Partial-Interest Sales

By: Paulina Ruta

Although not a new strategy to commercial real estate, partial sales have become increasingly popular for “large property deals,” billion dollar buildings for example. This is largely due to the mutual appeal to both the buyer and seller of the property. For the buyer, it has become increasing hard to finance such large purchases, and therefore buying in smaller chunks makes it feasible. In addition, foreign buyers get to have their investment tied to a local expert, decreasing their risk of entering an unfamiliar market. On the seller end, partial-interest sales allow them to hold onto a part of the property to continue benefitting from appreciation while moving onto other deals. As stated by Doug Harmon, chairman of Cushman’s capital markets group, these deal are a “marriage” between investor and owner and are the current trend.

Statistics Summarized:
 83% of all deals on Manhattan office buildings were partial-interest sales Comparable to 2015, where 42% of such sales were minority-interest sales
2016-2017: minority-interest deals made up 17% of total sales dollars Comparable to 7.1% recorded during the previous 10-year period.

Article reference:

Blackstone's Maui Deal

By: Sara Michaels

It was recently reported that Blackstone is buying the Grand Wailea resort on Maui for 1.1 billion dollars. Blackstone is set to buy the hotel from GIC, which is Singapore’s sovereign wealth fund. The purchase of the property has yet to be made public, so much of the details of the detail are unannounced. However, if the deal goes through, it would be the second-largest hotel deal for a U.S property in history.

The Grand Wailea is a 40 acre and 780-room resort that is currently managed by Hilton. Located on Maui’s southwest shore, the hotel has three restaurants, a spa, nine pools, a 2,000-foot-long river, 11 tennis courts and more.

Along with purchasing the Grand Wailea resort, Blackstone is set to purchase the Turtle Bay resort on Oahu’s North Shore for $330 million. According to the Hotel Management magazine, these two new acquisitions would mark Blackstone’s return to the real estate market in Hawaii, which ended two years ago after the company sold the Hyatt Regency Waikiki Beach Resort.

Real Estate Market in European Cities

By: Paulina Ruta

Many factors that are out of the hands of both the buyers and sellers heavily affect the Real Estate Market specifically when it comes to high-end real estate and investment properties. This has been clearly demonstrated in the European market with recent political unrest heavily affecting the stability of many real estate markets.

In the UK, Brexit is definitely partly to blame for London’s decline in prices. People fear the unknown and for many months the nation was heavily divided. However, as the dust settles, prices in recent months started to decrease at a much slower rate; perhaps there’s hope for the future.

On the other hand, with President Emmanuel Macron’s election in France, Paris is on the rise once again after nearly a decade of decline (or very minimal growth). Its low interest rates coupled with newly found ‘stability’ are very appealing to investors.

A government policy change in 2012 completely changed the game of real estate in Portugal, when it granted residence permits to non-European nationals. In 2012, prices in Lisbon rose by 35% and have been on an upward trend since. In other cities such as Santo António and Misericórdia consistently see year-to-year growth of over 35%.

Dublin has seen steady growth and had a tremendous year with 11.6% average price increases. However, predictions for the future are a bit more conservative as the Central Bank of Ireland is said to be releasing stricter mortgage lending rules.

Finally, Berlin has seen high growth rates for the past three years that many credit to the newly booming tech industry. Predictions for the future are more stable but still positive.

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Commercial Property Sales in New York City

By: Jonathan Kohan

For the first-time New York, has fallen behind both Dallas and Los Angeles in commercial sales. In New York, commercial real estate sales have declined by over 56% when comparing this fiscal quarter to the same fiscal quarter in 2016. The sales of New York commercial properties dropped to 14.1 billion, whereas real estate investment in both Dallas and Los Angeles equated to 15.1 billion and 21.2 billion respectively. This is a big national shock as New York is consistently ranked as the number one area for real estate investment. Overall, this has significant importance nationally as commercial property sales overall have decreased by 9% from 2016. This suggests that we as a nation are shifting from the hyper-supply aspect to recession aspect of the real estate cycle. This is backed by the notion that Real-estate industry participants in New York state that the slowdown is being caused by the extremely high values that have been reached after the lengthy bull market that has been occurring. Both buyers and sellers seem to be disagreeing on price values thus causing a stalemate. Many individuals believe that there will be a continuous slowdown until one side is forced to crack.

Sources: Grant, Peter. “New York Falls Behind Dallas and Los Angeles in Commercial Property Sales.”The Wall Street Journal, Dow Jones & Company, 24 Oct. 2017,

Real Estate Landscape in West Africa

By: Oluwafeyikemi Makinde

The lack of infrastructure investments in Africa specifically in growing metropolitan areas in west Africa such as Nigeria and Ghana has led to a unique phenomenon in the real estate market. This has allowed for developments that are mixed use and allow people who chose to be in these spaces to have access to the office space, housing and retail that they might need to enjoy the expanding middle class lifestyle that is becoming more accessible to them. The idea of live, work and play that is inherently associated with any mixed use development in the west and seen as relatively innovative, but this has become almost a necessity for up and coming real estate developers in Africa. The mixed use spaces are going to be able to help reduce traffic in highly congested cities and hopefully reduce the load on the already strained municipal and state infrastructure systems. Reducing the commute may help the African nations stay ahead and increase the efficiency of the work force.

The push for innovative real estate solutions is something that the current Lagos governor continues to push for even the affordable housing to be more mixed use so that the efficiency increase is captured across all income levels. In Ghana the One Airport Square area in Accra is becoming a flagship location for a mixed use facility in west Africa. The development includes a hotel, retail and residential. The increased developments means that private developers can move around the slow moving public infrastructure development, and many real estate professionals hope the upcoming WAPI summit would bring together investors and public officials to help coordinate on strategy for development in the regions.


Industrial Sector Update 2/7/2016

Industrial Properties Continue to Gain Momentum in the US Market

The industrial sector rose to tie with the multifamily sector at the end of 2015 for the most desired U.S. property type by foreign investors. In addition, speculative construction hit pre-recession levels, and almost half of the 130 million square feet of planned construction is already pre-leased. The national industrial availability rate dropped to 9.4 percent, maintaining the 23 consecutive quarter streak of falling vacancy rates. But having such great returns for a long period of time has driven investors to be wary of the market, with many speculating that the expansion cycle may be reaching an end. But according to John Morris, the logistics and industrial services lead for the Americas at Cushman & Wakefield, although we are seeing yellow flags in the market, there are indicators that signal more expansion to come. For example, the massive increase in foreign capital coming into the market and the large amount of class-B property out for sale are signaling that we have yet to reach the end of this massive expansion cycle. With the shift to e-commerce driving up the demand for industrial space and organisations like Chicago-based Brennan Investment Group developing multi-million square foot logistic parks, it is safe to say that we should still be keeping an eye out for more stunning statistics coming from the industrial sector.

Auto Industry Driving the Return of Domestic Manufacturing

From 2000 to 2014 there were virtually no new auto plants constructed in North America. But in 2015 almost one-third of the world’s new auto plants under construction are in North America, a large portion of which are located within the United States. This is all in an effort to streamline processes and reduce costs to manufacturers, which has become especially important with the emergence of electric and self-driving cars in the market. Nevada has become a hotspot for these sites, with Tesla motors recently announcing the construction of a $5 billion lithium-ion battery factory and competitor Faraday Future selecting North Las Vegas for the site of its $1 billion plant. Both sites attracted over $340 million in tax incentives and subsidies from the state, which has established itself as a strong national competitor for new manufacturing facilities. Over the past several years, General Motors, Honda, Nissan-Renault and Mercedes-Benz have opened offices in the San Francisco Bay area. With the close proximity of these offices to potential manufacturing sites in Nevada there is a strong promise of more developments to come. With these auto plant developments comes the promise of over 5,300 new jobs and the rise of the automotive industry in the United States once again.

Office Sector Update 2/7/2016

Midtown Office Leasing Report for 2015

Despite having fewer large-block transactions (meaning 100,00 square feet or greater) than 2014, Midtown as a whole outperformed the rest of New York City in office leasing activity in 2015, taking nine out of the top 10 largest leases. More specifically, real estate consultant JLL’s Vice President and Director of Research noted that the Midtown Trophy Index, a group of many of New York’s most exclusive office buildings, has outperformed the rest of the submarket, using the evidence that rents for these trophy properties rose 65% to $99.43 per square foot in 2015. Midtown has seen one of the largest growth rates since the 2010 market bottom at 38.9%. The submarket rents of Midtown, as well as Class A office space specifically, grew 4.1% year-over-year in 2015, from average prices of $77.11 to $80.24 per square foot. Vacancy rates for the Midtown office market hover around high 9% to low 10%. Despite positive rent growth, overall leasing volume was down 25%, which is consistent with the rest of Manhattan, with large-block transactions down 32% for the year at only 36 such transactions in 2015 compared to 53 in 2014. The supply of large blocks of space (over 25,000 square feet) in Midtown South has been depleted primarily by the creative sector, schools, and communal workplaces such as WeWork. Rent growth slowed slightly for Midtown South, but vacancy rates continued to drop. The most severe decrease in leasing volume was in the Downtown district, which dropped 50% in 2015 from 2014. The overall vacancy dropped to 11.1% from 12.5% in the beginning of the year, but Class A vacancy rose to 12% from 11.6% in 2014. Average asking rents for Lower Manhattan rose by slightly more than a dollar to $57.60 per square foot. Is There a Bubble in the San Francisco Office Real Estate Market?

While everyone hopes that the days of bubbles in the market are behind us, the place deemed the most suspicious in this sense is the “frothy” San Francisco Bay Area, and especially its real estate market. San Francisco’s office market has far outpaced the majority of the American office market, with rents growing 129% in the past six years to over $70 a square foot due to the booming technology industry. The tech industry accounts for 36% of office stock and 60% of leasing in downtown San Francisco. The main area of concern is the exponential growth of “unicorns,” start-ups-turned-firms that are valued at over $1 billion and are preparing to go public. There are 144 of these companies in the U.S., 60 of which are based in the Bay Area, accounting for 5% of total office occupancy. This concerns commercial real estate investors because IPO capital has slowed down in the past two quarters, which is what the “unicorns” need to survive since many are newly-public companies. However, Colin Yasukichi of CBRE, says that this is not cause for much concern because even if all of the “unicorns” failed, there would only be a 5% increase in vacancy, which he believes would be quickly absorbed by demand. Matt Hart, a senior managing director at Savills Studley who was in San Francisco during the bubble, says that he thinks tech start-ups nowadays are “more cautious with their real estate”; for example, he notes that the trend of tech companies subleasing their extra square footage (which has already been built out) provides extra income for the firm, and a cheaper option for smaller start-ups who would not be able to afford to build-out their own offices. Other cautionary activities like this of startups has led investors to believe the startups of today are less risky than those of two decades ago.

Retail Sector Update 2/7/2016

Amazon to Open Bookstores? Maybe.

The Wall Street Journal reported on Tuesday, February 2nd that Inc., the Seattle-based online retailer, has plans to open up to four hundred bookstores across the country. This would represent a huge leap for Amazon, as it currently operates just one bookstore in Seattle. The report was based on comments by General Growth Properties, Inc.’s Sandeep Mathrani, though it is unclear where he got those figures. The WSJ further speculated that Amazon was using the Seattle bookstore to experiment in urban retailing using nearby warehouses to quickly stock shelves. Mathrani noted that another motivation for the retail expansion could be to facilitate returns, citing that 38% of clothing and paper goods (i.e. books) bought online are returned. On Wednesday, Amazon declined to comment on the rumor. GGP issued a statement, however, saying that Mr. Mathrani’s comments “were not intended to reflect Amazon’s plans.” In the wake of Mr. Mathrani’s comments, news sources have continued to speculate on the plans by speaking with anonymous sources close to Amazon. New York Times blogger Nick Wingfield wrote that Mathrani’s comments were not necessarily inaccurate, but that he vastly overstated the number of store that Amazon is intending on opening. Gizmodo, a tech media reporting site, stated that “anonymous Amazon sources” were unpleased with the initial report, but would not issue an outright denial of the plans. Jason Del Rey of Re/code, another tech reporting site, went furthest in stating that Amazon was definitely moving forward with retail expansion, and that the project was being headed by its longtime executive Steve Kessel. Rey noted that the expansion was not just bookstores, however, but would include other types of retail locations as well. While “other types” of retail doesn’t give much away, it could be an allusion to the presence Amazon is trying to assert on college campuses. In fact, in the coming months Amazon will open a package facility underneath 1920 Common’s here at Penn. It’s difficult to say exactly what the company is planning at this time, but retail expansion seems to fit the bill of Amazon’s growth mentality.

Slow Recovery for Retail Nationwide

The years leading up to the Great Recession of 2008-2009 were particularly strong for the retail sector – total stock increased by 14.2 percent. The downturn, however, left the retail market with an oversupply of space, as decreased consumer spending pushed many retailers out of the market. Since then, new construction has progressed much slower than it did before 2008. The market has not been hot enough to fuel speculative construction, and retail centers are rarely expanding. Community center retail inventory only grew by 1.2 million sq. ft. in the final quarter of 2015, well below the 15-year historical average of 5.2 million sq. ft. With demand rising faster than supply, however, vacancies have fallen such that Reis, a NYC research firm, projects vacancy to reach 9% by the end of 2017. Further, the company projects nearly 34.0 million sq. ft. to have been added to the market from 2014 to 2017, equaling the inventory output of the six years before that. In that three year window, the top five markets for retail completions are forecasted to be Houston, Dallas, Chicago, Philadelphia, and Atlanta, in that order. As employment and wage growth continue to rise, Reis expects discretionary income, and thus retail demand, to rise. The year 2016 is expected to generate the strongest demand for retail space of any year since before the recession.

Multifamily Sector Update 2/7/2016

Maintaining Momentum for Fannie and Freddie

Fannie Mae and Freddie Mac both have lofty goals for 2016, which will require maintaining and perhaps even accelerating their momentum from last year. In spring of 2015, the FHFA (the Federal Housing Finance Administration) lifted a barrier hindering the lending agencies’ success: they decided that lending to affordable housing and “workforce” housing properties no longer counted towards the restrictive quota enacted since the financial crisis (when the government seized both companies). In response, both companies exceeded the previously set $30 billion limit by a landslide: Freddie Mac by $17 billion, Fannie Mae by a close $12 billion. The timing of the loosening policy could not have been more perfect; last year was a busy year of transactions, with a lot of purchases and financial activity. Borrowers needed loans to finance transactions including entire portfolios of apartment properties (think Freddie Mac financing Loan Star Funds’ purchase of Home Properties). Borrowers also turned to Fannie Mae and Freddie Mac to refinance apartment mortgages that reached the end of their terms (including many 10-year loans made at the end of the last real estate boom). Experts expect demand to continue as more loans come due. New loan products – such as Freddie Mac’s two rehab products for capital improvements, and a “value-added product” Fannie Mae is working on – have helped both companies further expand their business. Freddie Mac’s products, designed to maintain multi-housing stock in the US, require borrowers commit $10,000 to $50,000 in capital improvements, mostly for multifamily units. Fannie Mae’s product hasn’t made its debut yet, but it’s expected to expand its loan offerings for affordable and workforce housing. Fannie Mae and Freddie Mac have set a high standard for themselves with last year’s performance, but, given demand and the companies’ competitive advantages, there’s little doubt in expert’s mind that they’ll be able to surpass it.

College Towns: Not Just for College Students

A new 28-story tower graces the skyline of University City, but, unlike most of the older buildings in the area, it isn't targeting university students. Instead, the tower at 3601 Market Street, and the other new luxury residential beginning to appear around it, aims to house young professionals and graduate students. The goal is simple: to bring a new demographic into the area. More specifically, the conveniently located luxury housing will hopefully help University City employers, including the universities themselves, win over young recruits. This trend of luxury towers popping up in college towns is not unique to Philadelphia; developers across the country are investing in high-end housing for the staff rather than the students. College campuses have caught the attention of developers because of their potential to become “trendy live-work enclaves.” Their bars, restaurants, and residential services, coupled with the cities’ urban, walkable nature, make these areas extremely appealing for younger workers. However, touting luxuries such as a roof deck with a heated saltwater pool, a fire pit and outdoor televisions, these deluxe accommodations come with a steep price tag. For example, although overall median rent in University City is $1,450 a month, a mere 427-square-foot studio at 3601 Market would set you back $1,525 a month; two bedroom apartments start at $2,749 a month. These comparatively exorbitant rent prices, in conjunction with other restrictive efforts (such as time leasing to miss the start of the academic year, rejecting applicants who rely on guarantors, and designing spaces not tailored to young students), help developers assure potential residents that their halls won’t be inundated with raucous undergraduates.

Hospitality Sector Update 11/19/2015

"Expansion in the Hospitality Sector Not Slowing Down Through 2016"

The hospitality industry has been growing steadily since the Great Recession, as evidenced by a significantly high occupancy rate of 65.6 percent by December 2015, an increasing average daily room rate, and revenue per available room. While these increases have obviously been a positive for the industry, there is also some concern as to what this means in the bigger picture. Because this business sector is extremely cyclical, meaning it expands and contracts in somewhat predictable patterns, many people worry that the peak is coming sooner rather than later. The hospitality data firm Lodging Econometrics reported that, as of the third quarter of 2015, there has been a twenty percent increase in the number of new hotel projects (4,038 hotel projects and 507,221 rooms) when compared to the third quarter of 2014. Lodging Econometrics predicts that this growth will continue through 2017, which it believes will be the peak. Because the expansion phase is not over yet, J.P. Ford, the senior vice president at Lodging Econometrics, believes the most desirable properties are under brands such as Courtyard, Holiday Inn and Hampton Inn because they are cheaper and take less time to build, which is important with a peak looming. Essentially, the hospitality market is still a great choice to invest in, but the window of opportunity is quickly closing.

"Another Potential Buyer, Hyatt, Emerges For Starwood"

Starwood Hotels & Resorts Worldwide has recently seen the price for its shares rise steadily after news came out that Hyatt Hotels Corp. has reportedly been in discussions with Starwood regarding a potential takeover. Hyatt, along with three Chinese companies (Shanghai Jin Jiang International Hotels Co., HNA group, and sovereign-wealth fund China Investment Corp.), has shown interest in acquiring Starwood. Interestingly, only one Chinese company will end up bidding, if any at all, because of government regulations preventing the Chinese companies from entering into a bidding war and driving up the price. Starwood’s shares have increased steadily from $68.55 October 26th to $79.87 October 30th and the company has a market value of approximately $13.6 billion, so any bid will need to be in that price neighborhood. Hyatt makes for an interesting suitor because it is a smaller company that still owes money for the financing of other purchases, so a purchase of this magnitude may not be feasible. If Hyatt is able to make the deal, however, they will move from the 10th largest hotel company with about 160,000 hotel rooms globally to becoming the 6th largest with the absorption of Starwood’s more than 350,000 rooms. Another potential issue in the deal is the fact that both companies have performed well among higher-end brands as their brands are seen as competitors, while they have both struggled in the limited-service hotel segment, which are hotels that do not typically have many of the services and amenities offered by more luxurious hotels. Thus a merger would not necessarily provide them with optimal benefits because it would add to their debt and not aid the sectors in which they are lagging.

Retail Sector Update 11/19/2015

"Innovative, Interactive Retail with ShopWithMe"

ShopWithMe, a smart, interactive retail store that looks to change the retail industry in the future is a concept new to the industry. Its first store, located in Chicago, opened this month selling TOMS Shoes and Raven + Lily products. The “smart store” is made to combine online and offline shopping in one store. Some of the store’s innovative, personalized creations include changing rooms with interactive mirror displays and the option to have different products brought to the changing room without having to leave the room. With the store’s high tech model, it can change sellers in only days, allowing stores that want to move from city to city to easily do so without having to build out new spaces. With this model, ShopWithMe aims to build a chain of stores all over the world, so that their retailers can hop from city to city throughout the year. Additionally, the store will further personalize shoppers’ experiences by recommending products based on browsing history. With retailers struggling to retain customers and meet their needs, ShopWithMe provides an innovative solution.

"Walgreens and Rite Aid Merger"

The boards of directors at two of the drug store industry giants, Walgreens and Rite Aid, have agreed to a merger in which Walgreens would acquire Rite Aid for $17.2 billion. Walgreens currently operates 8,200 stores and Rite Aid operates 46,000. If the deal passes federal anti-trust regulation, there will be significant consolidation of space – meaning Walgreens will need to close stores that are at risk of competing with nearby stores. Additionally, to overcome the anti-trust laws, Walgreens will likely have to sell off a number of stores to avoid having a monopoly, as the drugstore industry would be dominated by Walgreens and its competitor, CVS. Neither Walgreens nor Rite Aid have had substantial new development of stores in the past several years; however, there has been no shortage of drug store products. With cap rates at their lowest points since the beginning of the recession, many investors are selling off their investment properties to take advantage of record high prices. The supply of drug store property has risen by over 20 percent, allowing Walgreens to close suboptimally located stores and redevelop them on major corners. Finally, with Walgreens credit behind the Rite Aid stores, Rite Aid’s cap rate will drop to match Walgreens’, making all of the top drug store companies investment grade, which will increase demand for the drug store’s real estate.

Retail Sector Update 11/19/2015

"Redefining ‘Going to Church’"

It has become increasingly difficult for churches to self-sustain when faced with declining membership and high maintenance costs. The few successful churches, on the other hand, are moving further out into suburban areas to increase in size. This leaves a large buyers’ market for churches in urban areas. Companies such as New York-based HFZ Capital have been teaming up with church leaders to repurpose some of the land owned by the church for mixed use. The Marble Collegiate Church in Manhattan is a prime example of this trend. A new development plan aims to incorporate the existing structure of the church into a 64-story building that includes retail space and condominiums as well as space for congregation and administration for the church. On top of creating stability for the church through rental income, the condo development incorporating the church is exactly the kind of unique living space for which buyers in the city are willing to pay a premium. The new trend of investing in churches allows investors to purchase prime land at a low cost, and supplies an existing structure off which a new development can be created.­redeveloping­properties­to­give­them­new­life­1443519001

"Casting Wider Nets on Domestic Investment"

Secondary markets, with a primary focus on 18-hour cities, which calm down at night, are forecasted to be more compelling to investors in 2016 than 24-hour gateway cities, which are active all hours of the day. Low costs of living coupled with high growth potential make cities such as Austin, Portland, and Nashville ripe for investment in the coming year. This growth potential comes from an influx of new inhabitants that are able to afford rent while having income to spare. Opportunities for retail markets specifically are expected to be over six times larger, both in margin for profit and numbers, than those in New York, Boston and the Bay Area. Domestic investors who face compressed cap rates as values rise and the market heats up in the core markets of gateway cities, along with the competition of foreign investors, have little choice but to turn to these secondary markets for investment. This explains the nearly 13.5 percent growth in non-major markets from June 2014 to June 2015 as opposed to only 6.5 percent growth in major markets. But domestic investors may not be alone in some of the newly ‘hip’ cities such as Denver, Austin, and San Diego. Foreign investors have been casting wider nets when it comes to investment in the United States, realising the opportunities presented by these newly hot secondary markets.

Multifamily Sector Update 11/19/2015

"Multifamily Loan Growth Slowing Down to Steady and Normal Rate"

The volume of loans given to multifamily properties is expected to remain the same through 2016 and 2017 as it is in 2015. Jamie Woodwell, VP of research and economics at MBA, describes the current multifamily loan market as strong, steady, and healthy, especially in comparison to the rapid growth rates of around 10-15% that the multifamily loan market experienced in the last few years. For the year ending 2015, experts anticipate that $224 billion will be given in permanent loans to multifamily properties. This will be about a 15% increase from the amount awarded in 2014. The majority of experts expected growth rates to have leveled off more than they have so far in 2015. Most of these loans have come from banks and agency lenders that go to properties based on Fannie Mae (The Federal National Mortgage Association) and Freddie Mac (The Federal Home Loan Mortgage Corporation) programs. Both of these government sponsored enterprises are meant to increase the secondary mortgage market, thus increasing the amount of money available to new home buyers. The government officials who run Fannie Mae and Freddie Mac have made this large volume of loans possible by slightly changing the lending limits for these agencies so that loans on affordable and workforce housing do not count towards lending caps. Small and steady growth of about $1-2 billion a year is expected in multifamily loans.

"Rents Soar Across the Country Putting Landlords in Position of Power"

Rents across the country are increasing rapidly, at a much faster rate than are salaries and inflation. Around 88% of property owners have hiked up rents in the past 12 months, and 68% think rental rates will continue to increase in the next year at an average of 8%. This is three times the expected increase in wages this year. Further, landlords are being tough on credit scores and are refusing to make any concessions at all, since they are in a position of power due to the lowest vacancy rate in twenty years of 6.8%. Many renters are now spending more than the recommended benchmark of 30% of income on rent, and the number of people spending more than 50% of their income on rent will rise 11.8% in 2015. Both local and federal governments are reporting that they simply do not have enough supply to meet the demand for affordable housing now, and the market has risen too high to reach low-income renters. The highest rent increases are seen in San Francisco, which surged a whopping 14% year over year to $3,530 for a one bedroom apartment, compared to NYC’s already high 5% year over year price increase to $3,160 for a one bedroom apartment. Those in NYC also cite the exorbitant broker fees of 15% of annual rent one must pay as well in order to find an apartment.

"Luxury Manhattan Condominium Complex Sparks Debate Once More Over EB-5 Funding"

Steven Witkoff plans to build a new 900 ft. tall condominium tower on “Billionaire’s Row” along the southern edge of Central Park. What makes his tower so controversial is that more than $200 million of his funding comes from the federal visa program EB-5. EB-5 allows aspiring immigrants to invest in increments of $500,000 in either rural areas or areas where unemployment is 150% of the national average, with the assurance that new jobs will be created. However, the law does not specify what size the ‘targeted areas’ have to be; thus, developers are left to draw the lines of their own districts. For example, Witkoff linked his luxury development to a census tract in East Harlem with a plethora of public housing projects. His proposed $1.7 billion project will be the highest-end development to receive EB-5 funding yet. Witkoff said that working-class people receive the construction jobs no matter where the construction actually is, yet others argue that glitzy projects like 36 Central Park South pull the funds away from the less glamorous projects that EB-5 was enacted to help fund. The savings from using EB-5 funding as opposed to more traditional sources are on average between five and eight percentage points per year on loans, which adds up to tens of millions of dollars of savings. Key parts of the EB-5 legislation expire on December 11, at which time will Congress will have to debate whether to change the program in order to prevent situations like this, or do away with it entirely.

Industrial Sector Update 11/19/2015

"A New Solution in E-Commerce"

In response to decreasing vacancy rates in the industrial real estate sector, e-commerce retailers have had to alter their approach to distribution to better meet the demand of customers for greater quantities and quicker delivery. As demand for improved and expanded infrastructure remains sustainably high for e-retailers, industrial space is being absorbed at a faster rate than it is being constructed, leading to more strategic approaches to warehouse operations. Increased online purchasing, and its consequent need for higher production, has predominantly fueled this trend. It has also been driven by the goal of achieving same-day delivery, which arose when retailers began trying to compete with Amazon’s quick production and delivery. Without the capital to match Amazon’s infrastructure, retailers have resorted to breaking industrial operations into two key strategies: “first mile” distribution, which relates to large-scale operations and large warehouses in primary markets, and “last mile” distribution, which relates to smaller-scale warehouses with close proximity to urban centers. More specifically, first mile distribution for e-commerce firms has led to the norm of large distribution centers, designed for advanced technology and future expansion. Last mile distribution, on the other hand, has moved distribution outside of these large warehouses into smaller ones that can reach farther locations faster, leading to faster delivery. Last mile distribution, however, is also less efficient, because of factors that are difficult to overcome, especially for companies without a lot of pre-established infrastructure, such as traffic, low-load factories, and end high courier costs.

"The Sale/Leaseback Trend Breaks Into Medical Real Estate"

The practice of sale/leaseback — in which a real estate asset is sold then leased back from the buyer, done primarily to untie the cash invested in the property — has been a growing trend among large retailers and restaurant chains, and is becoming increasingly prevalent in healthcare. Many firms are employing the practice to take advantage of high property values, despite the fact that it can lead to high expenses from the lease in the long term. Sears, for instance, sold 235 properties for $2.7 billion last month, and plans to lease back most of them. The trend has begun to impact smaller assets, particularly healthcare facilities and medical offices, which have seen a decreasing vacancy rate as a result of favorable demographics in the medical care industry, such as an aging population that demands more healthcare. When the landlord and tenant come to an agreement, the landlord essentially buys the practice that inhabits the building, and this has led to an important note on valuation: the value of the property is increased a great deal because the lease is agreed upon by the present tenant. The recent flow of cash into the medical sector has driven property prices up, raising the sale price of a sale/leaseback transaction. Medical offices in general tend to be considered recession-resistant, due to the relatively constant demand for medical care, and most facilities are considered low-risk because they are anchored by medical practices. Conversely, leases can negatively impact operating margins by introducing rent expenses, which prevents hospitals from selling and leasing back; but the sale/leaseback trend is still expected to continue as healthcare real estate sees new highs.

Office Sector Update 11/19/2015

Seattle Leads the Nation in Demand for Office Space

The Seattle-Bellevue metropolitan area led the nation in the absorption of office space during the third quarter of 2015, adding nearly 1.3 million square feet of leased space. As a result, the vacancy rate for Class A space to fell to 7.8 percent in downtown Seattle, and 10.8 percent in Eastside. The tightening market has pushed rents higher; Seattle’s $38.26 per square foot average rent for Class A space at the end of the third quarter represents a 9.7 percent increase from a year ago. Much of the demand for office space in Seattle has come from the city’s largest tenant, Amazon is expected to occupy over 6 million square feet by the end of this year, not including the 1.9 million square foot, two-tower complex it currently has under construction in the city’s South Lake Union neighborhood. Demand for space from the many other firms seeking to open office space in the city is fueling many speculative office projects in the region, including 4.5 million square feet of office space in buildings currently under construction. Major investors are taking notice of the long-term potential of the Seattle market, including Blackstone Group, which bought GE Capital’s local portfolio of nearly 2.3 million square feet for $360 million in July.

Vornado Celebrates Strong Third Quarter

Vornado Realty Trust continued to make a splash in the Manhattan office market during the third quarter of 2015. During that period, the REIT signed leases for 509,000 square feet of Manhattan office space at an average rent of $79.80 per square foot. Of the newly leased space, 69,000 square feet were booked at rents over $100 per square feet. The company has benefited from rising rents due to Manhattan’s vacancy rate falling to 9.7 percent, the lowest rate since the 2008 financial crisis. David Greenbaum, president of Vornado’s New York division, explained that while the TAMI (technology, advertising, media, and information tech) sector remained strong, the FIRE (finance, insurance, and real estate) sector was increasingly active in seeking new office space. The third quarter was also marked by the company bolstering its presence in the West Chelsea office market by acquiring the Otis Elevator building, just south of the Related Companies’ Hudson Yards development. The acquisition was one of a number of recent moves the company has made in the West Chelsea market, which include developing a 10-story retail/office building, and a joint venture to develop a 175,000 square foot office tower overlooking the neighborhood’s famed High Line. As the company seeks to “dominate” the West Chelsea submarket, Vornado’s CEO Steven Roth noted that he expects holdings there to soon command rents similar to Midtown’s more traditional submarkets.

Hospitality Sector Update 11/8/2015

“Fate of Starwood Potentially in Chinese Hands”

The fate of Starwood Hotels and Resorts Inc., a multibillion-dollar player in the hospitality industry, is essentially up for grabs. Starwood’s Chief Executive, Frits van Paasschen, left the company in February due to the Board’s loss of confidence in his ability to further its expansion. After his departure, Starwood hired the investment bank Lazard to evaluate potential strategies for growth, such as a merger or sale. Since then, several companies from around the world have made offers to either buy a large stake in or completely purchase Starwood. Three large Chinese companies – Shanghai Jin Jiang International Hotels Co., HNA group, and sovereign-wealth fund China Investment Corp. (“CIC”) – are competing against each other to have the right to make a bid to acquire Starwood, a right which is given by the Chinese Government as all of these companies are at least partially owned by the state. The face that only one company will be able to make a bid works to the companies’ benefit because it will eliminate the risk of the price being driven up by several bidders. It is important to note that although one of the companies will win the right to bid, if the price is too high they will most likely not follow through with a purchase. While there is no concrete price, people familiar with the discussions believe a bid would have to be greater than Starwood’s market value of just under $12 billion. If the deal is approved, it would surpass the largest acquisition by a Chinese entity of a U.S. company by over $5 billion, which was made by CIC for a 9.9% stake in Morgan Stanley for $5.6 billion. This trend of Chinese entities acquiring U.S. companies is not new; Anbang Insurance Group Co. purchased the Waldorf-Astoria Hotel for nearly $2 billion in February of 2015 and Sunshine Insurance Group Co. (another Chinese insurer) paid approximately $230 million for the Baccarat Hotel in New York also in February of this year. On the U.S. side of the deal, the Committee on Foreign Investment would have to approve any purchase of Starwood by a Chinese company, making Starwood’s future even more murky and uncertain.

“Cost of Upgrades Determining Your Brand”

An emerging trend in the hospitality industry is large hotel operators focusing on existing hotel owners who want to upgrade to their brands as inexpensively as possible. Both Hilton Worldwide Holdings Inc. and Marriott International Inc. are entrenched in the continuing battle to dominate the so-called conversion market. The conversion market is characterized by hotel owners switching flags – a Marriott hotel changing to a DoubleTree by Hilton, for instance – in order to secure greater flexibility and lower costs with respect to property improvements. This has been a great strategy as DoubleTree has doubled its room count since 2007. Marriott, realizing the potential in this market, recently purchased Delta Hotels and Resorts, a Canadian brand, with the goal of using it as its own DoubleTree. The use of the Delta Brand, as opposed to the Marriott brand, is practical because Delta can offer more flexibility on improvements and will save the hotel owners millions of dollars in minor improvements, such as types of showers and central air conditioning versus in-wall air conditioning systems. These conversion brands, DoubleTree and Delta, also have an edge in the sense that they focus on secondary markets (small towns) rather than primary markets (gateway cities, resorts, airports). In the secondary markets, the flexibility offered by conversion brands leading to cheaper renovations is extremely useful as expensive upgrades are not optimal given the smaller revenue typically generated by those hotels.

Retail Sector Update 11/8/2015

“Blurred Lines in Asset Class Categorization”

The definition of retail space has been evolving rapidly. Investors who were previously able to bucket properties into rigid asset classes such as retail, residential, industrial and other major classes are now being forced to think more creatively as the boundaries between property classes become more flexible. Popovec, the author of the article, focuses on one shopping centre in Dallas to illustrate this. She notes how lifestyle retailers such as Barnes & Noble are occupying the same space as other retailers such as FedEx and Whole Foods. Thomas Park and Martha Peyton of TIAA-CREF asset management attribute this diversification to companies’ desires to reach a broader consumer base, no matter where that base may be. According to Park and Peyton, the TIAA-CREF applies a “holistic analytic framework” to all retail property categories, focusing on trade area demographics, the competitive environment, and the property’s strengths as indicated by the tenant mix and sales. With companies including space for “Airport Retailers” in their investment portfolios, it is safe to say that investors should not allow narrow definitions of retail properties to play a large part in the analysis of potential investments.

“China Sees Malls Close Despite Rising Consumption”

Despite data showing an increase in consumer activity, malls and other retail spaces in China have been subject to rising vacancy rates and plummeting rents. Possible explanations include the rising prevalence of online shopping among consumers as well as the possibility of government purchases solely to boost statistics. These failing malls, which were built with the intention to reap a solid reward on the rising levels of consumption in the country, are now adding to the country’s massive debt problem that clocks in at 160% the national GDP. While some malls are trying to refurbish in an attempt to draw a larger consumer base, others are simply closing down and turning to the online market. Major Chinese retail developers such as Dalian Wanda have already announced their closure of over 30 retail venues, with more expected to close in the coming months. Despite these failing properties, China is still the site of more than half of the world’s shopping mall construction, with over 4000 new malls projected to be completed this year. This is primarily due to local governments strongly pushing commercial development in an effort to stimulate the economy. In reality, these efforts lead to poorly managed malls and non-performing loans made by banks. Tim Condon, an economist for ING Singapore, aptly stated, “If you build it and they’re not coming, that’s a non-performing loan. That’s the bank’s problem.”

“Microsoft’s First Flagship Store”

This week, Microsoft is set to open its first flagship store on Fifth Avenue in New York City. The 5 story storefront located at 667 Fifth Ave. aims to showcase Microsoft’s products and devices in a push to become a major consumer retail force. Retail stores are a relatively new concept to Microsoft, who seeks to become a consumer brand as opposed to a brand consumers know. Since opening its first store in 2009, Microsoft has been in the works of finding the right location for a flagship store. While originally skeptical of the NYC retail market, Microsoft tested the market with a Times Square pop up store in 2012. With strong results from that store they decided NYC is the right market and this is the right time to build their largest retail store. The first floor of the 22,00 square foot space will feature a living room where customers can play Xbox on an 84-inch monitor and can test the company’s newest products, which will be untethered to enhance the experiential shopping experience. The push for experiential retail is a relatively new concept, with the idea that the longer you keep the customer engaged, the longer they stay and therefore the more they buy. On the second floor, there will be large areas for customers to play Xbox games, a community theatre where there will be 70 hours a week of workshops, and an answer desk. The third floor will be the Dell Experience at the Microsoft store where Microsoft will display their Dell products. Finally, the fourth and fifth floors will not be retail, but employee space and meetings and events rooms. In a push to compete with their competition such as Apple and Sony, Microsoft seeks to tap the retail market and consolidate their brands and products. According to Cushman & Wakefield, asking rents on Fifth Avenue between 49th and 60th streets are an astounding $3350 a square foot. The upscale location on Fifth Avenue seeks to attract both the tourists and the New York customers.

“Retail Store Expansion”

In the latest National Retailer Demand Monthly report from RBC Capital Markets, retail chains plan to increase store openings 4% over the next year and 4.2% over the next 24 months. These increases come from higher consumer confidence and retail sales growth. The increased consumer confidence could be a result of lower gasoline prices having an effect in the budget of consumers. Rents and occupancy are set for steady growth with the new store openings in the coming years as a direct result of increasing consumer sales, greater demand for retail space, and insufficient new development. Over the past year, absorption has overshadowed new construction by an almost 2 to 1 margin. In addition, retail construction is 38.5% lower over the past year than it was between 2006 and 2008. Not all chains, however, are trending towards more store openings in the coming years. Wal-Mart is set to open between 135-155 stores next year, while they opened 354 new stores last year. Although absorption is strong, retail rents are still 7% below where they were before the recession. That being said, the retail sector is in for strong growth and rent increases as new stores open in already existing spaces.

Multifamily Sector Update 11/8/2015

“Sam Zell Sells Suburban Units to Starwood Capital Group for $5.4 billion”

Sam Zell, chairman of Equity Residential, is selling 23,300 apartments to Starwood Capital Group for $5.4 billion. The transaction will rid Equity Residential of around a quarter of the units in its portfolio, and will be one of the largest transactions since the 2008 recession. The units are spread across suburban markets in Florida, Denver, Seattle, Washington, D.C., and Southern California. Zell is credited with calling the peak and impending downturn of the real estate market in 2007. Many investors are beginning to question how long the high prices in the market can last after the steep ascent of prices since the recession, given that some offices and hotels in the U.S. are at record values and rents have risen 20% in the past five years. Zell is moving from suburban markets to urban centers due to the influx of young people (who no longer tend to buy houses but opt for urban living instead), and the difficulty to build in those areas. Three-fourths of new apartments set to be completed in 2015 are in suburban markets. On the other hand, Barry Sternlicht, CEO of Starwood, has bought or put under contract 67,800 units this year and does not see the high prices of the market reversing anytime soon. Both Zell and Sternlicht have historically done well in economic downturns, by buying commercial real estate cheaply and then selling for nearly double the value in the recovery. The capitalization rate (a measure of yield) on this portfolio is about 5.5%, which is on par with recent deals.

“Brookfield Makes Ambitious Bet in Brooklyn”

Brookfield, one of the world’s largest office landlords and NYC developer, is making its first move into Brooklyn by buying a majority stake in two new apartment towers, totaling 780 units on the waterfront that have not yet been built. They are making a bet that Brooklyn will continue to develop and become the new hotspot destination for NYC residents. Sam Zell and Blackstone Group, LP have both been betting on urban center apartments as well. The two towers are just a piece of a 22-acre project called “Greenpoint Landing,” which is set to have 5,500 units developed over the next decade. This project is part of a larger movement of rezoning and promoting high-rise development in Greenpoint and Williamsburg, two neighborhoods on Brooklyn’s waterfront. Williamsburg has become a very desirable neighborhood, with average rents at $4,100 for a two bedroom apartment, while Greenpoint has lagged behind, averaging at $3,200 for a two-bedroom apartment, due mostly to its inferior access to transportation. This project is seen as the most ambitious development in Brooklyn thus far, especially with the lack of public transportation access. Brookfield has said it will try to get a ferry stop built near the new apartments and/or a shuttle bus to the subway to alleviate this problem. Building will begin in the first half of 2016. There are 21,822 new units to be delivered in Brooklyn by 2019, up from 10,052 delivered between 2010 and 2014, which will all be about one third below the average Manhattan rent of $3,995.

Industrial Sector Update 11/8

E-commerce and the Shortage of Big-Box Industrial Space”

For the past five years, the net industrial absorption rate (the rate at which property is bought over time) has exceeded the rate of space completion, resulting in a scarcity of available space. This year, industrial space absorption is expected to exceed the completion thereof by 48 million sq. ft., and it is predicted that this shortage of space will continue into 2016. This supply imbalance has predominantly influenced the big-box market (industrial spaces exceeding 500,000 sq. ft.), since the major reason for the imbalance is the rise of e-commerce and its increasing demand for large warehouses. Amazon, for instance, has recently built a 1.1-million-sq.-ft. warehouse in Kenosha, Wisconsin, after having been unable to find sufficient space in Chicago. Another consequence of rising e-commerce is an increasing number of outdated properties, since technology tenants want new features like higher ceilings, more parking, space for racks, and electricity for robotics, with which most of the older buildings are unequipped. As a result of the lessened big-box supply in primary markets, most users are moving from primary markets like Chicago and Philadelphia, to secondary markets like Indianapolis and Lehigh, which have close proximity and strong connectivity to the industrial centers; this trend is likely to continue into the near future.

“Increasing Demand Leads to Decreasing Industrial Vacancy in New Jersey”

According to New Jersey market reports released last month, industrial vacancy in the state has dropped to its lowest rate since the recession. This has come about as a result of the sustained, high demand within the industrial market, and as more firms move southward from the lack of available space in New York. More specifically, as absorption of real estate continues to exceed new development, occupancy rates and competition for space are rising steadily. With projected retail and online sales continuing to increase, the trend is likely to continue into 2016. The greatest gains in space occupation have been in central New Jersey around the Turnpike (most of the gains, totaling 5 million sq. ft., have been in Middlesex County), as more and more tenants are moving from New York City because of the high demand for space and low supply of industrial real estate in New York and northern New Jersey. The state’s industrial rents continue to be lower than those in New York, which is attractive to new tenants. Rents are, however, steadily increasing as a consequence of New Jersey’s rising manufacturing sector and its decreasing vacancy rates, and are currently at an all-time high in certain areas. The majority of new construction is concentrated around the main Turnpike, and, as this continues, firms are moving toward the construction of spaces with smaller footprints (all but five of the current projects are under 200,000 sq. ft.).

Office Sector Update 11/8

“Future Tenant Seeks to Create Tech Hub at Hudson Yards Development”

Related Companies and Oxford Properties Group are nearing the completion of 10 Hudson, a 52-story office tower that marks the beginning of the New York City’s Hudson Yards development. The tower is now 85% leased with the signing of VaynerMedia, a social media company, as a tenant occupying 88,000 square feet. VaynerMedia joins the German-headquartered SAP on the growing list of technology companies looking at space in the Hudson Yards development. VaynerMedia’s CEO stated that there is an opportunity to create a serious tech hub akin to Silicon Valley. Starwood Property Group brokered a $475 million construction loan for the developers to build 10 Hudson in a deal that included $350 million in funding from Starwood. Other firms leasing office space in 10 Hudson include Coach, L’Oreal, and Boston Consulting Group. Also nearing completion on the site is 30 Hudson Yards, a 92-story office tower that contains over two million square feet of office space. Tenants at 30 Hudson Yards include Time Warner Cable, KKR & Co., and both Related Companies and Oxford Properties Group. The developers recently broke ground on 55 Hudson Yards, a 51-story, 1.3-million-square-foot tower on the site as well. In its entirety, Hudson Yards is estimated to cost $20 billion, making it the largest private real estate development project in the history of the United States. It will include nearly 10 million square feet of office space spread among several towers.

“Office Vacancy in Detroit Trending Downwards”

Detroit’s office market has steadily improved in recent years following the last U.S. recession. The good news continued as both Amazon and Lear Corp. announced that they would be leasing more office space in the city’s Central Business District. Lear will soon be opening its new Innovation and Design Center to foster new growth. Amazon has plans to bring several hundred employees into Detroit in the future. New data from CBRE predicts office vacancy rates of about 15% in Detroit, down from over 30% experienced during the recession. There is a very limited supply of class-A office space in the city, and tenants looking for large contiguous spaces are expected to have a difficult time. A market study by Colliers International partly attributed the scarcity of class-A space to a lack of new construction. Still, the drop in office vacancy rates and the strong multifamily rental market have helped revitalize central Detroit.