Retail Sector Update 11/1/2015

Don and Eli Ghermezian of the Triple Five Group have awakened a massive commercial development project in the Meadowlands of North Jersey that has been dormant for the past six years. The $5 billion project includes plans for a 300-foot Ferris wheel, North America’s largest indoor amusement park and water park, an indoor ski hill, and over 500 stores. After two other organizations had their finances foreclosed on the development, Triple Five Group was able to acquire the land, and has a goal of raising $1 billion in financing through bonds – a risky endeavor as interest rates in the bond market have been steadily rising, increasing the degree of success the project demands. In addition, a large portion of funding for the project has been from public sources because the project is creating jobs and acts as a huge stimulant for the North Jersey area. The mall complex, entitled American Dream, plans to garner over fifty percent of its patrons from New York City’s constant inflow of tourists. This has caused real estate research firms, such as Green Street Advisors, to provide mixed feelings on the mall’s projected success. Considering only 12.4 million of last years 56.4 million visitors to New York City ventured as far as Lower Manhattan, skeptics have been asking what, if anything, would bring tourists across the Hudson and outside the allure of Manhattan. Despite this skepticism, Triple Five Group, which already owns two of the largest retail complexes in North America, has put the project into high gear with a projected date of completion sometime during Summer 2017.

http://www.nytimes.com/2015/10/03/nyregion/dream-of-a-mall-starts-to-rise-out-of-a-meadowlands-nightmare.html?ref=topics&_r=0

The redevelopment of the World Trade Center site includes plans for a 365,000 square foot, 100-store retail complex that houses high-end retailers and luxury goods. The incorporation of the complex with the Oculus, a transportation hub and center of the World Trade buildings, is set to make this area a retail hub that has been lacking in the lower part of Manhattan. Westfield Corp., the developer of the retail portion of the World Trade Center, has been working to create an enticing environment with premium domestic and international retailers. The organization has also been working to bring restaurants such as Eataly to the complex in an effort to give the area a feel similar to that of the borough of Brooklyn. The new retail development is also bringing companies like London Jewelers to the area, opening these companies up to a new clientele as the development plans to attract patrons from all over the city and the world. A retail complex coupled with art galleries and stunning architecture is exactly what Westfield believes will pull people to the development and create a feeling similar to that of the stores along the Broadway corridor and Howard Hughes Corp.’s redevelopment of the South Street Seaport area. Above all, the development project represents a regeneration of the World Trade Center area that has been ongoing since the September 11 attacks in 2001.

http://www.wsj.com/articles/a-retail-cathedral-takes-shape-1445213399?mod=residentialrealestate

In a time when more and more retailers are spinning off their real estate assets into REITs, Macy’s is left with deciding what to do with their flagship store, the prized Herald Square building. Retailers have been pressed by investors lately to sell off their real estate assets into REITs and lease them back. This allows the company to pay off debt and improve return on invested capital. REITs also protect investors from income tax on the real estate, leading to higher dividends. Macy’s, however, does not have a clear-cut path for its flagship store, largely because the value of the building is not clear. Speculation ranges from less than $3 billion to more than $4 billion on the central Manhattan building that contains 1.1 million square feet of retail space with additional room for offices and storage. As investors such as Starboard Value LP pressure the company, it will have to make a decision both on its real estate assets as a whole and its flagship Herald Square store.

http://www.wsj.com/articles/macys-faces-thorny-question-what-to-do-with-flagship-herald-square-building-1440521068?alg=y

As Bed Bath and Beyond finds itself in steep competition with online retailers, its decision on how to compete becomes crucial to the success of the company. The company has announced plans to invest heavily in its omnichannel strategy of selling in stores, on the web, and on mobile devices. Bed Bath and Beyond, however, only generated 8% of its revenue online last year and may need to look in other directions. Online margins are much lower than brick and mortar sales due to free shipping and fulfillment costs, and with the recent acquisition of Cost Plus and 30% expansion to a total of 1,513 stores, Bed Bath and Beyond has to be very careful about maintaining its margins on that large of a scale. As displayed by Williams-Sonoma and Pier 1 Imports, whose profit margins were destroyed due to online sales, online expansion does not always have a positive effect on the company.

http://www.wsj.com/articles/bed-baths-online-push-whats-in-store-1445187633

Multifamily Sector Update 11/1/2015

There are rezoning concerns in the Bronx about whether the new apartment buildings, meant to replace older auto-repair shops on Jerome Avenue, will be too expensive for the residents who live nearby. There are further concerns that the loss of the auto-repair shops will lead to a loss of local jobs as well. This re-zoning arose from Mayor Bill de Blasio’s strategy to improve poorer neighborhoods with “higher-density development” that will increase the number of affordable homes and improve neighborhoods. This strategy includes doubling the budget to $600 million per year in subsidies for developers to build affordable housing, and $1 billion for new parks and playgrounds. South Bronx residents are now protesting the new development, as a recent study taken claimed 80% of residents fear displacement due to rezoning. The Bronx Coalition for a Community Vision released a report asking the government to make a larger percentage of the apartments permanently affordable, to set aside 50% of the units for current residents of the neighborhood, and to both protect and create local jobs. In response, City Planning commissioner Carl Weisbrod made the valid point that housing can never be affordable to everyone who lives in a certain neighborhood, although they were trying their best. http://www.wsj.com/articles/rezoning-worries-in-south-bronx-1445387982

The Stuyvesant Town and Peter Cooper Village complex, which consists of 11,200 apartments in multiple separate buildings, was inches away from foreclosure five years ago, with its value down to $3 billion from its sale price of $5.4 billion. This past Tuesday, however, Blackstone Group LP and Ivanhoé Cambridge (a Canadian pension investor) announced that they are in a deal to buy the 80-acre complex for $5.3 billion. Some investors have said this deal showcases the “remarkable recovery” of the Manhattan real estate market since the downturn, which can be explained by two main reasons. Firstly, investors who left during the downtown are hungry for anything in Manhattan, especially investors from Norway and Middle Eastern countries. Secondly, there is a growing demand due to a growing population. This, in turn, is driving average rent prices up to over $4,000 a month. Tishman Speyer, who purchased the property in 2006 and handed it over to creditors in 2010, over-projected the amount of income that would come in from converting rent-regulated apartments to market-rate. Now, about 45% of residents pay a regulated rent, down from 71% in 2006, which has led to a doubling in income since the ‘unregulated rent’ (market rate rent) is significantly higher. However, a large chunk is required to be rent-regulated for at least 20 years under government mandates. The deal is unusual in the fact that it is between Blackstone and New York City officials, instead of a real estate development firm like Tishman Speyer. Jonathon Gray, head of Blackstone real estate, has said they will not move forward until the tenants’ association, which wants to ensure that rents are kept affordable for current residents and those in the neighborhood, approves the deal.

http://www.wsj.com/articles/stuyvesant-sale-typifies-boom-in-real-estate-1445388300

Industrial Sector Update 11/1/2015

A report from CBRE stated that, as of second quarter 2015, an increasing number of automotive companies are reshoring manufacturing in the U.S. This has significantly affected international industrial markets, as the restructuring continues to restore America to its role as a center for production. Companies like Volvo Car Corp., which will begin operations at its first U.S. manufacturing facility in 2018, are relocating from Asia, where there are growing production costs and supply chain complexity, to the U.S. and Mexico. The American South (particularly cities near seaports) has leveraged its productive advantages — particularly its port infrastructure, comparatively low costs of labor, and government incentives — to become a growing industrial hub. Mexico has seen the greatest benefit of all, experiencing a dramatic increase in auto production through 2015, and a significant future investment from the auto manufacturers. This will prompt long-term growth of U.S. distribution and logistics, especially in Texas and the Midwest, where there will be increasing auto distribution demand.

http://www.worldpropertyjournal.com/real-estate-news/mexico/mexico-city-real-estate-news/auto-manufacturing-reshoring-data-2015-mercedes-benz-bmw-cbre-trey-pennington-9092.php

Rapidly increasing occupancy and absorption rates are making it difficult for industrial properties to be built fast enough to meet demand. With such high demand and low vacancy rates, the industrial sector continues to see a higher average cap rate (the potential percentage return an investor would receive on his or her investment) of any asset class. In addition to new developments currently under construction, a growing share of supply is speculative development, indicating expected future growth. Following the recent recession and its accompanying supply shut-off, companies focused on acquisitions because of an increase in vacant space and a difficulty in leasing property. Now, in light of improved leasing, most industrial firms are redirecting focus to construction. This can be attributed largely to e-commerce, which has changed the speed at which orders are processed and goods are transported, and has consequently necessitated acquisition of industrial space. In addition, an upsurge in U.S. development, especially in major distribution centers like Dallas, Los Angeles, and Kansas City, has resulted from the rising demand for industrial manufacturing space, and companies are acting quickly to buy and develop the land in light of this growth.

http://nreionline.com/industrial/strong-demand-leads-developers-pursue-new-industrial-projects

Office Sector Update 11/1/2015

A recent report from CBRE indicated that office vacancy rates across the U.S. fell to 13.5 percent during the third quarter of 2015. Vacancy rates have fallen in every quarter since the recession, and the most recent data shows a yearly decrease of 80 basis points from this time last year. Growth in the demand for office space is expected to continue to outpace growth in supply as firms are leasing more space than is being delivered by new construction. As a result, vacancy should continue to decline, keeping rent growth above inflation in most U.S. office markets. The report stated that office rents increased by 1.6 percent during the third quarter, resulting in a yearly increase of 4.3 percent since the beginning of the year. Groundbreakings for new office developments will begin to accelerate in the coming months, fueled by the Federal Reserve’s decision to delay a hike in its interest rate. The Fed’s low interest rate makes borrowing money relatively cheap, incentivizing new construction as developers can more easily repay construction loans. Landlords of new spaces will likely charge rents well above market rate, as more companies are relying on their office space as a recruitment tool in the increasingly competitive employment market. With job growth occurring in all professional services sectors, office demand is expected to be tight through at least the middle of 2016.

http://nreionline.com/office/tight-office-demand-continue-through-mid-2016-new-research-reports-promise

Brandywine Realty Trust, Philadelphia’s largest office landlord, has recently agreed to sell some of its properties at the Laurel Corporate Center in Mount Laurel, New Jersey. The offices at those properties encompass more than 560,000 square feet of Class A office space. The price of these sales have not yet been disclosed, though it is speculated that the company will use the cash raised to fuel development projects it is planning for several recently acquired properties in Philadelphia. The company sold another office building in Mount Laurel for $16.5 million last month. Brandywine is also rumored to be searching for a purchaser for the IRS Building across from 30th Street Station, on which the company spent $252 million in renovations in 2010. The properties for which Brandywine is currently developing plans include parcels on the 2100 block of Market Street, a parking garage on the 700 block of Market, and a plot on JKF Boulevard across from 30th Street Station. The first image below shows the completed Cira Complex with Brandywine’s currently under construction FMC Tower and its yet-to-be-developed Cira II tower behind 30th Street Station. The second image below shows conceptual renders of a mixed-use residential and creative office building it has planned for the 2100 block of Market Street.

http://www.philly.com/philly/business/homepage/20151021BrandywinesellssomeMt_Laurelholdingstoraisecashforcityprojects.html