Chicago apartment landlord Stuart Handler is continuing his push into the suburbs, dropping $53 million on a housing complex in west suburban Bloomingdale.
A venture led by Handler acquired Stratford Place, a 342-unit property near Stratford Square Mall, said Handler, CEO of TLC Management. The seller was a venture of San Francisco-based Friedkin Realty Group, which paid $52.5 million for it in December 2012.
It’s Handler’s fifth big suburban apartment deal since the end of 2014, when he began to expand beyond his base in Chicago and Evanston. Using a slow and steady approach and targeting the mid-market, he has amassed a portfolio of about 4,500 units, including more than 1,500 outside the city and Evanston.
Handler, who doesn’t bring in outside investors on his deals, aims to buy one more property in the Chicago area by the end of the year.
He has nothing fancy in mind for Stratford Place, a property that he classifies as B-plus. The 27-acre complex at 232 Butterfield Road, which has an occupancy rate in the mid-90 percent range, was completed in 1991. He expects to spend $1 million or so sprucing it up but doesn’t see a need to do much more.
“It’s a strong asset now,” he said. “We’re just going to move it up to another level.”
Suburban apartment landlords have been operating at a high level for the past several years, a period of rising rents, occupancies and property values. The median net suburban apartment rent per square foot rose 3.7 percent last year, according to Chicago-based consulting firm Appraisal Research Counselors. Rents were up 22 percent over five years.
Handler remains optimistic about the market, but with interest rates rising again, he doesn’t expect property values to rise much more.
“It’s not as hot as it has been, but it’s still good,” Handler said.
Friedkin Realty, meanwhile, still likes the Chicago market and has been scouting the suburbs and downtown for more properties to buy, said Morton Friedkin, founder and chairman of the company. Friedkin Realty owns eight properties totaling more than 2,100 apartments in the Chicago suburbs. In its most recent acquisition, the firm paid $42 million for a 144-unit building in Des Plaines.
Though other suburban multifamily properties have sold for big gains the past few years, Stratford Place bucked that trend, with Handler paying roughly what Friedkin bought it for more than four years ago.
“We overpaid, and he underpaid,” quipped Friedkin.
He expects Stratford Place to fare well under Handler, who can give it more attention than he could from 1,800 miles away.
“Stuart’s local to the area,” Friedkin said. “He’s there to stay, and he’s an operator.”
Source: Crains Chicago Business May 15th 2017 Alby Gallun
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Whole Foods Acquired Seven Shuttered Chicago Area Dominick’s Stores
Whole Foods Market has acquired seven shuttered Dominick’s stores — four in Chicago and three in the suburbs — and will open them in a year.
“Whole Foods Markets takes 12 to 15 months, on average, to open a store, so [the wait time] is not unusual,” company spokeswoman Allison Phelps said Friday. “Each store is unique to the community and we take our time making sure it reflects that and is a special place for each neighborhood.”
Terms of the deals were not disclosed, but details are expected to be released when Austin, Texas-based Whole Foods reports earnings on Feb. 12.
The stores are at:
—Edgewater, 6009 N. Broadway
—Lincoln Park, 959 W. Fullerton Ave.
—Streeterville, 255 E. Grand Ave.
—West Loop, 1 N. Halsted St.
—Elmhurst, 215 S. Route 83
—Evanston, 2748 Green Bay Road
—Willowbrook, 6300 S. Kingery Highway
An existing Whole Foods store that’s just around the corner from the Willowbrook site will no longer serve as a Whole Foods, but no further information was available.
Phelps said Whole Foods chooses sites based on availability, population density, cost of the real estate, and the neighborhood’s levels of education, income and interest in natural and organic foods.
In addition to the seven former Dominick’s stores, Whole Foods Markets is scheduled to open three more stores in the Chicago area by 2017. The new stores join five existing Whole Foods stores in Chicago and 15 in the greater Chicago region.
The three Whole Foods stores opening by 2017 are in the Englewood and Hyde Park neighborhoods and suburban Lake Forest.
Former Dominick’s workers are encouraged to apply for jobs at any Whole Foods, including existing stores, Phelps said.
Source: Chicago Sun Times Sandra Guy January 31, 2014
CNN Ranks Naperville in Top 100 Best Places to Live
Top 100 rank: 54 Population: 152,600
In its list of America’s best small cities, CNN Money ranks Naperville at No. 54
Community is king in Naperville, which adds a local 1% tax on food and beverages to fund events and heritage celebrations. Come summer, residents converge on Centennial Beach, a huge quarry purchased by the city during its 1931 centennial celebration, or stroll along the 1.75 miles of brick paths on the DuPage Riverwalk in the heart of town. Top schools and lots of jobs at firms like OfficeMax and Alcatel-Lucent round out this picture of near perfection — marred only by some congestion on nearby highways and a lengthy commute for those who work in downtown Chicago.
When JPMorgan Chase released its fourth quarter earnings for 2013, it announced that it had provided $19 billion of credit to U.S. small businesses. The figure sounds impressive, but it pales in comparison with the $589 billion of credit that it provided to big corporations.
This should not surprise anyone. The country’s biggest banks ($10 billion+ in assets) actually prefer to provide capital to “small businesses” that average $10 million in revenue or more. While, it is encouraging that the spigot has opened and big bank loan approval rates for small businesses reached 17.6 percent, according to the December 2013 Biz2Credit Small Business Lending Index, many of them are primarily interested in lending to large “small businesses.” (Yes, that is an oxymoron.)
For many of the big banks, small loans are paper intensive and thus cost more to process. This is a reason why they prefer to offer non-SBA loans, which typically require more forms and documentation and, as a result, take longer to process.
Small banks, which typically do not have the same type of brand recognition, cannot afford to be as choosy. Often, they are a secondary choice as consumers tend to go to the names they know first. Further, because of the amount of advertising that big banks have invested in advertising to promote their small business loan-making, entrepreneurs are going to the bigger players.
Unfortunately, although big bank lending approval rates are currently at post-recession highs, they do not approach the percentage of loan applications granted by small banks (almost 50 percent). Alternative lenders, comprised of microlenders, cash advance companies, are approving more than two-thirds of their requests.
Here Is How Things Can Change:
1) As they continue to be thwarted by big banks, borrowers will continue to comparison shop and seek alternatives to the big banks. Many will use the Internet to find the best deals. Small business owners will secure capital from community banks, alternative lenders, and increasingly, institutional investors that are hungry to make deals.
2) Big banks can improve and upgrade technology. It is still astounding that many of the biggest financial institutions in the country do not allow for online loan applications or eSignatures. What makes this so perplexing is the fact that the large, name brand banks have more vast resources to invest in upgrades.
One can look at the mercurial rise of alternative lenders as proof that when there is a void in the marketplace, the hole is quickly filled. Accounts receivable and cash advance lenders used their technological advantage and made capital more readily accessible. In many cases, speed is often more important to borrowers than low interest rates.
For instance, if you need working capital to make payroll, you cannot wait three months for an SBA loan. Employees want to be paid in a timely fashion and likely won’t wait around for a long period of time without payment.
A number of the large banks, such as TD Bank, Union Bank and others, are investing in upgrades and becoming more active in small business lending. Look for others to follow suit in 2014.
Source: Smallbiztrends Jan 26, 2014 by Rohit Arora
A 114,016-square-foot office building in Naperville owner Omaha, Neb.-based Quarter Circle Capital LLC sold for more than $5.7 million. DuPage County records show the buyer of the property at 1717 Park St. was a venture of a Farida Tazudeen, a local real estate investor who could not be reached. The venture financed the Jan. 15 purchase with a $4 million loan from New York-based Garrison Realty Finance LLC, according to county records. It was the last remaining building owned by an approximately eight-year-old fund that also had included 1755 Park, which previously sold for $2.5 million to Riverwoods-based Podolsky Circle CORFAC International, Quarter Circle Principal John Martin said. A Podolsky venture also agreed to buy 1717 Park, but Quarter Circle sued the venture in December, saying it failed to close on the deal. The lawsuit is still pending, Mr. Martin said.
Source: Chicago Real Estate Daily January 28th, 2014
Hot 100 Retailers The Nation’s Fastest-growing Retail Chains
Many of the nation’s hottest retailers are either on a growth tear or coming off a major acquisition — which may be a good thing or bad long term, if too much baggage was included in the transaction. Next year’s Hot 100 report will likely tell tales of what happened to several of this year’s leaders. Various scenarios are well-represented at the top of this year’s STORES Hot 100 Retailers report, with Bi-Lo Holdings, a collection of struggling supermarkets, ranking No. 1, followed by Michael Kors, one of the hottest brands in clothing.
While the economy is improving, the outlook isn’t overly rosy, notes Bryan Gildenberg, chief knowledge officer at Kantar Retail.
“We are looking at retail growth over the next five years as roughly the same as the rate of inflation, about 4.5 percent, but that isn’t to say everyone will be growing equally,” Gildenberg says. “We see non-store and online growth of 11.4 percent and the bricks-and-mortar segment growing at 3.5 percent … [and] losing market share. Right now, non-store accounts for approximately 7 percent of non-automobile consumer sales, but we see that doubling to 14 percent by 2020.”
Food for thought
B i-Lo emerged from Chapter 11 in May 2010 after operating for 14 months under bankruptcy protection. Controlled by private equity fund operator Lone Star, it acquired the remnants of the Winn-Dixie chain in December 2011. Bi-Lo was the smaller of the two entities, hence 2012’s triple-digit sales increase.
This spring Bi-Lo also acquired three groups of supermarkets from Delhaize Group: 72 Sweetbay stores in Florida; 72 Harveys markets in Georgia, Florida and South Carolina; and 22 Reid’s Groceries in South Carolina.
Grocery retailing is a $450 billion business and supermarkets “have always been a bit of a mirror as to what is happening in retailing in general,” says Gildenberg. He sees further contraction among traditional supermarket chains while specialty supermarkets will grow as they “get their value message across to the consumer.” Kantar sees a scenario in which “20 supermarket chains control as much as 90 percent of the market” at some point in the future.
No. 3 Sprouts — 2012’s hottest retailer — is one of the specialty grocers that Kantar sees as driving supermarket growth. Earlier this year, the company hit a milestone by opening its 150th store just a decade after its founding. Though its origins can be traced to 1943 when Henry Boney opened a fruit stand in Southern California, the company marks its modern era from the time Boney family members opened the first Sprouts store in Chandler, Ariz.
Also in the top 10 is The Fresh Market, another specialty supermarket. Emphasizing customer service and presenting an unconventional store layout, it has grown to more than 100 locations in 25 states over the past 30 years. Rather than growing progressively, it clusters stores by region: In the past few months, the company opened its fourth store in Pennsylvania, its eighth in Illinois and its sixth in California, with four more slated to open later this year. In all the company plans to add 19 to 22 new stores in 2013.
Craig Carlock, Fresh Market’s CEO, suggests that there are three reasons consumers shop The Fresh Market stores, which average just over 21,000 sq. ft.: Food quality that emphasizes healthy, fresh, local and regional; extraordinary customer service; and the stores’ neighborhood grocery atmosphere. In the first quarter of this year, sales remained in “hot retailer” territory with a 12.9 percent increase and same-store sales growth of 3 percent.
Wearing it well
M ichael Kors, which went public in December 2011, posted a 57.1 percent jump in revenues and same-store sales gains of 36.7 percent in the first three months of 2013. The company has increased revenues at a compound annual rate of about 50 percent over the last five years and has tripled its store count over the past three years.
No. 4 Lululemon Athletica has been through a dramatic year that included a quality control issue that led to the exit of its chief product officer and, subsequently, the abrupt and unanticipated departure of chief executive Christine Day. In March, Lululemon was forced to remove nearly one-fifth of its inventory after its black stretch pants were deemed too sheer when the exclusive Luon fabric was stretched. The recall would cost between $57 million and $67 million, the company said.
“While we regret that we had quality issues … we are proud of the organization’s ability to get Luon delivered back into our stores within 90 days of having pulled it from our line, all the while keeping our guests happy and engaged with the brand,” Day said in announcing her resignation. In June, Lululemon said it would begin opening stores devoted exclusively to menswear by 2016.
No. 6 Under Armour, which sells almost as much merchandise through Dick’s Sporting Goods as it does through its own stores and website, may see tougher competition as it expands into global territory controlled by Nike and Adidas. Well-represented among American high school, college and professional teams, last year only about 6 percent of Under Armour’s revenues were from abroad; Nike and Adidas each generated about 60 percent of their revenues in non-U.S. markets.
Company executives acknowledged that “international was underinvested because they were trying to find the right team,” noted Kate McShane, a securities analyst with Citi Research. Under Armour outfits one team in the English Premier soccer league and plans to outfit many athletes at the 2014 Winter Olympic Games in Sochi, Russia, and the 2016 Summer games in Rio de Janeiro.
Hot 100 newcomer H&M has experienced a slowdown in sales so far this year and says it will step up store openings in response, particularly in China and the United States. American store openings include a high profile location on New York’s Fifth Avenue about a block from Saks Fifth Avenue, and another three-story, 42,500-sq.-ft. site at Broadway and 42nd Street. The company also plans to launch an e-commerce site catering to U.S. customers.
H&M, which was stung three years ago when news media reported the retailer disposed of unsold inventory by putting holes in the garments and leaving them on the street for trash collectors, in February launched a program to encourage customers to recycle old garments in exchange for discounts on new merchandise.
“We don’t want clothes to become waste, we want them to become a resource,” says Henrik Lampa, H&M’s sustainability manager. “We want to make new commercial fibers out of this, to make new clothes and textiles.”
The online factor
No. 5 Apple’s hot growth continued last year, but this spring’s e-book pricing trial was a distracting sidelight for company executives seeking to keep consumers’ attention focused on products and services. iTunes Radio, a streaming music service offering more than 200 free stations, was launched in June; later this year, Apple is expected to introduce its Mac Pro, a sleek new desktop computer. One of Apple’s more significant retail moves was last fall’s ouster of Scott Forstall, a long-time associate of Jobs who oversaw Apple stores.
No. 7 Amazon.com’s most recent splash in the retail arena was entering the Los Angeles market with a grocery delivery service honed for years in its Seattle home territory. Called Amazon Fresh, the operation was jump-started when Amazon acquired Kiva Systems last year for $775 million; Kiva employed concepts and technology used by early Internet grocer Webvan.
Citing Amazon as “one of the few large-cap [businesses] to have secular exposure to e-commerce,” Oppenheimer & Co. analyst Jason Helftstein says the company “continues to gain share of U.S. e-commerce with its deep product selection, low-cost express delivery through its Prime program and breakthrough successes of its Kindle e-reader platform.”
Amazon also has an advantage because of its “head start and deep operating capability,” says Kantar’s Gildenberg. “It’s hard to see other e-commerce start-ups replicating what Amazon has done.” There is still plenty of opportunity for Amazon, he says, noting its relative weakness in such areas as consumables and apparel.
The expansion of Amazon Fresh to a second major market may turn out to be as significant a game-changer as Wal-Mart’s entry into the grocery business, Gildenberg says. “There are a lot of parallels” in that both Amazon and Wal-Mart went about showing the retailing establishment “a fundamentally different way of selling,” he says. “They operated with business models that were different from the way consumers bought things before.”
Curation and convenience
Kantar predicts drug stores, dollar stores and membership warehouse clubs will remain in growth mode.
“One reason club stores and dollar stores will be successful is that they both do a good job curating product,” Gildenberg says. Drug stores will also see an anticipated $15 billion increase in prescription medication spending as a result of coming changes in health care coverage, he says.
Even if dollar store openings see a temporary slowdown after the past five years’ explosive growth, Gildenberg sees expansion in the sector continuing as they exploit their capability “in curation and proximities as competitive advantages.”
The most successful retailers will be those that “best present their business’s value proposition to consumers,” he says.
Whatever the economy is doing, consumers were out and about in their cars more often in 2012 than 2011, as evidenced by the presence of eight convenience store chains on the Hot 100 Retailers chart, up from seven last year. Kantar’s researchers say c-store chains are growing through “acquisition of smaller chains and independents, rapid organic store growth and big investments in store remodels, food service and private label merchandise.” The numbers back that up: At the end of 2012, there were nearly 150,000 convenience stores in the United States, according to Nielsen Research — accounting for a little more than a third of all retail stores in the country.
As much as a quarter of the population says it shops convenience stores as often as supermarkets, according to a study released in June by Imprint Plus. The survey, which polled 1,000 consumers, also found that 60 percent of respondents bought something at a convenience store at least once a week.
C-store sales are segregated into two major categories: Fuel sales, which last year amounted to $501 billion, according to the recently-released State of the Industry Report by the National Association of Convenience Stores; and in-store sales of $199.3 billion. The three hottest categories for in-store sales were “alternative snacks” like meat snacks and health/energy/protein bars, which grew 12.2 percent year over year; liquor, up 11.6 percent; and cold dispensed beverages, up 11.3 percent.
The highest-ranked c-store chain on the Hot 100 Retailers chart is No. 24 Stripes, owned and operated by Susser Holdings. Stripes, which has locations throughout Texas, New Mexico and Oklahoma, has opened eight new stores so far this year. The company recently brought in Sid Keswani from Target stores to serve as senior vice president of store operations.
No. 73 7-Eleven, owned by Japan’s Seven & I Holdings, is the largest c-store chain among the Hot 100 Retailers in terms of sales and has plans to double its North American footprint over the next several years, both through takeovers of small operators and increased penetration of urban areas.
The chain “could increase … store numbers to 20,000 or even 30,000,” says Toshifumi Suzuki, chairman of Seven & I, declining to specify a timetable for the expansion. The company acquired more than 650 stores last year and controls nearly a quarter of the North American market. 7-Eleven has also invested heavily in remodeling and renovating both its own older units and acquired stores. It has been an industry leader in improving the quality and freshness of its offerings along with increasing the amount of private label products.
USA Retail Sales (000)
Sales Growth (’12 v ’11)
Worldwide Retail Sales (000)
USA % of World Sales
Growth (’12 v ’11)
Michael Kors Holdings
Sprouts Farmers Market
Apple Stores / iTunes
Helzberg’s Diamond Shops
N. Kansas City, Mo.
The Fresh Market
Ulta Salon Cosmetics & Fragrance
Fort Myers, Fla.
Whole Foods Market
Bed Bath & Beyond
Corpus Christi, Texas
Dick’s Sporting Goods
American Eagle Outfitters
Pier 1 Imports
Fort Worth, Texas
North Bergen, N.J.
IKEA North America
Tractor Supply Co.
City of Industry, Calif.
Yankee Candle Company
South Deerfield, Mass.
C & J Clark
The Woodlands, Texas
Harp’s Food Stores
Sally Beauty Holdings
Abercrombie & Fitch
New Albany, Ohio
99 Cents Only Stores
City of Commerce, Calif.
Academy Sports + Outdoors
Ascena Retail Group
Basking Ridge, N.J.
Casey’s General Stores
Trader Joe’s *
Burlington Coat Factory
VPS Convenience Store Group
The Home Depot
City of Industry, Calif.
Pilot Flying J
Wakefern / ShopRite
San Diego, Calif.
Ethan Allen Interiors
BJ’s Wholesale Club
Harris Teeter Supermarkets
Source: Kantar Retail
Notes on Methodology
USA = 50 States and District of Columbia; sales in Puerto Rico, the U.S. Virgin Islands, and Guam have been estimated and removed if reported as part of the U.S. business segment for that company.
All retail sales estimates are excluding wholesale and non-retail services (not sold at store).
Fuel sales are included, except where revenues of fuel exceed 50% of average store revenues, in this case sales are reported exclusive of fuel sales.
All figures are estimates based on Kantar Retail research and company reports.
* Trader Joe’s Worldwide figures are for ALDI NORD.
While housing marches to the slow, steady drumbeat of recovery, the grass is getting greener and optimism is creeping back into the hearts and minds of both real estate professionals and homeowners. But the wild ride isn’t over, and hiccups remain as the sector struggles to find its footing yet again.
At the National Association of Realtors (NAR) Conference and Expo in San Francisco, real estate consultant Scott Muldavin outlined what he believes the top 10 issues affecting real estate currently are, and by issuing a statement to the press on the topic, NAR agrees.
1. Interest Rates. Muldavin indicated, and our recent news coverage supports, that the top issue affecting real estate is interest rates. They were historically low for so long that as rates begin to rise, capitalization rates are likely to follow, which could spark anxiety about investing in real estate.
2. The Aging Population. As the population ages, there will be greater demand for senior housing, requiring a change in the configuration and size of available housing, and for greater medical care, resulting in an expansion in medical facilities.
3. Tight Credit. The capital market resurgence has positively impacted real estate – credit has become less restrictive for the commercial sector and transaction volume is up, and while underwriting remains a challenge for residential markets, interest rates are low and affordability remains high.
4. New Developments for Future Homeowners. Future housing demand from echo boomers, the 80 million Americans born between 1982 and 1995, will also impact real estate markets, he said. “We are the only developed country that has had an echo boom, and that’s a positive thing if the country can react and respond to it,” Muldavin said. This segment of the population prefers an active urban lifestyle, relies on public transit and often chooses location over size – suburbs are catching up, Muldavin notes, with better mass transit, new bike paths and the like.
5. Climate Change and More Extreme Weather Patterns. These will also continue to have a strong impact on coastal homes and many other properties across the country. Muldavin cited the impact of recent storms like Hurricanes Katrina and Sandy, and how property owners in these markets are now dealing with changes in code and zoning standards and paying significantly higher insurance premiums.
6. Global Events, Including Crises. Like weather and geologic events, major global events can also impact real estate markets, such as acts of terrorism, war, the global debt crisis and financial and economic downturns, he said. “The risk of future events is high, and while it’s always hard to anticipate these risks, they need to be considered because their impact is often great,” Muldavin said.
7. The Gas and Oil Industry. Natural gas and oil production is on the rise in the U.S., and though that is creating greater employment opportunities and reducing U.S. dependence on foreign oil, it’s also contributing to climate change, environmental degradation and contamination.
8. Other Countries’ Economies. Muldavin also cited globalization, foreign investment and the economies of other countries as variables that will continue to have a greater impact on the U.S. economy and real estate market.
9. Tech. Another issue is how technology will continue to impact office spaces. Muldavin said many corporations are employing work-from-home policies and other mobility solutions that are allowing individuals to work when and where they want, significantly reducing office space requirements.
“Many people are replacing physical items with electronics and free or virtual products, such as e-books and smartphones enabled with cameras, GPS and flashlights. This means businesses will continue to require less retail space, so I believe the trend in the future will be for fewer and smaller stores,” he said.
10. The Demand for Actual Storefronts. Muldavin said the impact of the Internet on bricks-and-mortar retail stores is also a growing issue. He said retail demand is down across the country due to an increase in Internet sales, which are expected to rise from the current 6.5 percent to nearly 15 percent by 2020.
The average vacancy rate for a U.S. strip mall improved slightly in the fourth quarter from the third quarter, as consumer sentiment and retail sales ticked up, according to a preliminary report released on Tuesday from real estate research firm Reis Inc.
“Consumers appear to be acting more aggressively in response to improvements in the labor markets,” the report said.
The national vacancy rate for strip malls was 10.4 percent in the fourth quarter of 2013, down from 10.5 percent in the second and third quarters.
The report noted a growing rift between “have” and “have-not” markets as income inequality worsened. “In these ‘have-not’ areas,” the report said, “demand remains enervated, rents continue to fall even as the macroeconomy and labor market improve, and new development activity is virtually if not completely nonexistent.”
Reis said it expects this “two speed” recovery to continue in 2014.
Investors Flirt with Riskier Real Estate Strategies in 2014
Other trends predicted for the new year include that multifamily properties might fall off of investors’ must-have lists, construction investment could pick up and foreign investors are expected to continue to scoop up trophy properties in the U.S.
“Looking ahead, I would fully believe investors would take advantage on value added and opportunistic strategies instead of focusing on core,” said Brad Morrow, senior private markets consultant in the New York office of Towers Watson & Co. The riskier strategies appear to be a better opportunity because of the risk-return spread between them and core.
Mr. Morrow does not expect a wholesale switch of capital out of core for value added and opportunistic real estate. Instead, he expects investors to begin using riskier strategies with a little more return potential “at the margins.”
As for the real estate markets, Jim Sullivan, managing director, REIT research, of Green Street Advisors Inc., a Newport Beach, Calif.-based research firm, said real estate market projects are “tied at the hip with any investor’s view of interest rates.”
One camp’s view is that interest rates might go up because the economy will be recovering at a robust pace, Mr. Sullivan explained.
“A higher cost of capital is bad for real estate investing but a robust economy is great for real estate,” he said. Another view is that if interest rates go up unaccompanied by strong economic growth, it will be bad for real estate because it is an industry that is capital intensive, Mr. Sullivan said.
Multifamily is out, malls are in
Meanwhile, multifamily real estate investments may no longer be the darling of real estate investment community in the coming year.
Apartments — and the multifamily sector as a whole — have been extremely strong for several years, but it won’t be as hot going forward, Mr. Morrow said.
The net operating income might start to come down as new multifamily development projects that are in the pipeline are completed, he said. Indeed, there might be oversupply of multifamily properties in certain markets.
“I don’t see the growth opportunity we’ve seen in the past,” Mr. Morrow said. “Apartments might become less desirable.”
It could be a completely different story in the apartment real estate investment trust sector, Mr. Sullivan said.
Apartment REITs were red hot in 2011 and 2012, but underperformed the rest of the public markets in 2013, he said.
“Our view is the market overreacted to the decelerating growth,” Mr. Sullivan said. “Apartment REITs look cheap going into 2014.”
There will be a similar story with mall REITs, he added. In 2013, the mall sector significantly underperformed as investors anticipated a decline in consumer spending and a tax increase.
As a consequence, high-quality malls look cheap in the public real estate market, Mr. Sullivan said.
“Investor angst in relation to investor spending is legitimate but the mall sector was overly discounted,” he said.
One really big-picture item in 2014 is that the pace of new construction is starting to pick up.
“The commercial real estate party … usually ends not because of the lack of demand but because of excess new supply,” Mr. Sullivan said.
New construction, which had been at generational lows, is starting to change “in a pretty meaningful way,” he said.
The pace is picking up the quickest in multifamily, industrial and niche strategies such as student housing and data centers.
“The good news is that there is demand to meet the new supply,” he said.
The increasing supply is not enough to ring any alarm bells, but it is the first time in two or three years that observers will be watching out for oversupply.
One trend that sprouted in 2013 and might take firm root in 2014 is an increase in co-investments in real estate. While co-investments are fairly common in private equity, real estate deals have not been large enough for co-investments.
Real estate managers that can’t raise a large blind pool closed-end fund are looking to new ways to raise capital including seeking co-investments.
Managers may be more open to it in 2014 as fundraising continues to be a challenge, said David M. Sherman, president and co-chief investment officer of Metropolitan Real Estate Equity Management, Carlyle’s newly acquired real estate fund-of-funds business, and head of the real estate fund of funds group in Carlyle Group’s solutions subsidiary.
“Managers that need to stretch the remaining equity in a fund may co-invest, even if their deal sizes are manageable, during the latter half of a fund’s lifecycle,” Mr. Sherman said. “A manager of a new fund may seek co-investment because fundraising is going slowly. Some managers utilize co-invest in between fund raises.”
A big theme in 2014 is expected to be continued investment by foreign investors in U.S. real estate, said P.J. Yeatman, head of private real estate for CenterSquare Investment Management, a Plymouth Meeting, Pa., real estate manager. In a flight to quality, foreign investors have been buying up trophy assets in the U.S., leading to the overpricing for these properties, Mr. Yeatman said.
“We (the U.S.) became the flight-to-quality market,” he said.
These investors consider U.S. core real estate to be akin to fixed income, Mr. Yeatman said. What’s more, many of these buyers purchase properties on the basis of “perception,” he added. “The perception is that New York is a fortress and it is worth paying anything for New York real estate,” Mr. Yeatman said.
He added: “I don’t expect (foreign purchases of U.S. property) to stop” in 2014.
Astute investors will begin investing in value added and opportunistic real estate in order to sell into the overheated core market.
“The smart money will recognize the arbitrage opportunity between creating income streams to sell into the overheated market vs. buying income streams,” Mr. Yeatman said.
Another huge investment opportunity will be European real estate debt, said Joe Valente, managing director and head of real estate research and strategy in the London office of J.P. Morgan Asset Management (JPM).
Some €400 billion ($546.7 billion) of distressed European assets will be coming to the market, Mr. Valente estimated. “Half will be in core European markets where investors don’t have to take macro risk,” he said.
As for the year just ended, one of the big surprises was that the capital markets rebounded stronger than many real estate investors expected.
“I expected it to be strong, but it was stronger than I had expected,” said Gary M. Tenzer, Los Angeles-based principal at real estate investment banking firm George Smith Partners Inc.
Even though prices were at very high levels, in many cases around the pre-financial crisis levels, cap rates were very low, he said, noting that investors were chasing yield.
Source: PIOnline Arleen Jacobius, January 2nd 2014