In volatile world, investors like commercial real estate
As the stock market continues its roller-coaster ride of volatility, commercial real estate (CRE) remains an attractive investment alternative from a return vs. risk perspective. That’s one of the insights gleaned from the 3Q 2018 Situs RERC Real Estate Report, “Under Pressure,” which was released this week.
Situs RERC’s institutional respondents said that for the first time since 2Q 2017, return is outweighing risk in the overall CRE market. Respondents’ ratings are based on a scale of 1 to 10, with 10 indicating return far exceeds risk or value far exceeds price. In 3Q 2018, Situs RERC’s institutional respondents rated return vs. risk for overall CRE at 5.2, up from 4.8 the previous quarter and from 4.7 a year ago.
The return vs. risk rating has been on an upward trend for almost a year, an encouraging sign. For perspective, the return vs. risk rating was at or above average for nearly eight years prior to 2Q 2017. Long-term real estate yields remain attractive compared to other investments; however, institutional investors are concerned that the potential for future rising short-term interest rates could eat into risk premiums.
On the other hand, Situs RERC’s value vs. price rating for overall CRE declined from 4.6 in 2Q 2018 to 4.3 in 3Q 2018, continuing to stay below average and indicating that the overall CRE market is overpriced relative to value. The rating has not been this low since 4Q 2008 and is considerably lower than the post-recession average of 5.1.
The value vs. price rating for overall CRE has generally trended downward since 4Q 2015, and respondents have rated the CRE market as overpriced since 1Q 2016, except for a brief spike in 4Q 2016. Investors are concerned that prices are getting ahead of market fundamentals. One institutional investor stated that there may be a potential weakness in future net income growth due to rising expenses and potential capital expenditures that could be exaggerated by any rise in cap rates.
Situs RERC provides a high-level view of the CRE investment environment. We base the return vs. risk and value vs. price judgments on our own professional knowledge of the CRE market, data from third-party sources and information collected from industry experts, including our clients and institutional survey respondents.
It is important to remember that these conclusions are for the CRE market as a whole. Because CRE valuations are made within social, economic, governmental and environmental contexts, it is difficult to generalize value assumptions across the entire CRE market. Certain property types and markets are faring considerably better than others in terms of return vs. risk and value vs. price. Also, the attractiveness of a particular asset class is relative to the desirability of alternative asset classes, which can vary depending on the risk appetite of the market.
Next week in Newswatch, we’ll provide a more in-depth look at results in the quarterly report for return vs. risk among the major property types.
Our full results are available in our 3Q 2018 Situs RERC Real Estate Report, “Under Pressure.” Our report is the nation’s longest-running real estate research report offering investment criteria and investor insights on all the major markets and property types.
Visit our website or call 319-352-1500 for subscription information.
The future of malls could look more like towns
In a surprising twist on the manufactured downtowns that have spread across suburbia, a developer in Columbus, Ohio — looking to survive amid a retail apocalypse — is doubling down on the much-derided mall.
Turkish developer Yaromir Steiner plans on expanding a mall into a bona fide town at a time when thousands are downsizing. Columbus has long been known as a test market, as its population is a near-perfect microcosm of the country. If a new model for malls as towns works in Columbus, it’ll work across America, experts say.
Steiner tells Axios he envisions a real town where you can rent an apartment, go to work, do your groceries, go out to eat and even go clubbing on Saturday night. It won’t be known for a while if Steiner is onto something. But he is spending $500 million on the gamble.
Read more: Axios
Fewer people shopped during the 5-day Thanksgiving weekend, but holiday sales seen as strong
With discounts starting early and more days to shop before Christmas this year, fewer people turned out for the five-day shopping extravaganza that runs from Thanksgiving Day to Cyber Monday, a retail industry trade group said Tuesday.
But holiday shoppers still have long lists of gifts to buy and plenty of days to do it, giving the National Retail Federation (NRF) confidence it will be a robust holiday season.
“This was a very strong holiday weekend … and a very positive indicator of where we are headed,” Bill Thorne, senior vice president for communications and public affairs at NRF, said during a call with members of the media.
More than 165 million Americans shopped either online or in stores from Thanksgiving Day to Cyber Monday this year, down from more than 174 million in 2017, NRF revealed. The industry’s trade group is still calling for holiday sales to increase between 4.3 percent and 4.8 percent, emphasizing it expects growth will come on the higher end of that range.
Read more: CNBC
Former urban big-boxes, class-B office buildings are being converted to last mile industrial space
The limited supply of urban industrial inventory available for “last mile” e-commerce distribution space is causing investors and end-users to get creative by repositioning other types of real estate with failed uses or shrinking demand, according to a JLL report, “Urban infill: the route to delivery solutions.” The report notes that annual e-commerce deliveries have more than tripled over the past five years, but development of new urban industrial infill assets has remained relatively flat.
Despite dwindling opportunities in urban locations, investors remain interested in the 18 percent sales price premium last mile industrial assets command over “first mile” locations, and the higher rents users are willing to pay in order to be near their customer base.
Older office buildings, underused parking structures, abandoned strip centers — even former churches — are now among properties being repositioned as last mile fulfillment centers. E-commerce fulfillment centers are actually “terminal facilities,” as trucks deliver merchandise there to be broken down for home delivery trucks and other types of vehicles, according to Mark Glagola, D.C.-based senior managing director for industrial services with Transwestern. He notes that these distribution facilities are especially critical for time-sensitive merchandise like food products.
Read more: National Real Estate Investor
Apartments are getting smaller – but renters are paying more
Apartments are getting smaller in much of the U.S., even as rents are rising. The average size of newly built apartments in 2018 is 941 square feet, which is 5 percent smaller than it was a decade ago. For studio apartments, the change is more pronounced — they’re 10 percent smaller. Rents, on the other hand, have jumped 28 percent during the same time period, according to RENTCafe, a nationwide apartment search website.
“Changes in renters’ living habits are literally redrawing floor plans,” wrote Nadia Balint, senior marketing writer for RENTCafe. “The largest share of apartment dwellers, millennials, prefer living in locations close to restaurants and entertainment, rather than having a large kitchen or living room to cook or entertain at home.”
Higher rental costs today, however, have millennials looking for savings by renting smaller units, and developers are clearly responding. Micro-units are becoming more popular, following on the tiny-house trend, as millennials tend to be more environmentally conscious than previous generations. Apartment developers are supplementing the smaller units by adding more common spaces to their buildings, in which residents can both work and entertain.
Read more: CNBC
$640 million former Fannie Mae HQ redevelopment launched
The former Fannie Mae headquarters in Washington, D.C., is set to undergo a transformation. Roadside Development and North America Sekisui House (NASH) LLC will break ground on the $640 million redevelopment of the 10-acre property, which will re-emerge as the 1 million-square-foot City Ridge mixed-use destination.
“City Ridge wasn’t designed to be another enclave of a residential community; it was designed to become an urban village which allows mixes of uses that drive and rely on each other,” Richard Lake, principal & founding partner of Roadside Development, told Commercial Property Executive.
Roadside and NASH acquired the historic Fannie Mae site at 3900 Wisconsin Ave. NW in 2016, snapping it up from the government-sponsored enterprise for approximately $86 million. The partners began crafting a vision for the site by first consulting the community. Ultimately, the joint venture partners formed a plan for the adaptive reuse of the existing 228,000-square-foot, Georgian Revival-style office building and the addition of eight new structures to create a live-work-play property.
Read more: Commercial Property Executive
BOE warns disorderly Brexit may halve commercial-property prices
A disorderly Brexit could cause U.K. commercial-property prices to fall by even more than after the global financial crisis, the Bank of England warned.
Price of offices, warehouses, malls and hotels could drop as much as 48 percent if the U.K. crashes out of Europe without a deal, more than the 42 percent peak-to-trough decline following the 2008 global crisis, the Bank of England said in its Financial Stability Report. In a “disruptive” Brexit, the slide would be limited to 27 percent, the central bank said.
Prices for the best U.K. commercial real estate have so far mostly shrugged off the 2016 vote to leave the European Union after the weaker pound made Britain cheaper than markets such as France and Germany. The prospect of a drop in prices, coupled with the effects of a further slide in the currency if the U.K. does crash out of the bloc without a deal, could make the nation’s 833 billion-pound ($1.1 trillion) commercial-property market an even better bargain.
Read more: Bloomberg
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