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. 

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. 

Originally published by Wealth Management In an environment of rising interest rates, net lease assets occupied by early childhood education centers are growing in popularity.  Investment brokerage firm B+E released a report recently that shows early learning and day care assets are seeing their cap rates compressed. The high levels of development of new early learning centers “show no signs of slowing as demand from customers in this segment is sky-high and growing,” the firm’s researchers note.  Historically, net lease assets occupied by early learning centers have traded at higher cap rates in comparison to other net lease assets such as quick-service restaurants, according to Jim Ceresnak, a director at B+E who specializes in sale-leaseback transactions. This trend has shifted as the reputations and creditworthiness of the larger early learning tenants have steadily grown, alongside the expansion of their businesses and nationwide footprints, Ceresnak says.  Market listings for such assets during the fourth quarter featured a higher number of properties with more than 10 years of remaining lease term and larger average offering prices, B+E notes.  Investors favor the internet-resistant nature, long lease terms, quality of underlying real estate and growing demand for these assets, Ceresnak says. This has amalgamated to record-low on-market cap rates in the third quarter, with the average breaking the 6.00 percent threshold at a 5.99 percent cap, he adds.  “Early learning assets have tended to trade at higher caps, largely because of their smaller guarantees,” Ceresnak says. “But more and more investors and lenders have become familiar with the growing players in this market, which has helped their growth in popularity.”  State of the market  The common tenants in the early childhood education space that comprise the majority of the current listings include The Learning Experience, KinderCare, Childtime, Guidepost Montessori and Kiddie Academy.  A phenomenon that net lease brokers have witnessed recently is that while many other sectors of the net lease market have experienced dramatic shifts upward in cap rates as the Fed has tightened its policy, the early learning space has seen a less dramatic change, Ceresnak says. Early learning assets priced in the 6-percent range are now some of the only options for buyers that offer a cap rate that is higher than their financing rate, he notes.  The asset class is gaining in popularity because the rise in interest rates has “created a dichotomy between the owners that have moved pricing to where the market is and buyers who need yield,” according to Peter Block, executive vice president with real estate services firm Colliers. Traditionally, child care centers have traded at higher cap rates, which means there’s a better yield for the buyer now compared to other options, he notes.  “I think it will continue for a while for two basic reasons,” Block says. “One is if other yields start to move up, then the yield on these will have to move up to attract buyers. Second, and an equally important reason, is child care is presumed to be a reasonably recession-proof asset class because parents still need to put their kids in child care. People look at that and contrast that with other retailers that consumers may pull back on what they are spending.”  The early education sector is doing very well, with most centers either meeting or beating pre-Covid enrollment, notes Milo Spector, senior director at capital markets services firm Northmarq, which recently acquired Stan Johnson Co.  “The pandemic really cemented how essential of a service these operators are providing,” Spector says. “It is important for children to have face-to-face interaction to develop social skills, and when you only have online learning it is impossible for a child to learn and develop to their full potential.”  There has definitely been “a push for the asset in the last five or so years” and even during the worst of COVID, investors targeted e-commerce resistant and essential businesses that are going to weather any type of storm, according to John Feeney, senior vice president of The Boulder Group, an Oak Tree, Ill.-based net lease brokerage firm.  “This industry is definitely coming into more favor,” Feeney says. “What that alludes to is that you have groups like KinderCare (with more than $1 billion-plus in annual revenue) who sign corporate leases and have a significant number of locations.”  Spector notes that in early 2022, his firm saw a much higher demand for early childhood facilities than ever. Investors started looking at everything they could to fulfill their 1031 exchanges, and the cap rates in this space were higher than what they could get on most retail NNN properties like dollar stores, banks and quick-serve restaurants. The strength of that demand is demonstrated by the average cap rates hitting all-time record lows, Spector adds.  The industry  Due to the reputation-based aspect of the early childhood education industry, the larger operators tend to outshine their smaller rivals due to their proven success records, more extensive programming, organization, quality staff and safety for the children who attend, Ceresnak says.  Most early childhood education centers are for-profit, and the industry has its share of franchisees.  Kindercare properties have long been the most popular and stable early childhood education triple-net investments because Kindercare is the largest operator in the sector and its leases are typically corporate-guaranteed for the full lease term, Ceresnak notes. Full corporate guarantees, however, tend to be the exception rather than the rule, he adds.  As operators such as Goddard School, Primrose School, Kiddie Academy, The Learning Experience and others have grown their unit counts, more investors and lenders have become familiar with their lease structures and guarantee structures as well. Buyers and lenders now know how to underwrite these assets, which has helped to raise their popularity as a whole, Ceresnak says.  Typical properties  Most early childhood educations buildings range between 8,000 to 12,000 sq. ft., and their leases are often signed at between 15 and 20 years at commencement, according to Ceresnak. There’s much variation between landlord responsibilities on different properties, though many assets tend to be double-net. There’s also a lot of variation on rent increases in terms of frequency and percentage amount.  Early education centers are typically free-standing locations in residential areas, according to Feeney. Some are in retail locations, but those are tucked away from high-traffic areas for the protection of children, he notes. Many operators seek out two-acre sites in order to be able to have a fence and build a playground.  Who are the investors?  There are private investment funds that focus specifically on early childhood education, Ceresnak says. Recently, there’s been increased interest from some of the largest publicly-traded REITs in this space as well, he notes.  “These large institutions have tended to shy away from early childhood education assets that don't have strong corporate guarantees,” he adds. “But we have seen some REITs recently pursuing sites that are well-located despite having less robust guarantees. I think this is generally driven by the desire to capture yield.”  Feeney cites net-lease syndicate funds and publicly-traded REITs, including Essential Properties and STORE Capital as two of the bigger players interested in early childhood education centers.  Cap rate breakdown  Throughout 2022, the industry hit multiple cap rate records, with several early education properties trading at sub-6 percent cap rates, which are a historic low for this segment of the market, according to Spector. Comps are still reflecting this pricing even as interest rates and the 10-year yield have been volatile while most of these properties have been under escrow, he notes.  “I will say that despite the changes in cap rates in the net-leased sector in general, we are still seeing some of the lowest cap rates that we have seen over the last 10-years,” Spector says. “We have had such an aggressive market for such a long time that people may forget that in the grand scheme of things, the market is very strong. We are still seeing a lot of demand, and even more demand than prior years due to more investors becoming aware of the early education segment.”  The Boulder Group seeing deals on early childhood education centers with cap rates ranging from the upper 5s to a 7 cap rate, depending on the lease structure, guarantor of the lease, whether the property is new construction and whether the existing lease has a near-term expiration, according to Fenney.  “The net lease market is undergoing what we call price discovery, given what’s happening in the macroeconomic space with rising rates,” Fenney says. “There’s definitely a change to cap rates here.”  The daycare space typically trades at higher cap rates than smaller net lease assets, such as quick service restaurants, Feeney says. The QSR space is made up of deals that are typically priced between $1 million and $3 million, while daycare centers tend to be more expensive.  “You definitely have more buyers for lower-price point assets than higher price-point assets,” Feeney adds. “People buy net leases for the stable cash flows the lease presents to the investor, but at some point, you are buying real estate and the real estate quality typical for QSR can be better than daycare. If you have a Burger King, and they ever leave, you have a 2,000 to 3,000 square-foot building with a drive thru that you can repurpose. If KinderCare leaves, there’s not a whole lot of users that go into that footprint exactly the way it is.” 

Originally published by Wealth Management Retail brokers and consultants expect strong interest when Sears spinoff Seritage Growth Properties starts to liquidate the remainder of its assets, as recommended by its board of trustees. But these industry insiders expect discounts will be necessary in order to consummate transactions.  Shareholders recently approved a plan that will bring additional Seritage properties to the market during a time of rising interest rates and a slowdown in commercial real estate deals.  Despite that added challenge, Seritage assets are bound to garner a lot of investor interest, says Margaret Caldwell, investment sales broker at Northmarq, which provides capital markets services to commercial real estate investors. Many of these properties are located in prime markets, with strong population and income levels, she notes.  Typically, a Sears box attached to a regional mall includes the parking field surrounding it, which can add a significant number of acres to the property, making it all the more attractive to potential investors, according to Caldwell.  “There are lots of investors and developers that continue to look for opportunistic investments where they can create value,” Caldwell says. “Many of the Seritage properties provide exactly these types of opportunities—repositioning an asset, for example, through redeveloping these boxes into other uses, such as multifamily or exterior-loaded retail.”  Industrial and self-storage could also be among potential uses for those sites, according to other industry insiders.  The investor demand will be there as long as the pricing on the assets is in line with the market expectations for absorbing risk, backfilling vacancies and undertaking redevelopment, says Matt LoPiccolo, first vice president specializing in retail with Matthews Real Estate Investment Services. He expects that to be the case because Seritage has a loan payment due to Berkshire Hathaway.  “The demand is there, and it’s just a function of their expectation on the price and that’s why some of their deals have sat on the market for a while or fell out of contract,” LoPiccolo says. “[There’s interest] because you’re going to be well below replacement costs and land value. The opportunity creates value in terms of backfilling with better quality tenants or in-demand tenants. All of that just boils down to the time and cost to reposition or redevelop the site.”  The main challenge to completing sales of remaining Seritage assets will likely be what’s going on in the debt markets, says Daniel Taub, senior vice president and national director of retail with real estate services firm Marcus & Millichap. Some of the deals where there will be opportunity to create higher value are also going to be capital-intensive, and matching up those investment opportunities with the right capital—including both debt and equity—is likely to be more challenging due to the current instability in the capital markets, he says.  Neil Saunders, managing director at research firm GlobalData Retail, is a little more pessimistic. While there will be some demand for the assets, it won’t be as strong as it would have been a year ago, he notes. The market has turned downward, and people are more concerned about taking on debt to finance new transactions. Real estate values under more pressure as well, he adds.  “I think some of the yields people see coming from it are much weaker than they were last year and before the pandemic hit,” Saunders says. “There’s definitely something they can do in terms of a sale, but I don’t think they will get the maximum value out of these things. There are certain properties they will have to sell at a discount if they want to unload them.”  In the end, Saunders says, he sees the liquidation sales going through because Seritage must realize it could be more difficult to close deals in 2023 if rising interest rates and lower consumer sentiment further damages the economy.  “Maybe the thought process is to get rid of them now because they might get less in a year’s time,” he adds. “It’s not a great time to be selling, but the risk is if you leave it, it might be even worse.”  Pricing  Seritage properties will most likely be priced based on land values per acre in the local market or price-per-sq.-ft. for existing older buildings, according to Caldwell. Pricing would be maximized, however, if investors are provided the option to purchase these assets separately or in mini portfolios, she adds.  Caldwell doubts that the remaining assets can be easily sold as a portfolio other than at a discount, given the significant number of remaining properties and the diversity of locations included.  According to Taub, it’s hard to feel confident about prices and their impact on private and institutional investors at this time.  “Pricing seems to be the most difficult to get your hands around because of what it was 30, 60 or 90 days ago and what it is today, being materially impacted by what’s going on in the capital markets,” he says. “The market to varying degrees is impacting all asset classes in retail.”  Some of the assets, if there were stabilized and depending on their location, could have sold at cap rates in the high 5 or 6 percent over the summer. The ones offering more of a value-add approach or more of a redevelopment opportunity, could see cap rates reach the 7.5 to 8.5 percent range, Taub notes.  Potential buyers  The mix of interested buyers for Seritage properties could range from retailers to developers looking at the best possible uses, including multifamily, says LoPiccolo. Most former Sears and Kmart properties hold strategic locations and could also offer an opportunity to develop mixed-use projects, he notes.  Saunders expects potential buyers to include real estate developers, mall owners and private equity investors. That buyer pool is going to be a lot smaller than it would have been before the current economic environment set in, he notes.  “There would have been a whole suite of people interested, but now the prospective field is a bit thinner,” Saunders says. “I think you’re more likely to get some of those investment firms if they can see these as a long-term win for them. I don’t think you will get much interest from the retail community, quite honestly. There are buyers, but they are a bit more discerning, and you have to work hard to find them.”  Some buyers, however, will be attracted by the risk-adjusted returns and property locations, according to Taub.  “The real estate in many instances is fundamentally good real estate, including those in non-primary markets,” Taub says.  If the asset is attached to an enclosed mall, the mall owner may be the one to buy it because they could see it as a way to control their destiny and create additional value for their mall, Taub says.  In addition, the liquidation could open opportunities for investors who can complete all-cash transactions and wait out the current economic cycle, he says.  Where the assets are  During an initial offering, Seritage brought about 38 assets to market, and Taub says he’s awaiting an announcement for the next batch.  Seritage owns properties across the country, but primarily east of the Mississippi River, he notes. They are located along the East Coast from New Hampshire, New York, Delaware to Virginia, the Carolinas and Florida. There will also be opportunities in Ohio, Illinois and Wisconsin in the Midwest, Texas and Arizona in the Southwest, and California on the West Coast.  The properties vary tremendously, but the majority of the Seritage sites are in traditional suburban locations  “With some of them, [Seritage] had successfully executed on the majority, if not the entire business plan, on repurposing those spaces,” Taub says.   

Originally published by Pittsburgh Business Times SomeraRoad has sold off the real estate of one of the SouthSide Work's key hospitality anchors as it continues to reposition the next complex with its new "micro neighborhood" approach.  A new owner based in New York called Regal Ventures bought the Cheesecake Factory restaurant property at the heart of the SouthSide Works, paying $7.1 million for the property. The restaurant, known to draw more than one million diners a year, will continue to operate as normal, as it renewed to a new 15-year lease last year.  Ian Ross, founder and principal of SomeraRoad, announced the sale on his LinkedIn account, describing it as part of an ongoing component of executing its business plan.  The sale for a restaurant building that totals more than 12,500 square feet in size translates to a price of $565 a square foot, SomeraRoad announced.  The sale comes after SomeraRoad had bought the SouthSide Works as a distressed asset in the year before the pandemic, acquiring the nonperforming debt of the asset and then taking ownership with some significant redevelopment plans.  Now, the company is touting it was able to find at interested buyer for the property amid a challenging business environment as it works to invest elsewhere at SouthSide Works, with its $85 million apartment development The Park now under construction.  The New York-based investment sales broker who helped to bring the deal together, Asher Wenig, of New York-based Northmarq, noted a "major rejuvenation" of the SouthSide Works in a prepared statement and expects "this strong performing Cheesecake Factory will benefit from major growth in the area given the healthy term, rent and percentage rent outlined in the lease."  SomeraRoad has invested to redevelop the town square in front of the Cheesecake Factory, establishing three new food vendors there, as part of its bid to achieve a renewal with the restaurant, now selling off the restaurant asset as it works to improve the larger complex.  The sale of the Cheesecake Factory property is the second sale of a portion of the SouthSide Works by SomeraRoad, which also sold The Flats at SouthSide Works, anchored by a new Rite-Aid store at the corner of 27th Street and East Carson, in July.   

Originally published by GlobeSt The “frenzied” tempo of logistics leasing momentum of recent years is forecast to “normalize,” according to Prologis’ quarterly Industrial Business Indicator (IBI) and True Months Supply (TMS) research report issued last week.  Prologis said the pace of decision-making has already slowed “and is not expected to reaccelerate due to greater economic uncertainty.”  The firm added that users will have more options as the construction pipeline empties.  Compared with 2022, Prologis “expects more deliveries and slightly lower net absorption, roughly in line with the annual demand run rate at the current level of IBI activity.”  Market rent growth is expected to outpace inflation, TMS is expected to rise and the vacancy rate is expected to expand.  “Taken together, competition may ease in some places, but planning will be pivotal in key locations where options should continue to be limited.  Stuck in Pipeline, Supply Getting Delivered  Prologis’ research showed that competition for limited available space continued in the US and the vacancy rate was at 3.1% in Q3, up 10 bps from the prior quarter with rents increasing 6.2%.  “Supply that was stuck in the pipeline is finally being delivered, with 105 MSF of new supply in Q3, up 25 MSF from the prior quarter,” the report said.  Max Bosso, VP/Real Estate Development, Ryan Companies, tells GlobeSt.com that the numbers and overall trends vary from region to region, but uncertainty is a common denominator in many markets right now.  “In Florida, it’s causing end users to take a bit longer in signing leases or making go/no-go decisions, but leases are still being executed,” Bosso said.  “This pattern is pushing out leasing and occupancy timelines for existing spec facilities and also has a trickle effect since interest rates and exit caps are the other two major issues for developers that are opting to slow down on starting new projects.  “Those projects are still happening, just at a slower pace due to a more deliberate strategy with location, purchase price and timing allowed by the PSA.  “Absorptions are still outpacing new starts, which is the light at the end of the tunnel. If this trend can continue for the next 12-18 months, or until the Feds stop raising interest rates, then we will be home free and avoid a major recession.  Companies Trying to Shorten Their Supply Chain  Rob Gemerchak, investment sales broker and industrial specialist at Northmarq following the acquisition of Stan Johnson Company, tells GlobeSt.com that as the vulnerabilities of the global supply chain persist, companies continue to consider strategies to shorten their supply chain, which in turn drives demand for additional production and distribution facilities within the US.  “While many headlines have referenced Amazon’s slow-down in the pace of their distribution network expansion, the overall market demand for distribution space has remained at record levels through 2022, with corresponding increases in rent growth,” Gemerchak said.  “This rent growth is expected to continue in 2023 as the demand for distribution space, coupled with higher debt and construction costs, will maintain the pressure on base rental rates. From an investment perspective, there remains liquidity and motivated capital on the buy-side as net lease industrial assets remain in high demand and continue to grow as a favored asset among investors.”  Moody’s Uncommon and Astonishing Numbers  Ermengarde Jabir PhD, associate director – senior economist, Moody’s Analytics, tells GlobeSt.com that industrial remains at the top of the CRE sectors.  “Developers have responded positively to robust demand, but new construction has been unable to keep pace with demand because of increasing land and materials costs, hence declining vacancy rates,” she said.  Completions in 2020 reached a record high although completions are expected to be lower in 2022 as construction activity has slowed, she said.  “This is due in large part to inflation that has caused a surge in the cost of raw materials as well as the higher cost of borrowing resulting from interest hikes intended to curb inflation,” Jabir said.  Quarterly completions have declined each quarter since the third quarter of 2021 and the pullback in new square footage coming online is ongoing, with just under 20 million square feet of new supply added to the warehouse/distribution pool in the third quarter, she added.  Despite steadily declining business confidence over the past year and looming fears of an impending recession, Jabir said that the tightening of new supply supported a healthy decline in the vacancy rate in the third quarter of 110 basis points.  “This quarter’s new record-low vacancy rate of 3.9% is so uncommon for warehouse/distribution that, although records have been set each quarter since 2021 Q3, the next lowest recorded vacancy rate prior to the past five quarters of successive record low vacancy was 9% in the third quarter of 2017.  Effective rents continued to propel upward, increasing by an astonishing 5.6% in the quarter.  Supply Chain to Be ‘Caught Up’ By End of Q1 2023  Adam Roth, executive vice president of industrial services at NAI Hiffman and director of NAI Global Logistics, tells GlobeSt.com that the supply chain is projected to “catch up” at the end of first-quarter 2023.  “However, geopolitical concerns and transportation uncertainty have impacted how corporations assess risk,” he said.  “In the short term, just in time has become just in case, which will subside over time as the sting from the COVID supply chain bullwhip dissipates. Nonetheless, the need to reduce length of haul and shorten the supply chain where possible will be the long-term takeaways from the recent snarl in logistics.  Avison Young: NJ Vacancy to Remain at Historic Lows  Looking specifically to New Jersey, Avison Young’s Q3 report showed that inventory levels have steadily risen throughout the year, with a busy development pipeline set to deliver late 2022 and early 2023.  Meanwhile, vacancy has risen less than half a percentage since last quarter and is expected to stay at historical lows through year end.  Phoenix Picking Up Those Squeezed from SoCal  CommercialEdge reports that Phoenix currently has the largest supply pipeline on a stock basis and the second largest in terms of square footage, as it continues to attract an increasing number of industrial players squeezed out of Southern California.  Phoenix had nearly 45 million square feet of new industrial space under construction as of late September, the equivalent of 15.1% of its existing stock. Moreover, the market’s planned projects could more than double that pipeline for a full increase of 31.7%.  © 2022 ALM Global Properties, LLC. All rights reserved.

Originally published by ConnectCRE For the net lease sector as well as in commercial real estate at large, the economic picture remains murky, with inflation and rising interest rates at the forefront of consumers’ and investors’ minds, Northmarq (formerly Stan Johnson Company) says in a new report. Fears of a recession still loom, and there has been a noticeable decrease in consumer confidence this year.    Additionally, the industry continues to question the future of 1031 exchanges, and the upcoming mid-term elections could impact economic conditions and investor sentiment as well. Balancing out these trends are strong job growth, low unemployment, robust consumer spending and insatiable investor demand for quality assets, according to Northmarq’s Lanie Beck.   “In the single-tenant net lease market, we’ve seen investment sales volume decline over the past three quarters and compared to the record-setting end to last year, current activity levels may feel somewhat lackluster,” Beck reported. “Put in perspective, though, the market is on pace to have a very solid year, perhaps topping the $70-billion-mark and solidifying 2022 as a top three year in history.”   However, Beck said the fourth-quarter sales total will be telling. “The final three months of the year will not only dictate how 2022 gets logged in the history books, but it will also set the tone for 2023.” 

Originally published by GlobeSt Holiday retail shopping is expected to start earlier, offer with more promotions and see more sales despite the challenges of a tight labor market, lingering supply chain issues, stubborn inflation and soft consumer sentiment.  CBRE is projecting a 6.9% increase in Q4 retail sales year-over-year to $1.48 trillion, despite inflation straining consumer budgets.  “Consumers can expect greater costs this holiday season, evidenced by an 8.2% annual increase in the Consumer Price Index (CPI) in September,” CBRE reported.  CBRE said the most notable rising expense could be the cost of a homemade holiday dinner, which is projected to average $103 this year compared with $84 in 2020, according to data from the American Farm Bureau Federation and the St. Louis Fed.  Families Seek Bargains for Their Budgets  Jim Bieri, principal, Stokas Bieri Real Estate, tells GlobeSt.com that right now, families are struggling to pay the bills and meet their expenses.  “I expect online discounts to start early on overstocked items as customers look to beat rising inflation and a deepening recession by buying early,” Bieri said. “Online sales will continue to play a strong role in holiday shopping, as families look for bargains to stretch their budget.”  Expect Plenty of Markdowns from Nordstrom  CBRE said an “ill-timed slowdown in July retail sales has left some retailers with excess inventory that may prompt discount offers to consumers.”  It reported that Nordstrom, for example, estimates $200 million worth of markdowns over the second half of 2022.  “However, retailers could benefit from excess inventory due to an extended holiday shopping season,” according to CBRE.  Data analytics firm Placer.ai expects a repeat of last year’s early holiday shopping season when weekly sales in October grew by 3.2% compared with 2.5% growth in November.  An Earlier Start to the Holiday Season  Joe Coradino, CEO, PREIT, tells GlobeSt.com that PREIT is gearing up for robust in-person shopping with an earlier start to the holiday season than in years past.  “The traditional holiday season timeframe for comparison is continuing to morph,” Coradino said. “Due to this, mall owners and retailers need to be stocking product sooner.  “Most importantly for our business, while there have been improvements in supply chain, we think customers will seek surety of in-person purchases. Toward this end, we will be offering customers rewards for shopping in our centers this holiday season.  “At the same time, we have seen a healthy shift of consumer dollars toward dining in our portfolio. Naturally, we expect some of these dollars to be reallocated to goods during the holiday season.  Coradino said that he is watching employment and wage levels, which remain “strong” right now, and know there are inflationary challenges impacting many consumers.  “That said, we think this year is the true return to holidays past and customers are looking for celebratory festivities with their loved ones.”  Parking Lots Are Already Busy  Mark Whiting, mall manager at Simon Property Group’s Northshore Mall, tells GlobeSt.com that shopping in stores is still the preferred way to shop.  “People crave connecting in real life and find joy in discovering the new and different,” Whiting said. “It’s too soon to project sales but we’re already seeing lots of shopping bags, busy Santa set reservation activity and busy parking lots – which is always a good sign and indicator of a busy holiday shopping season!”  Season to Be ‘Promotionally Driven’  Chris Butler, CEO of National Tree Company, said this holiday season will be “extremely” promotionally driven and that in general there will be consumer softness.  “We are seeing a ‘return-to-store’ post-COVID after consumers did a lot of their shopping online,” Butler said. “Over the long term, online shopping will continue to grow, but this year there is a softening based on strong comps from last year.  “Last year, holiday spending was pulled forward due to the supply chain and consumers worrying about lack of availability of goods. We believe that consumers will start spending much later this year.  “The most important thing will be the ability to react in real-time, using data to make in-season decisions to either spend more promo dollars or buy back if volume remains soft.  “We have not seen any issues with the labor market today. We have given our hourly workers a temporary ‘inflation increase’ but have not experienced any other issues.”  Compared to Last Year, This Season is ‘Flipped’  Dave Cheatham, president, X Team Retail Advisors and Velocity Retail Group, tells GlobeSt.com that he expects a more “normal” holiday retail season.  “The supply chain is improving, as we are now able to get merchandise out of the ports,” Cheatham said. “We should see more aggressive pricing during the holidays. I am not saying it will be completely back to normal, but it will be closer to what is expected.  He also expects that people will shop earlier online and in-store according to their preferences and will benefit from aggressive promotions and holiday deals.  “Last year, inventory was so low that retailers were not in any position to offer consumers special markdowns. The retail industry saw high demand for merchandise at all levels and low inventory.  “This year is flipped. Retailers will have a better level of inventory versus last year’s supply chain drought. However, the consumer may fill their shopping list with needs and staples for the family, rather than wants and aspirational luxury items.  “I expect value stores and the basics, such as clothes for the kids, to do well. One thing is clear, economic uncertainties will decidedly play a role in this season’s outcome.”  Retail Foot Traffic Picking Up  Avison Young’s Craig Leibowitz tells GlobeSt.com that according to Avison Young’s Vitality Index, when looking at retail foot traffic across the U.S. the week of Oct. 27, relative to the same week in 2019, he is seeing retail foot traffic at 71.5%.  “As a predictive element, when looking at tourism and hospitality foot traffic, we are seeing a recovery rate of 74.2%. which is a great indication of future demand. We expect this to increase into the holiday seasons.”  Retail Rent Collections at Favorable Levels  Mark Sigal, CEO of Datex Property Solutions, tells GlobeSt.com that three factors make him bullish about holiday sales.  “One is that rent collections in terms of timely rent payments by retailers to retail portfolio owners remain strong for both national and non-national retailers, a trend that has only increased in the past couple of months, and which is outpacing 2021’s numbers. This suggests merchants will have favorable footing to market to customers during the holiday season.  “Two, sales per square feet numbers across the 21 merchant categories that we track in Datex Tenant Track has shown a 71% increase in the number of merchant categories showing sales growth vs. the quarter prior, suggesting favorable tailwinds for merchants.”  The Tenant Track is a monthly report of rent collections, retail sales and occupancy cost trends from thousands of shopping centers, and tens of thousands of retailers nationwide  “Three, the job market remains strong, suggesting that consumers will be feeling flush, and will spend favorably during the holiday season,” Sigal said. “With an amelioration of the supply chain issues that impacted merchants’ ability to fulfill orders last holiday season, we believe this bodes well for the holidays.”  Investors Seek Recession-Resilient Retailers  Daniel Herrold, investment sales broker at Northmarq, following the acquisition of Stan Johnson Company, tells GlobeSt.com that, in general, most investors who are investing in single-tenant or multi-tenant retail are looking at both the historical performance of the tenant, as well as future trends and forecasts for the industry.  “Investors generally lean their preference on those retailers who are recession-resilient and have strong e-commerce platforms so they can capitalize on both in-store traffic and online shoppers,” Herrold said.  “If the forecasts point to a strong holiday season for retailers, that only affirms their investment in the sector. Strong holiday projections aren’t likely to increase investor interest or volume in the sector, but it should certainly help to maintain current investment volumes.”  © 2022 ALM Global Properties, LLC. All rights reserved.