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REIS Q2 2015 First Glance Commercial Real Estate IndustrySHARE
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REIS Q2 2015 First Glance Commercial Real Estate Industry

REIS 3rd Quarter 2015 Commercial Real Estate Sectors Overview

Apartment Trends

green-bulletMultifamily vacancies inched upward by 10 basis points in Q3 to 4.3%.
green-bulletDespite a pullback in new construction in Q3, vacancies still rose.
green-bullet100,000 new units are expected to come online over the next 6 months.
green-bulletAsking and effective rents increased by 1.4% and 1.5%, respectively.

Office Trends

green-bulletOffice vacancies hit 16.5% in Q3, down 10 basis points.
green-bulletAsking and effective rents increased by 0.6% and 0.7%, respectively.
green-bulletMuted supply growth should produce slow and steady declines in vacancy and increases in rents over the next year or two.

Retail Trends

green-bulletNeighborhood and community center vacancies remainder unchanged at 10.1%.
green-bulletAsking and effective rents increased by 0.5% for neighborhood and community centers.
green-bulletClass A malls also stalled; vacancies didn’t move from 7.9%.
green-bulletMuted new supply coming online has balanced tepid demand for this property type.

Industrial Trends

green-bulletIndustrial properties outperformed most other property types.
green-bulletWarehouse/distribution vacancies fell 10 basis point to 10.7% in Q3.
green-bulletAsking and effective rents rose by 0.4%.
green-bulletFlex/R&D vacancies fell by 20 bps to 12.1%.
green-bulletAsking and effective rents grew by 0.3% and 0.4%, respectively.

New Construction Trends

green-bulletNew completions for each of the major property types changed relatively little versus last quarter, a sign that construction is firming.
green-bulletSurprisingly, Retail was the only sector that experienced an increase versus last quarter.
green-bulletThe Apartment and Office sectors registered declines.
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Office Trends Q4 2013

REIS Reports: Q4 2013 Office Trends, Office properties continued to recover, and the retail market showed its first signs of improvement.

 

CREConsult 1

Coldwell Banker Commercial® (CBC®) professionals specialize in office properties and can develop customized real estate solutions for landlords and tenants of office properties. CBC professionals clearly understand today’s corporate business climate and work to eliminate excess, trim expenses and drive value to your bottom line. Whether you need to lease or sublease office space or buy or sell an office building, the CBC organization can develop a customized solution that meets your real estate needs. With access to colleagues in over 250 CBC companies across the globe, and completing over 10,000 office transactions in the past two years, CBC professionals can expertly provide innovative solutions to multi-market requirements.

CBC professionals come to their clients as trusted advisers with innovative and profitable ideas and solutions. Every CBC professional is client-focused and results-driven.

CBC professionals can assist you with any of these services:

  • Tenant Representation
  • Acquisition
  • Disposition
  • Capital Services
  • Investment Analysis
  • Property & Facilities Management
  • Relocation Services
  • Transaction Management
  • Lease/Own Analysis
  • Leasing Services
  • Lease Analysis
  • Lease Administration
  • Build to Suit
  • Strategic Real Estate Planning
  • Consulting
  • Appraisal and other Valuation Services
  • Market Surveys and Analysis

All office accounts are handled through a single point of contact and use web-based project management and lease administration technology that allows you to access your projects anytime, 24 hours a day, seven days a week.

Contact Us:

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naperville-il

CNN Ranks Naperville in Top 100 Best Places to Live

WINNER

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.

Source: CNN Money
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US Sales

Big Banks Are Lending to Bigger Small Businesses

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
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CREConsult 1

The Top 10 Challenges Affecting Real Estate

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.

Source: ChicagoAgent Tara Steele, 2013
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Real Estate Forecasts See CRE Recovery to Accelerate in 2014

Commercial real estate firms are moving into the New Year with a renewed sense of optimism – a positive outlook not seen for the past seven or eight years.

While many in the industry predicted a recovery in 2013, they did so with a sense of nagging worry over slower than expected job growth and concerns that the political brinkmanship in Washington could threaten the nation’s credit rating and pitch the economy into stagnation or, even worse, recession.

Much of those concerns have ebbed as the two parties came to terms in December over next year’s budget. In addition, the Federal Reserve has established a clear path for rolling back the so-called quantitative easing steps taken in years past to bolster the economy. By spelling out its path for reducing debt purchases, the Fed has taken out much of the guesswork for when those financial supports will end.

Given the overhanging sense of dread seems to have disappeared from most forecasts, experts are predicting a better year in 2014.

CoStar News has encapsulated Following 14 outlooks for 2014 from forecasts offered by respected industry participants and observers. We’ve sorted them alphabetically by the firm making the forecast.

Cassidy Turley: Impact from Rising Rates
If the big economic story of 2013 was policy vs. housing, this year doesn’t promise much in the way of variety. Policy vs. Housing, Part II will see the same threats to economic growth as we continue to struggle with dysfunction in Washington and, most likely, more political brinksmanship that may undermine confidence in the economy. But, while the challenges will be the same, the underlying fundamentals will be slightly stronger. Perhaps the biggest difference is that by the middle of 2014, economic growth should be strong enough for inflation to start to be a possibility once again. This is actually a good thing. The timetable could vary, but we anticipate the Fed raising interest rates by the end of the second quarter-likely in May or June. So long as interest rates don’t move too far too fast, the impact on the overall economy will be minimal. But there will be one. This could slow the housing recovery and it will certainly have an impact on commercial real estate pricing as the price of borrowing becomes more expensive. But that is assuming the underlying economic fundamentals have heated up to the point of warranting such a move-which is ultimately a good thing. A stronger economy may bring higher interest rates, but it will also bring higher earnings, lower unemployment, greater consumer spending and-for landlords-better rental rate growth and NOI. In the meantime, look for the first big political squabble (over the debt ceiling once again) to start up again in late January.

CBRE: Office Market Recovery Poised To Accelerate
The office market recovery is poised to accelerate in 2014, as an improving economy should result in increased office-using employment according to CBRE, the world’s largest commercial real estate services and investment firm. The growth in office-using occupations, particularly in high-tech industries, is expected to increase demand for office space. The U.S. office market vacancy rate will continue to decline next year, falling by 80 basis points (bps) to 14.3% by the end of 2014, Steady improvement in the office market is expected to continue in 2015, with the vacancy rate forecasted to dip another 80 bps to 13.5%. CBRE forecasts that office rents will increase by 3%, on average, in 2014, and rise another 4.4% in 2015, as vacancy levels fall steadily toward the “equilibrium” level over the next two years.

Cornell Univ. and Hodes Weill: Big Money Will Continue To Rule
Institutions are significantly under-invested in real estate and are poised to allocate significant capital to new real estate investments. The weight of this capital can be expected to have broad implications for the industry, including transaction volumes, fund raising, lending activity and property valuations. The supply of capital may sustain current valuation and financing metrics (including capitalization rates and the cost of debt capital), according to Cornell University’s Baker Program in Real Estate and Hodes Weill & Associates, which co-sponsor the Institutional Real Estate Capital Allocations Monitor.

Deloitte: Steady Growth but Not Enough To Spur Much New Development
CRE fundamentals continue to improve across all property types, including vacancy, rent, and absorption levels, according to Deloitte’s real estate forecast. However, demand is yet to increase enough to drive development activity, except for multifamily and hotel construction, which continues to be robust. These same sectors, which were the first to grow and recover after the recession, may see some tapering off in fundamentals as new supply comes to the market. Overall, it appears that fundamentals will continue to improve at a moderate pace, in line with the macroeconomic situation.

DTZ: Business Tenants Keep Bargaining Clout
The U.S. economy will continue to expand at a moderate rate, which will lead to more job growth and a related increase in demand for occupational space, reports global property services firm DTZ. However, with the expected moderate job growth, vacancy will only trend down slowly. Occupiers will remain in good bargaining positions over the next two years and occupancy costs will increase in line with inflation. They will continue to receive concessions as landlords compete to increase their properties’ net operating income. Occupiers will gravitate to the most affordable markets and continue to reduce their costs through more efficient internal space build-outs.

EY: Private Equity Funds Getting Hands Dirty
Having emerged from the global recession and its aftermath, the real estate private equity sector is finally positioned for growth in 2014, according to a global market trends outlook in real estate private equity published by EY (Ernst & Young). Strategies being deployed by different PE firms and even funds to take advantage of this growth opportunity differ, as fund managers seek to differentiate themselves in a hotly competitive fundraising environment. But EY sees fewer opportunities in the future for fund managers to capitalize purely from the financial structuring side of their investments. The funds that come out ahead of the competition in this next phase of growth will have one thing in common: an ‘old school’ asset management approach that realizes maximum investment value by working closely with service providers to fill buildings and manage real estate.

Freddie Mac: The Emerging Purchase Market
Led by a resurgent housing sector, 2014 should shape up to be better than 2013 with a quickening recovery pace leading to more job creation. Freddie Mac expects single-family home sales and housing starts to be at their highest levels since 2007, and expect multifamily transactions and construction to post gains as well. The big shift ahead will occur as the single-family mortgage market begins transitioning from a rate-and-term refinance-dominated market, to a first purchase-dominated market. The emerging home-buyer purchase market should gather momentum in the coming year.

Grant Thornton: Huge Boost Ahead for Industrial Markets
U.S. companies will bring production, customer service and IT infrastructure back home, reports tax-advisory firm Grant Thornton. The reshoring trend is real and about to dramatically reshape the U.S. economy. More than one-third of U.S. businesses will move goods and services work back to the U.S in the next 12 months, which means that as much as 5% overall U.S. procurement may return home. The Grant Thornton LLP “Realities of Reshoring” survey found that even IT services, one of the first business functions to move offshore, are likely to return within a year. The trend could provide an enormous boost to domestic manufacturers, retailers, wholesalers/distributors and service providers.

Jones Lang LaSalle: Pent Up Retail Demand Will Drive Investment
Total retail investment is expected to increase upwards of 20% in 2014, according to Jones Lang LaSalle, as pent up demand that was not satisfied in 2013 fuels investments and investors look to balance their portfolios. The retail market will continue to turn around despite store closings and consolidation. Vacancy rates are projected to inch downward driven by power center popularity, while rents are expected to increase albeit slightly for the fourth consecutive quarter. JLL also expects the number of retail property portfolios coming to market, which combine a broad spectrum of B and C retail assets, will increase as REITs look to sell assets and recycle capital in the year ahead.

Kroll Bond Ratings: Multifamily Resurgence in Conduit CMBS
The Federal Housing Finance Agency (FHFA) has begun to implement strategies to reduce the multifamily footprints of the two GSEs it oversees. As a result, Kroll Bond Rating Agency expects we will see a gradual decline in Fannie and Freddie’s securitized market share, which could revert to levels not seen since before the run-up to the CMBS market peak. At the peak of market in 2007, the conduit market’s share of the $36 billion securitized multifamily loan market was just over 78%. As the financial markets spiraled, that trend reversed and the GSEs became the primary source of loan production, dominating securitized new issues with more than a 95% market share.

Nomura: Muted CMBS Loan Maturity Risk
Based on the performance of loans maturing in 2012 and 2013, the investment bank Nomura estimates that 84% of loans maturing in 2014 will pay in full, a decline of just 3% from 2013 levels. Similar to 2013, Nomura expects the balance of loans rolling to delinquency to decline over the coming year, influenced by muted maturity risk and fewer term defaults resulting from improving CRE fundamentals. Most of the loans maturing in 2014 have 10-year terms and were underwritten prior to the sharp rise in property values that began in 2005. However, 15% of maturing loans have 7-year terms and were underwritten at the market peak. This set of loans has an increased risk of default at maturity.

PKF: U.S. Hotel Investors Poised To Do Well in 2014/2015
After a slight deceleration in growth during the last half of 2013, PKF Hospitality Research, LLC (PKF-HR) is forecasting very strong gains in revenues and profits for the U.S. lodging industry in 2014 and 2015. PKF projects national revenue per available room (RevPAR) to increase 6.6% in 2014, followed by another 7.5% boost in 2015. Concurrently, hotel profits should enjoy growth of 12.8% and 14.5% respectively over the next two years.

PwC US and ULI: Investor Activity Continues To Expand Beyond Core Markets
The U.S. real estate recovery is set to continue into 2014, with investors increasingly looking beyond some of the traditionally popular markets to secondary markets in search of higher yields, according to the latest Emerging Trends in Real Estate 2014, co-published by PwC US and the Urban Land Institute (ULI). The predicted growth in secondary markets will be driven by investors searching for returns as opportunities in core markets become harder to find and the most sought-after properties become more expensive. The move into secondary markets is underpinned by the anticipated increase in both debt and equity capital during 2014.

Transwestern: More Opportunities in Sale-Leasebacks and Net Lease
The cost of capital for owner occupants is on the rise, thanks to increasing interest rates. To cope with higher costs, owner-occupants are increasingly looking at selling their owned real estate as one strategy to generate funds for operating expenses, company expansion or retiring debt. This scenario presents an excellent sale-leaseback opportunity for investors looking to acquire real estate that comes with a long-term tenant in place. The lending environment is expected to bring more net-lease properties to market, as well. As interest rates increase, a larger number of office, industrial and retail buildings are projected to be marketed for sale.

That’s 14 predictions for 2014. We look forward to covering these and many other major trends in commercial real estate in the year ahead. Here is a bonus prediction from CoStar’s Property and Portfolio Research group:

CoStar: 2014 Best Year of Office Occupancy Gains in Recovery Cycle
Heading into New Year, office employment has been growing at the fastest rate since the start of the recovery, with the sole exception of early 2012. But there are two key differences between today’s market and that of the past few years. First, the office market now has far less under-utilized “shadow” supply space, which will drive a higher level of net absorption as more office-using tenants expand. Second, with the demand outlook improving and new construction still at bay in most markets, the 2014 occupancy gains in US office markets should be the best of the entire recovery and should tip the scales toward greater rent growth during 2014 than in the past few years. However, developers have already shown their willingness to break ground at the first sign of improvement. This has already happened in Boston, Houston, Silicon Valley and most recently, San Francisco. As developers ramp up new supply, the office occupancy gains are likely to slow in 2015 and certainly by 2016. Investors should enjoy the benefits of occupancy gains in 2014, which are expected to be the best in the current recovery cycle.

Source: CoStar Mark Heschmeyer December 31, 2013
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One-Financial-Center-Boston

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.

Fundraising

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
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Geneva Commons

Stiff Competition for Shopping Center Acquisitions

Dennis Gershenson, president and CEO of Ramco- Gershenson Properties Trust (NYSE: RPT), joined REIT.com for a CEO Spotlight video interview at REITWorld 2013: NAREIT’s Annual Convention for All Things REIT at the San Francisco Marriott Marquis.

Gershenson provided an overview of the acquisition market in the shopping center industry.

“It’s very interesting, because we were in a very frothy market in the first five months of 2013,” he said. “When Mr. Bernanke came out with his prognostication that things might change, the market just crushed. It took most of the summer for both the buyers and sellers to feel that there was some normalcy coming back into the marketplace. Now, here we are in the fall (Editor’s Note: video was recorded in November 2013), and we’re seeing the high quality shopping centers, as well as the B shopping centers, back on the market. What we find is, that as far as the highest quality assets are concerned, the institutional buyers are still paying approximately the same cap rates that they were paying before, and there is a tremendous amount of competition for those.”

Gershenson described his company’s involvement in in development and redevelopment activities.

“Development takes one of two forms,” he said.” Either it’s legacy property that we purchased in the go-go days of 2004 to 2007, and we’re now redeveloping those properties. We will not be greenfield developers going forward, but what we have been doing is acquiring land adjacent to our most recent acquisitions – that gives us the opportunity to expand on a very successful asset.”

Gershenson also talked about his anchor tenants, and what changes he is seeing in terms of occupancy.

“We’re very focused on improving the quality of our anchor tenants, as well as the whole spectrum of retailers in our shopping centers,” he said. “We have filed our shopping centers where we had vacancies, either that existed before the debacle of the recession, or as a result hereof, with high-quality, national retailers. One of the exciting things about bricks and mortar retailing, is it’s always refreshing itself. So, with the problems that Circuit City and Linen’s had, along comes retailers like BuyBuy Baby.”

Source: Reit.com 1/3/2014 Mitch Irzinski
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Apartment Building

Pent-up Demand Moderate Income Apartments Millennials & Fewer Homeowners

Ella Shaw Neyland, president of Steadfast Income REIT, recently joined REIT.com for a video interview at REITWorld 2013: NAREIT’s Annual Convention for All Things REIT at the San Francisco Marriott Marquis.

Neyland was asked to comment on demographic trends and their impact on Steadfast Income’s growth prospects in the multifamily sector.

“I think we’re going to see an outsized demand for our type of apartments in the next two to seven years for a variety of factors,” Neyland said. One such factor is the millennial generation’s preference to live in apartments as opposed to homes, Neyland explained.

“For one thing they can’t afford it…the second thing is that they’ve seen their parents either lose equity in their homes or lose their homes,” she said. The millennial generation, which totals about 68 million, also wants to have flexibility to be able to move for a new job, Neyland added.

Other factors influencing growth include pent-up demand for household formation, Neyland said. She also pointed to the potential for more foreclosures coming from a percentage of homeowners who are current on their payments, but underwater in terms of the value of their home. A drop in the homeownership rate of just one percent translates into a million new entrants into the rental pool, Neyland remarked.

Meanwhile, Neyland pointed to baby boomers wanting to downsize, and legal immigration of around a million individuals per year, as other potential growth factors.

The combination of all these demographic trends is good for the apartment sector overall, but “it’s great” for Steadfast Income’s particular niche, according to Neyland.

Looking back at Steadfast Income’s active pace of acquisitions in 2013, Neyland noted that “it’s been an amazing period for Steadfast Income REIT.” She explained that the company chose to focus on the central corridor of the U.S., and “we are increasingly finding they are not ‘flyover states’ they are ‘go-to states’ because that’s where jobs are being created.”

Neyland also mentioned that Steadfast Income apartment rents are priced at a point that is in line with salaries for the majority of new jobs being created.

Source: Reit.com 12/20/2013 | By Sarah Borchersen-Keto
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Retail

New Wave of Retail Tenants Filling Power Centers

Empty Big Boxes Getting Help from Unexpected Quarters as Dollar Stores, Warehouse Grocers and Large Discount Retailers Like Wal-Mart and Target Take Space.

During the recession, hundreds of retail power center tenants went dark, putting millions of square feet of vacant space back on the market. Store chains like Circuit City, Borders and Mervyns went bankrupt, while others such as Best Buy and Linens N Things, sharply reduced their number of stores, leaving vacant holes in many shopping centers. 

Power centers, unenclosed retail centers ranging in size from 250,000 square feet to 750,000 square feet that typically contain three or more big-box retailers along with smaller infill retailers, saw vacancies spike above the total retail vacancy rate from 2008 to 2010. 

Since then, power centers have experienced a steep drop in vacancy rates as the flood of store closings has slowed and a new crop of tenants has stepped in to occupy empty big box and in-line store space. 

“Power centers have had an extremely outsized recovery,” observed Ryan McCullough, who presented CoStar’s Third-Quarter 2013 Retail Review and Outlook with Suzanne Mulvee, director of U.S. research, retail. “The complexion of the power center real estate market is certainly changing, and the base fundamentals have really improved rapidly.” 

By the end of third quarter 2013, the vacancy rate for national big-box power centers had fallen to below 5.5%, from a high of nearly 8% in 2009. The total retail center vacancy rate has declined more gradually, from a high of about 7.5% in early 2010 to below 7% at the end of the most recent quarter. 

Many of the retailers taking space in power centers have traditionally leased space in community shopping and other smaller types of spaces, but are increasingly eyeing big-box space, especially in centers with good traffic and demographics. 

While the leasing activity varies by market, dollar stores have taken up vacancy slack in many power centers. In other markets, tenants like TJX Cos., Ross Dress for Less and various soft goods retailers have been especially active. 

For example, western and work wear retailer Boot Barn recently opened a store in a former Circuit City space west of the Greeley Mall in Greeley, CO. The retailer has occupied shuttered Circuit City stores in several markets. 

Eric Tumbleson, senior associate with Colliers International in Las Vegas, said he expects an influx of tenants will continue to move into abandoned big boxes. 

“But if you’re asking me, am I advising my investment clients to buy power centers? No way. Stay away, unless you’re the type of investor or developer that can reposition these centers into a different use. The problem is, you can’t acquire these centers at a significant enough discount so that it makes sense,” Tumbleman said. 

Most owners also don’t want to go through the costly and time-consuming process of redevelopment or repurposing of the space, agreed Peter Sengelmann of Pinnacle Real Estate Advisors in Denver. “They’re just getting more creative in the ways they’re filling the (empty spaces) with tenants,” he said. 

Within the highly competitive retail market, power centers appear to be stealing some of the tenants from neighborhood centers, especially their grocery store anchors. 

“We’re seeing a lot of expansion from the Wal-Marts, Targets, warehouse clubs that are stealing some of the thunder from neighborhood centers,” said CoStar’s McCullough. As a result, it’s only over last couple of quarters that CoStar has started to observe any material vacancy compression within neighborhood centers. 

On top of that, the mom and pop stores that occupy in-line spaces of neighborhood spaces are still having creidt issues, unlike the power centers, said Mulvee. 

“Power centers almost exclusively lease to national credit tenants that have better access to capital today,” she said. “For a full recovery in neighborhood centers, you need those smaller in-line tenants to come back. In stronger markets like Boston, we’re starting to see mom and pop startups opening new storefronts.” 

Overall, CoStar’s recent research shows that retailers and tenants are seeing healthy sales, making money and seeing higher productivity from their stores. An index created by CoStar measuring sales per square foot for different types of retail center shows that power center sales at up some 15% from the recession more than six years ago. 

There’s also hope for the recovery of neighborhood centers in the CoStar index, which shows, despite the weakness of smaller tenants, that per-square-foot sales are up 25% over the same period. 

“With strong productivity by neighborhood center tenants, once the flow of credit is restarted to those smaller tenants, it will set the stage for a fairly strong recovery,” McCullough added. 

Announced store openings are picking up in 2013 and closings are down. Overall absorption is getting stronger in retail across the board. A number of retailers have announced plans to open a significant number of stores, many of them in power centers. 

So far in 2013, Bed Bath and Beyond leads with about 2.25 million square feet of new stores announced. Others run the gamut of the retail spectrum, from value retailers like Big Lots to luxury tenants such as Bloomingdale’s and Nordstrom Racks. 

“We’re seeing a more broad-based group of tenants seeking space, thus, we’re at an inflection point in the market and 2014 will be a much stronger year,” Mulvee said. 

Although retail numbers have been choppy in recent quarter, the four-quarter trailing average shows that momentum for demand is building, with the highest point in net absorption since start of recovery. 

“We’re now averaging 19 to 20 million square feet of net absorption per quarter, the best we’ve seen in a number of years, and we think it’s going to pick up,” said McCullough. “We’re still below the 50 million square feet of 2007, but the trend is pointing to an increased rate of recovery.” 

Source: CoStar Randyl Drummer November 12, 2013