New capital is entering the real estate market. Where will it end up?
Money is flowing into the U.S. real estate market, and that trend is expected to continue in 2016. The big question: Where will all that new capital go?
Total acquisition volume for the 12 months ending June 30, 2015, was $497.4 billion (up 24 percent year-over-year), according to the 2016 ULI Emerging Trends Report. That type of growth isn’t likely to be sustainable, but the fact remains that investors will have capital to spend in 2016.
As we try to figure out where that new money could flow, here are a few options:
- Secondary markets: We’ve written about the rise of 18-hour cities before, and this seems to be a likely place for investors to spend capital. Markets like Austin, Denver, San Diego, and San Antonio are “cool,” “hip” and starting to grow.
- Outside the box: Investors may rethink their definition of real estate, or at least expand it. ULI highlighted the expansion of Real Estate Investment Trusts (REITS) to include cell towers and outdoor advertising. The market could grow by offering investors more opportunities to invest in infrastructure.
- Comeback story: Old properties are becoming new again thanks to the popularity of renovation and redevelopment. Consider the number of companies that are re-thinking the design of their office spaces. In some cases, the current demands of millennial workers can make rehabbed industrial space even more desirable than new Class A options.
- Going alternative: Properties that have traditionally been of interest to a small number of investors (medical offices, senior housing, data centers, labs) may find themselves in demand on a larger scale.
Clearly, CRE investors will be looking at their full range of investment options in 2016. The U.S. market offers plenty of choices, and now investors have the capital to match.
Are cities that never sleep being replaced in popularity by cities that know when to take a break? To an extent, according to the 2016 ULI Emerging Trends Report, which indicates some real estate investors are starting to favor 18-hour cities over their 24-hour gateway counterparts.
San Diego is an 18-hour city that is gaining popularity.
Secondary markets are becoming more attractive as global and domestic investors look for new opportunities. These markets, such as Austin, Denver, San Diego, and San Antonio, offer the benefits of large urban areas at a lower cost. Plus, they are often considered “cool,” which makes them unique and creates a quality of life that attracts a good work force.
This builds on a trend highlighted by Emerging Trends in 2014 and is supported by three major points:
- Stronger macroeconomic performance in the U.S. has helped absorption and improved occupancy in most American markets.
- Real estate investors are becoming bold as they find themselves in a better position to take on additional risk.
- More data on secondary markets is available than ever before, giving investors peace of mind when considering investment opportunities.
It’s unclear whether an economic downturn would hurt the investor interest that 18-hour cities have generated. History suggests that these markets are more volatile than gateway cities, but there are positive factors that could make 18-hour cities a viable option for the future:
- Capital markets have been careful about funding new development
- Investors have become smarter, focusing on precise areas or neighborhoods in a market.
Look for 18-hour cities to continue gaining momentum in 2016. Check out the full ULI report here.
What’s Ahead for Hotel Construction?
The new Four Seasons hotel in Fort Lauderdale is slated for completion in 2018
Hotel occupancy, construction and sales are approaching peak levels and 2016 could be the last strong year for this expansion cycle. Recent analysis from Marcus & Millichap and JLL provides these details:
- Room occupancy rates are near an all time high, reaching 65.6 percent by December 2015, says a recent Marcus & Millichap report.
- Room rents are on the rise, increasing 5.2% to $120.99 on average. With more tourists and business travelers occupying rooms, owners and investors are enjoying an average revenue per available room of $80. So, of course, an increase in interest is sparking near-record levels of new construction.
- Hotel sector capital markets also remained strong, with global hotel deal volume rising by 10 percent to nearly $60 billion in 2014, says JLL. Both Wall Street and Main Street are currently lending on hotels and transaction volumes could reach $68 million in 2015. See JLL’s Hotel Investment Outlook Report for more.
Caution for investors
Analysts are also warning investors to think ahead when building new hotels: assets that takes three years to build could open after the demand for hotels starts to drop again. As a result, developers are focusing on select service hotels that are less expensive and faster to build than full-service hotels:
- Courtyard by Marriott
- Holiday Inn
- Hampton Inn
These service hotels are making up a good portion of the 4,038 projects currently under construction, which will bring 507,221 new hotel rooms on the market in 2016. That may seem like a lot, but it’s a far cry from the 5,883 new hotels that came online in 2008. Also, cross-border transactions should account for one-third of deals in 2015, with the U.S., China, Singapore and the Middle East as the biggest capital exporters.
Amenities: More Over-the-Top Than Ever
Attempts to one-up other management companies to gain new student tenants have reached new heights, says the Wall Street Journal. Landlords are now partnering with corporations like Uber, Best Buy and bike-sharing service Zagster to offer promotions and discounts to students living in their buildings.
Good or bad approach? Some management companies love the way this helps them compete at a low cost, while others are skeptical of interfering with students’ consumer relationships. Where is this all going? Find out
Photo: Al Payne of A.F. Payne Photographic Inc.
Should We Scale Back?
National Real Estate Investor interviewed several student housing owners to analyze trends. While most say student housing is gaining value and becoming a more mainstream asset, Campus Apartments CEO David J. Adelman notes that high-level amenities often increase construction costs and only appeal to high-income students. Find out more here. Read more
E-commerce sales continue to grow—by an estimated 4.2% in the second quarter—while overall retail sales grew just 1.6%, according to the Commerce Dept. Online sales still only make up 7.2% of total sales; however, this shifting in consumer behavior and supply chain usage has retailers and CRE developers rethinking how to reach those powerful consumers. Here’s a look at current trends:
Third-party logistics providers see strong demand due to changes in the supply chain. 3PLs are in big demand right now for transportation, warehousing, and fulfillment services, particularly in the next-day and same-day delivery arena. 3PLs are in the highest demand in dense metro areas like Chicago, New York, Dallas, and New Jersey. Click here for more on where this is headed.
E-commerce boosting sales of traditional retailers as some successfully tap into the supply chains. Big U.S. retailers such as Home Depot, Target, and Wal-Mart are building fulfillment centers to package and ship goods to consumers more productively and profitably. Home Depot and Target saw their online sales grow by 25% and 30%, respectively, in the second quarter. Click here for more.
Bricks and mortar retail redevelops to compete. Westfield Corp. will spend millions on LA’s Century City Mall to compete with local retailers and the rapid growth in e-commerce. Click here for more on their attempts to make the mall an irreplaceable “lifestyle center” (which cannot be duplicated online).
Millennials are the hot commodity these days, but what do they want in office space? Scott-Spector, principal of New-York-based architectural firm Spector Group, describes how to appeal to Millennials in workspace design:
- Amenities. And more amenities—Bring on the fully stocked kitchens, the pool tables and the health clubs in the building.
- Collaboration spaces –so they can share ideas and work in flexible group arrangements
- Flexibility—to move desks around, pull up benches, etc.
What NOT to include?
- Private/enclosed spaces
- Poor lighting
- A shortage of free food! (A good salary and an awesome climbing wall are not enough, apparently).
See this story for more on Millennials. And, still more on this topic out of Atlanta.
(Pictured above: an open office in the UK, not affiliated with the referenced articles)
Strong multifamily growth supported by urbanization and continued job growth. Atlanta is reflecting the national trend of city migration. Millennials desire long-term renting in the city with access to trendy amenities and nearby city entertainment, and Baby-boomers are following suit. According to a CBRE report, the apartment vacancy rate is 4.8% with a home-ownership rate of 63.4%–the lowest since 1967. Popular Atlanta submarkets for Millennials and other renters include Buckhead, Midtown, Old Fourth Ward, and Inman Park. Find out more here.
Millennials are a target for this Buckhead development in Atlanta
Find out more on this Buckhead multifamily development.
Next-generation office developments are the trend in city centers like Orange County.
Irvine Co. is developing six next-generation office structures. Nicknamed “next-gen” office buildings, these developments intend to balance productivity and efficiency along with modern collaborative features in the workplace—features including cafes, wellness-centers, and other indoor and outdoor activities. The developers say the campuses they are building are not totally unlike college campuses. The “amenities race” is not limited to multifamily. Check it out in this office development story.
Retailers are following you online—and here’s why that’s good. Forbes’ writer Erika Morphy moves us past Amazon and digs into how technology, such as SmarterHQ, can help online retailers predict buying patterns and serve up online options accordingly. Check out this e-commerce and overall retail story.
Coastal markets hot for retail investment–As retail rebounds post recession, Real Capital Analytics looks at what markets are hot. Seven of the top 10 are coastal, with Chicago, Dallas and Houston the exceptions. The top? Manhattan, which accounted for 42 percent of the total investment sales. Click here for more.
By Ryan Ori
Originally published online on February 5, 2014 by Crain’s Chicago Business
A New York investor paid about $85 million for the 1.6 million-square-foot Solo Cup warehouse in south suburban University Park, the largest sale of a single-tenant industrial property in the Chicago area in eight years. An affiliate of W.P. Carey & Co. bought the distribution center at 701 Central Ave., the New York-based real estate investment trust said today. The seller was a venture of Chicago-based investor and investment manager Fulcrum Asset Advisors LLC.
It is the largest sale of a distribution center leased by one tenant in the Chicago area since early 2006, according to New York-based research firm Real Capital Analytics Inc. A three-building Kraft Foods Inc. warehouse in Aurora sold for about $93.9 million in January 2006, according to Real Capital.