Commercial Real Estate Lending Bounces Back in Q2

 

Commercial real estate lending volumes continue to thrive, bouncing back from its winter slump in the second quarter. Commercial real estate lending volume surpassed its 2015 levels. The area has been one of several asset classes which were severely affected by the global economic crisis, having witnessed property values decline by more than 25 percent in various markets. Experts even had predicted there would be a drop of 50 percent for worst affected regions. According to CBRE, United States loan origination volumes grew 5.7 percent year-over-year. CMBS lending volume is down from last year.

 

Banks had increased their United States commercial real estate lending share to 49 percent, compared to 10 percent for CMBS shops, highlighted CBRE. Most banks are deleveraging, with many including CRE lending. According to McKinsey & Company, bank financing for CRE has dried up significantly as a result. McKinsey released its Commercial Real Estate Finance Survey, one of two McKinsey surveys which focuses exclusively on commercial real estate. The survey highlighted estimated EU banking groups which comprised about 40 percent of the CRE loans outstanding on balance. The survey spanned 2006 and 2007, the final two years of the property boom, providing a clear picture of how the industry performs in good years.

 

The survey results revealed two key findings: First, the industry as a whole does not return its cost of capital (defined as equity) even in the best of times, let alone over the business cycle. Second, other factors include a lack of revenue diversification and cost inefficiency. McKinsey forecasts that even after the current crisis has faded, the CRE finance industry will continue to destroy value. The availability of capital has significantly constrained the balance sheets of CRE lenders. In Western Europe, net interest margins have gone up 100 percent or more.
According to McKinsey & Company, in the recent boom, CRE lenders did not see the need to invest in large workout organizations. “Now, given the unprecedented scale and pace of deterioration in many markets, banks urgently need to expand their workout units—no small matter, as these skills are hard to come by,” the firm noted. “These moves will help banks establish the needed comprehensive approach to loss mitigation.” Although lending margins will likely remain higher for a time, the firm believes that this relief with CRE lending will be transient. “As the next property boom takes hold (or perhaps even before), memories will fade, capital will re-enter the business, competition will increase, and a willingness to downplay risk will once again push industry margins down,” the firm highlighted. There is also a new era of regulation in which shareholders could bring challenges to CRE lenders. “If governments should impose, say, domestic lending requirements on the banks they “own,” that could undermine banks’ need for more careful risk assessment and pricing discipline, and could reduce lenders’ ability to select the most attractive deals.”

A Look At Donald Trump’s Potential $0 Tax Bill

Donald Trump’s potential $0 Tax Bill might just be the reason why we do Commercial Real Estate Development. According to the New York Times, perhaps the reason that Donald Trump hasn’t released his tax returns is because he’s not actually been paying any Federal taxation. The key point, is if the New York Times prediction is indeed true, then no one would ever conduct commercial real estate development. However, it is clearly obvious today that people are involved in commercial real estate development. “But this specific tax “break”, depreciation on commercial real estate, is entirely justified by the basic economics of the business itself. If buildings did not depreciate there would be no commercial property redevelopment business. We can see that there is a commercial property redevelopment business – thus commercial buildings do depreciate and a depreciation allowance is the correct thing to have,” Forbes wrote.

“Few tax advisers to major real estate developers would speak for attribution, because their clients benefit from the same tax breaks available to Mr. Trump,” the New York Times wrote. “Real estate is notorious for throwing off huge deductions,” stated Mr. Rosenthal of the Urban-Brookings tax Policy center.”That coupled with wide latitude in the timing and recognition of income make real estate development extremely attractive from a tax standpoint.”

Mr. Trump’s economic plan has three tax brackets which include limiting taxes on all forms of business income to 15 percent. This would end estate tax and would also “exclude child care expenses from taxation. Trump said the following at his economic speech in Detroit,” I am proposing an across-the-board income tax reduction, especially for middle-income Americans. This will lead to millions of new and really good-paying jobs. The rich will pay their fair share, but no one will pay so much that it destroys jobs, or undermines our ability as a nation to compete. As part of this reform, we will eliminate the Carried Interest Deduction, a well-known deduction, and other special interest loopholes that have been so good for Wall Street investors, and people like me, but unfair to American workers. Tax simplification will be a major feature of the plan. Our current tax code is so burdensome and complex that we waste 9 billion hours a year in tax code compliance. My plan will reduce the current number of brackets from 7 to 3, and dramatically streamline the process. For many American workers, their tax rate will be zero. While we will develop our own set of assumptions and policies, agreeing in some areas but not in all or in others, we will be focused on the same shared goals and guided by the same shared principles: jobs, growth and opportunity. These reforms will offer the biggest tax revolution since the Reagan Tax Reform, which unleashed years of continued economic growth and job creation. We will Make America Grow Again.”

 

Commercial Real Estate Trends to Watch For the Remainder of 2016

Surprisingly, the United States property market landscape in 2016 has remained very similar to what it was like in 2015. This result is a mix of mediocre and impressive numbers, due to interwoven themes which came into play and, yet, poised good opportunity for investors who were savvy. These opportunities brought technological, economic, and demographic trends to the CRE market. The United States Federal Reserve announced last December that the central bank forecasted growth in America to be stable. With inflation is being under control in the United States and in the emerging markets. The United States employment also remains positive. In 2016, unemployment dropped below 5 percent this year, and added to housing demand for office space, for retail, and for industrial or distribution.

For the second half of 2016, existing trends are continuing to still hang around, according to the Counselors of Real Estate annual Top Ten Issues Affecting Real Estate for 2016 report. The following are six trends were highlighted as commercial real estate trends in the upcoming year:

Global economic and political uncertainties. We would be remiss if we did not point to developments in the United States and abroad that are certain to have an impact on the state of the economy and the investment environment for the foreseeable future, starting with volatility in the energy sector that has prevailed throughout the year thus far. While oil prices have recovered considerable ground in recent months, continued volatility in the sector has injected uncertainty into the market—something investors typically try to avoid. In addition, the recent Brexit vote in the United Kingdom has introduced new uncertainties that will not be fully understood—much less resolved—in the near term. The International Monetary Fund has downgraded global growth twice since January as uncertainties blur the outlook. For U.S. markets—real estate in particular—the impact is likely to be largely positive as U.S. assets become more attractive and valuable to global investors. We can probably expect enhanced inbound foreign investment in U.S. real estate markets as the United States becomes even more of a safe haven for investors worldwide.

Steady interest rate environment. While it seemed fairly certain, at the end of 2015 and the beginning of 2016, that interest rates would begin an upward trajectory, the uncertainties mentioned in number 1, above, have probably dampened the Fed’s enthusiasm for further rate hikes in 2016. The slightest possibility remains that the funds rate could be boosted by perhaps 0.25 percent to 0.50 percent, but both inflation and employment appear to be coming in under the Fed’s expectations. And, with global economic growth lower than expected earlier in the year, the Fed will more likely maintain a wait-and-see position in the short term. We still believe that the Fed is more than likely to weigh the effects of each move it makes before adding any additional friction to current (if unspectacular) economic growth trends. Ten-year Treasury yields have been in flux as early concerns about the effects of Brexit have begun to smooth out. Yields, which had fallen to as low as 1.24 percent in the immediate aftermath of the Brexit vote, have risen back to over 1.5 percent in recent weeks. As concerns about global economic developments ease, we should expect those yields to push back toward a more normalized 1.75 to 2 percent range by year-end. The squeeze on cap-rate spreads remains of some concern for real estate investments should rates rise more rapidly than expected, especially as the “frothiness” we have seen in certain gateway, Class A markets emerges (see our cautionary note from early 2015). At present, little indication exists that a rate increase will push cap rates dramatically higher. Nonetheless, there are indications that yields may begin to drift upward. And, as pricing in first-tier markets stalls and yields hover in the sub–4 percent range in some of the major gateway markets—which are, in some cases, already in peak pricing territory—we should probably expect investors to move more aggressively into secondary and tertiary markets—and to opportunities beyond core assets to core-plus and value-add properties as well as some of the niche property sectors, including medical office, student and senior housing, and data centers.

Foreign investment in the United States. Global economic and political uncertainty continues to drive capital to the United States. International capital flows into U.S. real estate assets will continue—and increase. The U.S. property market is the most stable and transparent in the world, with higher relative yields and price appreciation potential, making it an easy investment choice. And, while slowing growth in China and much of Europe may dampen currencies and incomes over there, there is still abundant non-U.S. capital looking for placement and very strong demand for U.S. assets, as 2015 proved with record inflows. That year, foreign purchases of U.S. real estate assets rose to more than $87 billion over the 12 months ending in December, according to the Association of Foreign Investors in Real Estate (AFIRE), with China, Canada, Norway, and Singapore all riding the wave. That volume is up from just $4.7 billion in 2009, according to Real Capital Analytics. Among members of AFIRE, a substantial proportion expect to increase investment in the United States in 2016. Changes in the 1980 Foreign Investment in Real Property Tax Act (FIRPTA), which now allow foreign investors to be treated in a fashion similar to their U.S. counterparts, will likely lead to an increase in foreign investment in the U.S. real estate market as well.

Slowing new supply. Additions to supply will remain limited across the board, with only modest supply growth in a few sectors—multifamily (now slowing for the remainder of 2016), student and senior housing (creeping up), and single-tenant industrial (regional/nodal distribution centers)—and repurposing in others (suburban malls). Lending sources were extremely skeptical about funding new construction coming out of the last recession, and the current lending environment is showing signs of reticence as bank reserve requirements from Basel III and commercial mortgage–backed securities (CMBS) risk retention requirements from Dodd-Frank are due to kick in by late 2016. Market volatility has sharply reduced CMBS offerings as well. Insurance companies are stepping in to fill some of the gaps, and private debt funds are emerging as an alternative space. Of all the property sectors, only multifamily can be said to be near long-term new supply, although office is seeing some marginal supply additions in a few markets for the first time in years.

Ever-changing retail. There will be continued stress on retail and continued retail shifts—including mixed (virtual/physical) spaces and entertainment-themed spaces. The technology of retail continues to evolve, and the “Amazon effect” is becoming pronounced. Analysts expect that the more successful retailers will be those that can optimize a combination of virtual online and physical in-store shopping experiences (“clicks and bricks”). Amazon has begun to explore physical shopping spaces in combination with its wildly successful online model by opening its first physical store in Seattle this past fall (ironically, in a former Barnes & Noble location). It would not be a surprise to find physical retailers pushing similar formats in the other direction—including more “showroom”-styled storefronts (Tesla) with digital spaces offering fulfillment. As we said earlier this year, some retailers should probably seek out hospice care. In its 130th year, Sears could finally succumb in 2016, with some of its brands, like Craftsman and Kenmore, already being spun off to other outlets, while JCPenney is in recovery and taking up some of Sears’s traditional strengths (Penney’s is now competing in the appliance space). Macy’s is losing ground in the middle market, and has a short horizon to regain competitive advantage with lower-end discounters.

Volatile energy markets. As a colleague of ours remarks, “Whenever a key commodity demonstrates instability, it threatens global economic security.” Energy market volatility has already affected certain regional U.S. economies (e.g., Houston and North Dakota) and producer nations (e.g., Saudi Arabia and Venezuela). Last year saw a dramatic drop in oil prices, and the drop continued into early 2016, followed by substantial volatility through midyear. Increased production and reduced demand due to slowing global growth led to the decline that saw oil prices fall from $110 per barrel to a 13-year low of $27 per barrel in early 2016, with recovery to just $43 per barrel in July. The world is oversupplied, and major oil-producing countries have barely reduced production. This has had a profound economic impact and carries with it implications for property market fundamentals and commercial real estate pricing.

The impact on property market fundamentals varies by sector:

Office. Office demand is not likely to see an immediate impact from lower energy costs, but lower operational expenses do make office occupancy less expensive and contribute to higher corporate operating profits, which should, in turn, continue to fuel hiring and absorption of additional space.

Retail. Households typically spend windfalls. Retailers reported above-average, and better-than-expected, holiday sales at the end of 2015. Shopping centers and neighborhood shopping centers should benefit further should energy prices remain low to provide a windfall to consumer pocketbooks.

Industrial. The reduction of energy costs helps boost industrial production and lowers distribution costs. Petroleum-based products will benefit from lower input costs, which, in turn, can positively influence manufacturers’ decisions to increase production and occupancy. Demand for warehouse and distribution space should see an increase due to higher consumer spending. E-commerce operations will expand as well, likely resulting in more distribution and storage space.

Hospitality. Hotels benefit as leisure travelers find travel more affordable. And, lower oil prices should result in lower business travel costs, encouraging more business travel and lodging.

Apartments. Increased disposable income means that households will have more to spend on housing, including upgrading to higher-quality apartments. Furthermore, apartments in the suburbs will benefit with the lower costs of commuting.

*Counselors of Real Estate

 

The Off-Price Retailer Sector Is Hot – Even In Physical Space

During the next five years, the off-price retailer sector is predicted to continue to outperform and build momentum in the apparel retail segment. According “Off-Price Retailers Continue to Build Momentum on Value Appeal,” latest report by Moody’s Investors Service, off-price retailers are anticipated to experience apparel revenue growth of 6 percent to 8 percent, outperforming the broader apparel segment by a collective 4 percent in the timeframe.

Christina Boni, a VP and senior analyst at Moody’s highlighted that “TJX Companies, Ross Stores and Burlington continue to outpace overall apparel, which are growing at a much slower pace. In contrast, the department store industry is losing share to off-price and other areas of apparel spending, as online competition increases and mall traffic continues to decelerate.” The off-price segment’s market share in sales are expected to grow to nearly 10 percent of apparel sales by 2018 from 8.8 percent, according to Moody’s. Moody’s also estimates the home category grew almost 13 percent relative to overall growth of 3 percent for the off-price retailers.

With brick-and-mortar growth expected to contribute to off-price sector growth as demand for its goods drives a healthy traffic pattern, Boni also stated that “The off-price model has proven that the customer will still shop physical locations when given the right value and store experience.” The sector is also coming down hard on it’s competitors such as Macy’s and Nordstrom. Last year the Dow Jones United States Apparel Retailers Index fell by 6 percent. Shares of Ross and TJX rose by 15 percent and 4 percent. Ross has now become the single largest clothing shop in America.

Department stores are turning more to outlets and leaving shopping malls. Upscale chains such as Neiman Marcus have launched their own off-price divisions. Saks Fifth Avenue’s “Off 5th,” Neiman Marcus’ “Last Call,” and Bloomingdale’s have also been launching its own outlet stores. “In our opinion, there has been a secular shift toward price sensitivity in apparel purchases following the Great Recession,” stated Bridget Weishaar, senior equity analyst at Morningstar. “People now value price more than other retail attributes like customer experience. Compounding this is the fact that the quality of customer service and store environment seems to have fallen in some department stores, making the experience not that much different from shopping at an off-price retailer.”

 

Developers Eye Fort Lauderdale For Projects

A commercial real estate development boom is in the air in Miami, which is also causing a slew of developers to look at opportunities in the far North areas. Just last year, major Miamia brands such as SBE’s Hyde Beach, The Gale, Four Seasons, Auberge, and Paramount have made the announcement of new CRE projects in Fort Lauderdale.

So why Fort Lauderdale? Commercial real estate developers are noting that competitive pricing and the opportunities of availability of underdeveloped land are present here. Fort Lauderdale is being sought after by both hotel developers and real estate developers. Fort Lauderdale has always been known to offer land and overall value at lower prices.  Harvey Hernandez, founder of Newgard Development Group stated that, “We see a tremendous value in Fort Lauderdale.” “Everybody is looking at Fort Lauderdale as an extension of Miami, and that’s true whether you’re a visitor or a buyer.”

Better locations likely equate to better pricings in CRE development. “If we were building the Gale on this scale in Miami Beach, it would probably be worth $1,500 a square foot,” Hernandez also says. “The Gale in Ft. Lauderdale is about $600 per square foot, which just goes to show you the type of value that we can deliver in Fort Lauderdale.” The Four Seasons in Fort Lauderdale is asking an average of $1,500 a square foot for its residences, which is approximately 40 percent less than what Four Seasons condos have been selling for in Miami Beach, stated Nadim Ashi, Fort Partners’ chief executive, who is developing both projects.

It was just last year when Fort Lauderdale began undergoing its vast makeover. New luxury hotels and buildings along the beach promenade have been attracting buyers. According to the Greater Fort Lauderdale Convention and Visitors Bureau, nearly $1.5 billion in residential and hotel developments are under way in the Fort Lauderdale area. South Florida witnessed over a dozen commercial real estate deals of more than $100 million dollars in 2015. There has been billions of dollars of shopping malls, office buildings, warehouses, and condos which were bought and sold throughout the area.

“The price of land in Miami is very expensive and people have been looking at other nearby markets,” Suzanne Amaducci-Adams, a Miami attorney at Bilzin Sumberg Baena Price & Axelrod LLP who works on hospitality and development stated to the WSJ. “Fort Lauderdale has beautiful beachfront and older properties that are not developed to their fullest potential by today’s standards.”

Billionaire Investor Sam Zell Sees “Global Woes” To Push US Into Recession

Contrarian billionaire real-estate investor Sam Zell has warned that the US economy is ‘in the ninth inning,’ but predicts ‘milder’ downturn ahead. In a recent story with the WSJ, the chairman of Equity Group Investments and of apartment landlord Equity Residential warned that it isn’t immune to problems in the world economy. Those problems include low oil prices, falling import demand from emerging economies, volatile financial markets, deflation, possible negative interest rates and currency exchange rate fluctuations, he stated. “I’m not being pessimistic, I’m being realistic,” Zell stated earlier this year at a real-estate conference in New York.

Mr. Zell also sees the U.S. as deeply “polarized,” which brought upon the popularity of Donald Trump. Zell sees Mr. Trump as an “enormous wild card” whose leadership is “full of risk.” All his campaign has said is ‘it’s going to be great’ and to ‘trust me,’ stated Mr. Zell.

The U.S. economy is now “in the ninth inning,” Zell also said. For real-estate investors, commercial property values have been on a mostly uninterrupted upward march since 2009, according to the WSJ. “Over the past year, concerns over when and how much the Federal Reserve will raise interest rates have taken a toll on real-estate investment trust prices.”

Mr. Zell also noted that Nigeria slashed its 2016 economic growth projection to 3.2% from 6.3% in 2015. “For an emerging market like that, it’s a disaster, and that’s happening all over the world,” he said. “So, I just don’t think the U.S. can avoid it.”

He also believes that the Fed has deferred reality for much longer than normal. Mr. Zell said in an interview with CNBC on May 24, 2016, that “the Federal Reserve should have raised interest rates two years ago.” The Fed has deferred reality for so long that it now has no other option than to raise rates for the sake of its credibility, according to Zell. He also expressed that with prolonged low interest rates in the United States, the business community is desensitized to the cost of capital, leading to distorted markets.

Sam Zell is known for his success for capitalizing on distressed situations and bargain-priced assets. Mr. Zell constructed a $5 billion real estate empire by purchasing deep-value real estate in down markets in the 1960s, and followed through on this strategy over the next forty years. Equity Commonwealth returned 6 percent to its investors in 2015, ranking fourth among 21 companies in the NAREIT Office Index, which returned an average 0.3 percent, according to the proxy. On January 26, Zell received restricted stock worth about $2 million on that date. A year ago, he received $2.6 million in stock, according to the proxy.

Why CRE Could Be An Asset Bubble

The Fed’s George has said that commercial real estate could be a potential asset bubble. The commercial real estate market is a potential asset bubble that “bears watching,” said Kansas City Fed President Esther George earlier this year. George was pushing for the United States central bank to “stay the course” and gradually raise interest rates.

George joined the Fed in 1982 and served much of her career in the Division of Supervision and Risk Management. She began by becoming a commissioned bank examiner and eventually served for ten years as the District’s chief regulator. In that capacity, she was responsible for oversight of the District’s state-chartered member banks and nearly 1,000 bank and financial holding companies, as well as the Bank’s discount window and risk management functions.

Some real estate professionals are seeing pessimism in the economy, with a recession predicted in 2017. A survey of 400 people in real estate by PricewaterhouseCoopers (PwC) and the Urban Land Institute (ULI) revealed a drop in positive sentiment to 69 percent from 84 percent six months ago with current levels are at the lowest in two years.

Employment data has also been adding to the recession confusion because it is one of the underlying fundamentals. The Commercial Observer writes that the weak May jobs numbers are of great concern for commercial real estate nationally highlighting that last month, payrolls grew by just 38,000 jobs, far below the expected 162,000.

“In the long run, a failure to keep interest-rate policy in line with improving fundamentals can distort the allocation of capital toward less fruitful — or perhaps excessively risky — endeavors,” George stated in a speech to an economic forum in York, Nebraska. “My concern for some time has been that extending monetary policy too far beyond its scope of capability risks undesirable financial, economic and political distortions.”

“We have received four strong labor reports as well as data showing that inflation is moving higher” since the first Fed interest-rate hike in December, George stated. “I believe monetary policy should respond to these developments by slowly removing accommodation despite “what appears to be a more vulnerable global economy, and a domestic economy that appears to be slowing in the first quarter and is threatened by markets that are anxious, uncertain and volatile.”

Slow and gradual rate hikes remain the best policy, George also said. “Removing accommodation in small doses is consistent with the economy’s fundamentals, keeps policy accommodative while global and domestic risks play out, and does not preclude pausing or responding if downside risks materialize,” she stated.

 

Efficiency Standards May Save Commercial Real Estate Billions

As we all know, the commercial real estate industry conducts deals in the billions and millions as a “norm.” The opportunities to save billions of dollars are appealing to any industry across the board. According to IMT.org, (Institute for Market Transformation), the United States spends more than $400 billion dollars on energy for American buildings. The majority of these buildings were constructed prior to modern energy codes existing, consuming more energies.

When fixing old drafty buildings, the United States has grown to become a $20 billion dollar industry. While the U.S. redoubles its reducing greenhouse gases commitment, the experience of fixing such buildings may be replicated nationwide. Buildings account for 39 percent of carbon dioxide emissions, exceeding transportation and industrial uses, according to the U.S. Green Building Council.

“Most of the focus has been on new construction, but now people are really taking a look at existing buildings,” said Cliff Majersik, executive director of the Institute for Market Transformation, a Washington nonprofit that promotes more efficient buildings to Bloomberg. “If you really want to move the needle on climate change, you can’t ignore the 99 percent of buildings that are already there.”

According to Majersik, a decade of progressively stricter laws aimed at reducing energy use and consumer desire to lower costs have already bred a $20 billion-a-year industry in the U.S. Initially, regulators chased after gas guzzling cars and smokestack industries in efforts to improve the air quality. It wasn’t until the past decade that office buildings and apartments gained little scrutiny by regulators. Today, policy makers are focused on property owners to replace inefficient windows, fans, lighting and other components.

Terrill Laughton, vice president and general manager of demand response for Johnson Controls, said in an interview that a “favorable legislative environment” should accelerate growth in his business. “There’s only so many new buildings that get built,” Laughton said. “States aren’t going to achieve their environmental goals without getting to older buildings and facilities. Broadly speaking, most of our work is in older buildings and facilities. There’s a lot of low-hanging fruit.”
Thanks to the Investors Confidence Project, Energy Performance Protocols that define a standardized road map of best practices for originating energy retrofits are offered following the ICP Project Lifecycle. They leverage existing and commonly accepted standards such as ASTM-BEPA, ASHRAE Guideline 14, and EVO-IPMVP in conjunction with ICP specified elements, procedures, and documentation based on the various stages of a project life-cycle to create standardized projects with reliable returns.

REITs Boosting South Florida CRE

For South Florida, REITs had come into the picture about 15 years ago, changing the local commercial real estate market. According to Wayne Ramoski of Cushman & Wakefield, REITs invest across a broad array of sectors, from office buildings to shopping malls and hotels. Ramoski said there also are health care, timber and infrastructure REITs during the RCA Midyear Update. In Miami, low interest rates and improved employment have boosted REITS.

“The way REITs develop and hold is very different than a local developer would expect,” Ramoski said. “It’s brought in an institutional class of developer. They are here because the Miami market is not going away. There are certain factors about Miami that are going to keep it alive for a long time. The REITs are also cross selling other clients they have in different markets into this market.”

According to the Greater Miami Convention & Visitors Bureau, developers are buying and building new malls because of South Florida’s population growth and increased tourism. Miami-Dade, the most populous county in Florida, added 7.8 percent more residents in the last five years and has a population of 2.69 million, according to U.S. Census Bureau data. A record 15.5 million visitors visited Miami in 2015.

Just last June, a public REIT paid more than $180 million for a portfolio of self storage properties, which were mostly located in Florida. Self Storage Trust II had acquired 10 properties in Florida. The other properties were purchased in Baltimore, Maryland, from affiliates of the Mindful Capital Group, an investment and management company headquartered in Delray Beach. The Real Deal wrote that altogether, the deals come out to nearly $182 million in South Florida alone. One of the Florida properties is located in Port St. Lucie and another in Naples, so they aren’t included in the roundup.

“We like the diversity of these assets across the southern half of Florida,” Wayne Johnson, chief information officer for Self Storage Trust II, wrote in a company announcement. “There are 10 stores spread amongst five counties, each in dense and established markets.”

Investors just love REITs. REITs are one of the few investments that have escaped scrutiny with investors today. In the beginning, REITs were developed by Congress in 1960 for the smaller investor and they of course, offer plenty of opportunity for investors. With low interest rates, REITs currently pay yields in excess of 4 percent.

 

Commercial Real Estate Embraces Art

Art is not a trend. Art it here to stay! Art is is becoming even more popular with buyers when seeking out commercial, residential and hotel buildings. “Developers are trying something special because they have to get creative in order to attract new customers,” said Angel Law, head of residential investment at DTZ Cushman & Wakefield in Hong Kong. This includes using new color schemes, layouts and furnishings that are “different from the square boxes that used to sell,” she said to the WSJ. Property prices have doubled since 2003, according to UBS.

Real estate developers in Hong Kong are looking to art and design for competitive alternatives to stand out in the market. Architects in the city say that developers used to ask them to maximize floor area, but now request more flair in design and furnishings. In New York city, specially curated art is one of the hottest sellers on the market today with real estate. Gotham Magazine online recently interviewed three movers and shakers to learn more on how art relates:

Michael Namer: We’re basically a downtown company, and we wanted to make sure people moving there understood the importance of art in those neighborhoods. We found this Holy Grail of artists like Futura 2000 and Euro and Fab Freddy who are so iconic, and they were spraying our walls. All of a sudden I was in the middle of the art world and we opened Gallery 151, where we would show exhibits alongside our own projects. It worked, because we got a lot of publicity, but we’ve also helped many up-and-coming artists.

Emily Santangelo: I’m doing projects with Toll Brothers City Living, which finds fantastic properties to develop. They’ve recognized that art is very powerful, and they believe that their public and amenities spaces should match the level of quality and luxury found in private residences.

Alexander DiPersia: I just did a project for Related Real Estate at Hudson Yards, where we placed a massive Michel François bronze piece at the front. It’s their most expensive building in Hudson Yards, so we went with a recognizable, gilded, luxurious piece. We’re using art to create an emotional experience.

These real estate experts also see art as the “number-one status symbol” in the world. This is often considered as more valuable than real estate because it resonates with buyers. Some of the popular artists that were noted in the story were Emilio Perez, Ann Agee, John Clement, Oscar Dotter, Danny Fox, and Henry Taylor.

U.S. Industrial Availability at 15-Year Low, Thanks To E-Commerce

It looks like new constructions may be a key contributor to curbing tight supply and rising United States rents. CBRE sees the US industrial availability has declined in the first quarter to 9.2 percent, down 20 basis points from the fourth quarter. This has been the 24th consecutive quarter of its availability at a decline. According to the new 2016 industrial index report by CBRE, industrial space in the U.S. declined in the first quarter of 2016 to the lowest level since 2001 and rents remain on an upward trajectory, while new construction is poised to limit both trends over the next two years.

Thanks to e-commerce, the industrial availability has been pushed to unusual lows. Presently, the demand for facilities which are capable of handling same-day delivery fulfillment and reverse logistics is on the rise. Another important factor is the strong dollar which augurs more imports. These imports remain in the distribution system longer than exports which take up more space.

“The market is very strong right now, but we think we’ll start to see a pause as more supply comes online this year and next,” said Jeff Havsy, CBRE’s Americas Chief Economist and Managing Director of CBRE Econometric Advisors. “We also expect that demand might ease a little, because it’s been so strong for so long. You’ll probably see a slight pickup in vacancy this year, but nothing dramatic.”

CBRE also forecasts industrial rents will still continue to rise higher in 2016 and slow down next year. Industrial rents had increased by 5.3 percent last year to $5.74 per square foot. Rent rates have slowed down due to a rise in new construction. New construction had increased by 14 percent last year to 150.5 million square feet. According to CBRE, construction will continue to grow over the next two years, remaining under the 10-year high of 213.5 million square feet delivered in 2006.

E-commerce has pushed industrial availability to unusual lows as demand increases for facilities to handle uses such as same-day delivery fulfillment and reverse logistics. Another factor bolstering demand: The strong dollar augurs more imports, which stay in the distribution system longer than exports and thus require more space.

According to CBRE’s data which spans 57 top U.S. markets, 35 posted a decline in availability in the first quarter from the fourth. Another 10 were unchanged the report highlighted. The report also indicated that twelve saw an increase, due mostly to new construction. Among the largest markets in which availability declined in the first quarter from a year earlier are New York City, down 230 basis points; Detroit, down 140 basis points; Atlanta, down 90 basis points; and Dallas, down 80 basis points.

 

Major Retail Developers Flock To Miami’s Commercial Market

Local market experts recently said at the recent Realtors Commercial Alliance (RCA) Midyear Update hosted by the MIAMI Association of REALTORS® (MIAMI) that major retailers and developers are choosing South Florida for significant projects as the region’s brand and population grows. “Miami is the place to be,” Ronald Kohn of Kohn Commercial said. “You can go around the world and you don’t have to say you’re American. Just say you’re from Miami and everybody knows it.

In Miami, CBRE Project Management had recently announced the unveiling of the new AC Hotel by Marriott in Aventura, Florida. Developer Norwich Partners LLC hired the firm to manage the design and construction of the 233-key hotel. Norwich Partners invested $35 million to finance the development. The Marriott AC Hotel is located at 20805 Biscayne Boulevard and scheduled to open in November 2016.

“With so much construction going on in South Florida, one of the biggest challenges is ensuring permits are issued in a timely manner and projects stay on budget, which is where our local expertise and previous hospitality experience provides value to our clients,” said CBRE’s John Smotryski, director of project management in South Florida.

The Aloft hotel is another CBRE Project Management for Norwich Partners which is scheduled to be completed. The new hotels will be located directly across the street at the Aventura Park Square mixed-use development. Groundbreaking for the 207-room Aloft is slated for April 2016.

“Big name retailers see Miami as a must place to be,” said Juan Roberto DeAngulo of Elion Partners. “It’s less of an economic decision and more of a marketing decision.”

According to RCA Miami, Downtown Miami, which has more than doubled its population to 80,000 in the last decade, is the site of two major mixed-use projects: the $1.05 billion Brickell City Centre and the $1.7 billion Miami Worldcenter. The projects are just two of the various under construction projects in the region. The United States’ largest mall, the proposed 200-acre American Dream Miami, may also be coming to Miami-Dade, if approved by the county.

About RCA MIAMI

The REALTORS Commercial Alliance of MIAMI (RCA MIAMI) seeks to serve commercial members and to shape and unify the commercial real estate brokerage and service industry in South Florida. With about 2,000 members, RCA is the only association of REALTORS dedicated exclusively to commercial real estate interest throughout Miami-Dade County. The Alliance provides member services, including a legislative voice, education opportunities, a code of ethics, and networking opportunities that provide enhancement of the commercial REALTORS knowledge base and ability to service their clients. RCA MIAMI participation facilitates networking opportunities. The Alliance hosts the Annual Commercial Super Conference and Expo, the largest commercial expo in South Florida.

Building Mixed Offices Still Lags

For the workplace, companies today require different needs. The question amongst the real estate sector is: Why aren’t any mixed office buildings being developed today? According to CBRE, people everywhere recognize that technology has changed the workplace forever. It certainly is true. Today’s companies are required to be “high tech.” From personal choice, wellness, mobility, collaboration, flexibility, shared space, and work-life integration, these are areas found to be highly valued within any industry. There is no equal development for this.

The recent article in Blueprint Magazine online presented by CBRE suggests that most commercial developments today are designed for only one of these scenarios which were mentioned. Imagine the value that could be with one “hybrid tower” developed. “We would not only reduce the developer’s or owner’s risk, but also create more dynamic environments by bringing diverse enterprises together,” CBRE stated. The firms also believes that a hybrid tower will not only reduce the developer’s or owner’s risk, but also create more dynamic environments by bringing diverse enterprises together.

For the center-core tower, the center core also impedes employees’ views of their colleagues—and increasing visibility is one of the easiest ways to foster the collaborative workplace culture that keeps a company competitive, according to CBRE. “Many creative firms also dislike the perception of anonymity in a “corporate” office tower.”

The Loft Office, popular with technology firms often cluster together. According to CBRE, this contributes to a sense of community, and larger firms appreciate the proximity to smaller firms which may function like R&D labs or possible targets for acquisition. Ideal tenants include smaller firms, start-ups and incubators. CBRE sees locating the loft office near the courtyard building not only creates a sense of community across companies, but also gives startups a place to expand when they outgrow the incubator.

The courtyard building types gravitate toward businesses that choose to express identity to their building. “Companies with less hierarchy between managers and employees. Companies that want visibility—both horizontally across the floor and vertically up or down to adjacent floors—to encourage collaboration and a shared connection to their mission.”

CBRE also took a look at the “hybrid tower” in their recent article, suggesting that combining three typologies (center-core, loft, and courtyard) on one site, would greatly differentiate a commercial development from its competitors. “In a volatile market, it would allow developers to appeal to a wider variety of firms, especially tenants with which they might not have much expertise. Most importantly, it would create the armature for a new creative campus, one that would support the enterprises of the future,” the firm stated.

South Florida Talent Is Attracting Companies Left And Right

When it comes to natural resources, people are considered to be “it” as businesses look to hire and hire and expand in South Florida and markets across the United States. The midpoint of 2016 is a perfect time to assess the labor market’s health. With today’s economic uncertainty, companies still remain positive despite such challenges.South Florida’s hiring outlook continues to grow. South Florida employers are expected to hire at an “optimistic” pace July through September, according to a Manpower staffing survey recently released.

The research had regional employers surveyed and found that 22 percent plan to hire more employees during that  July through September period. It also highlighted that 72 percent expect to maintain staffing levels, while 1 percent indicated that they would decrease staffing, and 5 percent remain uncertain of hiring plans.

Fifty years ago, companies opened new locations to be near lumber, copper, or resources needed for their businesses. Today, people are the natural resources,” said Meredith Amdur, an analytics expert at advisory firm CEB. According to a survey of 229 executives released by real-estate services firm CBRE Group, Inc. in March, half of corporate real-estate executives rated talent availability as the leading consideration in moves and expansions. The survey also highlighted that around 44 percent of the respondents said their real-estate departments report to finance, operations or procurement leaders, while 17 percent. answer to HR.

Economists are saying that fewer workers and more employment that is presently available in the economic recovery, South Florida companies are raising wages as employers. These employers will have to be able to stay competitive in pay rate in order to keep retention and attract top talent. According to the United States Bureau of Labor Statistics, South Florida outpaced the nation in wage increases of 3.5 percent compared with 2 percent across the states for the year that ended in March.
Last month, Brilliant released its Q3 2016 Hiring Forecast. Findings of the report indicates that companies have strong hiring plans for the third quarter despite recent economic uncertainties. Brilliant’s CEO Jim Wong, CPA (Inactive) said, “The study brings important insight into the future of accounting, finance and IT, and the climate of businesses overall. The continued strength in hiring plans indicates that businesses expect continued growth and/or stability in their business, and they plan to fill the vacancies as quickly as possible. This is a remarkable degree of optimism despite some economic headwinds.”

Orlando Listed At The Top Of Most Friendly Cities

Orlando is not only the theme-park hub of central Florida, it is also listed as one of the most friendly cities. Competitive Alternatives 2016, the latest 2016 edition of the biennial KPMG series showed that the city is listed as one of the top three most cost-friendly cities to do business of the 31 large cities with populations exceeding 2 million that were analyzed. Coldwell Banker Commercial also released an annual ranking of the top commercial real estate markets for 2015, and Orlando ranked among the top metro area markets.

In 2014, Orlando’s metropolitan area attracted 62 million tourists, setting a record for a United States location. We are all familiar that Orlando has always been known as a worldwide holiday destination. After all, it is home of Disney World. Disney World alone has an employment rate of  74,000 people. It is the largest single employer in the Central Florida region. Orlando is also a popular second-home destination.

For commercial real estate developers and investors, the region is one of the top 10 locations in the country for business, with a growing population of over 2.3 million, and Florida’s tax-friendly offering. According to the Competitive Alternatives study, Orlando’s cost index is presently 94.4 compared to the United States national baseline of 100. The city also has the second-lowest labor costs, with low costs for both salary and statutory plans and benefits. Orlando’s low office lease costs are also an advantage, KPMG stated in its report.

The opportunities for capital growth for commercial real estate investors are there. Central Florida is also rapidly growing in e-commerce. Florida’s low tax has been attracting high technology start-ups. “If there’s an e-commerce business that’s getting placed in the state of Florida, it’s getting placed in Central Florida because of its interface of interstate highways and access to the entire state. Virtually every single user is looking for a hub in Central Florida,” Jared Bonshire of the commercial-real-estate firm Cushman & Wakefield, told the Orlando Sentinel.

Global companies such as FedEx and Amazon have been making a presence in the area. FedEx developed a 300,000 square foot center located in Davenport. The company is working in partnership with Amazon, completing a fulfillment center last year in nearby Lakeland.
Orlando is also undergoing a widening of Interstate-4. There is also expansion being conducted at Orlando International Airport, including the $1.8 billion south terminal which is due to be completed in early 2019 and a $3.1 billion Intercity train system.

The U.S. Commercial Real Estate Outlook Still Looks Good

The United States economy sputtered during the first quarter of 2016, as global economic activity throttled back and companies found financial markets’ volatility unsettling, according to Realtors.org recent Commericial Real Estate Outlook report. Real gross domestic product (GDP) rose at an annual rate of 0.5 percent, based on the first estimate from the Bureau of Economic Analysis. The report also indicated that the corporate outlook took a downward turn, with business investments dropping 5.9 percent on an annual basis in the first quarter.

Commercial real estate investments were also cut back. According to the Commercial Real Estate Outlook report, businesses cut back investments in equipment and commercial real estate to the tune of 8.6 percent and 10.6 percent, respectively. Investments in residential real estate — aided by a warmer winter — picked up, rising by 14.9 percent annual rate, while spending on intellectual property products — software, R&D — rose 1.7 percent.

Investments In Commercial Real Estate

Commercial space was also highlighted in the report and was cited to be heavily concentrated in large buildings. According to the report, large buildings are a relatively small number of the overall stock of commercial buildings. Approximately 72 percent of commercial buildings are less than 10,000 square feet in size, based on Energy Information Administration data. It was also indicated that an additional eight percent of commercial buildings are less than 17,000 square feet in size.The report highlighted that the majority of buildings (81 percent) are relatively small, but with the bulk of commercial space (71 percent) in the larger buildings.

For investors, CRE deals were indicated to be at the higher end. The deals ranged from $2.5 million and higher and were comprised of a large share of investment sales, and generally receive most of the press coverage. According to the report, the smaller commercial transactions tended to be obscured given their size. It was also noted that the smaller properties were able to provide commercial space such as shopping centers, small offices, supermarkets, etc. that fall into the average American consumers on a day to day basis.
Lastly, the report also highlighted that commercial transactions rate fell within the first quarter of 2016, following an upbeat 2015. The overall volume of commercial sales in LCRE markets amounted to $111 billion. This was a 20 percent year-over-year decrease, according to Real Capital Analytics (RCA). The first quarter data saw yearly declines in both individual and portfolio transactions, of 11 percent and 24 percent, according to Realtors.org report.

Palm Beach County’s Office Market Is Still Tight

 

This year’s CBRE Real Estate Outlook report indicates that the office market in Palm Beach County still remains tight so far within the first three months of this year. Cushman & Wakefield’s first-quarter report had indicated Palm Beach County was in the top 10 rank among 87 metro areas in absorption of office space and office rent growth.

According to the CBRE report, office vacancies fell to 18.9 percent, while the rent prices have rose for 10 quarters in a row. “Traditional concessions, such as free rent, generous improvement allowances and free garage parking, are almost non-existent,” CBRE stated.

Palm Beach County officials are presently working on bringing hedge funds from the Northeast to the area, targeting West Palm Beach and Palm Beach. So far, the efforts have been positive for the Class A office market and the luxury home market.

The Real Deal noted in an article that hedge fund firms have established offices in these areas:

-Tudor Investment Corp., led by legendary hedge fund manager Paul Tudor Jones. The firm is leasing 10,800 square feet at 109 Royal Palm Way in Palm Beach, and he bought a home at 1300 South Ocean Boulevard in Palm Beach for $71 million last year.

-Affiliated Managers Group is now taking the entire top floor of the Phillips Point building at 777 South Flagler Drive, covering more than 20,000 square feet, after starting with about 7,000 square feet, Smallridge said.

-Wexford Capital and SandPointe, which also are in the Phillips Point building, and Skybridge Capital, led by Anthony Scaramucci, which is based at 3601 PGA Boulevard in Palm Beach Gardens.

In Florida’s central business districts (CBDs), the areas revealed substantial growth in average asking lease rates, increasing 5.9 percent year-over-year, according to the report. CBRE also highlighted that Florida’s office markets recorded over 1.5 million square feet of net absorption in the first quarter, setting a slower pace than the quarterly average of 1.7 million square feet in 2015. Four office occupier sectors – banking, insurance, legal services and technical consulting – led leasing activity was also noted.

CBRE also indicated that Q1 2016 closed with nearly $947 million in sales volume in 34 transactions. As of Q1 2016, more than 1.3 million square feet of office space was under construction statewide, primarily in Miami, which accounted for 67 percent. In the last 10 years, Florida’s population grew by an average of 680 people per day.

South Florida Attracts Middle Eastern Real Estate Investors

 

Over the past two years, foreign investment has been pouring into South Florida’s commercial real estate market, according to the CBRE report Florida: A Destination for Global Capital. The recent report indicated that cross-border capital flows into the United States have risen dramatically. It also highlighted that in 2015, foreign investment in Florida commercial real estate reached its highest rate in nearly nine years. The top markets capturing Middle Eastern investments were New York, London, Singapore, Hong Kong and Paris.

The Miami area was the 10th most popular global destination for Middle East investment over an 18-month period ended in June, according to CBRE. The middle eastern foreign investors invested $517 million into Miami’s real estate market during this time period, making it the fifth most sought-after market in the United States. According to the report, nearly $9.8 billion was spent on commercial real estate, representing 20 percent of all global cross-regional investment.

The region’s “growth and demographics create very strong positive trend lines for long-term holders,” said Charles Foschini, vice chairman of South Florida markets at CBRE. CBRE also noted the largest recent commercial real estate deals were the $64.5 million acquisition of the W Hotel on Brickell by a fund from Qatar and the $120 million purchase of Modera Town Center in Miramar.

“Middle Eastern investors continue invest in Florida generally and South Florida specifically for many of the same reasons as they always have—its growth and demographics create very strong positive trend lines for long term holders, where many of their funds and direct investors seem to be,” said Foschini.”Recent direct flights from Qatar to Miami will also help accelerate that demand by individuals and institutions alike.”

Teresa King Kinney, MIAMI CEO stated that, “Investors and home buyers from Dubai and the United Arab Emirates love Miami’s vibrant nightlife, art and international business center.” “The Middle East is part of an increasingly larger array of countries purchasing Miami real estate.”

UAE investors have made several high-profile Miami purchases. In February 2015, the Abu Dhabi Investment Authority purchased the Miami Beach EDITION hotel for $230 million. During the same month, a corporate entity linked to Saudi Royalty paid $23 million for a plot on Indian Creek Island.

The proposed 1,000-foot SkyRise Miami tower is another project of interest to UAE investors. SkyRise Miami is an EB-5 project, which grants permanent U.S. residency to investors who create at least 10 domestic jobs and contribute at least $500,000 to $1 million in a U.S. business venture. Step America, a Dubai-based company, is seeking SkyRise investors in the Middle East.

Driven by its sovereign wealth funds, the Middle East spent $2.7 billion on real estate in the Americas in the first half of 2015, according to CBRE. That’s a large percentage of the $11.8 billion total that investors from the Middle East have spent on global real estate during that time period.

 

Digital Reality Takes Hold In Commercial Real Estate

 

Technology innovators of today could soon disrupt the commercial real estate sector. The commercial real estate industry has been very slow to adopt digital transformation. Wharton authors Michael Berman, Barry Libert, Megan Beck and Jerry (Yoram) Wind believe that this has to change with both mental and business models or risk getting disrupted by tech innovators and have outlined a five-step process called PIVOT to help companies change.

 

“The way we lived, the way we consumed, this whole ownership economy much of it emerged out of driving our cars. We built a big house in the suburbs, we moved there, we acquired stuff. The direction of change here is probably different, but it’s comparable in how profound it was and the societal implications.” The Wharton authors noted that a “strong prevailing wind is emerging” in the commercial real estate sector. “The first phase of digital development is finally arising in this location and asset-based industry where technology has long played a minimal role. And for good reason — this is the real asset industry by all measures,” they highlighted.

 

Mobile, social, Big Data, the Internet of Things, and cloud are being leveraged by industry companies such as Zillow setting a forward driven pace to change the commercial and residential real estate industry. Zillow got its start innovating in the real estate category, creating an unparalleled level of transparency to empower consumers to make smarter decisions about homes.  The smartphone and tablet ecosystems create additional opportunities for innovation, as they raise the bar of consumer expectations. We want our apps to be fast, smart, personalized.  Before the smartphone, Zillow was a reactive search engine. Come to the front door, enter a search term, and then we provide value.  Today, the Zillow app is centered around you to proactively help you find your home.

 

“For those in the technology world with some background in real estate, the opportunity may seem obvious: Participants in the real estate industry can use technology to make faster and better decisions,” the Wharton authors noted. “But as noted, the real estate sector is one of the few remaining sectors of our economy that has created immense wealth with little or no technology know-how and interest.”
“Assets are losing ground to access, whether the assets are hotels, homes or apartments. This industry has always believed that location, location, location rules. But in the mobile world, where ‘location’ is mainly virtual — many things can be done through smartphones — assets are losing ground to access, whether the assets are hotels, homes or apartments.”

Exclusive Interview: Jeremy Wacksman of Zillow, Leading With Mobile In Real Estate

 

Jeremy Wacksman is Chief Marketing Officer at Zillow. Jeremy is in charge of consumer marketing in this role and oversees strategy and product management for the company. He is a mobile first innovator, where prior to joining Zillow, Jeremy drove marketing and product management for Microsoft’s Xbox LIVE and consumer mobile effort. Prior to working at Microsoft, he has also worked in sales and product management for Trilogy Software. I had the opportunity to interview Jeremy while working at International Business Times. Here are some interview highlights:

Jennifer Lynn: Mobile has been driving a wave with both disruption and innovations within the real estate industry. What are some challenges you see with these factors and competition in the market?

Jeremy Wacksman: We see that disruption and innovation as an opportunity.  Zillow got its start innovating in the real estate category, creating an unparalleled level of transparency to empower consumers to make smarter decisions about homes.  The smartphone and tablet ecosystems create additional opportunities for innovation, as they raise the bar of consumer expectations. We want our apps to be fast, smart, personalized.  Before the smartphone, Zillow was a reactive search engine. Come to the front door, enter a search term, and then we provide value.  Today, the Zillow app is centered around you to proactively help you find your home.

Jennifer Lynn: With 27 mobile apps, how did you come about envisioning mobile apps develop in your strategy?

Jeremy Wacksman: Our suite of 27 apps are built to help consumers at all stages of the home lifecycle – renting, buying, refinancing, and improving/designing – and we offer a set of apps to help professionals connect with those consumers. Each line of apps is unique, and intuitively designed to have things that meet specific consumer needs, depending on what their end goal is – whether that’s quickly answering what they can afford to buy with our mortgage calculator, sitting on the couch browsing home design inspiration with Zillow Digs, or actively shopping for a home.

Jennifer Lynn: Zillow’s apps are also available at Google Play. What excites you about the future with Google apps?

Jeremy Wacksman: Google continues to push innovation in both the smartphone and tablet world – and a great example of that is Google Now. They are turning the smartphone into an intelligent personal assistant, connecting directly to apps with intent, predicting what people need when they need it, and doing it across multiple devices. A few years from now, I can’t even imagine what opening an “app” on “Android” will be, given their ability to evolve the platform and change the way we interact with technology.