Tag Archive for: cre investors

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Industrial Cap Rates Expected To Rise But Outlook For Seasoned Investors Remains Strong

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Industrial has been on quite a tear over the past few years, as changes in consumer behavior have driven demand for more logistics and fulfillment facilities in key markets.

And according to one industry expert, the sector should stay a favored asset class for experienced investors, despite rising capital costs.

“Post-pandemic consumer behavior has changed and the rate of growth in ecommerce has slowed which has already led to pullbacks by some companies,” says Greg Burns, Managing Director at Stonebriar Commercial Finance, noting Amazon’s recent announcements regarding its industrial portfolio. “Demand for industrial though was driven by other factors as well including a move toward onshoring and the disruption of just in time supply chains.”

With that said, however, Burns said “depending on the what and the where, I would not be surprised to see cap rates widen another 50 to 100 basis points.”

“The cost of debt and equity capital have increased and cap rate hurdles have increased for institutional buyers,” Burns says, adding that he recently saw an increase of 100 basis points in an appraisal for a property in a market where his firm closed a deal six months ago.

Burns will discuss what’s happening in the capital markets in a session at next month’s GlobeSt Industrial conference in Scottsdale, Ariz. He says Stonebriar’s definition of industrial includes not just warehouse and distribution facilities, but manufacturing, life sciences, cold storage and data centers as well, and notes that “each of those sub-categories have their own dynamic and, broadly, all are growing.”

“We prefer properties with multi-modal access, especially those near ports, with most opportunities we’ve seen recently being to the southeast of a line drawn from Baltimore to Phoenix,” Burns says. “We also pay attention to outdoor storage capacity as that has become a greater consideration for tenants. There have been several announcements of new manufacturing sites relating to microchip and electric vehicles which should lead to demand for new logistics properties nearby.”

As the costs of debt capital rise, Burns says Stonebriar’s underwriting will continue to focus on the sponsor, asset and market and “that won’t change.”

“We do few spec development deals and will likely be more granular on understanding the demand/supply side of a respective market,” Burns says.

Ultimately, a recession seems likely and Burns says the changing economic landscape will have “varying impacts” on investors and individual markets alike.

“From our perspective, there will be a premium on a sponsor’s experience and capacity,” Burns says. “I anticipate industrial will remain a favored asset class for investors although those with less experience in the sector could pull back until the economy recovers.”

 

Source: GlobeSt.

 

How CRE Investors Can Still Create Value In A Rising Rate Environment

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A building that makes “no sense” to most investors could be a diamond in the rough to another — and knowledge and information is key in the current rising rate environment, according to one industry watcher.

“You can’t add value to bonds — and unless you own a VC firm or you’re Warren Buffett or Elon Musk, you really can’t create value by owning stocks,” says Marcus & Millichap’s John Chang. “Other than owning a company or a franchise, only real estate allows investors to roll up their sleeves, either physically or metaphorically, and create value in an investment.”

And Chang says this happens in one of three ways: repositioning, management, or knowledge.  Repositioning can be as simple as upgrading common areas and as complex as transforming high-rise office towers into apartments (a trend that’s happening at a rapid rate in some major metros).  It can also fall somewhere in between those extremes: think moving a Class C property to Class B or repurposing an outdated shopping mall into a mixed-use asset.

“Creating value in management can also run the gamut,” Chang says. “At the simplest level, an investor may see some high value but basic operational things that can be done — perhaps just cleaning up a property, adding professional management and moving the rents to market. Something more complex may be re-tenanting a building. An office investor I know bought a very large property with an enormous vacant space. He already had a major tenant lined up so he bought the building, restructured the space a bit and then plugged the new tenant in. Boom: the building went from 25% occupancy to 90% occupancy and the property value changed dramatically.”

Chang also draws on another anecdote, this time in the multifamily space, to illustrate this point further. He says an investor he knows with a great apartment management team bought several small- to mid-sized near the ones he already owns and leveraged that team across multiple units.

And finally, there’s knowledge, which Chang says is “all about finding market inefficiencies and exploiting them.” This could include acquiring assets based on emerging demographics or population migration, or could come on the heels of a major employer changing its HQ location or in advance of a tax or policy change. Chang says there are ample opportunities to “capitalize on information where the pending changes are not baked into an asset’s price.”

Several recent examples bear that out: the global supply chain dilemmas plaguing virtually every sector of the economy have prompted many companies to consider re-shoring or near-shoring to mitigate those types of risks in the future.

“These and more opportunities are out there, and a lot of them will make sense regardless of rising interest rates or other factors affecting the market,” Chang says.

 

Source: GlobeSt

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Higher Inflation Means More Competition For CRE Assets

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Supply chain problems, labor shortages, and the housing shortage are all fueling inflation to eye-popping levels – and for CRE investors, that will mean greater competition for assets.

Headline inflation is up 7.1% from last year, the biggest uptick since 1982. And that rising inflationary pressure is forcing the Fed to switch gears and tighten policy.

“This will in turn put upward pressure on interest rates, raising the cost of capital for CRE investors,” says Marcus & Millichap’s John Chang.

Supply chain is the first contributing factor to inflationary pressures.

“It’s hard to move products from the manufacturers to the customers,” Chang says.

He points to shortages in raw materials, limitations on foreign port capacity, shipping container shortages, backlogs at domestic ports like those in Los Angeles and Long Beach, and a shortage of trucks.

“Basically, people want to buy more stuff than our supply chain can handle right now, so there are shortages and that means prices go up,” Chang says.

Retail sales are up 16% over 2019 numbers, while the amount of product moved by trucks in the US is down 5.1% over the same period.

The second issue? Labor shortages, which continue to stoke inflation.

“Quite simply, the US has never experienced a labor shortage like this,” Chang says. “At least not in the last 22 years, when records have been kept. As a result, companies are competing for personnel, and that’s driving up wages.”

Average hourly earnings are up 5% over last year, and sectors like accommodations and food services have seen labor cost increases of more than 15%.

“Rising wages create broad-based long-term inflation,” Chang says.

The third challenge is the housing shortage: there are not enough houses to buy or apartments to rent right now, and the problem will likely continue at least in the near term. There are currently about 1 million houses for sale in the US right now, about two months’ worth of supply; typically, four to six months’ worth of supply is required to maintain stability in the market.  Housing prices shot up 14.9% last year in response to the shortage.

In addition, there are only about 480,000 apartments available for rent, a vacancy rate of 2.6%, the lowest on record. Rents rose 15.5% last year.

“The Fed will be taking action to curtail the rising costs,” Chang says.

He notes that Fed Chairman Jerome Powell has already announced plans to accelerate the end of quantitative easing that was put in place during the pandemic, and says this will likely put upward pressure on long-term interest rates. The overnight rate is also on track to increase three times or more this year, which will put upward pressure on short term interest rates.

“As a result, interest rates are likely to continue to rise,” Chang says.

The ten-year Treasury rate is already up about 30 basis points from the beginning of December to a little over 1.7%. For investors, this will equate to more competition.

“Commercial real estate is viewed as one of the best places to invest money during periods of high inflation, especially properties that can increase rents with the market, like apartments, hotels, and self-storage properties,” Chang says. “Rising interest rates, and increased investor demand, implies that levered yields will compress this year. Basically, more commercial real estate buyer competition will push cap rates lower while the cost of capital, or interest rates, rise. That means CRE levered returns may tighten. But several property types still offer higher yields, like well-positioned office assets, retail assets, medical office buildings and some hotels, and properties in softer markets harder-hit by COVID restrictions could also offer higher yields and stronger multi-year returns.

 

Source: GlobeSt

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Florida Preps For Distress Deals

Skyscraper Buildings Made From Dollar Banknotes

Tony Arellano and Devlin Marinoff are co-founders and managing partners of Miami-based DWNTWN Realty Advisors.

The firm focuses on urban core transactions ranging from $3 million to over $20 million. GlobeSt.com caught up with them to discuss the long-awaited arrival of distressed assets on the market.

GlobeSt.com: When can we expect to see a high volume of completed distressed real estate transactions, and what opportunities are you already seeing?

Devlin Marinoff: Everyone in the industry knows what is on the verge of happening. We are starting to see the initial wave of bankruptcy and foreclosure filings, and this will accelerate quickly once the forbearance periods burns off during the fourth quarter. In Miami Beach alone, I anticipate at least 50% of the hotels there filing for bankruptcy in the coming months. We are already seeing notes on hotel properties in Miami Beach go on the market, and that’s before lenders start discounting notes to levels where investors will get interested. There have been some studies showing that up to 50% of retailers may not make it through this. This isn’t just local, statewide or national – this is global. The worldwide economy is going to be much smaller when we exit this pandemic. We will see many hotel, retail and even multifamily distressed opportunities in the fourth quarter and early 2021.

Tony Arellano: As with the broader market, the state of distressed real estate depends on the product type and neighborhood. It also comes down to the type of loan, whether it is CMBS, a conventional loan from a bank or private lender financing. Those factors will determine the urgency for a lender to get assets of their books, the appetite for acquisition and what makes for a truly enticing opportunity. Certain deals that are discounted by 20% will create a feeding frenzy. There are a lot of investors waiting for the market to flood with massive amounts of distress, but while there will be great opportunities to buy, I don’t necessarily think it will be an immediate glut of great deals.

GlobeSt.com: What are your investor contacts in South Florida and the Northeast saying about distressed real estate?

Devlin Marinoff: Pretty much every investor I know is calling me asking “what do you have?” There is an incredible amount of liquidity on the sidelines waiting for the non-performing loans to become available and for the forbearance extensions to end. It runs the gamut from small private investors to huge institutional funds with billions of dollars. Overall, there is more than $1 trillion just waiting to be deployed.

Tony Arellano: They are saying “send me every deal you have.” New York investors want out of New York and feel it won’t be investible for the next few years. They want to come to South Florida, but that doesn’t necessarily mean they will be able to understand what makes a good deal here. Real estate is local, and investors need to understand the supply and demand drivers and nuances of the different submarkets. South Florida is a particularly fragmented region with a mix of established core neighborhoods, emerging pockets and overlooked areas with upside potential.

GlobeSt.com: What do some of the high-profile South Florida assets going into special servicing (such as the Fontainebleau Hotel, Westfield Broward Mall and Southland Mall – now in foreclosure) tell us about where the rest of the year/early 2021 is heading?

Devlin Marinoff: The Fontainebleau belongs in its own category because I see that getting worked out due to the strength of Turnberry as a sponsor and size of the loan (nearly $1 billion). Every situation is unique, but there definitely are antiquated malls around the country that need repositioning. This cycle will expedite the issue of certain malls being obsolete. Looking broadly, a new Wells Fargo report showed that appraisals on CMBS properties in special servicing have averaged a 27% decline. That is staggering. For investors, the challenge with trying to acquire CMBS properties is that the servicer has all the power to make decisions with the goal of recouping the most dollars for the loan’s backers. Because of that, it’s a long road for an investor to get to the finish line.

GlobeSt.com: How is the investor interest in distressed real estate going to impact pricing?

Tony Arellano: The cost basis is relevant, but the most important thing moving forward is what the lending requirements are. It’s not about what someone paid or how much an investor bought below what someone else paid. The capital markets drive commercial real estate. If you can’t meet debt standards, coverage ratios or reserve requirements, the deals don’t work. Pricing will be determined by what something can be financed at and the underlying fundamentals. Is there a path to profit?

Devlin Marinoff: Investors are simply kicking tires until it gets to the level where they can obtain at least a 20% discount from the face value of the debt. If there is a $10 million mortgage on a commercial property previously acquired for $16 million, most of our investors would want to buy at $7-to-8 million and end up at a 50% valuation of the previous sale price.

GlobeSt.com: What are some of the challenges that could come from such a competitive environment for distressed assets?

Devlin Marinoff: People will buy debt and distressed real estate in different ways. The Starwoods and the Blackstones of the world will come in and acquire big portfolios of debt, put receivers in place, keep core assets and sell others. The buyers of debt will eventually become the sellers of assets, so there are many layers to this. The hardest thing right now is you can’t get the data. We don’t know what’s going on with the banks, they are not so transparent, so we’re guessing at this point.

Tony Arellano: The current value opportunities are hard to understand. That’s the biggest challenge in the market. At DWNTWN we like to say that we don’t find good deals, we make them. It’s going to come down to being creative and having the wherewithal to see where values and fundamentals are trending.

 

Source: GlobeSt.

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The US Commercial Real Estate Market Goes On Sale For Foreign Investors

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

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

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

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

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

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

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

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

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

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

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

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

 

Source: GlobeSt

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Five Post Covid-19 CRE Investment Strategies

American dollars grow from the ground

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

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

Here are five post Covid investment strategies:

1. Acquire Deeply Discounted Hotels In Suburban Markets

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

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

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

3. Acquire Deeply Discounted Mall Assets For Repurposing

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

4. Develop Suburban Office Buildings Around Blue Cities

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

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

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

 

Source: GlobeSt.

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These 3 Real Estate Investments are in High Demand: Here’s How to Capitalize

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

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

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

1. Cold Storage

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

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

2. Data Centers

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

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

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

3. Residential Housing, With Emphasis On Affordable Housing

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

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

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

 

Source: The Motley Fool

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Investors ‘Back With A Vengeance’ As Warehouse Demand Surges

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

Source: SFBJ

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CRE Investors React To Federal Rate Increases

As many expected, the Federal Reserve recently decided to raise interest rates to the range of 1.5 percent to 1.75 percent, and the increases are likely to continue in 2018.

In March, the Federal Open Market Committee meeting announced its expectation for “further gradual increases” this year. Interest rates are extremely important in the evaluation and performance of any commercial real estate investment due to their impact on the present value of future cash flows. Higher rates make borrowing more expensive for owners, and tend to raise cap rates and reduce property values. However, higher rates also mean a stronger economy, which tends to be associated with a stronger real estate market.

So how will these increases affect commercial real estate investors? Alex Zylberglait, Marcus & Millichap’s senior managing director of investment, delves into how the increase in interest rates is impacting both foreign and domestic investment in U.S. real estate.

How will the rise in interest rates influence the commercial real estate market?

Zylberglait: The Federal Reserve recently raised interest rates by a quarter of a percentage point and is expected to raise rates twice more this year. As a broker who handles investment sales targeting properties in the range of $1 million to $20 million, which is the most active segment of the CRE market in South Florida, I can say that I haven’t seen much of an impact in the commercial real estate market yet. But having said that, I do anticipate a delayed effect, with rates influencing the market in the next three to six months. What I am beginning to see are prospective buyers locking in rates for long-term financing.

On the other hand, I am seeing more properties hitting the market, as property owners seek to cash out before cap rates go up as a result of rising interest rates. For example, one of my clients who owns an office building in Miami has a mortgage that’s maturing and debt coming due. Due to rising interest rates coupled with a maturing mortgage, my client wants to unload the property now instead of selling in a higher interest rate environment. But rising interest rates is one of many factors positioned to impact the CRE market this year.

How will higher interest rates impact foreign vs. domestic investment?

Zylberglait: The impact of rising interest rates will most likely be less on foreign investment than on domestic investment. The foreigners who use financing pay a much lower interest rate in the U.S. than in their home country.

However, what we’re seeing is foreigners unloading their CRE assets. For the past seven years, foreign investors have steadily moved away from buying pre-construction condos and turned their attention to CRE properties in Miami. As the Fed raises interest rates coupled with the real estate cycle nearing an end, foreigners are now cashing out for different reasons. Based on where we are in the real estate cycle, foreign investors are selling to capitalize on the rapid appreciation that the South Florida market experienced in the last five years. They no longer expect a significant appreciation so many of them have no reason to hold on to their properties.

Can you give an example?

Zylberglait: One of my clients from Argentina, who has been buying commercial properties in South Florida for nearly a decade, is now selling a single-tenant building occupied by Starbucks in one of Miami’s hottest markets, Doral. He recently renegotiated a nice lease deal with Starbucks to maximize sales proceeds in order to invest in value-add opportunities in the region.

Another one of my clients, Metro Capital Partners, which invests capital from Colombia in Miami, is another example of this trend. Metro recently sold an office building in Miami-Dade County’s West Kendall submarket for $7.9 million, after acquiring it in a 2014 distress sale for $3.2 million. For the most part, these investors are selling to either buy more assets in South Florida or pay down debt on other properties. Foreign investors continue to see our region as a safe place to grow and protect their capital even as interest rates continue rise.

What impact will the rate increase have on the South Florida market?

Zylberglait: In this real estate cycle, a significant amount of assets in South Florida were priced aggressively, with 2015 being the peak. As the market stabilizes or levels off, a rise in interest rates will contribute to faster stabilization of prices, resulting in investors preparing for slower growth and appreciation.

However, some of my clients who are more yield driven are looking outside of South Florida to places like Orlando and Tampa. We are starting to see a migration of investors and developers northward. For example, Dezer, a well-known developer in South Florida, recently purchased a shopping mall in Orlando with plans to redevelop it into an entertainment complex.

Another example is Riviera Point Development Group, a South Florida developer that purchased 3.3 acres on 11551 International Drive, a few miles from Seaworld, where he plans to build a dual-branded hotel, La Quinta Inns and Suites, and Tryp by Wyndham. Riviera Point developed five office buildings in South Florida and a Radisson Red Hotel near Miami International Airport in this real estate cycle. When it came time to purchase more land, Riviera Point’s CEO Rodrigo Azpurua chose Orlando because of land values and appreciation, which can mitigate the impact of rising interest rates. But having said that, I may add that land values in Orlando today are not as advantageous as they were a year ago.

How will the CRE market respond as interest rates continue to rise?

Zylberglait: Everyone knew rising interest rates were coming and as a result, we haven’t seen much of a reaction in the market. There’s no panic. However, the value for Class B and C assets is softening and I expect to see a divergence between Class A, B and C assets.

 

Source: Commercial Property Executive

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Tax Overhaul Could Be Big Win For U.S. Real Estate Investors

U.S. commercial real estate is a likely winner in the evolving Republican tax overhaul, which is poised to lower rates for property owners, spur new investment and increase demand for rental housing, according to a new report.

Owners and developers of commercial real estate stand to gain from a new tax break for “pass-through” entities, which don’t pay corporate tax but instead pass income through to their owners’ individual tax returns, according to the report, by Cushman & Wakefield Inc. The House and Senate have reached a tentative agreement to create a 20 percent deduction for pass-throughs, which the report notes are responsible for 61 percent of investment in U.S. commercial real estate.

It’s not as big a boon for the industry as it might have been. The House bill passed last month slashed the top tax rate on pass-through income to 25 percent from a current top rate of 39.6 percent. That would have been a “huge win,” said Revathi Greenwood, head of Americas research for Cushman & Wakefield.

The Senate bill has tied the new deduction to the amount of wages the business pays, said Greenwood, meaning larger savings for ownership structures with more employees, such as real estate investment trusts. It’s unclear whether the House-Senate compromise retains that provision.

Representatives of the two chambers are meeting this week to reconcile their versions of the legislation, setting the stage for President Donald Trump, who made his fortune in commercial real estate, to sign a bill into law as early as next week.

In the weeks since the House of Representatives unveiled its tax plan, on Nov. 2, housing experts have warned of its potential effects on the U.S. housing market. Proposed changes to the treatment of mortgage interest and state and local taxes could reduce incentives for buying a new home. Potential effects on commercial real estate have gotten less attention, perhaps because the industry doesn’t have much to complain about.

Opportunity for Malls

Still, not every sector will benefit equally. The tax plan should favor residential landlords, the report said, with the tax benefits of homeownership curbed. It is also likely to benefit retail landlords by lowering taxes on companies that rent space and leaving consumers with more discretionary income to spend.

“Mall operators are looking at restructuring anyway, remaking their properties to give shoppers experiences they can’t get online,” Greenwood said. “We think some of the money saved in taxes will be reinvested back into the business. Office landlords are likely to see more-modest gains. While corporate tenants are key beneficiaries of the tax plan, they’re likelier to return tax savings to shareholders than to increase spending. The tax overhaul could benefit the office sector by discouraging companies from moving their headquarters abroad to save on taxes. Health-care companies are likely to pare back investment in real estate.”

That’s partly because a Senate provision to repeal Obamacare’s individual mandate could curtail demand for services, and partly because both the Senate and House bills reduce exemptions for charitable gifts, which are often used to fund the construction of new hospital buildings.

Click here to view the Bloomberg news video ‘House, Senate, Said To Reach Tentative Tax Deal’

 

Source: Bloomberg