director of Analytics. The larger markets - and markets with a significant existing pipeline of new apartment construction - could absorb the tech behemoth’s arrival fairly easily. "But smaller markets like Raleigh and Nashville, and even Austin, could see a pretty significant effect."

CoStar’s forecasting model predicts that rental property values would rise at about the same level that rents do. Amazon would lift apartment property values in Denver, for example, by about 4.6%, as rents would inch up 4.4% due to Amazon’s arrival. 

The Washington market, which includes the suburban Maryland suburbs and Northern Virginia, would experience just a 1.2% rent bump by the end of 2026 due to Amazon. (Amazon is considering three different sites in the Washington area - leading many watching the process to suspect the area has an inside track at landing the project).

180316_Amazon residential rent increase_graph.gif
 

CoStar’s model estimates the effect new jobs and apartment supply have on the market’s vacancy rate. However, the model makes no allowance for how multifamily developers may respond to news that Amazon has chosen their city. 

Michael Wolfson, associate director of capital markets research for brokerage Newmark Knight Frank, says multifamily developers are already preparing to pounce when Amazon makes its decision. "There are developers sitting there licking their chops, telling their partners we’re going to raise money now, to be ready," says Wolfson. Builders would be looking for quick turnaround for any new projects to take advantage of Amazon’s arrival. That’s easier in some markets - like Austin and Dallas - than others - like New York where permitting can take months or years. 

Wolfson thinks it’s possible Amazon itself could become a player in some of the local rental markets.

Last year, as Oracle expanded its Austin campus, the tech firm bought a 295-unit apartment complex to use as transitional housing for employees moving to the new campus. If Amazon chooses a supply-constrained market, it too could decide to invest in the rental market.

Meanwhile, the wait goes on as Amazon weighs a slew of factors in making its selection, including the amount of available office space, transportation and infrastructure condition, and local culture and entertainment options. Access to technology talent is also expected to be crucial. 
 

Source: CoStar Realty Information, Inc.


Feds See Increased CRE Lending Risk as Valuations Peak and Low Interest Rate Environment Comes to an End

 

MARCH 01, 2018

By Mark Heschmeyer

 

Multifamily, Owner-Occupied Property Loan Delinquencies Reverse Course, Start Moving Up

FDIC chairman Martin J. Gruenberg this week noted that the interest-rate environment and competitive lending conditions continue to pose challenges for many institutions. Credit: FDIC

FDIC chairman Martin J. Gruenberg this week noted that the interest-rate environment and competitive lending conditions continue to pose challenges for many institutions. Credit: FDIC

 

New data and commentary from federal financial regulators are pointing to signs of increased risks in CRE lending.

Notably, the amount of delinquent multifamily and owner-occupied property loans on the books of U.S. banks increased in the fourth quarter of last year, according to statistics released this week by the Federal Deposit Insurance Corp. (FDIC). 

And while the increases and total volumes are small, the uptick marks a change in the trend after multifamily delinquency levels hit the lowest mark ever recorded by the FDIC. The FDIC also reported a second quarterly increase in delinquencies for owner-occupied property loans, although by a low 0.4% to $6.74 billion.

The change in multifamily loan deliquency was more dramatic percentagewise, increasing 14.4% from the third quarter to the fourth quarter of 2017 to $1.08 billion. That change iin direction follows decreases of 4%, 8.1% and 9.8% over the first three quarters of 2017.

The FDIC data follows the Federal Reserve's latest Monetary Policy Report that noted growing vulnerability in the commercial real estate sector.

"Valuation pressures continue to be elevated across a range of asset classes, including equities and commercial real estate," the Fed noted in its report.

"In a sign of increasing valuation pressures in commercial real estate markets, net operating income relative to property values (referred to as capitalization rates) have been declining relative to Treasury yields of comparable maturity for multifamily and industrial properties. While these spreads narrowed further from already low levels, they are wider than in 2007," the report noted.

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FDIC chairman Martin J. Gruenberg this week said that the interest-rate environment and competitive lending conditions continue to pose challenges for many institutions.

"Some banks have responded by 'reaching for yield' through investing in higher-risk and longer-term assets," Gruenberg said. "Going forward, the industry must manage interest-rate risk, liquidity risk, and credit risk carefully to continue to grow on a long-run, sustainable path. These challenges facing the industry will remain a focus of supervisory attention."

Gruenberg earlier noted the challenge facing the FDIC is to preserve improvements in the capital and liquidity of U.S. banking institutions and to "continue the strong performance of banks during the post-crisis period and to position the banking system to weather the next, inevitable downturn.

"By many measures, stocks, bonds, and real estate are richly priced. Stock price-to-earnings ratios are at high levels, traditionally a cautionary sign to investors of a potential market correction," Gruenberg noted in the FDIC's recent 2017 annual report. "Bond maturities have lengthened, making their values more sensitive to a change in interest rates. As measured by capitalization rates, prices for commercial real estate are at high levels relative to the revenues the properties generate, again suggesting greater vulnerability to a correction."

Meanwhile, the total amount of commercial real estate loans held by U.S. banks and savings and loans continued to swell.

The total amount of CRE loans outstanding held by FDIC-insured institutions increased 1.2% to $2.13 trillion at year-end from the third quarter. That compares to an increase of 1% from mid-year to third quarter, according to the FDIC.

The $2.13 trillion year-end 2017 total CRE loans outstanding compares to $1.63 trillion at the last peak of the CRE markets at the end of June 2007.

Total loan amounts outstanding increased in every category of CRE lending broken out by the FDIC.

Meanwhile, real estate lending by banks increased in some areas while moderating in others. Construction and development loan totals jumped by $7.43 billion (2.2%) to $339.7 billion. Owner-occupied CRE loans increased $4.77 billion (0.9%) to $530.3 billion. The rate of increase in both of those categories exceeded the rates of at which those categories grew on average last year.

The rate of increase for the two other categories -- other nonresidential and multifamily -- were below the rates of at which those categories grew on average last year. Other nonresidential CRE increased $8.66 billion (1%) to $860.7 billion. And multifamily increased the least, $3.73 billion (0.9%) to $404.1 billion.

Source: CoStar Realty Information, Inc.


Declining Occupancy, Rent Growth Spreading to Top Tier of Best-Located US Retail Properties

 

FEBRUARY 22, 2018

By Randyl Drummer

 

Vacancy Rates for Malls, Shopping Centers Expected to Tick Up in 2018 Despite Robust Retail Spending, Economic Expansion

The largest investment sale transactions of the fourth quarter included Albertsons' $721 million sale-leaseback of 71 properties across 12 states, including this Safeway property in Florance, AZ.

The largest investment sale transactions of the fourth quarter included Albertsons' $721 million sale-leaseback of 71 properties across 12 states, including this Safeway property in Florance, AZ.

 

Even the best performing and most well located U.S. malls and shopping centers are beginning to feel the pinch of flat-lining rent growth and a vacancy uptick as e-commerce continues to take market share from brick-and-mortar retailers and the retail sector enters the late stages of the real estate cycle.

Despite a relatively strong finish for retailers in the final three months of 2017 buoyed by improved consumer spending and an expanding economy, demand for U.S. retail property was generally lackluster for the year, according to market highlights presented by CoStar managing consultant Ryan McCullough and director of U.S. research Suzanne Mulvee in the Fourth Quarter 2017 State of the U.S. Retail Market.

"All told, we are seeing some signs of a slowdown in the retail market," said McCullough, noting that retail absorption totaled about 69 million square feet for 2017, down about 30% from 2016 and 2015 levels, with developers expecting to deliver roughly 80 million square feet of new retail space in 2018 as demand from retail tenants begins to soften. "Given the slowdown in demand and some uptick in supply, we might anticipate the national retail vacancy rate, which went flat in 2017, to start to rise modestly in 2018," McCullough said.

Reflecting slowing investment sales volume observed by CoStar analysts across all commercial property types, retail investment fell to just below $20 billion in the fourth quarter, its lowest level since mid-2014. In addition to a diminished appetite among cautious buyers, many sellers are also pulling properties off the market after failing to achieve pricing that meets their expectations, McCullough said.
 

Top Centers Seeing Rent Erosion

One sign of the softening market conditions is a moderate rise in vacancies and flat-lining of rental rate growth in recent quarters at the country's top located and most productive Class A malls, urban luxury centers and shopping centers. These properties have consistently logged the highest location quality scores, as ranked by CoStar’s proprietary formula measuring the combined effects of demographics, density of surrounding commercial property and market competition on individual retail centers.

While retailers are readily absorbing some new supply entering the market, especially spaces of 20,000 square feet and below, larger boxes in certain centers that are ranked in the top 10 percentiles of location quality are in many cases taking longer to lease up, reflecting broader weakness among U.S. power center tenants. 

Meanwhile, at the opposite end of the quality spectrum, the number of "zombie" power centers with vacancy rates of 40% or more has increased 60% since 2016 due to a spike in store closures by Kmart, Toys R Us and other big-box retailers and grocers. The closures and bankruptcy filings are mounting weekly and likely will not abate any time soon. Toys R Us plans to close another 200 stores and lay off corporate personnel, in addition to 170 previously announced store closures, the Wall Street Journal reported Thursday. On Wednesday, Northeast supermarket chain Tops Markets LLC filed for Chapter 11 bankruptcy protection.
 

Grocery Centers May Face Increased Risk

In contrast, the neighborhood grocery anchored retail segment has continued to see good demand growth and falling vacancies, the CoStar market analysts reported. Even these reliable performers, however, may be facing some underlying risk due to over-retailing and tenant competition in coming quarters.

"Because many developers and landlords still consider the grocery anchored sector to be a safe defensive play against e-commerce that brings foot traffic, we are continuing to see more absorption and development that could perhaps lead to issues with oversupply," McCullough said.

While total retail space per capita has decreased by about 5% since 2009, the amount of anchored space per capita has increased by the same amount during that period amid competition from big-box chains that have added food and groceries to compete with grocery chains.

"We're seeing increasing delinquency rates in CMBS issuance among centers with mid-market grocers such as Albertsons, Winn Dixie and even Publix as a large tenant," McCullough said.

Overall U.S. retail rents increased another 1.7% in the final three of 2017 to $20.67 per square foot. However, the growth rate has slowed over the past 12 months from the average 3% growth seen over the past three years as asking rents have moderated in New York City, San Francisco, Miami, Boston and other core markets.

Demographics are again driving rent growth, with Atlanta, Charlotte, Las Vegas and other high-population-growth metros recording some of the strongest rent growth in 2017 as homebuilding and commercial construction have finally picked up, while markets with stagnant or even negative population growth such Hartford, Long Island, Chicago and New Orleans logged very few rent gains. Rent growth has also started to decline in retail centers with a location quality scores above 90 in recent quarters. 

In spite of the threat of online competition and store closures, total monthly retail sales grew by an average 0.5% per month last year from an average 0.2% in 2015 and 2016, with gains driven by increases in health-care and personal care and building materials and supplies reflecting the growing strength in the housing market. On the other hand, apparel and furniture sales lagged in 2017. The decline in clothing sales particularly worrisome as apparel tenants occupy an estimated 64% of mall and department store space, Mulvee said. 

Despite hitting a soft patch, overall U.S. retail sales continued to trend in the right direction at about a 4.2% annual increase in January, according to U.S. Census data released last week. Increases in personal income and the positive impact of tax cuts could position 2018 as a stronger year for consumption, Mulvee said.
 

Investors Chasing Quality, Income Reliability

The retailer distress that has pressured comparable-store sales and fundamentals has affected the capital markets. The U.S. Retail Index of the CoStar Commercial Repeat Sale Index (CCRSI) began to decline in 2017, though it rebounded in the second half to end the year with a net 10% gain from 2016.

Investors are generally seeking highly productive assets with high location-quality scores and capitalization rates are now trending upward on sales of lower-quality assets, Mulvee and McCullough said. While well-performing Class A mall are trading at a premium compared with past cycles, an average of $387 per square foot compared to $347 in 2005-2007, B and especially C malls are trading at a sharp discount of up to 50% compared with the 2005-2007 boom years.

Investors are also rewarding in-place tenancy, with triple-net lease deals comprising nearly 20% of total retail sales volume in 2017, an increase of about 9% over the 2009-2012 period, McCullough said. The largest transaction of the fourth quarter was the sale-leaseback by Albertsons of 71 stores across 12 states to Cardinal Capital Partners, Inc. for $721 million at a 6.5% cap rate.

Some well-located power centers also changed hands in 2017, including the 426,000-square-foot Centerton Square in Mount Laurel, NJ, sold by Black Creek Diversified Property Fund, Inc. to Prestige Properties & Development Company, Inc. for $129.6 million, or about $303.93/SF, at a 5.8% cap rate.

McCullough noted that location score for Centerton, which was fully leased to Costco and Wegman's at the time of the sale, ranks a solid 95 due to its affluent demographics and a significant nearby office and hotel presence.

Source: CoStar Realty Information, Inc.


Choice Properties Buying CREIT in $6 Billion Deal to Create Canada's Largest REIT

 

FEBRUARY 15, 2018

by Garry Marr

 

Combined Firms Will Have Enterprise Value of $16 Billion with 752 Properties Totaling 69 Million SF

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Choice Properties Real Estate Investment Trust has agreed to buy Canadian Real Estate Investment Trust in a $6 billion transaction they say will create the largest REIT in Canada with a combined enterprise value of $16 billion.

Toronto-based Choice Properties REIT said it would acquire all CREIT's assets and assume all of its liabilities, including long-term debt for $22.50 in cash and 2.4904 Choice Properties units per CREIT unit, on a fully pro-rated basis.

"We are excited to be creating Canada's leading diversified REIT. Choice Properties' expanded, diversified real estate portfolio, anchored by Canada's largest retailer, will provide unitholders of both Choice Properties and CREIT the opportunity to capitalize on the future growth and value creation opportunities of this strategic transaction," said John Morrison, president and chief executive of Choice Properties, in a statement. 

The combined entity will have a portfolio of 752 properties made up of 69 million square feet of gross leasable area. Loblaw Companies Ltd. and George Weston Ltd. will have combined proforma ownership of 65%.

"This transformational acquisition leads to the creation of a real estate investment trust with resilient characteristics and adds value creation opportunities to Choice Properties' existing strong portfolio of retail assets," added Galen G. Weston, chairman and chief executive of Loblaw and GWL, in a statement. 

The companies say the combined entity will be Canada's preeminent diversified REIT. The retail portfolio, which will make up 78% of net operating income and is focused on what the pair call "necessity-based retailers" that makeup 85% of the retail assets. Industrial assets will contribute 14% of NOI of the combined REIT with office assets making up the remaining 8%.

Stephen Johnson, chief executive of REIT, said the combination also provides tremendous opportunity for Choice Properties to capitalize on the firms' combined development pipeline to create long-term value. 

"Together, the combined REIT is uniquely positioned to deliver results for unitholders as the owner, manager and developer of a high-quality portfolio of diversified assets," Johnson said in a statement.

In the new combined REIT, Morrison becomes the vice-chairman of the board of trustees while Johnson will become president and chief executive.

Using the Choice Properties closing unit price on February 14, 2018, of $12.49, the deal equates to a price of $53.61 per CREIT unit, a 23.1% premium to the CREIT closing unit price on February 14, 2018. 

The total consideration consists of about 58% in Choice Properties units and 42% in cash. CREIT unitholders will have the ability to choose whether to receive $53.75 in cash or 4.2835 Choice Properties units for each CREIT unit held, subject to proration. The maximum amount of cash to be paid by Choice Properties will be approximately $1.65 billion, and approximately 183 million units will be issued, based on the fully diluted number of CREIT units outstanding.

CREIT's board of trustees has recommended unitholders vote in favour of the transaction. Choice Properties' board has unanimously determined that the deal is in the best interests of Choice Properties.
 

Source: CoStar Realty Information, Inc.


Liberty Planning to Sell Remaining Suburban Office Holdings for Up to $800 Million

 

FEBRUARY 8, 2018

By Randyl Drummer

 

REIT Looking for Buyers to Take Remaining Office Assets in Philadelphia, Tempe Off its Hands

The Vanguard corporate campus in Malvern, PA, is among the suburban office assets valued at up to $800 million that the REIT intends to sell this year. Credit: CoStar

The Vanguard corporate campus in Malvern, PA, is among the suburban office assets valued at up to $800 million that the REIT intends to sell this year. Credit: CoStar

 

Ramping up its transition out of the office sector and into the businiess of owning warehouse and logistics property, Liberty Property Trust (NYSE: LPT) said this week that it hopes to raise up to $800 million for reinvestment into industrial acquisition and development by divesting its remaining suburban office portfolio by the end of the year.

"We intend in 2018 to dispose of all of our remaining suburban office properties and redeploy these proceeds into our accretive development pipeline, along with industrial acquisitions within targeted markets," Liberty CEO Bill Hankowsky told analysts in a Tuesday conference call. "We anticipate asset sales of at least $600 million to $800 million."

While most of those properties designated for sale are located in the Philadelphia suburbs, "we also expect to take advantage of the market and selectively harvest value," Hankowsky added.

Liberty will plow proceeds from the sales into its growing industrial platform, acquiring $400 million to $600 million of industrial properties in target markets and starting up to $600 million worth of development projects, he added.

As part of its ongoing shift, Liberty last month sold a 641,000-square-foot suburban office portfolio in King of Prussia, PA in the Renaissance Park corporate center for $77 million. The REIT also disclosed the pending sale of 779,000 square feet of additional office space in the Philadelphia region, with multiple contracts totaling $107 million. 

Liberty executives said the properties being put on the market include the Vanguard corporate campus, a six-building office complex in Malvern where the REIT is based. The company will also sell its Malvern headquarters and holdings in Tempe, AZ. 

Liberty plans to hold onto its Philadelphia CBD office assets, including the under-construction Comcast Technology Center and newly build assets in the Navy Yard.

Sandler O'Neill REIT analyst Alexander Goldfarb applauded the asset sales, but noted that industrial capitalization rates continue to decrease. 

"We and others have pressed LPT over the years to exit the capex-intensive and slower-growth office to orient entirely to industrial," Goldfarb said.

In late 2016, Liberty sold a nearly $1 billion suburban office portfolio in five markets to a partnership of Horsham, PA-based Workspace Property Trust, Safanad, a Dubai-based global principal investment firm; and affiliates of diversified investment firm Square Mile Capital Management LLC.

Source: CoStar Realty Information, Inc.


With Demand Drivers in Place, U.S. Office Market Expected to Continue Cruising into 2018

 

JANUARY 25, 2018

By Randyl Drummer

 

Despite Deceleration in Occupancy and Rent Growth, Office Demand Expected to Track with Increased Office Supply

The $333 million purchase of a 9-building office portfolio by Starwood Capital Group in Austin is an example of heightened institutional interest in suburban office.

The $333 million purchase of a 9-building office portfolio by Starwood Capital Group in Austin is an example of heightened institutional interest in suburban office.

 

The U.S. office market continued to benefit from strong fundamentals going into 2018, despite continued deceleration in net absorption, occupancy and rental rate growth.

With robust corporate profits and continued office-using job growth, that trend is expected to hold through the year as the recently approved tax cuts and expected gradual increases in interest rates make U.S. office and other institutional-grade property types an attractive place for investors to park capital and get cash flow.

"You're going to like GDP growth over the next few months," CoStar Portfolio Strategy's Hans Nordby said during CoStar's year-end 2017 State of the U.S. Office Market report, co-presented with managing consultant Paul Leonard. "Corporate profit growth is a good story, and if you already think it's strong, look underneath the hood. It's even better."

The improved profit growth outlook for the services sector and other industries that drive office demand, along with expected higher GDP growth projected at a very strong 2.5% to 3% in the next few months, should help office job growth hold steady at strong levels for the next few month, Nordby said.

The U.S. office vacancy held steady at 10.1% at the end of the fourth quarter 2017, unchanged from the same period a year prior, despite a large amount of new supply and a 20% decline in office net absorption to 65 million square feet for 2017.

Meanwhile, the total amount of office property acquired by investors declined about 15% in 2017 from the prior year, largely due to a sharp drop in office trades in New York City and other gateway markets. 

Despite the declining sales volume, average prices in primary markets continued to rise, prompting investors to fan out into secondary markets such as suburban Phoenix, where Transwestern Investment Group and JDM Partners acquired Marina Heights, State Farm's office campus in Tempe, AZ, for $930 million at $459 per square foot. 

Signs of a deceleration in office sales and leasing are evident in several office boom markets, however, including Nashville and San Jose in California's Silicon Valley. Developers delivered 2.9 million square feet in Tennessee's Music City and 8.5 million square feet in San Jose as projects started during the height of the current cycle joined office inventory. 

In a positive sign, the brand-new stock in both markets is already about 80% occupied thanks to strong leasing by health-care tenants and tech companies such as Apple and Google.

"We've definitely seen a peak in the office market," Leonard said. "Everywhere across the board, we're starting to see a deceleration." 

Leonard sees the national office vacancy rate ticking up beginning this year through 2020 as the expected new supply of space finally begins to outpace demand. 

Another sign of the slowing office market is the continuing decline in the percentage of U.S. submarkets posting occupancy gains. At the beginning of 2016, more than 60% of office submarkets saw occupancy gains, according to CoStar information. A year later, that number has fallen to less than half.

Despite speculation about over the last few quarters about a potential bubble in technology stocks and a decline in venture capital funding, tech tenants continued to log huge absorption gains in the office leasing market. Office sharing firm WeWork led all companies with more than 7.5 million square feet of office space leased in 2017, one-third of that total in New York City alone. Amazon and Apple, which each made major announcements last week regarding future office campuses, each leased more than 3 million square feet. Google, Salesforce.com and telecommunications companies AT&T and Verizon also ranked in the top 10 in office leasing last year.

Moreover, availability rates for sublease space have fallen over the past few quarters after ticking up in markets such as San Francisco and Houston in 2016 through early last year during a pause in tech's dizzying growth of the previous few years.

Star Turn for Suburban, Tier 2 Markets

The largest investment deals of the fourth quarter reflected both the continued health of transaction activity and pricing in core coastal markets as well as rising investor interest in suburban, secondary and even tertiary office markets. 

Starwood Capital Group paid joint venture partners Brandywine Realty Trust and DRA Advisors, LLC roughly $333 million for a 1.2-million-square-foot office portfolio in Austin. In the Big Apple, SL Green Realty Corp. and RXR Realty acquired One Worldwide Plaza for $840 million, $829/SF, from New York REIT, Inc.

In the west, suburban Los Angeles submarkets like Torrance and El Segundo in L.A. County's South Bay are warming up in the wake of the downtown and Westside office boom. Starwood Capital scooped up Pacific Corporate Towers in El Segundo for $605 million, $381/SF, from a JV of Blackrock and General Motors Pension Trust.

Source: CoStar Realty Information, Inc.


Breaking News: Amazon Narrows HQ2 Search to 20 Markets

 

JANUARY 18, 2018

By Randyl Drummer

 

E-Commerce Giant Includes Many Major Markets but Also a Few Surprises in Running for $5 Billion, 50,000-job HQ in 2018

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Amazon (Nasdaq: AMZN) issued a short list of 20 metropolitan areas making the next cut in the competition to host the company’s second North America headquarters. This top 20 were narrowed from 238 proposals Amazon received from across the U.S., Canada, and Mexico in an unprecedented bidding process to host the company’s second North America headquarters. 

Amazon said it will work in coming months with each of the candidate locations to request more information and "dive deeper into their proposals" for the internet retailer's planned $5 billion investment and up to 50,000 employees, a partnership expected to bring profound economic development benefits to the winning market.

Editor's note: More to follow as CoStar News updates this breaking news story throughout the day. Updated: 2:50 p.m. EST

The next cut for the massive headquarters includes expected contenders such as New York City, Chicago, L.A. and D.C., but also several smaller markets such as Raleigh, Indianapolis, Columbus, Newark and Pittsburgh. Amazon listed the metros in alphabetical order and offered no signals about which geographic area or market the company would prefer.

The early morning decision brought swift reaction from local officials vying for the headquarters.

"We are beaming right now," said Kelly Smallridge, president of the Business Development Board of Palm Beach County, FL, of Miami's inclusion on the list. "South Florida is hip, chic, urban and we’re attractive to millennials. I’m not surprised at all that we made the list."

The South Florida counties of Palm Beach, Broward and Miami-Dade teamed to present a regional bid to Amazon that included confidential real estate sites in each county, Smallridge said. 

"Over the coming weeks and months, we look forward to working more closely with [Amazon] to show them why Music City would be the perfect fit for their company," Nashville Mayor Megan Barry said in a Twitter post. 

Indianapolis Mayor Joe Hogsett tweeted that Central Indiana’s "unique combination of connectivity, quality of life, and affordable living has once again put us on the global stage." In a statement, Hogsett said the inclusion shows that "every day we are gaining more recognition as a growing tech hub."

"As a thriving city with a talented and diverse workforce, culture of innovation and opportunity for all, I see no better city than Boston for Amazon to call their second home," Boston Mayor Martin J. Walsh said in a statement.

While Boston shares finalist status with 19 other cities, locals feel Beantown may have better odds than most of its competitors. That feeling was bolstered when it was revealed two weeks ago that Amazon was already seeking to lease up to 1 million square feet in the city.

Amazon has been looking to land space in the city’s revamped Seaport District, separate from the headquarters search. Boston's official bid for the new Amazon headquarters is focused around the 161-acre Suffolk Downs horse racing track property in East Boston and neighboring Revere. The company already employs about 1,000 people in the city.
 

Which US Region Has the Edge?

As the day progressed, analysts speculated on what part of the country has a higher probability of landing the coveted headquarters. Among other observers, Stephen Basham, CoStar senior market analyst for the Los Angeles market, believes Eastern markets have an edge.

"Amazon looks to be interested in expanding their geographical footprint," Basham said. "Three-fourths of the finalist cities are east of the Mississippi River, and Los Angeles was the only West Coast metro to make the cut."

The selection of three metros in the Washington, DC/Maryland/Virginia region has to position the region among the favorites, Basham said. As has always been the case, though, the final pick will likely hinge on what specific incentives and concessions the candidates are willing to offer.

"It would be hard to overstate the impact that an Amazon headquarters would have," Basham added. "You just have to look at how Seattle has transformed over the past 10-15 years as an example of a major metro that has been reshaped and revitalized by a single company."

Residential REIT analyst Aaron Hecht of JMP Securities opined that Atlanta or Austin are the most likely destination due to their active tech industry bases, quality higher-education institutions, favorable cost of living and low corporate tax rates.

"Although a number of East Coast cities have stronger strategic geographic locations to conduct business internationally, we believe the benefits being offered by many of those cities will ultimately be watered down by local politics," Hecht continued. 

"With Amazon already having its first headquarters in Seattle, which has a high cost of living and with local politicians looking to increase taxes on high wage earners, we believe the company will look for a city with more conservative views on tax policies," Hecht said.

Amazon's move comes less than a day after Apple, Inc. announced plans to ramp up its US investment by adding 20,000 jobs and another U.S. corporate campus in investments worth an estimated $350 billion to the U.S. economy over five years. 

Amazon said its HQ2 will be a complete co-headquarters and not a satellite office. In addition to direct hiring and investment, construction and ongoing operation of Amazon HQ2 is expected to create tens of thousands of additional jobs and tens of billions of dollars in additional investment in the surrounding region.

Over the past five years, Amazon has invested more than $100 billion in the U.S., including corporate offices, development and research centers, fulfillment infrastructure and compensation to the company's 540,000 employees.

"Getting from 238 to 20 was very tough," said Holly Sullivan, of Amazon Public Policy. "All the proposals showed tremendous enthusiasm and creativity. Through this process we learned about many new communities across North America that we will consider as locations for future infrastructure investment and job creation."

 

The 20 metropolitan areas advancing to the next phase of the process include the following:

  • Atlanta

  • Austin

  • Boston

  • Chicago

  • Columbus, OH

  • Dallas

  • Denver

  • Indianapolis

  • Los Angeles

  • Miami

  • Montgomery County, MD

  • Nashville

  • Newark, NJ

  • New York City

  • Northern Virginia

  • Philadelphia

  • Pittsburgh

  • Raleigh, NC

  • Toronto

  • Washington, D.C.


CoStar News reporters and editors Mark Heschmeyer, Paul Owers and John Doherty and Jacquelyn Ryan contributed to this report

Source: CoStar Realty Information, Inc.


Sam's Club Abruptly Closes 63 Stores

 

JANUARY 11, 2018

By Mark Heschmeyer

 

Not All Going Vacant as Walmart Subsidiary Will Convert 10 to Ecommerce Fulfillment Centers

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Sam's Club, a division of Wal-Mart Stores Inc. (NYSE:WMT), abruptly posted closure notices on 63 of its stores across the country yesterday.

The closings impact about 10% of its fleet of 660 clubs and are expected to affect about 10,000 employees, according to various media reports.

The action was taken after a thorough performance review.

"Transforming our business means managing our real estate portfolio and Walmart needs a strong fleet of Sam's Clubs that are fit for the future," said John Furner, president and CEO of Sam's Club. "We know this is difficult news for our associates and we are working to place as many of them as possible at nearby locations. Our focus today has been on those associates and their communities, and communicating with them."

Sam's Clubs stores average 134,000 square feet, which would mean that closures could impact about 8.4 million square feet of 'big box' retail space. However, not all of it will end up vacant. 

Sam's Club said it is converting 10 of the closed locations into e-commerce fa store at fulfillment centers, and possibly up to 12. The first of the conversions will be for a 120,000-square-foot store at 1805 Getwell Road in Memphis.

Walmart owns most of its Sam's Club stores (591 out of 660), the others are leased. Sam's Clubs stores in the U.S. post about $57 billion in revenue per year and account for about 12% of Walmart's total sales. 

Walmart reported that Sam's Club comparable store sales were up 2.8% year-over-year and that foot traffic was up 3.6% 

The company will record "a discrete charge" of approximately $0.14 per share related to these actions or approximately $414.73 million.

Source: CoStar Realty Information, Inc.


NYC, San Francisco, DC Slip; LA Gains Favor Among Foreign RE Investors

 

JANUARY 08, 2018

By Mark Heschmeyer

 

U.S. Real Estate Still Viewed as Most Stable in the World

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Among foreign investors, interest in New York has slipped and London has assumed first place as the top global city for their real estate investments, according to the results of a new survey of members of the Association of Foreign Investors in Real Estate (AFIRE) released today. In last year's survey, London ranked third globally; Los Angeles ranked second among U.S. cities and fourth globally.

"A year later, foreign investors are less concerned about the ramifications of Brexit," said, Edward M. Casal, AFIRE's newly elected chairman, and chief executive, global real estate, of London-based Aviva Investors, explaining London's rebound. "At the same time, the London market has been buoyed by several large sales over the last year. London has a number of attributes as a location for investment, including a stable rule of law, transparency, and use of the English language. In addition, a favorable time zone for international business, deep labor pool, and cultural attributes also help." 

Rounding out AFIRE members' list of top five global cities, in order, are: New York, Berlin, Los Angeles and Frankfurt.

San Francisco, which has been on investors' top five global cities list since 2011, fell into 11th place, and Washington, DC continued its slide among global cities, falling from 15th place last year to 25th this year.

Nonetheless, by a substantial margin, the U.S. was ranked as the number one country for planned real estate investment in 2018 followed by the U.K., Germany, Canada, and France. Survey respondents cited the U.S. market's stable economy, transparent capital markets, and reputation for innovation as the primary factors favoring investment. They pointed to senior housing, infrastructure, medical office buildings and student housing as options for alternative asset classes.
 

Industrial Boosting Los Angeles

And for the first time, Los Angeles has tied New York as the number one city in the U.S., boosted by its position as a leading global port. New York had been named the top U.S. city for the last seven years, holding a substantial lead over Los Angeles. As recently as 2014 Los Angeles was in fifth place among U.S. cities before moving up to second place in 2016. The remaining top five U.S. cities, in order, are: Seattle, Washington DC, and San Francisco. Seattle moved up from fourth place and Washington rejoined the list after falling off into sixth place last year.

"With the growth of on-line shopping, foreign investors continue to rank industrial / logistics properties as their number one investment opportunity," said Jim Fetgatter, chief executive of AFIRE. "The cargo coming into the Port of Los Angeles represents 43% of all cargo coming into the United States. Respondents also say on-line shopping is likely to have the biggest effect on real estate over the next five years. With these as benchmarks, it's easy to see why investors would be bullish on Los Angeles."

In 2010, industrial real estate was lowest-ranked among leading property types. This year, and every year since 2013 it has ranked first, except for 2014, when it was second-ranked. Meanwhile, retail property fell into fifth place; multifamily and office remained in second and third places respectively, and hotels, long in fifth place, moved into fourth.
 

U.S. Real Estate Still Viewed as Most Stable

With 58% of respondents' votes, the U.S. remains the country considered the most stable for real estate investment. Germany again took second place with 20% of the votes, and Canada remained in third place with 12%. The U.K. moved into fourth from fifth, while Australia fell from fourth to fifth. Eighty-six percent of respondents say they plan to maintain or increase their investment in U.S. real estate in 2018.

The survey also ranked the U.S. as offering the best opportunity for capital appreciation, followed by Brazil, remaining in second place. China and Spain both moved up from a sixth-place tie last year, taking third and fourth places respectively. The UK fell from third to fifth place.

At the same time, members are cautious, expressing concerns about where the industry is in the typical real estate cycle. They cited concerns about interest rate risks, high valuations, the impact of emerging technologies on retail and other property sectors, oversupply in some markets and property types, and possible economic and political missteps which could affect real estate by triggering an economic slowdown or disruption in the financial markets.

Ranking of US Property Types

  • Industrial (#1 last year)

  • Multifamily (#2 last year)

  • Office (#3 last year)

  • Hotel (#5 last year)

  • Retail (#4 last year)

AFIRE members are among the largest international institutional real estate investors in the world and have an estimated $2 trillion or more in real estate assets under management globally. The 26th annual survey was conducted in the fourth quarter of 2017 by the James A. Graaskamp Center for Real Estate, Wisconsin School of Business.

Source: CoStar Realty Information, Inc.


Sears Closing Another 103 Stores

 

JANUARY 04, 2018

By Mark Heschmeyer

 

Struggling Retailer Continues Shuttering Unprofitable Kmarts, Sears

180108_Sears.jpg
 

Like the retail version of the movie Groundhog Day, Sears Holdings is starting out 2018 the same way it started out 2017. Four days into the new year, Sears just announced the closing of 103 stores. Last year on this date it announced 150 store closings.

The retailer said it will close 64 Kmart stores and 39 Sears stores by early April, leaving it with about 875 locations.

Sears said it will continue right sizing its store footprint in number and size and close unprofitable stores in favor of investing more in its digital capabilities. The company informed store employees at the stores slated for closure that it will be closing them between early March and early April. Liquidation sales will begin as early as Jan. 12.

Source: CoStar Realty Information, Inc.


Head of the Class: CPPIB, GIC and Scion Acquire 24 Student Housing Properties for $1.1 Billion

 

JANUARY 03, 2018

By Mark Heschmeyer

 

Deal Represents Second Purchase in Past 12 Months from Harrison Street Real Estate

180108_Student housing.jpg
 

Scion Student Communities, a student housing investment group that includes the Canada Pension Plan Investment Board (CPPIB), GIC and The Scion Group LLC, has acquired a U.S. student housing portfolio for $1.1 billion, or about $80,500/bed.

The investment group is buying 22 properties from affiliates of Harrison Street Real Estate Capital. The deal also includes the recapitalization of two student-housing communities previously owned by Scion-affiliated private syndications.

Chicago-based Harrison Street Real Estate had assembled its 22 dormitories in the portfolio over the past several years mainly through one-off transactions across five of its different investment funds.

The entire portfolio consists of 24 assets located in 20 different university markets across the country comprising 13,666 beds. The portfolio includes a mix of recently developed rental housing as well as some value-added assets, CPPIB said in announcing the deal.

"This is a compelling investment opportunity to efficiently build further scale in the U.S. student housing sector with a portfolio of high-quality, well-located properties in new and existing joint venture markets," said Hilary Spann, managing director, head of Americas, real estate investments, CPPIB. 

"We believe the secular strength of the U.S. student housing sector will continue to deliver attractive, risk-adjusted returns for the CPP Fund, and we look forward to continue growing the joint venture with GIC and Scion," added Spann.

Scion president Robert Bronstein called the transaction "particularly strategic" given the joint venture was adding six properties in markets in which it already owns other student housing properties.

"This is consistent with our strategy to concentrate our investments in targeted markets by owning multiple properties with diverse product types and rental price point options," Bronstein said.

Since its inception in January 2016, the joint venture known as Scion Student Communities has completed over $4 billion of investments, primarily through four portfolio transactions, deploying $1.4 billion in equity capital. CPPIB and GIC each own a 45% interest in the newly acquired portfolio and Scion owns the remaining 10%.

The joint venture's national portfolio now includes 73 student housing communities in 52 top-tier university markets, comprising 46,555 beds. The average effective age of the portfolio is less than five years and over 70% of the assets are located within one mile of their respective campuses.

This was the second student housing portfolio in the past year that Harrison Street has sold to the CPPIB/GIC/Scion joint venture. Last March, it sold nine student housing properties to Scion Student Communities for $465 million.

Harrison Street is still one of the largest private investors in the student housing market with over 73,000 beds throughout the U.S. and Europe. It also invests in medical office properties, senior housing communities and self-storage facilities.

Christopher Merrill, co-founder, president and CEO of Harrison Street, said the portfolio sale reflects its strategy of acquiring single student housing assets or development opportunities located near large universities, increasing tenancy and packaging them for sale to other investors.

Peter Katz, executive managing director of Marcus & Millichap's IPA Student Housing Division, served as a strategic consultant to Harrison Street on the transaction.

Separately this week, Harrison Street acquired a portfolio of 25 medical office buildings from Minneapolis-based Investors Real Estate Trust (NYSE: IRET) for $367.7 million.

For IRET, the sale was a major milestone as the final disposition in its goal to refocus as a multifamily company. It plans to deploy proceeds from the MOB portfolio sale to acquire multifamily properties in the Twin Cities and Denver.

Source: CoStar Realty Information, Inc.


Proposed Westfield/Unibail Deal Could Spark M&A, Breathe Life Into Embattled Mall Sector

 

DECEMBER 20, 2017

By Randyl Drummer

 

Merger Talk, Activist Takeover Activity Seen Driving Recent Market Rally

Unibail-Rodamco has offered handsome price of $16 billion for Westfield Group, in part to land such attractive U.S. assets as the $1.5 billion Westfield WTC mall adjacent to the 911 Memorial in Lower Manhattan shown here

Unibail-Rodamco has offered handsome price of $16 billion for Westfield Group, in part to land such attractive U.S. assets as the $1.5 billion Westfield WTC mall adjacent to the 911 Memorial in Lower Manhattan shown here

 

Paris-based Unibail-Rodamco's agreement to acquire Westfield Corp. for $15.8 billion in cash and stock has emerged as a potential turning point for the U.S. mall sector as Wall Street struggles to assess the implications of a flurry of mall and shopping center buyout and spin-off reports which has helped boost shares of mall REITs as much as 37% in recent weeks. 

The proposed Unibail-Rodamco/Westfield pairing, coming on the heels of reports that GGP, Inc. (NYSE: GGP) turned down a $15 billion buyout offer but remains in merger talks with major shareholder Brookfield Property Partners, and the sharp lift in mall share prices over the past six weeks, has created a groundswell of positive sentiment for the mall sector over the past week. 

The shift in sentiment suggests that high-quality malls remain a profitable play for prominent and well-heeled investors, despite the high-profile retail chain bankruptcies and the thousands of stores expected to go dark in coming months as e-commerce and changing consumer buying behavior continue to disrupt brick-and-mortar shopping centers.

Media outlets have reported recently that Taubman Centers (NYSE: TCO) and Macerich Co. (NYSE: MAC) may again be subject to takeover efforts, possible by the world's largest mall owner, Simon Property Group (NYSE: SPG), which made a $16.6 billion bid for Macerich in 2015 which was rejected by MAC's board of directors. 

Other mall and shopping center operators are pursuing a spin-off strategy to improve their portfolios and bolster share prices, including DDR, Inc. (NYSE: DDR), which announced plans earlier this year to dispose of $900 million in properties and last week announced plans to spin off its non-core assets into a separate publicly traded REIT, Retail Value Trust.

"We certainly could see more consolidation in the space, given the recent activity and continued disruption," said Matt Kopsky, REIT analyst for Edward Jones. "There are synergies to scale with improving tenant relationships and better access to capital. We wouldn’t rule Simon out as a potential consolidator." 

While Simon is viewed as being unlikely to enter the fray in the GGP/Brookfield talks, there's a small chance the huge mall and outlet center owner could pick off certain assets from GGP," Kopsky said.

"We'll see if and when there are some fireworks in the mall space," Kopsky said.
 

Consolidators, Activists See Unibail Deal as Trigger

The Westfield deal, which would make Unibail-Rodamco the second-largest mall operator behind Simon with 104 centers in 13 countries, is "very positive for the U.S. mall space overall" given a lack of price discovery due to the very few number of deals negotiated for high-quality properties in recent years, Kopsky said. The capitalization rate for the Westfield deal appears to be in the mid-high 4% range, compared with the initial offer for GGP by Brookfield, which was in the high 5% or low 6% range, he added.

"When the initial Brookfield offer came in at a less favorable price than many had hoped, some of the market's fears became reality," Kopsky said. "However, the Westfield deal certainly alleviated some of those fears and provides some good support for Class A malls."

Land & Buildings founder and chief investment officer Jonathan Litt, who along with Paul Singer's Elliott Management have led hedge fund efforts this year to take Taubman private or spin off some of the company's assets, this week cited the Unibail-Rodamco deal as "just the latest data point highlighting the severe discount that Taubman trades at relative to the underlying asset value." 

"Opportunistic buyers are taking advantage of extreme discounts at publicly traded retail real estate companies," Litt said in a presentation released Tuesday. "The announced $25 billion sale of high-quality mall company Westfield Corp. is the latest transaction highlighting deep value in the sector."

In fact, Litt argues that Taubman merits an even higher valuation than Westfield given its superior sales productivity, exposure to malls with sales over $800 per square foot, and 30% higher concentration of Class A assets as a percentage of net operating income.

The reports have definitely jump-started mall REIT shares. GGP shares have increased nearly 25% in the wake of the reports since falling to a year low of $19 on Nov. 6. Stock prices for Macerich and Taubman have increased 23% and 37%, respectively, during the same period. 
 

Investor Sentiment for Malls Hanging in Balance

While the recent rally by mall companies has been cause for investor optimism, some analysts caution that the round of merger and acquisition activity that investors appear to expect may not materialize.

"Success is not a given," and completing deals at prices that exceed current market valuations "may be easier said than done," Morgan Stanley equity analyst Richard Hill noted in a recent report. "We believe this a critical but untested crossroads for mall REITs."

On one hand, success in selling or privatizing higher quality mall REITs could demonstrate that mall stock prices have finally bottomed and are beginning to turn around after years of stagnation. Morgan Stanley's Hill said the buyout activity "couldn't have come at a better time" as malls may finally be due for a rally with share prices falling to a six-year low. Many stronger retailers are reporting better-than-expected earnings in spite of bankruptcy and closure announcements by department stores and apparel chains.

"There is certainly no guarantee that anything will happen, but sentiment is improving given the Westfield-Unibail deal, activist investors, and optimism that 2018 will not be as bad as 2017 in terms of retailer store closing and bankruptcies," Kopsky agreed.

If current M&A deals fall through or close at lower-than-expected prices, however, investors may see continued erosion in growth prospects and valuations, with share prices falling even lower, Hill noted.

According to an analysis of past merger and acquisition activity by Hill and his Morgan Stanley team, merger deals in the broader REIT sector have historically succeeded at share prices near the takeover target's 52-week high. However, mall REIT shares before the rally traded at 15% to 40% below their year highs, 

Recent comments by retail real estate executives at the recent NAREIT annual conference suggested "there may be a disconnect between [the seller's] ask and the market's bid for malls given the current retail environment," Hill said.

The surprise $24.7 billion bid for Westfield, owner of high-profile properties around the country such as Westfield WTC in Lower Manhattan, Horton Plaza and UTC in San Diego and Century City mall in Los Angeles was nearly 18% above Westfield's share price as Unibail pays a princely sum in the view of some analysts to gain a foothold in the U.S.

Unibail CFO Jaap Tonckens addressed the bid pricing in a presentation on the sale last week.

"Based on our preliminary calculations, we're buying [Westfield] at an approximately 6% premium to our estimate of their NAV, so overall, this makes sense," Tonckens said, noting that the pricing is "well within the range" of other proposed transactions around the world, including Brookfield's reported offer for GGP.

As mentioned, Simon Property Group has previously attempted to buy both Taubman and Macerich. Activist investors Third Point and Starboard Value last month reported a stake in Macerich in a potential prelude to a buyout.
 

Rating Agencies Offer Differing Mall Outlooks

A Nov. 30 study by S&P Global Ratings suggests that investors still see value in U.S. retail, with the low U.S. unemployment rate helping bolster the mall sector in the face of other variables, such as the growing competition from e-commerce.

S&P said while retail collateral exposure in CMBS transactions clearly shows the potential for extreme default and loss rates among malls, "we still see the inclusion of this property type as helpful to diversifying multi-loan pools as long as the properties are underwritten based on an evaluation of their location, competitive landscape, and long-term performance trends."

Well-located brick-and-mortar stores within shopping centers and freestanding properties in areas with strong demographics are usually competitive and should continue to perform well. However, "the need to focus on local market analysis, competitive positioning and performance trends of each property is clear," S&P said.

While overall retail cap rates remained unchanged in 2017, spreads between higher-quality and less-desirable properties are widening, CoStar Portfolio Strategy Managing Consultant Ryan McCullough said.

"Highly productive assets, including A-rated malls and high street retail, have been commanding cap rates roughly 40-50 basis points below what comparable properties would trade for during the peak of the last cycle," McCullough said. "Yet investors are demanding higher returns on weaker product, which include C malls and exurban retail trade areas. The cap rate curve is therefore steeper in 2017 than at any point this decade, which is emblematic of a bifurcated market."

Morningstar equity analyst Brad Schwer has taken a more bearish view on malls, arguing that the rise of e-commerce has hit malls hard and "the pain has just begun."

Although online accounts for only 10% of total retail sales, this percentage is climbing at a double-digit pace annually, softening demand for physical store space.

"While we believe retailers desire a storefront presence to interact with customers and display and market their brands, we see malls taking a significant hit in an already over-retailed environment," said Schwer, who recently reduced value estimates for Simon, Macerich and GGP.

In the e-commerce era, mall owners no longer enjoy the traditional "moat," or competitive advantage, offered by scale and network efficiencies. Rising occupancy costs will continue to financially pressure tenants and reduce mall owners’ abilities to push rents, Schwer said.

"Our uncertainty surrounding the physical retail environment is too high to award an economic moat," Schwer said. "We see a diminishing network effect as retailers shift strategies and place less emphasis on physical storefronts."

"Mall landlords believe they can revitalize the shopping experience with lofty redevelopments, but this approach is highly capital-intensive and also carries great uncertainty, making it a risky endeavor," Schwer said. "With the U.S. massively over-retailed as it is, we think the industry as a whole will have a tough road ahead."

Source: CoStar Realty Information, Inc.


CVS-Aetna Combination Signals Coming Convergence of Health Care and Retail Real Estate

 

DECEMBER 14, 2017

By Mark Heschmeyer

 

Traditional Drugstore Model Focused on General Merchandise with Pharmacy Counter May Give Way to Reimagined Health Care Hub

171214_CVS and Aetna.jpg
 

Last week's blockbuster deal in which CVS Health (NYSE: CVS) agreed to acquire Aetna Inc. (NYSE: AET) for $77 billion, including assumption of debt, has the potential not only to fundamentally alter the health plan market but also radically reshape the retail and health care real estate markets.

With about $245 billion in combined revenue and around $19 billion in combined EBITDA, CVS and Aetna are banking on the potential to redefine the way individuals access health care services in lower-cost, retail/pharmacy locations. Aisles of greeting cards and soft drinks could eventually make room for wellness treatments, clinical and pharmacy services, vision and hearing testing, as well as the expected nutrition, beauty and medical equipment offerings.

CVS Health's current network includes more than 9,700 CVS Pharmacy locations and 1,100 MinuteClinic walk-in clinics. In addition, CVS Health has more than 4,000 nursing professionals on staff providing in-clinic and home-based care across the nation.

Aetna is a leading diversified health care benefits company, insuring 22 million people and providing services to an estimated 44.6 million people in other ways.

At the heart of the combination is a business proposition to address the growing cost of delivering health care services by reducing check-ups and other "between" doctor visits through face-to-face counseling at a store-based health hub.

"These types of interventions are things that the traditional health care system could be doing," noted Larry J. Merlo, CVS Health president and CEO. "But the traditional health care system lacks the key elements of convenience and coordination that help to engage consumers in their health. That's what the combination of CVS Health and Aetna will deliver."

One of the proposed merger's goals is to deliver more health care services in CVS stores and its retail clinics, shifting the traditional health care delivery model further away from more costly settings, including urgent care centers, doctor offices and hospital emergency rooms.

This shift has been ongoing but could accelerate following the CVS-Aetna merger. CVS has been transitioning space in its stores for the last two years, adding such things as vision and audiology centers.

"There's no question that we have the opportunities to repurpose some of the space in our stores," Merlo said. "You can think about this as more of a hub-and-spoke model in that there will be a core set of services that would be available broadly, and there likely would be a subset of stores that would have enhanced services. And that delta would certainly be reflected in the space allocation within the store. But, obviously, we'll have a lot more to say about that as we get these pilots underway and go from there."

With its deal to acquire Aetna, CVS could further sharpen its focus on making health care its core business, said Brian McDonagh, a director with CBX Brand Strategy in Minneapolis.

"For far too long, U.S. chain drugstores have suffered from a bit of an identity crisis," McDonagh said. "Despite the coolers and front-of-the-store merchandise, CVS, for one, has realized that it isn't primarily a food seller, nor is it a discount retailer or c-store. Increasingly, CVS has been trying to act like a health care company."
 

Real Estate Industry Paying Close Attention

As CVS begins to remake its retail pharmacy stores to become a new "front door" to a fragmented health care system, real estate investors will need to pay close attention to both near- and long-term consequences of the combination, said Quinn McCarthy, an analyst with JLL Capital Markets, Net Lease.

"In the short-term, I expect the acquisition to give many risk-averse net lease investors pause regarding CVS-leased assets," McCarthy said. "CVS will almost inevitably experience a multi-notch credit downgrade as a result of the acquisition cost, and will also see their EPS diluted significantly. The other risk that stands out to me is the future viability of current CVS locations."

Without knowing how CVS intends to physically implement the expanding health services arm of its business, leases approaching expiration of the initial term may be approached with a significant discount until the future of CVS's prototype is known, McCarthy said.

"If it is revealed that they intend to reduce retail floor area in existing stores to add dedicated health service space, this worry will likely be assuaged. But the risk of a fundamentally different new prototype making existing layouts obsolete will be a common investor worry," McCarthy said.

However, over the long-term, assuming successful implementation by CVS, McCarthy said he can see the merger boosting net lease investors' interests in CVS as a tenant.

Milt Charbonneau, a senior director at Cushman & Wakefield in Iselin, NJ, sees any growth in health care shifting to more conveniently located retail space as a downside worry for investors in medical office buildings. Charbonneau said the concern would be even more if other retailers, such as Walmart and Walgreens, expand their health care offerings in a similar fashion.

"The CVS/Aetna deal may be the start of 'the department store of health care,' said Mike Polachek, executive vice president at SRS Real Estate Partners. "In addition to their fleet of retail stores, I could see them opening selective stores in former large boxes and housing, in addition to their retail format adding an insurance office, urgent care (without overnight) stays, physical rehab, concierge doctors and other medical providers. They could form a hub-and-spoke distribution with the hub being these large format operations and the retail stores being the spokes."
 

Defending Against an Amazon Incursion

Tony Miller, owner of The Miller Family Cos. in Agoura Hills, CA, said the merger is clearly a defensive play to the expected entrance into the pharmaceutical field by Amazon, offering steeply discounted prescription drugs via mail order.

"By combining forces, the newly formed entity could offer 'in-store' medical care, creating a one-stop shop for medical needs. I am not sure how Amazon would compete with the human interaction a medical staff offers," Miller said.

But the potential Amazon incursion is just enough of a worry that major investors are already adjusting their pharmacy holdings. Agree Realty Corp (NYSE:ADC) said last month that it reduced its net leased pharmacy holdings from 30% to 13.2% in the last three years. Walgreens, Agree's largest tenant, has been taken down to 8.5% from 22% in that time.

"We're committed to taking Walgreens down to sub-5%, not because we don't believe in the tenant or the business, but we think it's the right thing to do to divest and redeploy on an accretive basis there, and you'll continue to see that trajectory," said Joey Agree, president and CEO of Agree Realty.

"While we remain believers in the pharmacy space, I will tell all investors just to [compare] what we've accomplished to their diversification efforts," Agree said. "It's one thing for Amazon if and when they do enter the pharmacy space to enter it and disrupt it. It's another thing for them to operationally affect the Walgreens and CVS's of the world. So we haven't seen those rumors trickle down. What we have seen is just generally a continued flight to safety. And frankly, people have gotten in line behind the strategy, which we've been expounding upon since 2011 in terms of e-commerce."

Source: CoStar Realty Information, Inc.


Unibail-Rodamco Buying Westfield in $25 Billion Deal

 

DECEMBER 14, 2017

By Mark Heschmeyer

 

Deal Gives Paris-Based Global Property Giant Entry into U.S. Retail Market, Combined Portfolio Valued at $72 Billion

Westfield's Century City in Los Angeles

Westfield's Century City in Los Angeles

 

Unibail-Rodamco SE has agreed to acquire Westfield Corp. in a deal valued at US$24.7 billion, creating one of the world's largest shopping center developers and operators.

Under the terms of the agreement, security holders of Sydney, Australia-based Westfield will receive a combination of cash and shares in Paris-based Unibail-Rodamco, valuing each Westfield security at US$7.55 and representing a premium of 17.8% to Westfield's closing security price on Dec. 11, 2017. The deal implies an enterprise value for Westfield of US$24.7 billion.

The transaction has been unanimously recommended by Westfield's board of directors and Unibail-Rodamco's supervisory board.

Unibail-Rodamco said a combination with Westfield is a "natural extension" of its strategy to own and operate high quality large shopping destinations in wealthy capital cities. The acquisition will mark Unibail-Rodamco's entry into the U.S. market.

The merger will create a global retail property leader with US$72 billion of gross market value. The combined entities will own a platform of 104 retail centers across 27 European and U.S. markets. About 22% of its holdings by gross market value will be in the U.S. with properties in Seattle, San Francisco, Southern California, Chicago, New York and Annapolis.

The portfolio includes malls in such cities as London, Los Angeles, Munich, New York, Paris, San Francisco, San Jose, Stockholm, Vienna, Madrid and Warsaw. Net rental income was approximately US$2.6 billion for the 12 months ended June 30, 2017.

The combined firms development pipelines totals about US$13 billion, with developments in London, Milan, Hamburg, Brussels, Paris, San Jose, Lyon and other cities.

Unibail-Rodamco has earmarked approximately U.S. $3.5 billion of the 104 assets to be disposed over the next several years.

Christophe Cuvillier, chairman and CEO of Unibail-Rodamco, will be the group CEO, and Colin Dyer, chairman of Unibail-Rodamco's Supervisory Board, will be the group chairman.

"All of us at Unibail-Rodamco have immense respect for what the Lowy family and the Westfield team have accomplished with the Westfield brand and the company’s iconic collection of world class shopping destinations," Christophe Cuvillier, chairman of the Management Board and CEO of Unibail-Rodamco said in a statement announcing the agreement. "We believe that this transaction represents a compelling opportunity for both companies to realize benefits not available to each company on a standalone basis, and creates a strong and attractive platform for future growth."

The group will have its headquarters in Paris and Schiphol (Netherlands), with two regional headquarters in Los Angeles and London, and will retain its status as a Dutch REIT.

Deutsche Bank and Goldman Sachs are providing US$7.2 billion in committed acquisition financing facility to cover the cash portion of the offer, refinancing requirements at Westfield and Unibail-Rodamco and transaction costs.

Source: CoStar Realty Information, Inc.


What's Ahead for Non-Traded REIT Sector? Rebound Expected in 2018 Driven by Large Institutions, Small Investors Alike

 

DECEMBER 7, 2017

By Randyl Drummer

 

Yield-Hungry Investors Expected to Return to Nonlisted Space Next Year After Fundraising Craters in 2017

Nonlisted REIT Griffin Capital Essential Asset REIT, Inc. traded the 460,000-square-foot DreamWorks headquarters and studio campus in Glendale, CA to a South Korean investor 10 days ago for $290 million.

Nonlisted REIT Griffin Capital Essential Asset REIT, Inc. traded the 460,000-square-foot DreamWorks headquarters and studio campus in Glendale, CA to a South Korean investor 10 days ago for $290 million.

 

The amount of funds raised by non-traded REITs is expected to hit a 15-year low for 2017 amid increased federal regulatory scrutiny and pressure on companies to reduce their fee structures and increase transparency into their operations.

At least two large sponsors of nonlisted trusts have exited the space in recent months. W. P. Carey Inc. (NYSE: WPC), a major player which had sponsored non-traded REITs since 1990, decided to exit the business in June. In a similar move to focus on its real estate portfolio, net-lease operator VEREIT, Inc. (NYSE: VER) agreed to sell its Cole Capital nonlisted REIT operator to an affiliate of Los Angeles-based CIM Group, Inc. in a transaction valued at up to $200 million. 

Non-traded REIT fundraising will end 2017 at $4.2 billion, a nearly 79% plunge from the $19.6 billion raised during the sector's 2013 peak, according to sector consulting firm Robert A. Stanger & Co. Nearly half that total, about $2 billion, will be generated by just one player, Blackstone Group's nascent Blackstone REIT, which began trading this year.

However, Stanger and other analysts see a rebound in the future. The recent arrivals of Blackstone, Starwood Capital Group and other global investment institutions and money managers such as Cantor Fitzgerald, paired with the growing appetite for yield among smaller retail investors and major funds alike, may boost the fortunes of the non-traded REITs in 2018. 

Cantor Fitzgerald LP this week announced plans to launch Rodin Income Trust, its second non-traded REIT, with a goal of raising up to $1.25 billion to acquire CRE debt, securities and properties. In October, Starwood Capital Group became the latest major player to test the waters, announcing plans to launch Miami Beach-based Starwood Real Estate Income Trust, Inc., hoping to raise up to $5 billion through an initial public offering for the REIT and use the proceeds to acquire property and debt in the U.S and globally.

Stanger forecasts a more-than 33% increase in fundraising by non-traded REITs next year to approximately $5.6 billion, pointing to the acceptance of the formerly maligned non-traded REIT sector by big institutional players and the broader financial community as investors search all corners of the market for yield opportunities.

Kevin T. Gannon, managing director with Robert A. Stanger & Co., said the turnaround may be part of a strategy by Blackstone, Starwood and other major players to use non-traded REITs as a vehicle for pooling individual retail investors who buy securities on their own account rather than on behalf of large institutions. 

The Starwood IPO follows the formation of Blackstone Group's first non-traded REIT, Blackstone Real Estate Income Trust, which has already exceeded its goal of raising more than $1.4 billion this year. 

"Blackstone has been dominating the space with its institutional cachet and long-term relationships with the wire houses, who have been a significant force in non-traded REIT fundraising in the last two years," Gannon said. "This year, the wire houses have been an important factor through their business with Blackstone, and in prior years, through their fundraising through Jones Lang LaSalle." 

Non-traded REITs have also been active sellers. Griffin Capital Essential Asset REIT, Inc. late last month sold DreamWorks Animation’s headquarters and studio campus, a five-building, 460,000 square foot property in Glendale, CA, for $290 million. The REIT acquired the building in July 2015 for $215 million. 

Other important non-traded REIT players this year have been Carter Validus in the data center and health-care asset space, Cole Capital in the net lease sector, and Black Creek and Smartstop in industrial and self-storage properties, respectively, according to Stanger.

Los Angeles-based CIM Group agreed to acquire nonlisted REIT operator Cole Capital from net-lease operator VEREIT, Inc. (NYSE: VER) in a transaction valued at up to $200 million, a price that "seems light" compared with JMP Securities' estimated $260 million valuation of the platform, according to JMP Securities analyst Mitch Germain in a note to investors.

The non-traded industry has faced considerable challenges associated with the Department of Labor's new fiduciary rule and increased transparency, which have inhibited fundraising, Germain said, noting that full-year projections for 2017 are well below five-year averages for the industry. 

CIM said it plans to grow Cole's assets under management and expects to gain broader distribution of the non-traded REITs it sponsor through its broker-dealer agreements.

"With this acquisition, CIM acquires expertise and what it believes are best-in-class performing funds in the net/finance-lease space, complementary to CIM Group’s well-established urban product platforms," CIM said in a statement confirming the acquisition. "In addition, CIM acquires one of the market-leading retail distribution organizations serving Independent broker-dealers and registered investment advisers, complementing CIM’s existing relationships with institutional investors and wirehouse distribution channels."

JMP Securities' Germain also underscored the attraction of getting access to these sales channels for reaching individual investors.

"We think the emergence of retail platforms among well-renowned institutions including Blackstone and Starwood Capital should add further credibility to the industry," Germain said.

Source: CoStar Realty Information, Inc.


Once Poised to Become Third-Largest U.S. Pharmacy, Fred's Now Shrinking

 

DECEMBER 7, 2017

By Mark Heschmeyer

 

Weakening Sales Prompts Review of Owned Real Estate as Part of Turnaround Strategy

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It was just a year ago this month, when Fred's Inc. (NASDAQ:FRED) struck a deal to buy 865 Rite Aid stores for $950 million putting it on the cusp of becoming the third-largest drug store chain in the country.

The deal was contingent on Walgreens Boots Alliance's (NASDAQ: WBA) winning federal approval for its proposed acquisition of and Rite Aid Corp. (NYSE: RAD). But that merger never went through as planned and neither did Fred's acquisition.

Now this week, Fred's has cancelled its quarterly cash dividend in order to retain free cash flow for debt reductions. It also said it is putting some of its real estate up for sale.

For the third quarter, Fred's recorded a net loss of $51.8 million compared to a net loss of $38.4 million for the third quarter of 2016.

To help stem the losses, the company's focus is turning towards driving increased traffic, and reducing expenses. Its board is considering alternatives for certain non-core assets, including real estate and its specialty pharmacy business. The board's decision to consider these strategic alternatives is not in response to any third-party proposal, the company said.

Tracing its history back to an original store in Coldwater, MS, opened in 1947, today Fred's operates approximately 600 general merchandise and pharmacy stores, including 88 owned facilities.

"In the third quarter, we furthered our efforts to turn around the company, and we are encouraged by our positive front store comp sales in both October and November," said Michael K. Bloom, CEO of Fred's. "We are focused on driving traffic, reducing SG&A, generating free cash flow and lowering our debt. We are aggressively executing our turnaround strategy to accomplish these goals, and we are seeing traction in both front store and pharmacy."

Net sales for the third quarter were $493.6 million, down 4.5% from $516.6 million in the same period last year mainly driven by the closure or 39 underperforming stores earlier in 2017. Comparable store sales for the third quarter declined 0.8% versus a decrease of 3.8% in the third quarter last year.

Source: CoStar Realty Information, Inc.


Which Companies Carry the Highest Value in Leases for US Office and Industrial Real Estate?

 

NOVEMBER 30, 2017

By Randyl Drummer

Updated - Analysis of Top 1,000 US Leaseholders Representing $135 Billion in Rent Value Confirms Rapid Ascent and Influence of Tech Tenants, Importance of Govt. Occupiers to CRE Landlords

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The top 1,000 corporate, government and institutional occupiers in the U.S. hold leases worth an aggregated rent value of more than $135 billion, encompassing just over 8.4 billion square feet of office, industrial and flex space across about 115,500 properties, according to a recent analysis of CoStar Group tenant data.

The study ranks occupiers by the current value of rents paid across their U.S. real estate portfolios in CoStar's database. Total rent value was calculated by multiplying the space occupied by tenants in each building by the estimated rent value per property in the U.S. and providing a total lease value for each occupier across markets. 

Of the top 1,000, Amazon.com had the highest overall rent value relative to its occupied square footage, with a total $1.34 billion in rent value across 352 U.S. properties totaling more than 130 million square feet of industrial, office and flex space. Amazon controls large blocks of office space in Manhattan, San Francisco and its headquarters city of Seattle, among other markets. 

The high dollar value of the internet retailer's lease obligations can be attributed to its robust absorption of office space in recent years, along with its growing network of hundreds of fulfillment, customer service and other distribution facilities. For purposes of the study, which did not include retail properties, Amazon has also broadened its property footprint with the non-grocery assets in its June acquisition of Austin-based Whole Foods Market, Inc. Amazon occupancy is sure to grow even larger in coming years with the anticipated announcement of the site for its proposed $5 billion HQ2 corporate headquarters campus, which will have capacity for 50,000 employees and 8 million square feet. 

The internet seller's request for proposals (RFP) announcement set off arguably the largest economic development and business attraction scramble in modern corporate history last summer, with Amazon revealing that it received proposals from 238 cities and regions across 54 states, provinces, and local or regional jurisdictions throughout North America. Rumors are swirling that Amazon will soon announce the short list of contenders or even the winning city.

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The study was directed by CoStar Senior Research Director Corey Durant, Senior Vice President of Technology Jason Butler and Senior VP of Global Research Lisa Ruggles. CoStar's analytics team contributed data on the estimated rent value per property for U.S. office, industrial and flex properties.

Durant said the results were eye opening and in some cases, surprising. 

"The number of banks and tech companies among the largest rent payers was revealing," Durant said. "Who would have thought the Dept. of Justice would have the fourth-highest rent value among the 1,000 largest tenants? Amazon, Apple, Google and Microsoft were all near the top as one might expect. However, DaVita Healthcare, with its network of dialysis treatment centers stood out as a definite riser at #21," Durant added.

Other significant findings in the study included the high rent value contributed by federal government agencies and other state, local and regional jurisdictions. Of the top 25 occupiers in total rent value, the U.S. Dept. of Justice ranked just behind Wells Fargo at #4, representing total rent value of $822 million in more than 850 facilities totaling 24.5 million square feet.

After Amazon, the #2 and #3 spots are held by two of the nation's largest banks, Bank of America and Wells Fargo. Other financial institutions in the top 25 include JPMorgan Chase, Morgan Stanley, Citigroup and the U.S. Treasury Dept., which occupies nearly 300 properties for a total of nearly 13.5 million square feet with a rent value of about $347 million, ranking #22 among the top 1,000 occupiers.

State Farm Insurance had the largest number of properties among the top 1,000 occupiers, 9,654 properties totaling 25.6 million square feet, and total rent value of just under $500 million, ranking #10 in the top 1,000 with rent value of about $498.6 million. 

Tech companies were strongly represented among the rent value leaders, with their offices and other facilities concentrated in the priciest submarkets of top gateway metros with the nation's highest average office rental rates such as Manhattan, San Francisco, Silicon Valley, Boston, Los Angeles and Seattle.

Alphabet, Inc., the multinational conglomerate formed in a 2015 corporate restructuring of Mountain View, CA-based Google and the world's second-largest internet company by revenue behind Amazon, ranked #8 in rent value with its nearly 12.5 million square feet of occupied space. Other tech companies with fast-growing footprints such as Microsoft and Apple were also in the top 25.

Other data points of note in the survey included the following:
 

  • Shared-office space leaders Regus and WeWork ranked #9 and #26, respectively in rent value. Regus spaces have a rent value of $501.6 million in 13.7 million square feet at about 560 properties. New York City based WeWork, which provides shared workspaces, tech startup subculture communities and services for entrepreneurs, freelancers and small businesses, controls nearly 6 million square feet of U.S. office space at nearly 100 locations. The company founded in 2010 has among the fastest-growing valuations in American corporate history at more than $20 billion.

  • Telecom giants AT&T and Verizon Communications ranked #6 and #15, respectively in rent value.

  • Federal agencies led by the Justice Dept. (#4), US General Services Administration (#7), U.S. Department of Homeland Security (#13), Social Security Administration (#22), Treasury Department (#22) and Health & Human Services at #24 held almost one-quarter of the top 25 occupiers.

  • Boeing Co. (#12) and Ford Motor Co. (#16) were the only manufacturers to make the top 25.

    Editor's note: This update conforms several of the rankings in the text of the article with the correct rankings in the chart above.

Source: CoStar Realty Information, Inc.


Major Apt. Developers Disclose Plans to Slow Pipeli