Steady Outlook for Commercial Real Estate, Says ULI

Steady Outlook for Commercial Real Estate, Says ULI

Oct. 2018

What’s ahead for the U.S. commercial real estate market? Steady as it goes, according to this ULI Real Estate Economic Forecast.

Economist expect the market to remain strong for the rest of 2018 and continue to grow until at least 2020.  With continued job and GDP growth, vacancy rates in most sectors will stay steady or continue to decrease and rents will continue to rise, but at a decreased rate. In the following sectors, vacancy rates will all remain well below their respective 20-year averages:

  • Multifamily
  • Industrial
  • Office

Multifamily Sector Remains Strong, Says ULI

Apartments, which have led the charge in real estate growth, will retain their low vacancy rates, edging up to 5.2% by 2020. Experts anticipate apartment rental rates will grow by 2.9% in 2018, heading to 2% by 2020.

Job growth will continue to fuel the expansion of real estate. Experts anticipate the creation of 2.4 million new jobs in 2018, 1.9 million new jobs in 2019, and 1 million in 2020.

Industrial Update

As the industrial sector continues its strong run, the ULI forecast shows a slight slowdown in rental rate growth over time. In the past five years, industrial warehouse rental rates have grown significantly above the long-term average. The outlook calls for increases of 3.9% in 2018, 3.3% in ‘19, and 2.4% in ‘20.

Multifamily Skyscrapers Reign in Chicago

Multifamily Skyscrapers Reign in Chicago

In Chicago’s skyscraper race, multifamily is outpacing office, as Millennials and others flock downtown.

Sept. 2018

Chicago’s multifamily market continues to reach new heights, quite literally. The city is now one of just a few cities in the U.S. to boast 100 skyscrapers in its skyline, with the addition of Jupiter Realty Co.’s 444-unit apartment building at 465 North Park. Since 2000, developers have added 38 skyscrapers in Chicago, and 25 of them are multifamily towers, according to a recent Bisnow story. Another seven towers are scheduled to open by 2022, and just one, 110 N. Wacker, is an office building.

Millennials Still Rule

Demand is high on the multifamily front, with an increase in employment and the “live, work, play” trend that is bringing Millennials and others into the Loop and other city neighborhoods. According to a recent report from Real Capital Markets, there is plenty of capital, both domestic and foreign, chasing multifamily investments in Chicago and on a national scale.

 Among the new developments to watch is Vista Tower, a 406-unit condo development nearing completion along East Wacker Drive and the Chicago River. When completed in 2020, it will reach 1,198 feet, surpassing the Aon Center as the city’s third-tallest building.

Chicago’s Skyscraper History

Chicago has a rich history of skyscraper development dating back to the 1960s. Its 1000 Lakeshore Plaza, a 55-story, 590-foot multifamily property was the tallest concrete reinforced building in the world when It was completed in 1964, according to RentCafe. Among the notable multifamily skyscrapers in Chicago are Marina City and Lake Point Tower.

But today, American skyscraper development is mainly taking place in New York. Around the world, China is leading the way in skyscraper construction, developing 76 such buildings in 2017. Just 10 were completed in the U.S. in that same year.

RCM Report: Multifamily Investment Still Strong

RCM Report: Multifamily Investment Still Strong

Sept. 2018

Strong Multifamily Investment Outlook for 2018-19

Real Capital Markets Report: Job growth and strong market fundaments propel multifamily

Strong market fundamentals, an abundance of capital, and an influx of investors continue to push the U.S. multifamily investment market, according to Real Capital Markets’ 2018 Multifamily Investor Sentiment Report.

As detailed in this Globe Street article, the majority of investors surveyed are looking to buy, with many finding a shortage of quality assets, particularly in the value add category. Experts interviewed by RCM noted that underlying fundamentals shaping rental demand continue to draw a wide range of investors into the multifamily sector, despite upward movement in interest rates.

“Based on the number of multifamily properties being brought to market, 2018 is a very solid year in California,” Steve Shanahan, executive managing director at Real Capital Markets, tells GlobeSt.com. “So far, the number of multifamily investment assets brought to market is up year over year, and we believe the activity will continue through the second half of 2018.”

Across the country, both job growth and home prices are high. Because of prohibitively priced homes and millennials’ continued focus on renting over buying, rents are rising to record levels, making apartment buildings a solid investment.

There is $250 billion or more  in capital currently allocated to multifamily investment across the country. For example:

  • National–there is significant capital ready to be deployed in this sector. “Closed end real estate funds have billions of dollars in callable capital—capital that has to be invested over the next three years,” said David Schwartz, CEO, Chairman, and Co-Founder of Waterton, a real estate investment and property management firm based in Chicago. “On top of that is a plethora of non-traded REITS, public REITS, private high net worth capital, foreign capital and other sources, each of which has some interest in multifamily investment. That’s what’s keeping these cap rates low.”
  • Phoenix— more than 1,000 older properties with 100 units or more are well-positioned for value-add redevelopment.
  • Dallas–pricing has risen dramatically from $35,000 to $45,000 per unit in a Class B building five years ago to $90,000 today, creating competition for higher end and value-add units across the MSA.
WeWork Expands Shared Office Concept

WeWork Expands Shared Office Concept

Office lease sharing

WeWork is expanding quickly in New York and other key cities. Image courtesy of WeWork.

But Growth Questions Linger

August 10, 2018

Is this the next phase of the shared office landscape? Can WeWork sustain all the buzz and move to profitability?

The popular New York co-working space provider is now opening its doors to midsize companies that want to be WeWork members– but aren’t totally into that sharing concept! According to Ethan Rothstein of Bisnow, the concept would allow companies between 11 and 250 employees to have private and flexible space but fewer services than typical WeWork offices.

Companies committing to the HQ service line will sign a two-year lease agreement as opposed to month-to-month. They will not receive WeWork’s traditional concierge services, full stocked pantries and kegs amenities — but would choose from a list of space features for additional costs.

HQ by WeWork also allows companies who surpass the mark of 250 employees to use the company’s traditional office sharing locations for additional spots. With close to half of 1 million companies expected to expand beyond their midsize level within the next year, WeWork expects to soon exceed past their six office sharing locations in Manhattan. The focus is on Toronto, San Francisco and London for further expansion.

Office Lease Sharing Not Always a Quick Hit

While WeWork’s aggressive growth and impressive revenue stream have caught a lot of media attention, some are wondering if it’s too much too fast. The firm posted a net loss of $934 million in 2017 and $732 million in the first half of 2018, notes this Crunchbase story. Time will tell whether the growing revenue stream can sustain long enough to turn those numbers to black.

 

What Millennials Really Want in Commercial Real Estate

What Millennials Really Want in Commercial Real Estate

July 2018

What Millennials Really Want: Not the Fancy Office Space

Skip the fancy commercial real estate offices? That’s what some Millennials and members of Generation Z are saying — as they look beyond office space and a paycheck when they go to work, according to the 2018 Deloitte Millennial Survey. The survey captured the thoughts of more than 10,000 Millennials and nearly 2,000 Gen Z respondents globally.

Younger employees want to work for companies that drive societal progress, believe in social progress, practice environmental sustainability, and keep the safety of their employees and customers at the forefront at all times.

The report shows that their perceptions of businesses have changed, however, especially over the past year. The majority of Millennials now think that business leaders do not behave ethically or think outside of their own agendas.

The report indicated that the keys to keeping Millennial and Generation Z workers’ loyalty will be the showing that the company values the same things they value:

  • Training
  • Diversity
  • Flexibility
  • Sustainable environments

Since many commercial real estate decisions are made based on maintaining employees, business leaders should consider these factors when selecting a location for their office space and building out the space.

Office Space: Consider the Urban Core

By moving commercial real estate offices to the urban core, employers can find a diverse workforce of people and address sustainability issues. Many Millennials prefer to walk, bike or use public transportation to get to work because these modes of transportation are more environmentally friendly and don’t require car ownership.

Employers should also think about building out their commercial real estate spaces with collaborative areas for training. Younger workers are looking to hone their skills in softer Industrial Revolution 4.0 areas, and they often learn best in a more casual, small-group oriented environment, for example. Everything from flexible conference space to casual breakout areas with soft seating can help with these training needs.

General flexibility is also important to Millennial workers. Many of them have or would consider joining the gig economy as a supplement to or instead of having a full-time job, so they want to be able to work from anywhere—an office, their home, a coffee shop, or a beach. Employers should consider making sure their commercial spaces are technologically well-equipped to meet these needs. Collaborative spaces will also help bring employees into these offices when they do need to talk face-to-face with their colleagues.

Retailers Turn to Niche Opportunities

Retailers Turn to Niche Opportunities

Retailers turn to niche to thrive

May 20, 2018

By Lauren Farhat

Niche retailing should be considered risky business, right? Well, think again. According to Dees Stribling in this Bisnow national story, up-and-coming retailers can still look ahead to a bright future, but, “the niche has to be right.” With some retailers across the nation closing up shop, some such as Dutch men’s clothier Suitsupply, Magnolia Bakery and Club Pilates aren’t ready to be put to rest.

Suitsupply initially grew its brand in countries overseas. Unlike many other men’s clothing suppliers, the company now has big plans to expand beyond its 33 already existing stores in the U.S.. In selling, off-the-rack suits that are more expensive than mass-market but not as pricey as custom suits, the company’s niche is a perfect fit for cities like Brooklyn, Manhattan and Boston.

Retailers Focus on Niches

According to the Wall Street Journal, New York City brand Magnolia Bakery is also planning an expansion of franchises over the next few years. Except this time around, the company’s strategy isn’t to leverage from the sole success of its cupcakes, but the other parts of Magnolia that just as equally establish sales.

Other deep-seated commercial real estate retailers are those following the rage in the newly hot and trendy fitness world. Fitness chains such as Club Pilates, have been replenishing unoccupied spaces once filled by their failed retailer counterparts. Next year, Club Pilates foresees 5% to 10% of their locations occupying these types of retail spaces.

Will this niche approach work for retailers? It just might. As the industry transforms, look for more creative approaches that target niche markets. Consider how retailers are using a mix of online and bricks and mortar, for example.

 

RCM Report: Retail Investors Still Buying

RCM Report: Retail Investors Still Buying

May 2018

Real Capital Markets Report: Retail Investors Still in Buying Mode

Retail investors are still in a buying mode, as they continue to focus on finding assets that can meet the changing needs of today’s consumers and produce desirable returns, according to Real Capital Markets’ May 2018 Retail Investor Sentiment Report.

While big box vacancies and high-profile retail store closures continue to adversely affect parts of the industry, investors surveyed noted optimism in other retail segments. Retail owners who embrace new models—whether they are experiential or contain some variation of mixed use—are considered to be in the best position to succeed in today’s retail environment.

“Retail may be the most diverse and bifurcated of all commercial real estate asset classes,” said Steve Shanahan, Executive Managing Director, Real Capital Markets. “Certain subsets of retail perform well, are in great demand and push the market in terms of price and value. Others have issues and are part of what is leading investors to consider other options, such as exploring other asset types.”

In May 2018, RCM surveyed its U.S. database of retail investors to gauge their sentiment on various investment related topics. Highlights of the 2018 RCM Retail Investor Sentiment Report include:

  • The State of Retail is Most Impactful—The overarching state of the retail market is having the greatest impact on retail property investing.
  • Investors are Expanding Into Alternative Asset Classes—Almost 70 percent of investors surveyed categorize themselves as net buyers with only 11 percent taking a wait and see attitude.
  • Anchored Shopping Centers Remain the Preferred Retail Investment—Especially grocery-anchored centers—by a greater margin in 2018 than in 2017. Nearly half of investors, 48 percent, said anchored centers are the most attractive retail investment today compared to strip centers, which were characterized as the most attractive by 23 percent.
  • Greatest Threat is Big Box Vacancy—With new big box bankruptcies and previously announced store closures taking place, investors’ views on the greatest threat to retail investing has changed. Big box vacancy is now viewed as the greatest threat, cited by 39 percent of investors.
  • The Call for Core and Value—Many buyers—private capital, entrepreneurs, foreign investors and private equity investors—primarily are acting when a value component is present. The survey results echo that finding that value-add remains a popular strategy, with 52 percent seeking properties where they can create value.
Retail Stores Outlook: What’s Ahead After Toys “R” Us Store Closings?

Retail Stores Outlook: What’s Ahead After Toys “R” Us Store Closings?

Retail stores are scrambling to fine tune their approach as Toys “R” Us announces plans to close 800 stores

March 25, 2018

By Lauren Farhat

Toys “R” Us stores close: downfall sends wakeup call to other retail stores

With the recent closure of 800 Toys “R” Us store throughout the U.S., many retailers are reevaluating their own retail presence. Lucky for them, there are various solutions being proposed. Jamie Ward, group head of the retail finance group in the Boston office at Citizens Business Capital, tells Midwest Real Estate News the answer is online marketplaces.

By tying into booming online markets such as Amazon and Walmart, physical retailers can use these platforms for the implementation of their own shops. This provides customers greater convenience, lower prices and expanded product selection. Ward notes that about half the customers who start an online search today start it on Amazon.com. Retailers such as Nike, Land’s End and Lord and Taylor have brought in seemingly more customers through this “omnimethod” approach, as opposed to relying on just bricks and mortar stores and their own websites.

Retail stores and larger malls throughout the Midwest are also experiencing the same types of issues when trying to attract customers. The efficiency, cost savings and wide selection found with online retailers is brutal to compete against. Mall owners and leasing brokers are better off focusing on customer experience with the incorporation of restaurants, bars, and gyms – to name a few. Malls that give customers more reason to traffic their facility rather than browse the web will have the ability to stay afloat.

What’s the outlook for traditional retail?

There is plenty of hope — as long as retailers stay mindful of changing their habits as customers change theirs. Those physical retailers who decided to stay close-minded about an “omnimethod” approach may soon find themselves descending into their own demise, leaving the commercial real estate industry with a surplus of vacancies, and online retailers a heaping of new customers.

Commercial Real Estate Investors Still in Buy Mode

Commercial Real Estate Investors Still in Buy Mode

Feb. 16, 2018

Strong corporate growth and recently-passed tax legislation are among the factors keeping commercial real estate investors in a “buy” mode for 2018, according to the recent National Investor Sentiment Report released by Real Capital Markets. Recent surveys and interviews revealed that 76.7 percent of commercial real estate investors characterized their investment strategy as “buy.” More than 41 percent said they were in full buy mode, while 35.3 percent said they were buyers, but trending toward holding.

Commercial real estate investors are in a buying mode, according to a report by Real Capital Markets

“Investors across the country continue to see great opportunity and benefit in commercial real estate investing,” said Steve Shanahan, Executive Managing Director, Real Capital Markets. “Regardless of the product type or whether the strategy is core or value add, the focus is on finding assets that can deliver strong yields that outpace other investment options.”

Some of the highlights of the report include:

  • Multifamily assets are seen as the most attractive, with 35 percent of investors ready to buy them. Industrial is close behind with 33 percent of investors interested.
  • E-commerce continues to drive industrial growth, creating a need for more warehouse space, sometimes at the expense of retail real estate.
  • Investors are looking for value-add, but those properties are difficult to find.
  • Investors are concerned about unrealistic pricing and the availability of quality product.
  • Southern and Western regions are attracting the highest number of investors.
  • Overall, 48.4 percent of investors say that their attitudes about investing have not changed in the last 12 months. 5 percent say they are even more of buyers no than they were one year ago.

Overall, investors are optimistic going into the first quarter of 2018, which is likely to give rise to another good year for capital markets.

To read the full report, click here.

Race for Amazon HQ2 Narrows; Questions Arise

Atlanta is seen as a favorite for Amazon HQ2 given its low cost of living and strong talent pool.

Jan. 29, 2018

The race is still on for the Amazon HQ2 project — a potential $5 billion construction bonanza that would bring 50,000 jobs. After 238 cities and regions in 54 locations (US and Toronto) submitted bids, Amazon recently announced the short list of 20 cities still in the running.

Before we get to the finalists, let’s take a look at some contrarian views coming out:

It’s all a sham, as the Washington, D.C. area (which has 3 finalists) has already been chosen, according to a recent Bisnow story.  The story points to Amazon founder Jeff Bezos’ new mega-mansion in the area as the critical link to those sites. Executives do like to live near their offices, after all.

Others say it could all be a publicity stunt by Amazon. Look at all the good publicity and the scramble by government officials to appease Amazon.com. See more on that at axios.com.

Time will tell where the Amazon HQ2 goes and what the motivates are. Meantime, the official list of contenders includes Atlanta, Austin, Boston, Chicago, Columbus, Dallas, Denver, Indianapolis, L.A., …and several others. Here are a few snapshots of those that made the cut:

Atlanta

This southern city with $5.8M residents is considered a top contender due to its cost of living, strong talent pool and access to the world’s busiest airport. Traffic was cited as one negative issue, however.

This is how a Chicago Amazon HQ2 might look. Image from Goettsch Partners.

Chicago

Chicago made the cut and here’s what is pushing the city ahead, according to this Bisnow story. The proposal included 10 sites, many with large land areas for development. From Lincoln Yards to the old Michael Reese Hospital site to 700 W. Chicago (pictured here), the city proposal includes many land masses.

The incentives package included about $2B. One frontrunner, according to the story, is the old Chicago Tribune printing plant in River West, as it would connect downtown, River North, the Fulton Market and other neighborhoods.

 

Dallas

Dallas and Fort Worth are gaining attention for their strong supply of tech talent. And, the cost of living is much lower than other tech hubs, such as New York or San Francisco.

Columbus and Nashville are in, but neither has a major airports, which seems like a liability.

For a detailed look at which cities made the list — and why — see this money.com story.

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