The largest company on earth by revenue got a little smaller this month. Walmart, the Bentonville, Arkansas headquartered retail behemoth and largest employer in the world announced it would close 269 of its 11,600 stores globally as part of a review of financial performance and a portfolio management aligned with strategic goals. The move represents approximately 2.3% of stores globally and includes 154 US locations and 102 of the company’s smallest format stores branded Walmart Express. To see a full list of affected stores, follow the link.
Small Format Pilot Ended`
The Walmart Express pilot program explored the notion of Walmart opening small-footprint outlets to compete with neighborhood and small-town dollar stores. The strategy was assumed by many to be a no-brainer given the company’s record of trillions of revenue made on low-cost merchandise.
But the program was reportedly plagued with supply chain issues that in some cases put hypermarket-sized package goods on convenience-store shelves, straining what the neighborhood customer could be expected to carry home.
The closures, while significant, don’t exactly derail the retail juggernaut’s long-form tale of expansion. Over 200 stores are in the pipeline for opening in 2016, according to a company press release:
“Walmart will continue to invest in its future, with plans to open stores worldwide in the coming fiscal year. Domestically, Walmart intends to open 50 to 60 Supercenters and 85 to 95 Neighborhood Markets in Fiscal 2017, which begins Feb. 1. In the same period, Sam’s Club plans to open in seven to 10 new locations. Internationally, Walmart intends to open between 200 and 240 stores during the coming year.”
In total, approximately 16,000 associates will be impacted by the decision, about 10,000 of them in the U.S. More than 95 percent of the closed stores in the U.S. are within 10 miles on average of another Walmart, and the hope is that these associates will be placed in nearby locations. Where that isn’t possible, the company will provide 60 days of pay and, if eligible, severance, as well as resume and interview skills training. Whether with Walmart or elsewhere, the company’s objective is to help all associates find their next job opportunity.
“The decision to close stores is difficult and we care about the associates who will be impacted,” McMillon said. “We invested considerable time assessing our stores and clubs and don’t take this lightly. We are supporting those impacted with extra pay and support, and we will take all appropriate steps to ensure they are treated well.”
As reported in Bloomberg Business, Toronto-based Avison Young’s CEO Mark E. Rose doesn’t see the global boom in commercial real estate continuing in Canada. The indicators include rising vacancy rates in offices matched with new construction of 20 million sq. ft coming online across the country. Added to this is the recent move by the US Federal Reserve to raise borrowing costs plus the expectation that 2Q 2016 will see another hike by the central bank.
“We’re at a peak. I don’t think we’re getting any higher,” Mark E. Rose, chief executive officer of Toronto-based Avison Young, said in a phone interview. “The next step is down — it has to be,” Rose is quoted.
Bloomberg’s Katia Dmitreieva explains what’s behind the recent report and why the warning bells are sounding. Watch the video below:
Your kids are probably playing it. Microsoft recently paid $2.4 billion for it. It’s got over 100 million registered users. It’s the hugely popular video game called Minecraft. Everything in its world looks a little like Lego blocks. Players explore, mine and develop the game’s nearly unlimited, virtual land. Aside from being great fun, Minecraft is showing that wherever you have land and improvements — even when they’re simulated — you’ve got real estate and the potential for commerce that goes along with it.
Minecraft can be played as a multiplayer online game that provides a simulated world where players dig for resources, build towns, cities and homes, and sometimes fight each other over virtual turf. The multiplayer game runs on a server where potentially thousands of players are connected at the same time, mining, building and bumping into each other, with all the benefits and drawbacks that having neighbors can bring. As it turns out, the real-world rules we’re all familiar with for dealing with neighbors and property development are beginning to become part of Minecraft, as its software evolves and new capabilities are added to the gameplay.
Claiming Land: Beating Griefers
Exploring and building in a massive world are key features of the game, but these features don’t always attract players with the best intentions. The online game is subject to the “bad behavior” of players known as “griefers”, who enjoy ruining the game experience for other players. In Minecraft, this is done by “damaging” a player’s buildings and property using many of the game’s features in destructive ways.
What’s fascinating about the griefing phenomenon as it pertains to real estate is how game players and administrators have worked to prevent in-game grief by implementing basic real estate law and easements in the game code.
In the real estate world, title to land stems from initial claim on that land. Making land claims in Minecraft wasn’t possible in the early days of the game, but game administrators and programmers have added land claim capability, which restricts access to a player’s land and property to only those the player allows.
In the video following this link, you can hear a Minecraft server administrator (think of them as a host to the thousands of players) explain how, on his game servers, land claims as well as mineral rights are enforced.
From Land Claims To Commerce
In the Minecraft world, it turns out to be a short hop from preventing bad behavior to establishing property markets. The software add-ons to Minecraft that allow players to claim, subdivide and protect property and developments have themselves been extended to support rental and purchase property markets! From the software developer’s web page:
Grief Prevention – Real Estate aims to extend the Grief Prevention plugin by allowing users to be able to buy and sell claims or subclaims. Currently this is one of the biggest requests that are made for this plugin and the author has pointed out that they are concentrating on anti-griefing aspect of GP and that the API is there for anyone that wants to help extend the project!
Translation into plain English: The Minecraft game software is evolving to meet the needs of the community. There are a large and growing number of players who want real estate market features and if you write software, you can help develop features beyond what Minecraft already has, such as claims, subdivisions and rent.
Which means the future promises even more Minecraft features that will form a full in-game economy: taxes, capitalization, insurance, maintenance. These are the building blocks that make possible the familiar real-world markets, services and instruments built upon them: net leases, appraisals, even securitization or REITs.
If this seems far-fetched, notice that the Minecraft universe already has property listings.
Not bad for a “kid’s game”.
Four areas of retail real estate to watch in ’16, heightened apartment demand stemming from soft home demand, spotlight on Indiana, and a big deal closes in Rubber City, aka Akron, OH — it’s all here in today’s National Commercial Real Estate News Roundup.
- US Office Market Stays Vibrant in 4Q – GlobeSt, Jan 11, 2016 – The capper to a boffo 2015 in the national office market.
- Risk Tolerance Buoys Spec Office Development – GlobeSt, Jan 11, 2016 – Meanwhile in SoCal, more are willing to build now and lease later.
- $30MM Office Portfolio Sale In Akron – ReJournals Jan 11, 2016 – Rubber City rumblings as Colliers brokers a big deal.
- 142 Unit Building Moves In Indiana – ReJournals, Jan 10, 2016 – Greenfield, IN sees a deal moving ownership of a large apartment community.
- Homeownership Rate Flat, Goosing National Apartment Demand – NREI, Jan 11, 2016 – Harvard study suggests apartment demand is being supported by flat home ownership.
- Blackstone In Front Of NYC Pack When It Comes To CRE Acquisitions – GlobeSt. Jan 11, 2016 – Multifamily is just one of the categories Blackstone spent 2015 buying ($6B) and selling ($4.2B)
- United Pipe And Steel Renews 100K SF Lease – REJournals Jan 10, 2016 – Franklin, IN tenant keeps its footprint right where it is.
- Five Ways To Get Large Commercial Property Tax Refunds – Orlando Business, Jan 9, 2016 – It pays to understand the appraisal process.
- Triangle Industrial Market Remains Model Of Good Health – News & Observer, Jan , 2016 – A low vacancy rate and considerable storage needs for local businesses are driving the NC Triangle’s industrial market.
- Four Areas Of Retail Real Estate To Watch This Year – Law360, Jan , 2016 – The legal issues facing the national retail RE sector, in one list.
- Net Lease: The Perennial Performer – Globe St., Jan 11, 2016 – The predictable, portable performance of net leasing yet again on display.
- Apparel Retailers Facing Challenges In New Year – RetailCustomerExperience, Jan 10, 2016 – It’s getting harder for clothing retailers to keep their shirts on.
As the Cincinnati-based retailer suggested it would back in September, Macy’s has announced the closure of 40 stores across the US. Citing a series of “cost-efficiency and process improvement measures” to be implemented 1Q 2016, the retailer aims by 2018 to ultimately save $500 million in selling, general and administrative expenses (SG&A) with the closures. The move will lay off over 2,700 employees by my count and affects 4.4% of the company’s portfolio of stores.
“In light of our disappointing 2015 sales and earnings performance, we are making adjustments to become more efficient and productive in our operations. Moreover, we believe we can operate more effectively with an organization that is flatter and more agile so we can pursue growth and regain market share in our core Macy’s and Bloomingdale’s omnichannel businesses faster and with more intensity. We will continue to invest in strategic initiatives that anticipate emerging customer needs and create shareholder value,” said Terry J. Lundgren, chairman and chief executive officer of Macy’s, Inc. “The cost efficiencies represent more than two-thirds of our goal of annual SG&A expense reduction of $500 million, net of growth initiatives, from previously planned levels by 2018. In some cases, there will be short-term pain as we tighten our belt and realign our resources. But our eye is on a long-term vision of Macy’s, Inc. as a dynamic retailer that serves existing customers and acquires new ones through innovative approaches to the marketplace.”
Which Stores Are Closing?
Final clearance sales at the following Macy’s stores closing in early 2016 will begin onMonday, Jan. 11 and run for between eight to 12 weeks (with the exception of Westfield Century City, North DeKalb Mall and Roseburg Valley Mall, where final clearance sales are already in progress):
- Irvine Spectrum, Irvine, CA (140,000 square feet; opened in 2002; 112 associates);
- Country Club Plaza, Sacramento, CA (165,000 square feet; opened in 1961; 111 associates);
- Westfield Century City, Los Angeles, CA (136,000 square feet; opened in 1976; 108 associates). Note that this store will be closed in January 2016 and replaced with a new, larger store to open in this same shopping center in spring 2017;
- Enfield Square main store, Enfield, CT (166,000 square feet; opened in 1971; 84 associates);
- Enfield Square furniture/home/men’s store, Enfield, CT (76,000 square feet; opened in 1971; 20 associates);
- North DeKalb Mall, Decatur, GA (190,000 square feet; opened in 1965; 89 associates);
- Kailua, HI (59,000 square feet; opened in 1946; 57 associates);
- Palouse Mall, Moscow, ID (41,000 square feet; opened in 1979; 47 associates);
- Northwoods Mall, Peoria, IL (165,000 square feet; opened in 1985; 62 associates);
- Cortana Mall, Baton Rouge, LA (243,000 square feet; opened in 1976; 108 associates);
- Valley Mall, Hagerstown, MD (120,000 square feet; opened in 1999; 59 associates);
- Berkshire Mall, Lanesborough, MA (111,000 square feet; opened in 1994; 58 associates);
- Eastfield Mall, Springfield, MA (127,000 square feet; opened in 1994; 71 associates);
- The Shoppes at Stadium, Columbia, MO (140,000 square feet; opened in 2003; 81 associates);
- Middlesex Mall, South Plainfield, NJ (81,000 square feet; opened in 1976; 69 associates);
- McKinley Mall main store, Buffalo, NY (88,000 square feet; opened in 1989; 65 associates);
- McKinley Mall home store, Buffalo, NY (31,000 Square feet; opened in 1989; 10 associates);
- Arnot Mall, Horsehead, NY (120,000 square feet; opened in 1995; 79 associates);
- Hudson Valley Mall, Kingston, NY (121,000 square feet; opened in 1995; 72 associates);
- Eastern Hills Mall, Williamsville, NY (127,000 square feet; opened in 1971; 80 associates);
- Cary Towne Center, Cary, NC (107,000 square feet; opened in 1991; 63 associates);
- Chapel Hill Mall, Akron, OH (169,000 square feet; opened in 1967; 91 associates);
- Midway Mall, Elyria, OH (105,000 square feet; opened in 1990; 64 associates);
- Quail Springs Mall, Oklahoma City, OK (146,000 square feet; opened in 1986; 87 associates);
- Pony Village Mall, North Bend, OR (41,000 square feet; opened in 1980; 54 associates);
- Roseburg Valley Mall, Roseburg, OR (40,000 square feet; opened in 1980; 59 associates);
- Suburban Square, Ardmore, PA (102,000 square feet; opened in 1930; 74 associates);
- Century III Mall, West Mifflin, PA (173,000 square feet; opened in 1979; 101 associates);
- Ridgmar Mall, Ft. Worth, TX (181,000 square feet; opened in 1998; 92 associates);
- Chesapeake Square, Chesapeake, VA (95,000 square feet; opened in 1999; 69 associates);
- Virginia Center Commons, Glen Allen, VA (110,000 square feet; opened in 1993; 81 associates);
- Peninsula Town Center, Hampton, VA (173,000 square feet; opened in 1977; 109 associates);
- Military Circle Mall, Norfolk, VA (153,000 square feet; opened in 1976; 95 associates);
- Regency Square main store, Richmond, VA (100,000 square feet; opened in 1990; 100 associates);
- Regency Square furniture/home/men’s store, Richmond, VA (124,000 square feet; opened in 1990; 35 associates);
- Downtown Spokane, Spokane, WA (374,000 square feet; opened in 1947; 94 associates).
Macy’s stores closed in the final three quarters of 2015 (previously announced):
- Owings Mills Mall, Owings Mills, MD (164,000 square feet; opened in 1986; 90 associates);
- Bedford, NH (180,000 square feet; opened in 1966; 105 associates);
- Essex Green Shopping Center, West Orange, NJ (93,000 square feet; opened in 1975; 101 associates). Note that this location was converted to a Macy’s Backstage store.
- Downtown Pittsburgh, PA (1,158,000 square feet; opened in 1946; 170 associates).
The value of a commercial space is determined by how well it serves the people and enterprises who occupy it. Measuring a space’s fitness (and therefore its ultimate value) is a constant challenge to find hidden problems. A property’s location is one factor that’s obvious when adding up a property’s value, but when it comes to a property’s amenities – relative quality and fitness can be difficult to understand.
Of all the amenities, it may be acoustics — noise problems — that are most difficult to pin down. Noise problems plague workers and visitors in commercial buildings, cutting down productivity, security and ultimately, performance. Expensive conference rooms that are impossible to hear in, noisy common areas piling on worker fatigue, or improper and outdated acoustic treatments — all of these are common outcomes of a commercial property industry that understands acoustics poorly at best.
In another life, I built recording studios, so when I met Sound Management Group’s Roy Boccieri at a recent Bisnow medical office conference in Chicago, a lively discussion followed about the understanding of acoustics in commercial property deals.
Why do you think acoustics are so poorly understood by real estate developers, tenants and owners?
RB: They think that acoustics is technology beyond their ability to comprehend. They follow previous building designs/techniques that do not address acoustical issues, meaning unwanted sound transmission from adjacent units and the exterior. It also means managing the propagation of sound within – the new “open floor plan” designs do not allow closing doors to cut down on noise. Buyers/renters don’t even consider acoustics until after the fact. They also accept noisy space as an unalterable fact of life. As in the case of commercial space – occupants get used to bad. They perceive acoustics like the weather – there’s nothing you can do about it. Architects learn little about acoustics in their curriculum and thus it is passed on to the next phase of the project.
There’s a significant upswing in environmental measurement technologies for commercial properties, enabling tenants and managers to watch a buildings’ energy and water usage more closely than ever. What does measurement in audio and acoustics gain for a property owner or operator?
RB: Any developer or builder could have a big competitive advantage if they included acoustical design features and promoted them. With proven increases in efficiencies […] smaller space would be required to accommodate less people to accomplish the same work. In addition, atmosphere and the absence of “noise pollution” are a part of the Green Initiative and figure into the LEED scoring.
Do you do most of your work on the drawing board or as retrofit?
RB: Most of our work – the lions share – is remedial. Fortunately much acoustical correction in commercial space can be accomplished without major disruption. It is “in addition to – not instead of” what is in place – masking, barriers, acoustical wall and ceiling panels. What is visible can be made to look like it was there in the first place and, in some cases, enhance the décor.
In office layouts, the west-coast tech-company “open office” style is gaining popularity. Does this improve or worsen noise problems and opportunities to address noise problems?
RB: Not sure what the “west coast tech company open plan” is or how it’s different that the open plan first introduced from Germany in the ‘60’s. Most modifications – and, there have been many – have affected acoustics one way or another. First, the industry recognized that from a pure acoustical perspective (and to gain acceptance of the concept) partitions should be 60” high, […], high performance ceiling, indirect lighting, block lines of sight, and add sound masking, This resulted in a sameness in space so now for the sake of being different – and “on the cutting edge – partitions are lower, made of glass, the ceilings are exposed deck, etc.
What’s the number one piece of advice you’d give a new tenant or developer of new space?
RB: Before you begin to design space, determine the general acoustical requirements compatible with the work performed in the space and allow for places separate from the overall space to get things done that cannot be done at individual workstations. The design trend to address this is a proliferation of huddle rooms. The space to do this is gained from smaller individual work stations. A simple sound masking system throughout these more compact open areas accomplishes a quieter workplace and much needed speech privacy at fractions the cost of additional square footage between work stations.
The imposition of energy efficiency standards for new and altered commercial buildings in California is helping to stoke the fires of a hot landlord’s market in offices, says one Los Angeles-based property exec.
At issue is the 1978 California law called Title 24, which aims to decrease the environmental impact of buildings. The law’s requirements impose costs on buildout and tenant improvement plans to the point that, according to Jim Proel, EVP of PM Realty Group, office tenants facing sub-10% vacancy rates are increasingly going the other way — toward longer lease terms with somewhat stiffer annual rent escalations than would be popular in a different market.
GlobeSt.com: Which barriers do you see worsening?
Proehl: The cost to build out tenant improvements will continue to escalate, which makes lease deals more expensive and requires higher rental rates and longer terms. Parking barriers will worsen as tenants go to more open space plans where the per-square-foot per employee continues to decrease.
GlobeSt.com: Are tenants continuing to shift their space needs down, or do you expect this trend to reverse itself at all in 2016?
Proehl: Most tenants do not want to take a step down since their largest operating cost is the cost of their staff. Tenants will try to get more creative with more open space to reduce their square feet while still maintaining the same quality of office space in the same quality location. There will be some tenants in low-margin businesses that will need to move down a class of building or relocation to a cheaper submarket to stay in the same quality of building. For tenants who signed their leases five years ago, they can expect a 50% increase in their rent, which is very significant.
GlobeSt.com: How optimistic are landlords about the office sector for this year?
Proehl: Landlords have not been this optimistic since 2006-07. Vacancy should drop below 10% in 2016, and rental rates will achieve double-digit increases. Landlords now have multiple tenants vying for good suites. Due to Title 24 raising the cost to build out suites, tenants are now signing five-to-seven-year leases with 3% to 3.5% annual bumps. 2016 will be a banner year for office landlords.
As old man 2015 passes from the stage and a brand spanking New Year gets the spotlight, what is in the cards for 2016’s commercial real estate industry? Here’s a fast roundup of predictions from industry stalwarts.
- NAR’s Chief Economist Lawrence Yun: Predicts vacancy rates for office and industrial space will fall, to 14.8% and 9.7% respectively, driven by job creation. Retail space availability is expected to drop to 11.3%. Because of new multifamily projects in several markets, multifamily vacancies are expected to increase to 7.3% Read the Q4 2015 Commercial Real Estate Outlook in full here at this link.
- Urban Land Institute Real Estate Consensus Forecast: Commercial property transaction volume is expected to increase for another two years and then level off at a robust $500 billion by 2017. Commercial property rents are expected to increase for the four major property types in 2015, ranging from 2.0% for retail up to 4.0% for both office and industrial. Read the entire report at this link.
- Kimco Realty President Conor Flynn: Five predictions for the national retail real estate market from the head of North America’s largest portfolio of neighborhood shopping centers. Get the entire article here.
- Fortune Magazine’s Hottest Real Estate Markets in 2016: If you can treat residential market analysis as a trailing indicator for commercial property markets, you can play along with Fortune Magazine’s peek into the crystal ball. Get the entire article here:
Happy New Year!
From everybody at the Source blog — and from NAR Commercial — here’s wishing you the very best and most successful 2016!
The Protect Americans From Tax Hikes (PATH) Act was signed into law days ago by President Obama, a bill that rolls together a great many
temporary IRS rules and makes them permanent. Included in the long list — viewable in some detail entirety at the always-detailed JD Supra law blog — are the rules for cost recovery on certain types of real property. These rules speak to the time it takes from an asset to move in value from its purchase price to its salvage value, a process also known as depreciation.
The relevant IRS regs are not fun reading by any stretch of the imagination – but they do speak to an important component in real property dealmaking, property management and leasing. Capital depreciation, when done inaccurately, can poison the performance of any property. The distinction between capital expenditures and business expenses is no small matter, and depreciation methods vary.
REIT Changes As Well
Depreciation isn’t the only topic on the table with the PATH Act. Also signed into law are permanent changes in areas including tax credits for new markets, renewable electricity, foreign investment. Additionally, the spinning off of REIT subsidiaries of property owning entities now has permanently adjusted rules that seem to make it tougher to shelter a company’s real property by spinning it off into a REIT and leasing back the assets. As David Miller and Jason Schwartz point out in their treatment of the PATH Act:
Under prior law, C corporations were able to spin off REITs (or elect REIT status after a spinoff). This was a popular technique for separating an operating company’s real estate assets into a tax-efficient REIT that would lease back substantially all of the real estate to the operating business (so-called “OpCo-PropCo structures”). Companies such as Penn National, Windstream and Darden adopted OpCo-PropCo structures. Recently, the IRS and the Treasury Department issued Notice 2015-59, which suggested significant restrictions on the ability of C corporations to separate their assets into a REIT. The PATH Act now generally bars tax-free spinoffs involving REITs except in two situations.
Setting aside the fact that opco-propco sounds like a delicious Eastern European soup, it seems a big page in the corporate playbook regarding the disposition of property has been rewritten significantly for 2016 and beyond.
Read the full PATH Act post at JD Supra Business Advisor. And remember: never act on tax law information without the benefit of fully qualified legal counsel.
The cost of money has come up for the first time in more than nine years: the Federal Reserve Bank announced a raise in its short-term interest rate of a quarter point. For a quick look at various takes on the move, check out the following video gallery:
Bloomberg video: Fed Raised Rates Without A Hitch And It Only Took $105 Billion.
Bloomberg Video: Fed’s Lockhart Suggests Pace Of Four Raises Over A Year
Bloomberg Video: Don’t Expect Big Profits At Banks In Wake Of Rate Raise