Millennials, Baby Boomers Still Driving CRE

Millennials, Baby Boomers Still Driving CRE

July 2016

The retail, healthcare, multifamily and hospitality sectors are all seeing gains from America’s two biggest generations — the Baby Boomers and the Millennials, as each reaches a different life stage.  According to research from Marcus & Millichap, these two groups comprise 150 million Americans whose spending makes up 30 percent of the U.S. GDP.  That’s a lot of buying power and a boost for the commercial real estate industry. Here’s a look at some key findings:

Bisnow multifamily yardi

Multifamily Gains — Millennials, the renting generation, have fueled the completion of 215,000 new apartment units over the past 12 months. With the absorption of 237,000 units, vacancy has fallen to 4.2 percent, leaving developers room to build even more.

Restaurants Rules — Because they’re not spending on houses and goods, many millennials are spending more on experiences. The bar and restaurant industry has seen a 6.5 percent gain in sales over the last year.

Hotel occupancy is up — to 60.7 percent in the first quarter of 2016, making it the second highest quarter on record, according to Marcus & Millichap.

Retail is stronger — SoBeverly Hills Marriottme millennial are starting to settle down and buy homes or move out from roommate situations, leading to a large increase in spending in several retail sectors. Both home furnishing and home improvement retail stores have seen a 3.6 percent increase over the past year.

Retail

Image via NREI Online

Don’t forget the Boomers — Medication sales, plus an expanded pool of Boomers with insurance pushed sales at drug stores up 8.3 percent from a year ago.

By 2020, 57 million people — 16 percent of the population — will be over 65. Don’t count this age group out, as the spending is likely to continue to drive these key sectors.

Hotel Owners Get Creative In Search Of Revenue Growth

Hotel Owners Get Creative In Search Of Revenue Growth

Hotel

The Mayflower Hotel in Washington, D.C. (Photo via NREI)

June 2016

The performance of the hotel industry has been shaky in 2016, forcing owners and investors to get creative when it comes to finding ways to squeeze every last dollar out of their properties.

With revenue per room growth stalled, the focus has shifted to total revenue growth. NREI recently outlined a few of the ways major hotel brands are maximizing their profits:

Rightsizing: NREI cites the example of Marriott, which purchased — and then “rightsized” — the Mayflower Hotel in Washington, D.C. Marriott launched a $6 million renovation, focusing on increasing the available meeting space and making the hotel’s restaurant and bar more appealing. By identifying a few key opportunities with a chance for good return on investment, Marriott was able to make the hotel more profitable.

Beverly Hills Marriott

The entrance to the renovated Marriott Beverly Hills Hotel. (Photo via Marriott)

Repositioning: Savvy investors are targeting hotels that hit a lot of things on their checklist but need to be reinvigorated. The Marriott Beverly Hills Hotel was one such case, receiving a complete “gutting and reskinning” after it was purchased for $21 million. The reason? Marriott saw an opportunity given that the next closest hotel was more than 6 miles away. NREI also described the example of an island hotel that moved away from single and double occupancy rooms in favor of group rooms, resulting in year-to-year revenue growth of 19 percent.

Creating more hotel space: Some hotels that are overloaded with amenities — think pools, restaurants and gyms — are turning those areas into boutique villas or residence lots. These do more to grow revenue.

Adding residences: Speaking of residence lots, some hotels are considering the positive effects of adding branded residences. These residences increase spending by more permanent guests. However, there is risk involved. Hotels will feel the burn of revenue losses if the residences do not sell.

Supply concerns are weighing on the hotel industry. Until revenue per room rates start to rise again, hotel owners and investors will need to continue finding creative ways to bring in money.

Cautious Optimism on Investment; Non-Gateway Markets Rule

Cautious Optimism on Investment; Non-Gateway Markets Rule

May 2016

Investment

Austin, Texas

How long will this strong CRE investment cycle last? That’s what’s on the minds of many CRE executives surveyed recently by DLA Piper. Among the key findings from the survey are:

  • Cautious optimism: We all know that CRE is cyclical. It’s been a good seven years of growth. About 62 percent of the executives surveyed are bullish about investment during the next year — down from 89 percent in the 2014 survey.
  • Non-gateway markets are king: As pricing in core markets continue to push out investors, cities such as Austin, Seattle, Denver and Raleigh are becoming the hot spots. This is particularly true among domestic investors, according to the report.
  • Record pricing, but reduced transaction volume: There was just $25.1 B in commercial property sales in February of 2016, down almost 50 percent from the previous year.
  • Foreign investment will continue: The U.S. is considered a safe haven and will continue to draw foreign investors into non-gateway markets and core markets (which are considered an even safer bet).
    Seattle

    Seattle, Washington

Among the top non-gateway cities to watch, according to the survey respondents, are:

  • Austin
  • Seattle
  • Miami
  • Denver
  • Nashville

See the law firm’s “State of the Market” survey for more.

Multifamily growth expected to be slow, steady in Q2

Multifamily growth expected to be slow, steady in Q2

Multifamily growth

Multifamily growth in Houston was downgraded in a recent report by Yardi.

April 2016

After adjusting their estimates for the second quarter of 2016, commercial real estate experts are anticipating a period of slow, but steady, multifamily growth over the next three months.

Rents on multifamily properties reached an all-time high of $1,181 last month, rising 0.5 percent over February, according to the Yardi Matrix Monthly report. But the report also predicts that rent appreciation will taper off soon. National rents are already showing the signs, decreasing by 20 basis points from February 2015.

Of the 30 major metropolitan markets for which Yardi creates forecasts, 13 were downgraded from the end of first quarter, 11 were increased and six remain the same. The top markets and their expected rent growth included:

  • Portland (14.1 percent)
  • San Francisco (11 percent)
  • Sacramento (10.6 percent)
  • Denver (10.3 percent)

Mid-Atlantic markets Richmond, Va.; Washington, D.C.; and Baltimore were the only markets to fall below their long-term average for growth. This is likely due to their weakness in the high-end lifestyle rent sector.

See this Commercial Property Executive story for more.

What’s Behind Manhattan Land Sales Slowdown?

What’s Behind Manhattan Land Sales Slowdown?

According to The Real Deal, Manhattan land sales slowed during the first part of 2016.  Data and analytics firm Real Capital Analytics (RCA) shows that there were only $90 million worth of development deals in January and zero on record in February. Land sales slow

What’s going on? Looks like three main factors are at play–stringent financing, lackluster luxury condo sales and the termination of the 421a tax abatement program. Another key factor is that buyers are not willing to pay the high prices sellers are touting. This is having a ripply effect on development sites. Click here for more.

Midwest Update: A Closer Look at Retail (and More)

Midwest Update: A Closer Look at Retail (and More)

March 2016

The retail sector has issues. The health care sector has opportunities. Chicago has a few huge commercial real estate projects that might just get off the ground after years of being dormant. These are just a few of the stories we’re tracking:

Retail

Photo via NREI Online

  • Retail woes: We wrote about retailers struggling to strike a balance between e-commerce and brick-and-mortar stores last week. NREI put together a list of 12 retailers who are in bad shape and have been forced to close physical stores. Radio Shack, Barnes & Noble and J.Crew all make the list. (Via NREI Online)
  • Are physical stores better for the environment? While we’re on the topic of retail, a recent study by Simon Property Group indicates brick-and-mortar shopping might actually be more sustainable than shopping online. Assuming consumers purchased the same goods online and in a physical location, the study found that online shopping had a 7 percent greater environmental impact over brick-and-mortar shopping every year. (Via REIT.com)
  • Fewer banks are lending a hand: As economic growth in the U.S. slows, it appears that lenders are getting more cautious about funding domestic real estate developments. A six-year recovery has meant good times for investors, but Mark Myers, the head of the commercial real estate business at Wells Fargo & Co., predicts that banks are going to change their approach to be more cautious this year. That could force landlords to look elsewhere for funding. (Via Bloomberg)
    The Old Main Post Office in Chicago is currently unused (photo via Wikimedia).

    The Old Main Post Office in Chicago is currently unused (photo via Wikimedia).

  • Playing the odds in Chicago: Crain’s has a fun look at four of Chicago’s biggest (and most controversial) real estate projects. Progress has been made on three of the properties in recent weeks, and all four have massive potential. Personal favorite: imagining what could be done with the Old Main Post Office in the West Loop. (Via Crain’s Chicago)
  • Opportunities in health care: John Wilson, president of Chicago-based HSA PrimeCare, outlined the types of properties and markets his company looks for in an interview with GlobeSt.com. Wilson called the health care sector fruitful and said there are even opportunities in secondary markets, provided those markets had strong hospital systems. Cities with universities or state capitals are also good markers. Wilson’s specific examples included Lincoln, Nebraska; Ann Arbor, Michigan; and Columbus, Ohio. (Via GlobeSt)
(Somewhat) Affordable Housing

(Somewhat) Affordable Housing

March 2016Affordable housing

Nearly every day, we hear news of a new high-end apartment complex being built in a major metropolitan area. But new construction with lots of amenities is not what every renter is looking for, says David Schwartz, CEO and co-chairman of Waterton. His investment firm has spent much of the last few years looking for Class B and Class C value-add apartment properties, and renovating them for middle-income renters seeking affordable housing.

Industry experts see more of this from private investors on the horizon.

One current project for Waterton is the Vida Hollywood, a 25-year-old apartment complex in Hollywood, California. The company is renovating its 345 units, but rents in the building will still remain about $800 less than they would be at a Class-A building in the same area.

Barbara Byrne Denham, an economist with New York City research firm Reis, Inc., urges redevelopers not to interfere with Class B and Class C apartment buildings that are already fully occupied. In areas with high job growth and salaries to match, the existing renters might pay the higher prices to live in the renovated building. But in areas where people are just staying stable in their careers, the tenants looking for affordable housing might move out.

What should they do instead? And, what are investors chasing? Click here for more.

Retailers Still Working on Mastering E-Commerce Model

Retailers Still Working on Mastering E-Commerce Model

March 2016E-commerce

Nordstrom is struggling, and e-commerce (and perhaps shipping costs) might be partly to blame. That’s according to a recent Bloomberg.com story by Shelly Banjo.

The luxury retailer has seen the price of its shares plummet over the past year and missed its fourth-quarter earnings estimates last month. CFO Mike Koppel talked about Nordstrom’s rough stretch with Bloomberg.com, giving some insight into some of the issues retailers face as they split their focus between brick-and-mortar stores and selling products online.

E-commerce isn’t going away. Nordstrom expects that 30 percent of its sales will come online by 2020, compared to just 8 percent in 2010. But retailers don’t have as good a handle on the e-commerce model as they would like.

Brick-and-mortar stores might seem increasingly old fashioned, but retailers knew how to plan for that model. You build your store. You train your staff. Once you paid off those initial overhead costs, the profits flow in–ideally!

Selling online brings the benefit of low overhead (less of a need for labor and physical stores). But the more retailers like Nordstrom sell online, the more they have to spend to collect and ship the goods to customers. It all adds up!

Nordstrom is trying to catch up to e-commerce competitors like Amazon. But it’s finding that e-commerce isn’t always as profitable a business as physical stores. Nordstrom – and other retailers – will need to figure out the model soon.

Origin Investments Hits it Big with $35M Sale of Lux24

Origin Investments Hits it Big with $35M Sale of Lux24

Origin Investments

March 2016

Origin Investments and Randolph Street Realty Capital hit it big for investors this week with the $35 million sale of Lux24, a 73-unit condominium project they repositioned after the condo meltdown.

The JV purchased the project out of bankruptcy in 2013, after its original developers ran into financial troubles. With a $19 million total investment, the team converted the property at 24 S. Morgan into a rental building, tapping into the hot downtown apartment market and the West Loop’s revitalization.

As reported in Crain’s, the team invested about $2.3 million to finish construction, reconfigure unfinished units, and move the fitness center. They also bought back a few condos that had been sold and leased up the ground floor retail space.

This project shows:

  • Buying right is important, but creatively repackaging an asset can help create tremendous value
  • Timing is everything and a great location doesn’t hurt
  • The West Loop/Fulton Market just keeps on going
Midwest Update: Atlanta Good for Industrial, Office

Midwest Update: Atlanta Good for Industrial, Office

March 2016Atlanta

It’s a good time to be in the Atlanta commercial real estate market. Research shows the southeastern hub enjoyed a prosperous 2015, with strong industrial and office absorption figures pushing vacancy rates in those sectors down to levels not seen since the turn of the century.

Clearly the Atlanta market is gaining momentum. Here are a few Atlanta-focused stories and trends worth tracking:

  • Another good year for industrial: Atlanta’s industrial market performed particularly well in 2015, absorbing the third-most square footage in the United States. That’s according to research from Colliers International, which also found that the industrial vacancy rate dropped to its lowest point since the first quarter of 2001. 
  • The office sector’s perfect storm: The mix of high absorption activity with minimal deliveries helped Atlanta achieve its best office market results since 2000 last year. Colliers found that Atlanta’s office absorption totaled 4.8 million square feet, the highest annual total in 15 years. 
  • Benefits of build-to-suit: Atlanta, with its strong industrial market, is one of the cities that has seen a rise in build-to-suit projects in recent years. With more tenants seeking new technologies and specialized buildings, this isn’t a trend that’s likely to go away anytime soon. (Story via GlobeSt)
  • The future of cars: What would Atlanta look like if there were cars, but no drivers? That was the subject of a recent program called “Evolving Transportation and the Future of Commercial Real Estate” hosted by the Urban Land Institute. Industry experts debated the potential impact of this technology, looking at how it might change variables like parking for current (and future) developments. (Story via Curbed)
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