Matt Lipson, associate vice president in Northmarq’s Oregon office, completed the $2.4 million sale of a freestanding retail property located at 1008 East Main Street in Bradford, Pennsylvania. The property totals 2,860 sq. ft. and is leased to Carrols Restaurant Group, which owns and operates over 1,000 Burger Kings. Lipson represented the seller, a New York-based private investor. The 1031 exchange buyer was an individual located in New York.   “This was a great deal for both buyer and seller. Pre-marketing, the tenant extended its lease 20 years due to its excellent performance at the site. The seller received a great cap rate in a challenging interest rate market and are thrilled with the lifespan of their investment,” said Lipson. “The strength of the tenant, combined with the extraordinary store performance kept the lender engaged, even as interest rates were rising 75 bps each federal reserve session.”  Conveniently located on Bradford’s Main Street, the quick service restaurant benefits from the rapid development in the last 10 years. Neighboring tenants include a brand-new ALDI, Taco Bell, and freestanding Verizon, in addition to a shopping center with tenants such as Tractor Supply Company, Dollar Tree, Anytime Fitness, and Big Lots. The tenant operates on an absolute triple net lease guaranteed by the world’s largest Burger King franchisee.

Originally published by GlobeSt Holidays and extreme weather conditions prompted a typical seasonal office demand slowdown in December, according to the VTS Office Demand Index (VODI). However, the year-over-year decline for the month was slightly larger than in previous years.  New demand for office space ended the year 31.3 percent below its May 2022 peak and fell 20.7 percent year-over-year to a VODI of 46 in December.  The report said that a tight labor market, layoffs, threats of another COVID-19 variant, and interest rate hikes have “given pause” to prospective office tenants.  Nick Romito, CEO of VTS, said in prepared remarks, “The reality is that the outlook for the U.S. economy is still unknown, and expectations of a recession continue to loom large in 2023. Where the economy heads will be the through-thread for office demand decisions as we head into the new year.”  Romito said a silver lining is a significant momentum in return-to-office trends. “Continued momentum in return-to-office will undoubtedly provide a tailwind for office demand in 2023 and beyond,” he said while acknowledging that “realistically, it seems unlikely to ever revert in full.”  A weekly report from Kastle that measures office worker occupancy showed the national average of 49.5% of workers were in the office compared to pre-pandemic. The Kastle measurement has not exceeded 50% since COVID-19 set in.  Tech Layoffs and Potential Recession Won’t Help  Doug Ressler, business manager, Yardi’s Commercial Edge, tells GlobeSt.com that office-using sectors of the labor market lost 6,000 jobs in December, according to the Bureau of Labor Statistics, only the second monthly decrease since the onset of the pandemic in early 2020.  Financial activities gained 5,000 jobs in the month, but information lost 5,000, and professional and business services lost 6,000. Year-over-year growth for office-using sectors has rapidly decelerated in recent months.  Office-using employment growth will further decelerate as tech layoffs bleed into 2023 and a potential recession loom. Between January 2021 and July 2022, office sectors added an average of 117,000 jobs a month. In the last five months, they have averaged only 25,000 jobs per month.  “Even as some firms become more forceful in bringing workers back into the office, many have fully committed to hybrid and remote work policies,” Ressler said. “This will be another year of uncertainty and change in the office sector as it moves toward a post-pandemic status quo. Significant change will depend on the duration of the recession, rising interest rate stabilization, and the acceptance of a hybrid or pre-pandemic work model.”  Remote Work Makes Office Leasing Picture is ‘Hazy’  Lanie Beck, Northmarq Senior Director, Content & Marketing Research, tells GlobeSt.com that the outlook for office leasing is a bit hazy right now, with many factors influencing tenant demand.  “Merger and acquisition activity, and the resulting consolidation of physical space that often occurs, can impact office demand,” she said. “Layoffs too can alter a tenant’s need for space.  “But the remote work trend has been one of the primary drivers in recent years, and for employers who haven’t mandated a return-to-office, they’re undoubtedly evaluating both their short and long-term needs for traditional office space.”  Desired Space Shrinks by One-Fourth  Creighton Armstrong, National Director, Government Services, JLL, tells GlobeSt.com tenants committed to leases in 2022 leased space that was, on average, 27% smaller than their prior lease.  However, despite the smaller average, the overall volume of space leased held steady between 2021 and 2022 due to a slightly higher number of deals closed.  Seattle Office Demand in Hibernation  Bret Jordan, president of the Northwest region at Ryan Companies US, tells GlobeSt.com that office demand in Seattle went to sleep in July of 2021 and hasn’t yet awoken from its slumber.  “We’re seeing the large layoff announcements oxygenating the smaller scale and start-up companies’ labor choices, so we are expecting office demand to awaken mid-year,” Jordan said.  “The caveat is that demand will be smaller in nature given the past cycle was full of giant demand deals. This is a reversion to our norm and not a fundamental shift in the underpinnings of our region.  One data point supporting this is the net new demand for residential, he said.  “While again lower in total than the heady pandemic years it remains resilient and in excess of the foreseeable supply,” Jordan said.  Minneapolis to Seek New, Amenity-Rich Assets  Peter Fitzgerald, vice president of real estate development at Ryan Companies US, tells GlobeSt.com that despite the downward trend of office demand, he expects an unprecedented flight to the newest and amenity-rich assets in the Minneapolis-St. Paul market.  He said that new construction is leading the market with several buildings 90%+ leased. One example is 10 West End. Ryan Companies sold the Class A office building in St. Louis Park, Minn. to Bridge Investment Group.  “The building opened in January 2021, in the thick of the pandemic, and experienced nearly 300,000 square feet of leasing activity until it was sold in November 2022,” Fitzgerald said.  Office Tours Increasing Significantly  Chicago-based developer Bob Wislow, Parkside Realty, tells GlobeSt.com that while winter months can sometimes put a damper on real estate tours, especially in colder climates like Chicago, he hasn’t seen a decrease in activity this year.  “Tour requests at all five of our office buildings have significantly increased this month, with one seeing the highest level of activity in years,” Wislow said.  “Companies that need new space because they are expanding operations or have a lease expiring are looking at all options available to them because they know their office space represents more than just a place to do work.  “With hybrid schedules becoming the norm, it’s more important than ever to offer a dynamic environment that promotes collaboration and engagement and provides the amenities and conveniences workers want in exchange for their commute. It also helps to be in an area that is buzzing with activity, as that energy and vitality can’t be recreated in a remote setting.”  South Florida Worker Office Occupancy 60% to 70%  Tere Blanca, founder, chairman, and CEO of Blanca Commercial Real Estate, tells GlobeSt.com that across South Florida, there is a “tremendous” return to the office, especially across the finance sector and it seems that three to four days a week has become prevalent in many industries.  “Because Miami, Fort Lauderdale, and Palm Beach (South Florida in general) is experiencing such constant, amazing migration, with the demographics very strong, many companies are moving here and whatever contraction we might see is mitigated by new buildings being created,” Blanca said. “There is quite a bit of new product in the pipeline to deliver over the next three to seven years; whatever is available right now is getting leased.”  She said buildings are seeing employee occupancy at 60% to 70% in most cases.  “The reality is, even before COVID, when a building was leased out, you still never had full occupancy, Blanca said. “This was from people traveling, being out for meetings, having a family situation, etc. This is why parking garages can oversell by 15% to 20%.”  Offices Need Tech Modernization  Katie Klein, North America Country director at WiredScore, tells GlobeSt.com that what people look for in an office has changed.  “To bring employees out of their homes and back into the office, office landlords must provide appealing properties and spaces. One way to do this is to provide the technology platform that modern office tenants require,” she said.  According to WiredScore North American Office report, only 38% of offices are considered advanced ‘smart offices,’ yet 80% of employees state they would be more inclined to go to the office if their building had smart technology.  © 2022 ALM Global Properties, LLC. All rights reserved. 

Originally published by GlobeSt Logistics and parcel delivery remains No. 1 in million square feet requirements for industrial space but other industries have been making traction, according to a new report from JLL.  The report showed that the automotive industry has seen its demand increase by more than 156% since 2021 to serve an influx of electric vehicle and battery manufacturing endeavors across the country.  And demand for construction, machinery and materials companies grew by more than 41% this year because of the oversized pipeline of commercial and residential demand for housing.  JLL added that with companies reevaluating their existing operations and addressing the COVID-induced supply chain disruptions, demand will continue to increase for manufacturing and automotive users.  From a macro perspective, supply chain woes continue to create backlogs at the ports. The concept and practice of reshoring have come into play, and many occupiers have placed this at the forefront of their business operations.  Tight availability, high rents, and port congestion along the West Coast have pushed many occupiers to the Southeast region and to ports along the East Coast, such as Savannah and Charleston, which are seeing record TEU volumes.”  Industrial Outperforming Other Sectors  Meanwhile, investor interest in industrial continues to flourish. Northmarq’s Jeff Tracy, senior vice president, Tulsa, tells GlobeSt.com that while there has “obviously” been an impact on cap rates, “we continue to see the broad industrial sector perform well in relation to the other sectors.  “From an industry perspective, logistics and general light manufacturing continue to garner the most interest from buyers,” Tracy said. “Additionally, outdoor storage and assets that require quality outdoor yard space for operations are also popular amongst buyers at this point and seem to achieve the most aggressive pricing compared to other asset classes and sectors.”  Tracy added that the Midwest and Southeast are performing the best in relation to other locations around the country.  Robust Online Retail Sales Boosts Logistics Demand  Northmarq’s Rob Gemerchak, vice president, Toledo, tells GlobeSt.com that despite the challenges in the economy, there continues to be strong user demand across a range of industrial sectors, including logistics, technology, and manufacturing.  “Logistics demand is the strongest and is being driven by robust online retail sales and a national focus on supply chain efficiencies,” Gemerchak said.  “While the largest industrial markets such as Chicago, Dallas, Atlanta, New York, and Los Angeles continue to grow and thrive, there has also been tremendous growth in several notable markets such as Indianapolis, Kansas City, Phoenix, and Columbus.  “Looking towards the future, we expect that industrial demand and development will follow population growth in regions such as the Southeast and Southwest, as companies seek to locate near consumers and with strategic access to a growing employment base.”  Charleston, Savannah, Jacksonville E-Commerce Magnets  Avery Dorr, vice president at Stonemont Financial Group in Atlanta, tells GlobeSt.com that he’s seeing “a significant bump” in demand in port markets across the country, with the East Coast outpacing the West in recent years.  “The practice of reshoring is more important as supply chain woes continue to create backlogs at the ports,” according to the JLL report. “Tight availability, high rents, and port congestion along the West Coast have pushed many occupiers to the Southeast region.”  This year the Southeast region was the top market in terms of demand, accounting for 240 msf in requirements.  Dorr said that Charleston, Savannah, and Jacksonville have been magnets for e-commerce users and third-party logistics providers, and Stonemont continues to source out new speculative development opportunities in those markets.  “Florida and Texas have been at the top of our radar due to the tremendous population growth, deep labor pools, and overall business-friendly climates in both states,” Dorr said. “Investor appetite in these areas is particularly strong and we anticipate activity will remain healthy there in 2023 despite recent economic headwinds.”  High-Barrier, Major Urban Markets Should Thrive  Ryan Nelson, Managing Principal of Turnbridge Equities, tells GlobeSt.com that high-barrier-to-enter, major urban markets will see the greatest industrial growth in 2023.  “Businesses are striving to be as close as possible to the end user, and this has made urban markets with high population densities and land constraints a hotspot for last mile logistics,” Nelson said.  “Recently, Turnbridge topped out Bronx Logistics Center, the largest industrial development in the NY Metro Area, set to be complete in Q3 of 2023, which is one of a very limited number of new industrial projects that will be delivered in the market, given land scarcity, construction costs, and debt capital markets dislocation.”  Nelson said projects that will be delivered in 2023 will have been financed in the last cycle with the majority delivering pre-leased.  “New development starting in 2023 and delivering in 2024 or later will largely be limited to build to suit, as spec construction will be constrained by capital market dislocation,” he said.  3D Printing Shrinking Commercial Space Requirements  BKM Capital Partners’ CEO Brian Malliet, tells GlobeSt.com, “The small-bay, light industrial landscape has been transformed over the last decade and a half as tenant demand shifted towards dynamic growth industries such as e-commerce, technology & innovation, and advanced manufacturing.  “E-commerce demand has reshaped the supply chain, which has driven demand for industrial product to new levels,” Malliet said. “As consumers demand faster delivery times, retailers require well-located and highly functional light industrial warehouses to reduce transportation costs and meet customer needs.”  He said that new technologies are driving further use of chip capabilities, such as autonomous vehicles and robotics, that now utilize light industrial spaces for their operations since many of these spaces offer flexible zoning for multiple uses, including office, assembly, warehousing, and manufacturing.  Companies capitalizing on advanced manufacturing and 3D printing are also migrating toward smaller facilities, according to Malliet, with 3D printing allowing businesses to accomplish operations in just 10,000 square feet that would previously have needed five times the space.  Desire to Produce Goods Closer to Customers  HSA Commercial Real Estate recently broke ground on four speculative industrial warehouses totaling 1.9 million square feet along the Interstate 94 corridor between the Chicago and Milwaukee metros.  “We’re bullish on adding modern warehouse space along major logistics arteries,” Robert Smietana, vice chairman and CEO of HSA Commercial Real Estate, tells GlobeSt.com.  “Robust tenant demand for this space ranges from traditional retailers and e-commerce companies to third-party logistics firms, to manufacturers that are reshoring all or a portion of their operations. Across industries, there’s a desire to produce and store goods closer to customers as a means of mitigating future supply chain disruption.”  Logistics Firms Lessening Negative Impact of E-Commerce’s Pullback  Pedro Nino, vice president, head of Industrial Research and Strategy, Clarion Partners, tells GlobeSt.com that after some demand pulled forward in 2021, pushing net absorption to the highest levels on record, US industrial net absorption began normalizing in 2022.  “Despite some deceleration from e-commerce users, which accounted for most of the recent surge in” absorption, the industrial market still recorded its second-highest total for overall annual net absorption in 2022,” Nino said.  “This highlights the pent-up demand in the market as record low vacancies, limited supply, and an ultra-competitive leasing environment previously left some unfulfilled requirements on the sidelines.”  A combination of Clarion’s portfolio data, which includes more than 215 million sf and nearly 1,000 industrial properties across the US, as well as data from leading brokerage shops, show that third-party logistics firms and general retailers have sufficiently lessened the negative impact of an e-commerce leasing pullback.  “This makes sense as traditional retailers continue building out their modern/e-commerce distribution strategy, all while 3PLs offer comprehensive solutions, and ultimately, flexibility, in all things related to transportation and order fulfillment,” Nino said.  ‘Even a Recession’ Won’t Stall E-Commerce Demand  Contrarily, CommercialEdge said that e-commerce growth will continue to drive high levels of demand in the industrial sector for the foreseeable future, but it will not reach 2020 levels again.  “New supply has yet to match demand, and even a potential recession is unlikely to cause e-commerce sales volume to fall.”  CommercialEdge said that in-place rents have grown the most in the Inland Empire (13.1%), Los Angeles (10.7%), and New Jersey (8.9%). The lowest rates of rent growth were found in Tampa (2.5%), St. Louis (2.6%), Memphis, and Houston (both 2.8%).  The national vacancy rate measured 3.8% in November, falling 20 basis points from October. Despite record levels of new supply delivered in 2022, the vacancy rate fell throughout the year.  In-demand markets in the inner portion of the country also have low vacancy rates, including Nashville (1.2%), Columbus (1.7%), Indianapolis (2.5), Kansas City (2.5%) and Phoenix (2.9%). The abundance of space available on the outskirts of these markets for new development keeps rent growth lower than what is being seen in most port markets.  When Amazon Slowed Its Network, Others Stepped Up  Adrian Ponsen, Director of U.S. Industrial Market Analytics, CoStar, tells GlobeSt.com that as supply chain bottlenecks eased in 2022, imports into the U.S. surged to record highs.  To help process this increased flow of goods, “third-party logistics companies stepped up and increased their overall leasing in 2022 relative to 2021, helping to compensate for the fact that Amazon slowed its distribution network expansion,” Ponsen said.  He said that building material and gardening supply retailers like Home Depot and Lowe’s, which are some of the largest U.S. industrial tenants, also accelerated their leasing in 2022, mainly to increase the speed and scale of their home delivery offerings.  Additionally, industrial leasing by retailers like Dollar General, Rite Aid, and Target also accelerated in 2022, as these companies sell day-to-day necessities that have remained in high demand even as households feel the pinch of inflation.  © 2022 ALM Global Properties, LLC. All rights reserved. 

Originally published by Wealth Management Investor interest in medical office properties registered a slowdown during the second half of 2022, but brokers and analysts say they expect a rebound this year as inflationary pressures ease and the Fed is expected to pull back on interest rate increases.  While investment sales figures for the fourth quarter of 2022 aren’t available yet, transactions in the sector have been trending down, according to the latest data from research firm Revista and real estate services firm Cushman & Wakefield.  In the third quarter, the market saw only $2.6 billion in investment sales involving medical office properties, excluding the merger of Healthcare Realty Trust and Healthcare Trust of America that was completed in July. That was the lowest volume since the first quarter of 2021, when only in $2.1 billion in properties traded hands. Investment sales in the medical office sector peaked at $7.3 billion in the fourth of 2021. Since then, they have been on a downward path each subsequent quarter.  Cap rates in the sector have also expanded over the past 12 months. They averaged 5.5 percent in the first quarter of 2022, but rose to 6.0 percent by the third quarter, according to Jacob Albers, research manager with Cushman & Wakefield.  “The impact of rising interest rates and inflationary pressures on medical office buildings and their expenses are having a cooling effect on what transaction volumes were at the end of 2022 and going into 2023 as well,” Albers says.  However, Albers calls this trend “temporary and recoverable” as inflation appears to cool down. In December, inflation in the U.S. declined for the six straight month, with an increase of 6.5 percent year-over-year and a 0.1 percent month-over-month decline.  In addition, the investment community remains broadly interested in investments in medical office because of the sector’s stability, according to Alan Pontius, senior vice president/national director of the office and industrial divisions with real estate services firm Marcus & Millichap.  “I expect the year to start off slow on a transactional level, but I expect it to pick up relatively soon as the year progresses because the market is adapting to the new underwriting standards with an interest rate environment that is different,” Pontius says.  The buy/sell gap  At the moment, the market isn’t as active as it has been because lot of sellers are slow to come to market if they don’t think they will get their desired price and buyers aren’t going to pay the same cap rates as they would have in a 3 percent interest rate environment, Pontius says. For example, class-A medical offices could have been selling at sub-5 percent cap rates at the peak, but today, it’s difficult to close transactions below cap rates of 6.0 to 6.5 percent because borrowing cost are unlikely to be below that, he notes.  “The only way you would have a cap rate below the cost of debt is if, for some reason, there was an immediate upside in the rental stream or possibly you have a long-term high-credit lease and an escalation schedule that will take you into positive leverage within the first year or two of that lease term.”  Still, there is broad interest in medical office assets across the investment spectrum, Pontius says. For deals valued above $20 million, the medical office REITs are the most prolific buyers. Private investors are more engaged in dealmaking if they find the right fit. Institutional investors, on the other hand, have been less active and are taking a more wait-and-see approach.  Albers says he’s seen more transactions involving private equity shops that are able to be nimbler in this economic environment. In addition, “We’ve seen more activity when it comes to smaller investors and HNWs that have less hoops to jump through and less committee review,” Albers said.  At the same time, he notes that because of the scarcity of available debt, the average value of stand-alone transactions has declined.  For his part, Lee Asher, vice chairman of healthcare and life sciences capital markets at real estate services firm CBRE, says his team is seeing a buyer pool comprised of groups who still have dry powder—portfolio managers looking to rebalance their portfolios away from traditional office properties and seasoned investors in healthcare real estate who are confident in the long-term stability of the sector. REITs, while still active, are struggling to rationalize paying prices that might view as too aggressive as they have seen their stocks dip and a corresponding increase in their cost of capital, Asher adds.  Who’s selling?  Sellers can be split into two different pools—maturity investors and business plan investors, Asher says. The first group is comprised of investors who face either a fund life maturity or debt maturity with unfavorable refinancing options. For the most part, investors with a maturing fund life are only selling if they have a low basis and have already created significant value for the property. Otherwise, they are choosing to hold, he notes.  The second group of sellers likely bought their properties before 2020, didn’t underwrite the cap rate compression that occurred after 2020 and so can achieve their business plan even under current interest rates, Asher says.  The bid-ask spread on medical office has widened significantly in the past nine months and it hasn’t yet closed enough to move the market, Asher says. There are a number of investor groups on the sideline waiting for more price discovery before they start to make deals.  The widespread belief among industry insiders is that the first half of 2023 will continue to be slow for medical office deals, but there will likely be a rebound in the second half of the year, says Shawn Janus, national director, healthcare services, with real estate services firm Colliers. Much of that optimism revolves around the Fed pausing on interest rate increases.  “Investors and developers in the sector make their living by investing in medical properties, so they continue to do so or want to do so,” Janus says. “Investments are also being looked at from a relationship perspective, with the hope that as the markets improve, those relationships will bear fruit in future deals.”  Investors that are able to be the most aggressive on deals today have access to a line of credit with spreads lower than those than what the banks are offering, or they are able to close on deals all-cash, says Asher. He points to vertically-integrated funds as the most active of these types of investors—they are viewing this as a buying opportunity while the institutions slow down.  There’s a backlog of investment managers looking to add to their portfolios, as well as new groups attempting to break into the healthcare real estate sector due to proven fundamentals and the recession-resistant attributes of the asset type, according to Asher.  “The majority of the established healthcare investors still have a pile of dry powder from the influx of capital over that last 18 months,” he says. “Portfolio managers and traditional office investors are looking for an alternative investment for their struggling office allocations.”  Expected returns  Returns on investments in medical office properties have tightened as expenses on NOI have risen across the board, particularly in higher cost markets. Leveraged IRRs on core medical office properties today are averaging from 7 to 9 percent, according to Brannan Knott, managing director, capital markets, with real estate services firm JLL. Leveraged IRRs on core plus assets are ranging from 9 to 13 percent and on value-add assets from 13 to 20 percent.  “Debt cost certainly are affecting near-term and overall returns in the sector,” Knott says. But “The price adjustments in transactions have helped bridge this return impact,” he adds.  But despite the current environment, Albers says the healthcare sector is in a good position because of rising demand for healthcare that should provide opportunities for investors. In 2022, healthcare spending has begun to rise again as patients continued to seek care that might have been deferred during the pandemic, he says.  “I feel volume will be down and pace will be slow for the first half of the year,” says Jeff Matulis, senior vice president with capital services provider Northmarq. “Eyes will continue to be on the Fed with what they are doing with rates. Employment is still strong and there is plenty of capital to be spent, both debt and equity. Anytime we see a glimpse of inflation calming, the stock market lights up and treasuries drop.  I think this gives us an idea of what is waiting on the backside of all this when the Fed stops their rate hikes.” 

Originally published by BizJournals Despite lingering uncertainty in the economy, some retailers are preparing to roll out robust expansion plans in 2023 and subsequent years.  An analysis by Minneapolis-based commercial real estate firm Northmarq found, among several retail categories, which tenants have plans to expand in the coming years. Most identified retailers expect to add dozens of new locations in 2023 and later, but companies with more aggressive growth plans anticipate opening hundreds or even thousands of storefronts in the next several years.  Dallas-based convenience-store chain 7-Eleven Inc., for example, has plans to open 6,000-plus stores in North America in the future, according to Northmarq's analysis, as part of a long-term plan to open 20,000 stores in the U.S. Meanwhile, Chesapeake, Virginia-based Dollar Tree Inc. (Nasdaq: DLTR), which also owns Family Dollar Stores Inc., could see 5,000 or more store openings under both brands by the end of 2024.  Among quick-service restaurants, Seattle-based Starbucks Corp. (NYSE: SBUX) has plans to open 2,000-plus locations by 2025, on the heels of opening 428 U.S. stores in fiscal year 2022. It's spending $450 million for that expansion — focusing on pick-up stores, drive-thru and delivery-only locations — as well as to update existing stores.  Bank of America Corp. (NYSE: BAC), based in Charlotte, North Carolina, is on track to open 500 new bank branches in the coming years. Louisville, Kentucky-based Texas Roadhouse Inc. (Nasdaq: TXRH) — which opened 23 restaurants last year — is seeking to open 30 locations this year, tracking toward an ultimate goal of opening 900 locations in the U.S., mostly in smaller markets, according to Northmarq.  At Home Group Inc., the Plano, Texas-based big-box home goods retailer, wants to eventually have 600 stores in operation, which would more than double its current 255-plus stores in operation. Take 5 Oil Change LLC has aggressive growth plans, too, with a long-term plan to open 950 new locations in the coming years, according to Northmarq.  Although not called out in Northmarq's report, The Wall Street Journal recently reported bookstore retailer Barnes & Noble Inc. is also planning to open new stores after years of closing locations, in something of a comeback story for big-box retail. Separately, California fast-foot chain In-N-Out Burger said this week it was investing $125.5 million to open offices and retail locations in Tennessee.  It's not expansion across the board in retail, though.  Union, New Jersey-based Bed Bath and Beyond Inc. (Nasdaq: BBBY) this week said it was closing an additional 62 stores across the U.S. as it considers filing for bankruptcy protection. Those store closures will create significant vacancy in centers where the big-box retailer serves as an anchor.  Although not as substantial, New York department-store chain Macy's Inc. (NYSE: M) is also closing four stores in malls this year, after years of shuttering dozens of locations.  Mike Sladich, managing director at Northmarq, said certain categories of retail, such as convenience stores and dollar stores, tend to have aggressive growth plans in any given year.  But many retailers that are planning to grow in the coming years may find vacancy to be tighter in years past, as new retail development has slowed dramatically in the past decade and much of the existing retail space has been redeveloped to other uses.  Moody's Analytics Inc. found neighborhood and community shopping center net absorption was up 44% in Q4 2022, as compared to Q3. New construction delivery fell to less than 600,000 square feet, which brought inventory growth to a little more than 3 million square feet for the year.  The national vacancy rate for neighborhood and community shopping centers remained flat, at 10.3%, for the fifth straight quarter, according to Moody's.  "No one is really building large shopping centers," Sladich said. "Malls are being repurposed. It feels like everything wants to be live-work-play. We're seeing a huge ramp-up as retailers need their own prototype ... that’s where you've seen the low vacancy because no one is building those spaces."  It's gotten pretty expensive to develop a new site for, say, a new convenience store, which may mean some pushback on rental rates so developers can achieve the pricing they require, Sladich said.  With less vacant retail space sitting on the market, that could present new challenges for companies accustomed to backfilling that space.  "There will have to be some kind of intersection to make those deals pencil," he continued. "There are not as many sites to backfill, which was something Dollar Tree used to do."  Commercial real estate firm Integra Realty Resources Inc. in its 2023 forecast report predicts 38 of 61 retail markets nationally will be in recovery or expansion mode in 2023, versus 23 in hyper-supply or recession mode. That suggests positive rotation in the sector, something that hasn't necessarily been felt within retail in a number of years.  Anthony Graziano, CEO of Integra Realty, said his firm's market cycle predictions are based on a combination of factors. A expansion retail market will see declining vacancy rates, construction could be starting to pick back up, there's good absorption and at least moderate employment growth.  "Those characteristics in 2022 and heading into 2023 are better than they were in the past," Graziano said. "Retail was really the first property type to take a hit during Covid."  Coming out of the initial pandemic shock, retail owners were focused on repositioning and working with tenants as business were slowing coming back. Many retailers went bankrupt and ultimately vacated their spaces.  More recently, retail has had something of a comeback, although certain categories will be adversely affected if a recession does occur this year. Consumer spending has been closely monitored and, if that starts to pull back, retail types such as restaurants, home-goods stores and department stores will likely be hit first, as they represent discretionary spending households tend to eliminate first if they're worried about finances.  Still, total retail sales between Nov. 1 and Dec. 24 — the primary holiday shopping season — were up 7.6% on an annual basis while in-store spending grew 6.8% as compared to last year, according to the MasterCard SpendingPulse published in late December. Restaurants had a big comeback, in particular, with 15.1% more spending in those establishments this holiday season.  But if consumer spending slows in early 2023, that would likely dampen expansion plans for affected retailers — and affect retail owners.  "Overall, from a pricing perspective, retail is in a much better position right now than most of the other asset classes," Graziano said. He added other property types had been aggressively priced in recent years, and are now facing a more dramatic deceleration in demand, but that had not been happening in retail because of its long oversupply and how hard the sector was hit by Covid-19.  Pricing for retail real estate, on the whole, seems more reasonable now compared to other asset classes, Graziano continued. 

Northmarq’s Brad Pepin, senior vice president, and Mark Grossman, associate, have completed the sale of a 196,541-square-foot industrial property leased to FedEx Ground in the Pacific Northwest. The buyer was a private investor based in California and was represented by Northmarq’s Colin Couch.   “We’re very pleased with the outcome of this transaction, on behalf of our seller. The market continues to show great interest in quality net lease industrial build-to-suits like this one.” said Pepin.   The property was built in 2022 and is situated on approximately 30 acres. The brand-new facility features tilt-wall concrete construction, Class-A improvements, and ample room for parking.

Northmarq’s Josh Dicker, senior investment sales analyst with sale leaseback expertise, and Isaiah Harf, managing director, arranged the sale leaseback of a 28,000-square-foot, cold storage and meat processing facility located at 117 Masonic Drive in Princeton, Kentucky. Dicker and Harf represented the seller, Porter Road Butcher, which executed a long-term triple net lease at the time of sale. The buyer, a California-based private investor, acquired the asset for $5.0 million.  “The sale leaseback transaction was not only an investment in Porter Road’s unique real estate, but also an investment in their business and what they are trying to accomplish as an innovator in the direct-to-consumer butcher business,” said Dicker, a sale leaseback expert. “The deal represented a win for not only buyer and seller, but the local Princeton community in which Porter Road operates.”   Founded by two former chefs, Porter Road is a growing direct-to-consumer butcher service that sources their meat from local farms in Kentucky and Tennessee. The property was completely retrofitted in 2021 and converted to the state-of-the-art freezer/cooler and meat processing facility. Situated near multiple major highways, the facility is conveniently located an hour and 30 minutes from downtown Nashville and close to the company’s meat suppliers.  

Isaiah Harf, managing director of Northmarq’s Chicago office, has completed the sale of a single-tenant property formerly leased to At Home located at 3100 Washtenaw Avenue in Ypsilanti, Michigan. The superstore totals 91,743 sq. ft. situated on 11.02 acres. Harf represented the seller, a New York-based institutional investor. The property was acquired by AMERCO Real Estate Company for $2.6 million.   “This asset had the odds stacked up against it, but we were able to deliver for the client via an auction process and get this property sold with non-refundable money day one,” said Harf. “While the future occupancy of the tenant is unknown, and the retail trade area has seemingly moved away from this side of the highway, we were pleasantly surprised with six live bidders all chasing the deal down to the wire. It was an eventful process.”  The property is located 5.3 miles southeast of downtown Ann Arbor and serves the greater Detroit metro. Situated in a dense commercial corridor, neighboring tenants include Fresh Thyme Market, Dollar General, Planet Fitness, Domino’s, Walgreens, and many more. In addition, the property is within two miles of many major economic drivers, such as Washtenaw Community College, Rynearson Stadium, EMU Convention Center, and Eastern Michigan University.  

Summary of future growth plans for the top 100 retailers, as selected by brand recognition, expansion rate and frequency of investment sale transactions Average cap rate and sale price information for the most commonly traded retailers Credit rating summary with parent company information Average square footage ranges and store counts for each tenant

Northmarq’s Chris Adams, Vice President – Commercial Investment Services, arranged the sale of an industrial outdoor storage property leased to Ahern Rentals, the largest independently owned rental company in the country. The single-tenant property is located at 9110 Interstate 30 in Little Rock, Arkansas. Adams represented the buyer, a 1031 exchange private investor based in Southern California, who acquired the asset for approximately $3.4 million. The seller, TruCore Investments, a Tulsa, Oklahoma-based investment group, was also represented by Northmarq’s Tulsa office.   “This transaction is a great example of ongoing demand from private investors into the net leased industrial marketplace. The property featured a long-term absolute NNN lease, which makes it a very attractive asset for the buyers’ 1031 exchange,” said Adams. “During the transaction, Ahern was acquired by United Rentals, which served as a welcome tenant credit enhancement.”  The building is situated on 3.44 acres and features ample room for outdoor equipment storage and parking. Located in Southwest Little Rock’s dense industrial corridor, the property neighbors industrial tenants such as Dupont, Pinnacle Express, Sysco and XPO Logistics.  

Originally published by Wealth Management The past few months brought a lot of news stories about upcoming office distress. Just last week, for example, office building owners in Washington, D.C. warned city government it wasn’t prepared for the falling property values in the sector, according to Bisnow. Meanwhile, Financial Times declared that “New York ‘Zombie’ Office Towers Teeter as Interest Rates Rise.”  But while there is a lot of talk about the potential for office distress, the figures from the firms that track commercial loan delinquencies, including Trepp, Fitch and Moody’s, don’t bear this contention out. In October, the office CMBS delinquency reported by Fitch stood at 1.23 percent, up from 1.19 percent in September, but still behind delinquencies for hotel, retail and mixed-use properties. Trepp reported the office delinquency rate for the month at 1.75 percent, up from 1.58 percent in September. The firm’s researchers tied the increase to lease expirations in the sector. Meanwhile, Moody’s reported the conduit delinquency rate for office properties at 2.69 percent, up 13 basis points from September and 30 basis points from a year ago.  Similarly, data from MSCI Real Assets shows only about $1.1 billion in distressed office sales this year, or about 1 percent of the total of $93 billion in office sales overall. In fact, there were more distresses property sales happening prior to the pandemic than in recent years, according to MSCI, though, of course, the total office sales figures were higher too. So, for example in 2019, when $140 billion in office sales closed, about $3.2 billion, or 2 percent, were distressed sales.  The industry is expecting distressed office sales to emerge in some market pockets nationally, but the impact will likely not be widespread and will not affect all investors equally, according to Aaron Jodka, director of research, U.S. capital markets, at real estate services firm Colliers. That said, with limited distressed property sales to date, he suggests that given the low starting base, any increase could look big on a percentage basis. Properties with occupancy concerns, inferior locations and deferred maintenance are most at risk for distress.  A signal of potential instability in the office sector is weakening demand for office space and a marketplace increasingly favorable to tenants. Tenants are waiting until the end of their leases to consider renewal or negotiation, notes Asher D. Wenig, senior vice president at real estate services firm Northmarq. “Landlords are increasing tenant improvements (TIs) allowances, and with a flux in office rents, it’s become a bit difficult to know the backfill options in many markets,” he adds.  The office sector will likely undergo a lot of changes in coming years, with different tenant footprints and worker demands, Wenig says. While people are returning to the office, large gateway markets including New York, San Francisco and Chicago are seeing rent corrections and companies downsizing their office space.  The good news is there is enough liquidity in today’s market for financing distress transactions, according to Mike Walker, executive vice president, debt & structured finance, with real estate services firm CBRE. Over the past two months, a number of the firm’s clients have expressed interest in providing mezzanine, preferred equity and rescue capital to fill the gaps between the loan payoff amounts and what the new senior debt market will provide, Walker says. He notes that this funding can also help to cover carry costs or provide capital costs for TIs and leasing commissions.  At the same time, “We are nowhere near the conditions of the Great Financial Crisis,” says Jodka. “The big difference between the GFC and today are interest rates. Coming out of the GFC, lenders were able to ‘kick the can,’ and low interest rates and quantitative easing (QE) allowed many loans to essentially work themselves out.”  Interest rates are higher today, so loans needing to refinance face a different market environment, Jodka notes. “Market consensus is for the Fed to increase its borrowing rate into 2023, but eventually pivot. It is difficult to predict interest rates and economic conditions, but it is less likely for a QE situation to help support near-term loan maturities.”  Walker suggests that continued upward movement in the Fed rate has made CMBS loans a more attractive option for office owners in need of refinancing. Previously, CMBS financing wasn’t particularly appealing because it didn’t price efficiently, but compared to the coupons on most floating rate, SOFR-based (Secured Overnight Financing Rate) loans today, a five-year CMBS execution is now attractive because it can be accretive and limit further interest rate increases, he notes. Another benefit is that unlike with five-year floating-rate debt, with a CMBS loan there is no requirement to buy a SOFR cap or hedge, which is quite expensive in this environment.  Banks should also be back in play next year, according to Walker, with some funding for investments in distressed office properties. A number of CBRE bank clients have expressed an intent to return to the market in 2023 after sitting on the sidelines in the second half of 2022.  While much of their focus will remain on industrial, life sciences and multifamily deals, he expects some bank allocations to trickle back into the office sector. “This will start by focusing on the stronger, well-located and cash-flowing assets with top-tier borrowers, but it will also make its way to debt funds via the A-note market and warehouse lending, which will help some of the less stabilized assets secure financing—albeit at higher yields,” Walker says.  There will be no tidal wave of funding for stabilizing distressed office assets, but any increase will be a welcome change from the second half of this year. Then, if inflation levels off and there are no expectations for further drastic rate hikes, that “trickle” of funding will probably evolve in the second half of 2023, Walker adds.  Meanwhile, while investors are waiting on the sideline for opportunities to snap up distressed office properties at bargain prices, many of these assets will be repositioned for other uses or razed and replaced, notes Jodka. He cites numerous future scenarios that could play out for distressed office assets: conversion to life sciences space in select markets, housing, government facilities, schools or medical use are all likely outcomes.  At the same time, he notes that the narrative about large-scale office-to-residential conversions in practice revolves around a challenging strategy because building floor plates have to be compatible with residential use. “Cost is also a factor, as is zoning,” Jodka adds. 

Originally published by GlobeSt Small market and suburban office sales lately are holding up better than their urban counterparts for three reasons: they are smaller assets, they are better basis plays, and they are typically occupied by users who are more likely to have returned to work, according to Craig Tomlinson, Senior Vice President of Northmarq.  He tells GlobeSt.com this and that for Q3 22 in the net lease office sector, there were 71 arm’s length sales in small markets and 90 large (primary) markets.  For small markets, the average deal size was 34,000 SF and avg sale price was about $8.5 million and modest $245.00 SF.  In large markets, Tomlinson said the buildings averaged 54,000 square feet, selling for $25.5 million, a “whopping” $480 per square foot,” Tomlinson said.  “Smaller loan amounts and lower basis muted the effects of negative leverage for these buyers,” he said. “Small market office buildings are typically occupied by tenant’s who decision makers are local and more likely to mandate return to work measures.”  Tomlinson said all these factors gave small market office a leg up and he expects the trend to continue.  Flight to Quality ‘Will Drive Tenancy for Foreseeable Future’  The Newmark Office Report finds that “overall transaction cap rates have been stable, but there have been some relatively notable shifts within the office market. The spread between central business district (CBD) and suburban cap rates had closed in 2022.  “Higher-quality, Class A assets in suburban markets have performed better than CBD office markets thus far in 2022,” according to Newmark. “Similarly, secondary office market yields have closed relative to major metros, highlighting the strength of non-gateway markets, including Dallas, Austin, Atlanta, etc.”  Furthermore, Newmark’s report said that flight to quality “will drive tenancy for the foreseeable future, though high-quality assets in dynamic suburban markets may hold an advantage over traditionally stable downtown assets.”  Relatively high availability, downward pressure on rents and greater demand for a vibrant worker experience will benefit the upper tier of the office market.  For those with more risk appetite, capitalizing on low pricing for Class B+/Class A- buildings with plans to modernize “could be attractive, along with build-to-core in markets structurally lacking in top-tier office space.”  © 2022 ALM Global Properties, LLC. All rights reserved.