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09/23/2019

Let's talk about flex: Phoenix among fastest-growing coworking markets nationwide

Coworking space accounts for 1.3% of the Valley's total office inventory, which is up from 0.8% a year ago, the report said. Meanwhile, more coworking projects are in the works. Filled with "must read" stories, industry news and reporter insights, exclusive interviews with local business leaders, and expanded Top 25 Lists. Let's talk about flex: Phoenix among fastest-growing coworking markets nationwide

09/23/2019

Stable returns have investors hot on cold storage

In an increasingly uncertain global economy, investors are looking to cold storage as a safe haven for stable returns, as the growing demand for online grocery delivery shines a promising light on the sector. The cold storage industry is an integral part of the food supply chain, as the cold chain process involves any perishable food product stored or transported from refrigerated warehouses or manufacturing plants to distributors, grocery stores, restaurants or direct to the consumer. That key role makes it less vulnerable to cyclical impacts. "The frozen food industry benefits from being rather inelastic, as the demand for food products remain relatively stable regardless of the country's economic condition," says Alec Haley, a director and cold storage investment advisor in JLL's San Francisco office. "The steady demand through various economic cycles and long-term commitments from tenants mitigates the potential risks of owning and operating cold storage facilities." Investors are particularly interested in such stability as global economic uncertainty grows. Although economic growth in 2019 seemed set to slow after a growth spurt in late 2017 and 2018, it was fear, more than any metric, that exacerbated the loss of momentum in the first half of this year, according to JLL's Chief Economist Ryan Severino. "The culprit behind these fears remains geopolitical risk, notably global trade," Severino says. "Global trade, already falling amid the backlash against globalization, is faltering under the weight of trade tensions, particularly tensions between the U. S. and China." But cold storage is not just stable - it's growing as consumer demands change, including the adoption of online grocery delivery. By 2025, Grand View Research projects the global cold storage market will reach US$212.54 billion, expanding at a CAGR of 12.2 percent. The USDA reports the U.S. currently has approximately 3.6 billion cubic feet of food-commodity cold storage capacity, making up roughly 214 million square feet of industrial space. According to Haley, that isn't nearly enough. "There is a major imbalance of supply and demand right now with an aging and insufficient supply of space," he explains. "And, at the same time, there's been a massive uptick in demand due to changing consumer preferences, the adoption of e-grocery, natural growth in population and strong consumer spending." This rise in online grocery purchasing alone will result in increased need for cold storage space by up to 100 million square feet over the next five years. Additionally, as consumers embrace online grocery shopping, the demand for frozen goods rises, resulting in increased demand for cold storage facilities to house those frozen goods. More product needed The industrial property sector has emerged as a favored asset class among institutional and private investors in recent years. But many investors are feeling priced out of the quality offerings that enter the market, says Haley. "Institutional investors that are under-allocated to industrial but having a hard time deploying into the space are beginning to explore non-traditional industrial assets like cold storage, which offers less competition, and higher yields than traditional logistics warehouses." This is leading investors to increasingly look at retrofitting existing facilities or build new state-of-the-art product to meet the demand. According to a recent study by the Food Marketing Institute (FMI) and Nielsen, within the next seven years, up to 70 percent of U.S. consumers will regularly purchase consumer packaged goods online, turning the online grocery business into a $100-billion-a-year business. According the Haley, there is virtually no speculative construction market for cold storage, so when developers build new temperature-controlled warehouses, they will find a user or third-party operator to do a build-to-suit with a long-term lease that could be up to 30 years. Furthermore, most tenants will sign absolute triple net leases, so the tenant pays for all operating expenses and structural repairs. This means developing or investing in cold storage can be a "safe haven" for investors at this point in the economic cycle, as these properties provide "a stable, reliable, long-term cash flow with limited capital expenditures along with demand that doesn't fluctuate," he says. Click to find out how caution impacted global commercial real estate markets in H1. Never miss an update from The Investor. Subscribe Now! Stable returns have investors hot on cold storage

09/23/2019

Sustainability Rises as a Goal for Warehouse Developers

Developers are under more pressure than ever to include features in their buildings that are good for the environment, good for their workers, and good for the surrounding community. "There is an increased urge for sustainability in the built environment," said Elizabeth Dunn, vice president of global customer solutions for Prologis, who moderated a panel at the 2019 ULI Fall Meeting on the potential in industrial spaces for sustainability, social equity, and workforce development. Developers have been given this mandate just as they plan to build a huge number of new warehouse projects. "There are 200 million square feet [19 million sq m] of warehouse space under construction right now," said Dunn. The rise of e-commerce has created a massive need for warehouse space that is likely to continue even if the U. S. economy slows. That means a new generation of warehouse spaces needs to be built, often with different specifications for floor depths, ceiling heights, and parking and trailer storage to accommodate the needs of retailers that ship products to individual customers. Developers are under pressure to build these projects sustainably. "The demands from our investors have gotten increasingly robust," said Bohdy Hedgcock, senior vice president and assistant portfolio manager for Clarion Partners. "Every request for proposals that we get from an investor today has a sustainability component to it." To attract these investors, Clarion meets standards set by organizations like Global Real Estate Sustainability Benchmark and Fitwel. "There is a natural business case here," said Dunn. "We can actually help our customers improve productivity. We can help save them costs on energy, on lighting, and through solar. That helps create value for our customer, which helps us create value for our investors." Developers include features such as light fixtures that save energy and skylights that let more natural light into the warehouse space. "Our buildings are all LEED certifiable," said Hedgcock, meaning they include all the features necessary to earn a Leadership in Energy and Environmental Design certification, though Clarion does not spend the $40,000 necessary to actually be inspected and certified. "We don't think we are losing out of leasing decisions because we are not LEED certified," Hedgcock said. Warehouse developers are also creating programs to train potential warehouse workers and improve the quality of the workplace. "It's a war for talent," said Chris Whalen, assistant vice president of financial analysis for Duke Realty. "Operators want to create incentives for workers." Prologis has spent its own money to partner with nonprofit organizations to provide internships and train potential young workers in cities like Los Angeles, Miami, and Chicago. "We think it's essential to help our customers grow where opportunities are growing," said Dunn. Other developers, including Duke, build warehouses with large break areas, stand-alone recruiting offices, on-site bus stops, on-site daycare, and other features designed to attract workers. "It's a good deal for us, because it's going to be a good warehouse and it is going to stay leased," said Whalen. In the years to come, as increasingly high temperatures, rising sea levels, and an increase in the intensity of hurricanes and other storms make it more difficult to live in coastal areas, the United States may see a wave of internal migration, as people and businesses relocate to where climate change's effects are not as severe. That could turn cities such as Cincinnati into "climate havens," boosting their populations and opportunities for development, according to a pair of speakers in a presentation on migration trends and their effects at ULI's 2019 Fall Meeting in Washington, D. C. Real estate investors face a changing world, with the rising risk of recession in the short term and, over the long term, a slower rate of economic growth in general. Despite anxieties, however, U.S. real estate is still a favored place for investors from all over the world to invest their capital, according to Emerging Trends in Real Estate® 2020, released by ULI and PwC during the Fall Meeting. Five strategies to increase racial, ethnic, and gender diversity-and reap better performance. Sustainability Rises as a Goal for Warehouse Developers

09/23/2019

Navigating the Retail Sector’s Unpredictable Future

The commercial real estate sector is as healthy as ever, but it's the retail portion of the market that is proving hard to predict, according to MetLife Investment Management's latest report. In their quarterly report on commercial real estate, MetLife explained that the market has strong fundamentals, with declining vacancy rates and increasing rents across property types so far in 2019. Offices will benefit from a slowing construction pipeline in the next two years, while the industrial sector is also enjoying boosts from the rising demand of e-commerce and fulfillment centers. On the other hand, e-commerce is causing a lot of uncertainty for the retail sector of commercial real estate. As e-commerce continues to be a staple of the American shopping diet, brick and mortar retail has definitely felt the impact. But the picture of retail isn't that straightforward, as experiential retail is continuing to do well. According to another MetLife report on experience-based retail, people spent $1.30 on experiences compared to every dollar they spend on actual purchases. E-commerce has also prompted retailers to begin using their brick-and-mortars more as showrooms to boost online sales, meaning lower need for inventory and large footprints. In an analysis of 150 retail leases, MetLife saw that the median store footprint decreased 1.2 percent between 2017 and 2018. Even a retail category that was largely sheltered from the e-commerce effect might begin to feel the pressure. Grocery retailers have long proved profitable for investors, but the introduction and adoption of grocery delivery services like FreshDirect and Instacart could chip away at its armor from the e-commerce effect. Even so, MetLife's report felt that grocery will still be insulated from e-commerce and other economic conditions, but to exercise some caution. "Some investors may not be appreciating the headwinds facing grocery stores in the 2020s, with many centers still trading at sub-5 percent cap rates," Will Pattison, MetLife's head of real estate research and strategy, said. "There is also very little consideration given to the markets that are more or less likely to be further disrupted by e-commerce." While more global in scope, some external factors like ongoing trade tensions, the Tax Cuts and Jobs Act, a no-deal Brexit and the developing political situation with Iran could hamper the market. The MetLife report noted that these events will probably not have a negative outcome on the market, but the uncertainty they bring about could cause some dips. To better navigate the unpredictable market that is retail, MetLife developed a model to help identify how a metro market could be impacted by e-commerce's growth. Their method involves looking at consumer habits, statistics of transportation and logistics workers in the area and Google Trends to see if people in a certain area are searching for e-commerce terms, like "Amazon" or "coupon code." Their research showed that markets like Chicago, Baltimore and Salt Lake City have around 53 percent of their residents buying online regularly in 2018, and that percentage has since stabilized. The market in Chicago has become so conducive for e-commerce that Amazon is even expanding its presence there with a 70,000-square-foot tech hub. In other cities like Los Angeles, Las Vegas and Oklahoma City, 44 percent of the residents were buying online in 2018, which was a 5 percent rise from the previous year. Markets like these are more likely to be disrupted by e-commerce, according to the report. But some of MetLife's research results were more surprising. "We were not expecting residents in Minneapolis to be buying so many goods online," Pattison said. "Our first thought was that cold weather may be the culprit and although this may be partially true, we later discovered it was one of Amazon's first markets with free next day shipping." Pattison added that Nashville, Tenn.'s retail real estate outperformance was one of the biggest outliers and that they didn't have a solid explanation for it. However, the MetLife report explained that the e-commerce craze can't last forever and predicts a slowdown in its growth rate in the 2030s, which will put its numbers back on par with brick and mortar. At the same time, that slowdown would provide a good opportunity to buy retail real estate in markets with a slowing rate of e-commerce spending, according to MetLife. Navigating the Retail Sector’s Unpredictable Future

09/23/2019

JPM Provides $455M CMBS Refi for Nationwide Suburban Office Portfolio

J. P. Morgan Chase has provided a $455 million refinancing for a nationwide group of suburban office assets controlled by Brookwood Financial, according to The Carlton Group, which advised Brookwood on the deal. The debt package grants Brookwood - a private-equity firm based in Massachusetts - three years of floating-rate leverage on a portfolio of 27 properties concentrated in five regions: New England, the Dallas metro area, the region of Florida near West Palm Beach and Fort Lauderdale, the suburbs of Philadelphia and the environs of San Diego. Brookwood acquired the assets piecemeal over the years and the new deal, which was first reported by Commercial Mortgage Alert, represents the first time they're being lent against as a group. The debt will find a place in an upcoming CMBS transaction, as per CMA. "Brookwood Financial … wanted to move quickly to optimize its position within more than two dozen investments across the country ahead of changing market dynamics," Michael Campbell, the CEO of The Carlton Group, said in a statement. "We were able to work closely with the sponsor's team and J.P. Morgan Chase to structure a single transaction that allows Brookwood to buy out partners and gain maximum return on investment over the long term for a wide range of office properties." Joseph Geoghan led the J.P. Morgan team that originated the debt, while Brookwood's Thomas Brown supervised the deal for the borrowers. Neither immediately responded to an inquiry about the deal. The single most valuable asset covered in the refi is the McArthur Portfolio in Irving, Texas, a three-building campus that Brookwood bought in 2016 and that is now valued at more than $85 million, according to sources close to the deal. Tenants there include a company that makes ingredients for food manufacturers as well as a business- and I.T.-consulting company. Other prominent assets that back the debt include West Palm Beach's Sabadell United Bank Building, a 114,000-square-foot office tower that serves as that institution's headquarters, and Mission Valley Crossroads, a 140,000-square-foot property on Camino Del Rio in San Diego, about three miles north of the city's central business district. Brookwood, a 26-year-old company, has in the past owned everything from neighborhood retail centers to hotels, but its portfolio today is laser focused on suburban office holdings. An Iowa-based subsidiary, Yesway, is also active investing in gas stations and adjacent convenience stores, noting on its website that it aspires to own more than 400 such assets "over the next several years." Mesa West Lends $72M For the Purchase of Dallas-Area Office Campus JPM Provides $455M CMBS Refi for Nationwide Suburban Office Portfolio

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