The latest digital craze sweeping the globe happens to have significant commercial real estate implications.
Pokémon Go is a game that creates location value out of thin air. The game leads its players to roam the landscape in pursuit of digital characters, using smart phones and a technology technique called augmented reality (AR). Think of AR as digital hallucinations a game maker creates. The hallucinations aren’t real, but they nonetheless have physical positions in the real world – on a street corner, at a retail store, in a city park, etc. The people follow the characters and extra foot traffic results.
If you’re wondering what I mean by “location value”, refer to the classic “three rules of real estate” for the answer: location, location location. The value and performance of a commercial property is almost always deeply related to the desire of people to go to that property. AR, along with the software games or promotions it enables, is a completely new and very successful way to influence and build that desire. Because location value is core to commercial real estate, the economic implications of the game for the CRE industry could be staggering.
CBRE Market Flash is a Must-Read
The game works by luring players into locations they will not otherwise go. That’s both good news (for retailers especially) and bad news (for property managers responsible for common areas and security). CBRE’s most recent report on the phenomenon as it applies to commercial real estate is quite an eye-opener and a must-read to get a handle on the potential economic impacts behind all the fuss. From the market flash:
Consumers of commercial and residential property will soon benefit from emerging capabilities to visualize real estate virtually via mixed-reality offerings in tandem with parallel advances in personal media devices and underlying graphics technology.
The industrial market will have access to technology that will impact multiple elements of the supply chain. DHL and Ricoh recently carried out a successful augmented-reality pilot in a warehouse in the Netherlands that proved successful in enhancing time efficiency and error reduction.
The retail sector, already seeing an increase in foot traffic around Poké “stops” and “gyms,” is on the cutting edge of using augmented reality to engage its customer base, both online and in-store, so that customers are more informed about the products they buy.
Data centers, already a booming asset class, will benefit from the need for additional infrastructure, connectivity and storage capacity demanded by this evolution.
You can read the entire CBRE Market Flash “Pokemon. So? How will augmented technology impact commercial real estate?” at this link.
Remember: in this industry, it’s not about the Pokemon.
It’s all about the go.
Detroit’s industrial real estate past is a story of too many eggs in one economic basket. When the over-concentration of auto industry capital fled Detroit, the communities that capital once sustained vanished, and the rest is rust belt history.
But the fact is the auto industry didn’t vanish entirely. Today, strong demand in auto sales pushes Detroit and its suburbs toward an industrial output that represents a giant step toward long-missing sustainability. Robert Carr’s piece in NREI:
“You can’t find a lower vacancy rate in Detroit in the past 20 years,” [notes John DeGroot, research manager at real estate services firm NGKF]. “A big part of it is auto sales. The average yearly sales mark for the Big Three was around 16 million since 2002. During the recession we saw it dip to 10 million, but now we’re hitting 17.5 million per year.” Auto experts predict that figure will continue in 2016.
Typically, the suburbs around Detroit have fared better with industrial leasing and construction, with I-75/Auburn Hills, Macomb county and Western/Southern Wayne county being the preferred locations for new, modern facilities. However, though Detroit proper has many obsolete or dilapidated industrial buildings, the city is now a major draw for new construction as well, DeGroot says. Since 2015, the city has seen more than 765,000 sq. ft. of new construction completed, according to a second quarter NGKF report.
More from NGKF on the specific projects and locations in Detroit’s long path to industrial recovery:
Increased industrial demand in the city of Detroit continues to drive new construction of modern [facilities]. Much of the city’s existing inventory suffers from a form of functional obsolescence and/or physical deterioration and difficult to find users to absorb. Since 2015, the city has seen over 765,000 square feet of new construction completed. Auto supplier Flex-N-Gate is the latest company to make a significant investment in the city. The company recently announced plans to build a 500,000-square-foot production and sequencing facility on a 30-acre site in the industrial park located near Interstate 75 and I-94. Meanwhile, Lear Corporation is in the planning stages of building a new manufacturing plant in the I-94 Industrial Park. These planned upcoming developments follow the 904,000 square feet that is currently under construction, which include: Crown Enterprises’ 500,000-square-foot distribution facility for its Universal Truckload Services; YFS Automotive Systems Inc.’s 150,000-square-foot manufacturing facility; and Sakthi Automotive’s 540,000-square-foot expansion on Fort Street.
The wave of lending for commercial real estate development that arose after the 2008 financial meltdown is secured by offices, shopping centers, multifamily and industrial properties all over the US. But worries about regulatory pressure intended to tamp down systemic risk — risk of the same kind that caused 2008 — are sparking concerns that a wave of refinancing made necessary by closer looks at underwriting standards could cause a new crisis in lending.
The Joint Regulatory Statement of December ’15
In December of last year, the Federal Reserve set the stage for placing CRE lending under a microscope. In a press release named “Statement on Risk Management in Commercial Real Estate Lending” (download full PDF here), federal regulators had this to say about CRE lending:
The agencies have observed that many CRE asset and lending markets are experiencing substantial growth, and that increased competitive pressures are contributing significantly to historically low capitalization rates and rising property values. [Footnote 2 – For example, between 2011 and 2015, multi-family loans at insured depository institutions increased 45 percent and comprised 17 percent of all CRE loans held by financial institutions, and prices for multi-family properties rose to record levels while capitalization rates fell to record lows. Sources: Consolidated Reports of Condition and Income, Costar Property Price Index, and CBRE. End of Footnote 2.] At the same time, other indicators of CRE market conditions (such as vacancy and absorption rates) and portfolio asset quality indicators (such as non-performing loan and charge-off rates) do not currently indicate weaknesses in the quality of CRE portfolios. Influenced in part by the continuing strong demand for such credit and the reassuring trends in asset-quality metrics, many institutions’ CRE concentration levels have been rising.
The agencies’ examination and industry outreach activities have revealed an easing of CRE underwriting standards, including less-restrictive loan covenants, extended maturities, longer interest-only payment periods, and limited guarantor requirements. The agencies also have observed certain risk management practices at some institutions that cause concern, including a greater number of underwriting policy exceptions and insufficient monitoring of market conditions to assess the risks associated with these concentrations.
Regulators advise that lenders review their portfolios and “maintain risk management practices and capital levels commensurate with the level and nature of their CRE concentration risk.”
Wave of Refi?
A topic of concern in the wake of regulatory scrutiny is the extra burden placed upon lenders causing a credit crunch as banks struggle to comply with new capital requirements and more stringent underwriting standards. Some, like Morgan Stanley’s analyst Richard Hill, quoted in Bloomberg, believe that the new standards will affect smaller banks unduly. “”Given [regulators’] increasing concern about banks with high CRE exposures and years of loosening underwriting standards, we see a scenario where the most exposed banks will be unable to satisfy the CRE market’s financing needs.” he said.
Here Hill references the smaller banks — much smaller than Morgan Stanley with its 60,000 employees operating in 42 countries — characterizing them as “stepping into the void” left by a decline in bond issuances, aka commercial mortgage backed securities, which Hill says have declined to levels not seen in a decade. The small bank’s exposure to CRE, according to Hill, places them on a collision course with imposed federal standards, leaving the smaller banks outgunned in a regulatory fight.
One Writer’s Thought
In my experience, it’s not common to find the voice of a huge bank worrying much about the fate of smaller banks, even in the wake of regulatory adjustments. Such a position suggests that reading between the lines is called for. Is Morgan’s harrumphing here about how heightened lending standards will affect smaller banks really a backdoor sales pitch to hype its own CMBS offerings or its own refi absorption potential? Is it grist for the mill against how heightened standards will burden Wall Street? Or is it what it appears: a reasoned observation of the entire sector’s capital allocation ecosystem?
Time may tell.
Recent new store layouts at Target are leading some to ask: has the big box retail model finally come full circle, understanding that the local retail flavor and small operations it so often replaced might be the secret sauce it needs to survive?
The average size of a Target store has fallen, possibly for the first time in the company’s history. The New York Post reports:
With 20 smaller stores already open, the Minneapolis-based chain expects to roll out 14 more this year — including one in the New York City neighborhood of Forest Hills, Queens, which will open on Wednesday.
The store is 21,000 square feet.
There will be only one large-format store opened in 2016.
As a result, the average size of a Target store fell last year — to 133,700 square feet — for probably the first time in its history.
The store in Forest Hills, along a busy commercial strip, opened in a space previously occupied by a Barnes & Noble.
Target is looking beyond its core customers in the burbs and scooping up attractive real estate abandoned by other struggling retailers like grocers, Barnes & Noble and OfficeMax, a Target rep said.
“We can get into great locations now that we have smaller prototypes,” said Tony Roman, senior vice president of Target and head of the greater New York market area.
The big-box giant is relying on understanding of local community makeup to tailor its offerings; in its new smaller-format store in the majority-Jewish enclave of Forest Hills, products catering to local tastes include local sports jerseys and food that carries the kosher mark. New smaller Target stores whose operations are similarly tuned to local needs are coming in Tribeca, downtown Brooklyn and Elmon, Queens are in the pipeline.
The big may be hearing the call of the small after all.
The presence and solid performance of commercial real estate is a sign of a healthy surrounding transportation infrastructure. The fate of the former is ever-increasingly is linked to the fate of the latter. That’s the message Tishman Speyer President and CEO Rob Speyer had for the assembly at the Urban Land Institute’s Asia Pacific Summit in Shanghai.
“The time may be coming when transportation has a greater effect on real estate than interest rates,” he said. “So, move over banks; here comes the bus!”
Speyer emphasized the importance of city leadership in driving public transit initiatives, which will in turn drive real estate values.
“That leadership will have more of an impact on the real estate we own than even developers and architects,” he said. “We need mayors with energy, confidence, and a sense of destiny. Mayors are often in a better position than national leaders to work together and get things done.”
A common obstacle mayors face is traffic and pollution, he said, which will get worse as a predicted 2.5 billion people move to cities between now and 2050.
“We all talk a lot about connectivity; it is about much more than mobile phones and wi-fi. Connectivity is about where we go on the ground and how we get there,” Speyer said. “In the past, sometimes we built transportation after real estate, and sometimes we built it before real estate. But now, finally, we are building transportation and real estate at the same time.”
Partnerships Between Developers And Transportation Systems Cited
In addition to touting the plans of Los Angeles Mayor Eric Garcetti to add 32 miles of subways to the city over the next two decades, Speyer went on to discuss new and novel partnerships between transportation system providers and real estate developers, where developers acquire land over planned subway stops, trading significant company equity in turn to the state-owned transit provider.
Shenzhen, [China]’s Mayor Xu Qin has a city of 12 million people, which is set to see a 20 percent increase in population in the medium term. To cope with this, Xu plans to build the longest subway in the word.
State-owned transit company Shenzhen Metro has signed a landmark deal with developer China Vanke in which Vanke has acquired property above ten metro stations in Shenzhen, and Shenzhen Metro has taken a 20 percent stake in Vanke.
“So, Vanke gets prime development land, and Shenzhen Metro gets a share of the profits,” said Speyer. “This is a deal that all of us in this room should learn from. What works for Vanke and Shenzhen Metro could work for all of us.
“Property and transportation will increasingly become a single deal. We have 2.5 billion people moving to cities, and as much as they need somewhere to go, they also need some way to get there.”
Get highlights of the NAR Commercial Governance meetings in Orlando, and the Economic Issues and Trends forum with this special edition of Commercial Connections.
And speaking of legislative action, be ready to jump into action on behalf of your colleagues and your industry. Download the REALTOR® Action Center mobile app today! You’ll be able to respond to any Call to Action, review your REALTOR® Party engagement level and learn how your state and local associations are using the tools and program NAR provides.
As reporting about the world’s oil markets increasingly features terms like “glut” and “supply overhang,” property prices directly related to US oil extraction are widely taking a beating. At the same time, other indirectly related property sectors such as retail are benefitting from low gas prices. In the wake of the latest drop in oil prices, here’s a quick roundup of the recently reported ripple effects in commercial property:
- Houston Commercial Vacancy Rates Highest In 20 Years – (Reuters) A CBRE study lifts the stetson on the intimate relationship between Houston’s office market and the pumping, hauling and selling of the black stuff. A wave of sublease offers has tenants scrambling to reduce their space footprint in Space City.
- Pimco reports stormy future for CRE nationally – (TheRealDeal) Pimco’s most recent report cites oil price free-falls as driver for a “blast of volatility” in US CRE.
- Consumers, retail and cheap gas – (JPM) – Banking giant reviews 57 million anonymized debit and credit card accounts, arrives at retail spending patterns centered around gasoline savings.
- Oil industry exposure spells trouble for CMBS (Fitch) – The securitization market and oil prices may be taking a dive together, says ratings giant.
- North Dakota oil production sees biggest drop ever (Bismark Tribune) – The performance of Bakken wells and the leases upon which so many sit has become an issue as production is ratcheted back to match the skyrocketing world supply.
Gail Kalinoski’s piece in Commercial Property Executive focuses on a big adaptive reuse story in Chicago. At 317,000 SF, the Chicago Sun-Times newspaper built for the future, but not the future of newsprint. Its printing presses fell largely silent and its need for logistics fell away as demand for daily news printed on paper was obliterated by the world wide web.
Built in 1999 and shuttered twelve years later, the facility is seeing new economic life ironically by giving shelter to the very technology that closed the property at first. The plant is now a thriving data center, still dedicated to distributing information, albeit bits and bytes.
Owned by QTS Realty Trust, an international operator of data centers, the building went through a reported $80M retrofit to make the conversion from distributor of dead trees to modern computing marvel:
The first phase has been completed and features 48,000 square feet of raised floor and associated critical power. When fully developed, the building will support a total of 133,000 square feet of raised floor encompassing 24 megawatts of power. QTS said it has the ability to add 213,000 square feet of raised floor and 32 megawatts in Building 2 for a total of 346,000 square feet of raised floor and 56 megawatts of power within the campus at 2800 S. Ashland Ave.
The company is planning an open house on July 15 to showcase the Phase One completion.
“We are pleased to formally open our new Chicago data center that extends our platform delivering a broad selection of integrated IT infrastructure services for Chicago and nationally,” Dan Bennewitz, COO of sales and marketing at QTS, said in a prepared statement. “We are focused on a collaborative, high-touch enterprise approach serving the dynamic needs of today’s agile enterprises seeking a partner that can right-size flexible and scalable IT solutions for today and tomorrow.”
With revenue expected to exceed $62 Billion in 2016, the US cosmetics industry is a retail powerhouse. While $17B of that amount generated online in 2013 suggests this brick-and-mortar retail segment is susceptible to online pressures just like most retail sectors are, the growth in the overall market segment — plus the product discoveries customers need to make — seem to ensure that foot traffic and customer time spent with new product offerings will remain a key factor driving space needs going forward.
In fact, one struggling anchor retailer is doubling down on the power of the makeup counter to help address its own foot traffic declines. This November, JCPenney’s flagship store in Salinas, CA’s Northridge Mall will open 3,000SF of its space for a new Sephora store-inside-a-store. 3KSF comes in at double the usual space outlay for Sephora stores within JCPs. As Donna Mitchell at NREI writes:
Larger than the typical 1,500-sq.-ft. location, the store is one of 60 new Sephora inside JCPenney locations that are set to open this year. The move is big because it marks 10 years since the Plano, Texas-based fashion retailer began opening Sephora units inside JCPenney stores in 2006. It means expansion in one of the few retail categories that post consistent sales increases through bricks-and-mortar locations, and it exploits an important competitive advantage over Amazon.com, according to industry observers.
“Take companies like Ulta Beauty or Sephora. They are insulated from Amazon.com,” says Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment-banking firm headquartered in New York City. “Amazon can’t put makeup on you. They are doing something Amazon can’t do. That is a very big deal.”
Both Ulta, which plans to open 100 stores in fiscal year 2016, and Sephora pamper shoppers with complimentary consultations and mini-makeovers. Those services are not just tertiary in the battle to stay competitive. Ulta Beauty, for instance, posted a same-store sales increase of 15.2 percent for stores and e-commerce, along with a 23.7 percent increase in net sales.
The U.S. make-up market is expected to maintain positive growth through 2018, with an anticipated compound annual growth rate of 3.8% for the five-year period of 2013-2018, reaching $8.4 billion. Similarly, the global fragrances and perfumes market is expected to experience positive growth through 2019, with a compound annual growth rate of 2%.
The largest category in the cosmetics industry is skin care, accounting for nearly 35.3% of the global market in 2014. The products in the global skincare segment create a $121 billion industry. Hair care products represent a large segment of the beauty market too, with sales reaching $11.6 billion in the U.S. in 2014.