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Republican leaders in both the House and Senate reached a tentative agreement Wednesday, merging their proposed tax reform bills. It was a major milestone in President Donald Trump’s push to overhaul the U.S. tax system.
GOP lawmakers are set to vote on the combined bill as early as next week, according to CNN . If approved by the full Congress, the new tax policy could have strong implications for the commercial real estate market, with several experts regarding the bill as highly favorable to the industry at large. Congressional leaders expect a vote before the chambers recess for Christmas.
Below are seven items in the bill that could impact the industry, according to a report from Marcus & Millichap:
Retail Properties of America has paid $88 million for a Naperville retail and office complex in downtown Naperville, where it plans to build on.
The Oak Brook-based real estate investment trust today announced the deal for the 182,000-square-foot Main Street Promenade.
The west suburban center, on the east side of Main Street, is 93 percent leased and is zoned for another phase of construction, RPAI said.
“The acquisition of Main Street Promenade includes a vacant parcel that has approval for up to 62,000 square feet of mixed-use space, which will provide us the opportunity to leverage our robust, local operating platform and knowledge to densify the property,” RPAI senior vice president Matthew Beverly said in the statement announcing the acquisition.
Retail tenants include Anthropologie, J Crew, Ann Taylor and Hugo’s Frog Bar & Fish House.
Main Street Promenade was developed by Dwight and Ruth Yackley, owners of Naperville-based development firm BBM. They developed the property in 2003 and a second phase in 2013.
BBM was represented in the sale by Bob Mahoney and Nick Peters of CBRE. The sale was completed on Jan. 13, the Yackleys said.
“We’re semi-retiring, so we decided it would be a good time to sell,” Ruth Yackley said. “We’re ready to travel and work a little less.”
They declined to say how much it cost to develop the first two phases of the Promenade.
The property includes about 103,000 square feet of retail and 79,000 square feet of office space.
Source: Crain’s Chicago Business Ryan Ori January 17th, 2017
A Chinese maker of power tools plans to bring more than 200 jobs to its new North American headquarters in Naperville over the next three years.
Chervon North America, the U.S. arm of Nanjing, China-based Chervon Holdings, confirmed plans to move workers from Michigan and several suburban Chicago locations when it opens a new headquarters in Naperville sometime in the spring.
Earlier today, Crain’s reported the company was moving its headquarters to the western suburb from Grand Rapids, Mich. At the time, it was unclear how many people would work in the facility at 1203 E. Warrenville Road.
Now, the company said it plans to relocate 75 workers from Grand Rapids and the Chicago suburbs of South Barrington and Geneva, spokesman Joe Turoff said in an email. Also moving there will be 37 employees who were added when Chervon completed its acquisition of Mount Prospect-based Robert Bosch Tool’s Skil and Skilsaw brands on Jan. 1, Turoff said.
The company also plans to hire 25 new workers this year and another 75 over the next three years, Turoff said.
Chervon also considered locations in California, Texas, Georgia, North Carolina and Tennessee, Turoff said. The company is not receiving any incentives from the Illinois or Naperville governments, Turoff said.
“In the end our decision came down to three key factors: proximity to talent, proximity to current and acquired employees (and) Naperville’s pro-business attitude,” Turoff said in the email.
The facility will include research and development, industrial design, sales and marketing jobs, he said.
Chervon is subleasing the entire 124,000-square-foot building from Swedish manufacturer SKF Group, which signed a 15-year deal to use the building for offices and R&D. But SKF decided not to move in as the building’s exterior was completed in 2015, and instead began seeking a company to sublease the building.
Source: Crains Chicago Business Ryan Ori January 11th, 2017
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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.
|Rank||Company||Headquarters||USA Retail Sales (000)||Sales Growth (’12 v ’11)||Worldwide Retail Sales (000)||USA % of World Sales||2012 Stores||Growth (’12 v ’11)|
|2||Michael Kors Holdings||New York||$850,000||63.2%||$1,063,000||80.0%||173||2.4%|
|3||Sprouts Farmers Market||Phoenix||$2,142,000||62.6%||$2,142,000||100.0%||146||41.7%|
|4||Lululemon Athletica||Sumner, Wash.||$823,000||57.7%||$1,287,000||63.9%||135||25.0%|
|5||Apple Stores / iTunes||Cupertino, Calif.||$23,998,000||34.6%||$26,760,000||89.7%||255||4.1%|
|9||Helzberg’s Diamond Shops||N. Kansas City, Mo.||$692,000||20.5%||$692,000||100.0%||232||-0.4%|
|10||The Fresh Market||Greensboro, N.C.||$1,329,000||20.0%||$1,329,000||100.0%||129||14.2%|
|12||Lumber Liquidators||Toano, Va.||$813,000||19.3%||$813,000||100.0%||279||9.0%|
|14||Grocery Outlet||Berkeley, Calif.||$1,300,000||18.2%||$1,300,000||100.0%||173||11.6%|
|15||Ulta Salon Cosmetics & Fragrance||Bolingbrook, Ill.||$2,099,000||18.2%||$2,099,000||100.0%||550||22.5%|
|16||Chico’s||Fort Myers, Fla.||$2,581,000||17.5%||$2,581,000||100.0%||1,357||8.0%|
|19||Tops Holding||Williamsville, N.Y.||$2,066,000||16.4%||$2,066,000||100.0%||137||5.4%|
|21||Whole Foods Market||Austin||$11,324,000||15.6%||$11,699,000||96.8%||322||3.5%|
|22||Bed Bath & Beyond||Union, N.J.||$10,853,000||15.6%||$10,983,000||98.8%||1,434||25.5%|
|23||Ralph Lauren||New York||$2,167,000||14.6%||$2,367,000||91.5%||249||-0.8%|
|24||Stripes||Corpus Christi, Texas||$1,009,000||14.5%||$1,009,000||100.0%||559||3.3%|
|26||Bodega Latina||Paramount, Calif.||$1,061,000||13.6%||$5,009,000||21.2%||45||25.0%|
|27||Ross Stores||Pleasanton, Calif.||$9,712,000||12.9%||$9,721,000||99.9%||1,198||6.6%|
|29||Foot Locker||New York||$4,468,000||12.9%||$6,129,000||72.9%||2,406||-2.8%|
|32||Dick’s Sporting Goods||Coraopolis, Pa.||$5,836,000||12.0%||$5,836,000||100.0%||601||7.1%|
|33||Hibbett Sports||Birmingham, Ala.||$819,000||11.7%||$819,000||100.0%||873||4.9%|
|37||Dollar Tree||Chesapeake, Va.||$7,266,000||11.3%||$7,395,000||98.3%||4,531||6.6%|
|38||Festival Foods||Onalaska, Wis.||$587,000||11.0%||$587,000||100.0%||17||6.3%|
|39||American Eagle Outfitters||Pittsburgh||$3,158,000||10.8%||$3,586,000||88.1%||971||-2.3%|
|40||Pier 1 Imports||Fort Worth, Texas||$1,564,000||10.8%||$1,691,000||92.5%||982||1.1%|
|43||Vitamin Shoppe||North Bergen, N.J.||$942,000||10.6%||$949,000||99.3%||575||9.3%|
|44||IKEA North America||Conshohocken, Pa.||$3,902,000||10.4%||$36,406,000||10.7%||39||2.6%|
|46||Tractor Supply Co.||Brentwood, Tenn.||$4,664,000||10.2%||$4,664,000||100.0%||1,176||8.4%|
|49||Newegg.com||City of Industry, Calif.||$2,686,000||9.3%||$3,074,000||87.4%||N.A.||N.A.|
|50||Family Dollar||Matthews, N.C.||$9,331,000||9.2%||$9,331,000||100.0%||7,442||6.0%|
|51||Yankee Candle Company||South Deerfield, Mass.||$445,000||9.0%||$447,000||99.4%||562||2.7%|
|52||C & J Clark||Newton, Mass.||$990,000||9.0%||$990,000||100.0%||286||11.3%|
|53||Aldi Süd||Batavia, Ill.||$10,041,000||8.9%||$42,321,000||23.7%||1,260||5.4%|
|54||Conn’s||The Woodlands, Texas||$650,000||8.9%||$650,000||100.0%||68||4.6%|
|55||Harp’s Food Stores||Springdale, Ark.||$826,000||8.8%||$826,000||100.0%||74||8.8%|
|62||Dollar General||Goodlettsville, Tenn.||$16,022,000||8.2%||$16,022,000||100.0%||10,506||5.7%|
|64||Sally Beauty Holdings||Denton, Texas||$2,601,000||8.1%||$2,601,000||100.0%||3,658||3.6%|
|65||Cumberland Farms||Framingham, Mass.||$798,000||8.0%||$798,000||100.0%||972||5.4%|
|66||WinCo Foods||Boise, Idaho||$4,932,000||8.0%||$4,932,000||100.0%||86||7.5%|
|67||Abercrombie & Fitch||New Albany, Ohio||$3,445,000||8.0%||$3,721,000||92.6%||912||-3.6%|
|68||99 Cents Only Stores||City of Commerce, Calif.||$1,605,000||7.9%||$1,605,000||100.0%||319||7.0%|
|69||Academy Sports + Outdoors||Katy, Texas||$2,191,000||7.7%||$2,191,000||100.0%||156||9.9%|
|70||Ascena Retail Group||Suffern, N.Y.||$3,125,000||7.6%||$3,235,000||96.6%||2,585||3.0%|
|71||Verizon Wireless||Basking Ridge, N.J.||$8,010,000||7.6%||$8,010,000||100.0%||1,910||-18.0%|
|74||Casey’s General Stores||Ankeny, Iowa||$2,004,000||7.5%||$2,004,000||100.0%||1,754||3.2%|
|75||Ann Inc.||New York||$2,376,000||7.4%||$2,376,000||100.0%||984||3.3%|
|76||Trader Joe’s *||Monrovia, Calif.||$7,844,000||7.4%||$31,666,000||24.8%||395||5.1%|
|77||Signet Jewelers||Akron, Ohio||$3,330,000||7.3%||$4,065,000||81.9%||1,333||1.1%|
|78||Burlington Coat Factory||Burlington, N.J.||$4,104,000||7.1%||$4,131,000||99.3%||492||4.5%|
|81||O’Reilly Automotive||Springfield, Mo.||$6,182,000||6.8%||$6,182,000||100.0%||3,976||6.3%|
|82||VPS Convenience Store Group||Wilmington, N.C.||$324,000||6.7%||$324,000||100.0%||190||6.7%|
|83||CVS Caremark||Woonsocket, R.I.||$63,688,000||6.7%||$63,863,000||99.7%||7,472||1.7%|
|87||The Home Depot||Atlanta||$66,022,000||6.4%||$74,754,000||88.3%||1,965||0.1%|
|88||Hot Topic||City of Industry, Calif.||$734,000||6.3%||$742,000||98.9%||803||4.8%|
|89||Pilot Flying J||Knoxville, Tenn.||$694,000||6.3%||$771,000||90.0%||549||3.0%|
|90||Wakefern / ShopRite||Keasbey, N.J.||$13,656,000||6.3%||$13,656,000||100.0%||300||3.1%|
|92||Stein Mart||Jacksonville, Fla.||$1,232,000||6.2%||$1,232,000||100.0%||263||0.4%|
|93||Petco||San Diego, Calif.||$3,011,000||6.1%||$3,011,000||100.0%||1,193||4.9%|
|95||Ethan Allen Interiors||Danbury, Conn.||$834,000||6.1%||$834,000||100.0%||211||2.4%|
|96||BJ’s Wholesale Club||Westborough, Mass.||$12,465,000||6.0%||$12,465,000||100.0%||200||2.6%|
|97||Harris Teeter Supermarkets||Matthews, N.C.||$4,535,000||5.8%||$4,535,000||100.0%||208||2.0%|
|98||C&K Market||Brookings, Ore.||$514,000||5.8%||$514,000||100.0%||65||4.8%|
|99||The Buckle||Kearney, Neb.||$1,124,000||5.7%||$1,124,000||100.0%||440||2.1%|
|100||Kinney Drugs||Gouverneur, N.Y.||$825,000||5.7%||$825,000||100.0%||95||5.6%|
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
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
A health care software firm founded by a member of Marquette University’s national championship basketball team is expanding to about 39,000 square feet, the latest company to lease space in Tellabs Inc.’s headquarters in the western suburbs.
JDA eHealth Systems Inc. signed a long-term lease for 39,215 square feet in the Tellabs building, 1415 W. Diehl Road in Naperville, said Los Angeles-based CBRE Inc., which represented the tenant.
The company was founded in the early 1990s by James Dudley, a backup forward on Marquette’s colorful 1977 team, which was coached by Al McGuire and included Chicago-area prep stars Bo Ellis and Jerome Whitehead.
Mr. Dudley was a principal in a trading firm on the Chicago Board of Options Exchange before starting JDA in the early 1990s, according to the company’s website.
JDA is nearly doubling its space as part of a move from 1717 Park Street, a Class B building less than 3 miles east in Naperville, said Corby Bell, JDA’s chief operating officer.
Telecom equipment maker Tellabs completed the 800,000-square-foot structure with high-end finishes in 2001 but in recent years has leased space to outside tenants. Recent transactions include deals with accounting and consulting firm Sikich LLC and cable and internet provider Comcast Corp. for 80,000 square feet each.
JDA nearly tripled its revenue and employee count in the past six to seven years, said Mr. Bell, who declined to specify annual revenue. JDA and an affiliated company, Next Recovery Source LLC, have about 150 employees combined in their current location, he added.
The new office can accommodate up to 200 employees and can be reconfigured for as many as 400, he said.
“Despite the economy, we’ve experienced incredible growth over the last few years,” Mr. Bell said. “We need more space, and the building we’re going to gives us really nice space for our employees, and for clients we bring in.”
JDA provides software called revenue cycle middleware, technology that allows hospitals to efficiently track registration, billing and payment of patient accounts, while Next Recovery Source is a collection vendor. JDA’s clients include about 40 hospital systems throughout the U.S., he said.
The move, made possible by executing a termination option in its current lease, is expected by April, he said. The firm has small satellite offices in Dallas and near Fort Myers, Fla., Mr. Bell said.
In addition to Class A space that comes mostly furnished and built out, one major selling point in the Tellabs building was the onsite data center. JDA currently must keep data both on and off site, he said.
“We were able to get unbelievable economics compared with doing a data center somewhere else,” said CBRE Senior Vice President Jon Springer, who represented JDA along with CBRE Vice Chairman Gary Fazzio.
Tellabs occupies about half of the office space in the five-story building, with several tenants using most of the remaining half, a Tellabs spokesman said. “With this lease, the building will be pretty full,” the spokesman said.
Source: CommercialRealEstateDaily, Ryan Ori October 04, 2013
Thanks in part to the strength of retail properties, September’s delinquency rate for U.S. commercial real estate loans in commercial-mortgage-backed securities fell for the fourth straight month, to 8.14 percent, according to research firm Trepp. This is off 24 basis points from August and 185 basis points from a year ago. It is the lowest delinquency rate noted by Trepp in three years.
Some $1.7 billion in loans were delinquent in September, a sharp decrease from the $2.5 billion total in August. Delinquent CMBS loans totaled $44 billion for the month, excluding those past their balloon date but current on interest payments, Trepp reports.
This month’s improvement was attributable in part to some $1.9 billion of loans that came out of default in September. Loan resolutions totaled slightly less than $873 million for September, one of the lowest levels in recent months. Resolutions for August came to slightly more than $1 billion.
“The CMBS market managed to shrug off concerns over QE tapering, Syria, and impending government budget issues in September,” said Manus Clancy, a Trepp senior managing director, in a press release. “Supporting the improvement in the rate was a slowdown in new delinquencies and the addition of new deals to the overall loan pool.”
Among the major property types, retail continues to be strongest, while industrial remains the weakest. Office delinquencies improved best month-to-month, easing by 29 basis points, while lodging sustained a 12-basis-point increase.
Source: ICSC Shopping Centers Today, October 4th, 2013