Special Report: CRE — U.S. Primary, Secondary and Tertiary Markets: Searching for Value
This week, Situs shines its spotlight on the best investment opportunities in U.S. commercial real estate.
Our three part series focuses on Primary, Secondary and Tertiary markets.
>Part One: Primary Market
Situs RERC has identified the top 9 markets investors should flock to in order to create core portfolios that offer benchmark-focused return characteristics. Data on the relative price levels in relation to the sustainable value attributes within that market were analyzed to determine the top spots. Dallas and Seattle ranked numbers 1 and 2, respectively, as top relative value vs. price investment opportunities for the industrial, office and apartment sectors. Seattle’s relatively high pricing compared to Dallas allowed ‘Big D’ to edge out ‘The Home of Starbucks’ for the overall top spot among primary markets. Dallas climbed to the top primarily because of the relatively low price levels compared to the amount of value received. As we know, the sexy six coastal markets have been bid up in price as capital flows have been a powerful force in these markets.
In the retail sector, Seattle took the number one spot due to the abundance of high-paying tech-jobs, with employers such as Amazon, Boeing, Microsoft and Facebook topping the list.
Investors are very nervous with the oil-patch city of Houston. Its office market is getting soft, especially along the energy corridor. There is a great deal of unease about prices and values in the Houston office sector, and it scored seventh (out of 9 markets) in the apartment sector. The “Space City’s” exposure to a volatile energy market resulted in weaker fundamentals. Even though oil prices are poised for a slight come back, no one is banking on the $100 per barrel oil that was the catalyst for its resurgence over the past 5 years.
New York took the bottom spot among primary markets according to Situs CRE data, driven largely by the high prices paid for all property categories. The rank for the Big Apple surprises many investors; however, it is our view that the New York city market has among the most staggering price levels relative to the market constraints of lower population growth and job creation among the 48 ranked metros that we closely follow. That said, recent above-average increases in the Big Apple’s private-sector jobs, including its so called “Tech Alley,” will likely boost the city’s ranking in the near future. If there is one hard and fast rule to real estate, it is location, location, location. Are there still deals to be had in NYC? Absolutely.
Primary markets are typically preferred by big investors because of the perceived durability of the market when things get tough for CRE. Thus, it offers over the long run, a better risk-adjusted return due to its long-term establishment and economic diversity. Powerhouse cities such as New York and San Francisco are often seen as “too big to fail” in the sense of creating a benchmark portfolio that will match competitive portfolios. In investment strategy, it is all about matching or beating your peer-group benchmark. Prices in these areas, particularly for class-A properties, are at record highs. A large amount of foreign capital is entering the primary U.S. markets because of global uncertainty. Combining these factors with the solid property fundamentals and sparsity of supply, prices are likely to continue to increase for the primary markets through the remainder of 2016. Investors who are yearning for higher yields or chasing alpha may want to look to core-plus opportunities or spread their wings and venture into new markets.
>Coming Wednesday: Part Two – Secondary Markets
Manhattan Office Market Booming as Asking Rents Set Record
The cost of renting office space in Manhattan set new records in the third quarter amid strong leasing activity that was driven by a job creation rate in New York that exceeds the nationwide average, according to brokerage Colliers International.
Leasing activity across Manhattan is 13.8 percent above the city’s 10-year average, and year-to-date is 11.1 percent better than 2015, a banner year for commercial real estate in New York, the brokerage said on Thursday.
New York has created 89,000 new private sector jobs in the 12 months ended August, a 2.4 percent increase that tops the U.S. job gains rate of 1.9 percent, Colliers said.
If leasing activity maintains pace in the fourth quarter, traditionally a strong period as deals rush to close, 2016 will surpass last year to post the second-highest leasing volume in a decade, said Craig Caggiano, a Colliers’ executive director.
Demand is keeping up with supply but that could soon change, he said. Some 10 million square feet of new office space, the largest glut to hit Manhattan in at least 30 years, will begin to come online over the next few years in late 2017, he said.
“What’s going to happen when that comes on the market? Will that supply overwhelm demand, that is a big unknown,” Caggiano said.
Asking rents rose to a record average of $73.85 a square foot in Manhattan even though rents in Midtown, the largest U.S. office market, were 9.3 percent lower at $83.49 a square foot than their pre-recession peak in 2008, the brokerage said.
In downtown, which is the third-largest U.S. office market, asking rents set a new record of $58.83 a square foot, while asking rents in the smaller but trendy Midtown South market also posted a new record at $67.54 a square foot.
Overall leasing activity edged slightly higher from the second quarter, but rose 16.7 percent from the third quarter of 2015, a banner year for New York commercial real estate.
read more: NY Times
Meantime, Manhattan Apartment Rents Decline After 35% Surge in Listings
Manhattan apartment rents fell last month as landlords’ pricing power was hurt by a wave of new listings and tenants who shopped around for better deals.
The median monthly rent was $3,396, down 1.2 percent from September 2015, according to a report Thursday by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. It was only the second year-over-year decline since February 2014. Rents also fell this past March.
A surge of construction is adding thousands of new apartments in Manhattan, slowing momentum for landlords, who had pushed up rents as much as 20 percent since the end of the recession in June 2009. Price-weary renters now have the power to push back and search for more attractive leases, and landlords are working harder to offer them.
“It’s going to take a while to work itself out,” Jonathan Miller, president of Miller Samuel, said in an interview. “The market does not appear to be resuming an upward pattern anytime soon.”
read more: Bloomberg
IPE Real Assets 2016: Brexit Requires Active Stance from Investors
Brexit is “not something to be passive about”, according to BlackRock’s head of real assets.
Speaking at IPE Real Estate’s Real Assets & Infrastructure conference in London, Jim Barry said investors would need to consider the UK’s impending departure from the European Union when making commitments.
Barry, who heads BlackRock’s real assets group – created at the start of this year as part of a wider re-organisation – said Europe as a whole was “hugely challenged”.
“Brexit has just exacerbated that,” he said. “In the short term, we’re seeing a pausing rather than a fundamental repricing. The UK’s credit quality won’t change. But policy will change.”
Barry said investors in the UK market – which he described as “two-speed”, with high prices for large headline investments – should keep an eye on prices, volumes and flows.
Europe, he said, remains a large, liquid market with a diverse deal flow.
Barry said investors in real assets needed to decide what level of risk they were happy with, with government interference being a “very real risk” across the asset spectrum.
“You cannot ignore government policy,” he said.
read more: Real Estate IPE
U.S. Housing Market: Like a ‘Phoenix’ Rising
Talk about irony, turns out some of the cities hardest hit in the housing crisis nearly a decade ago are leading the recovery. This is especially true in Phoenix, where the homeownership rate has hit 63% , and new research from Ten-X finds home prices in the area among the country’s most affordable.
Phoenix continues its remarkable recovery from the volatility of the housing market boom and bust cycle, where it was one of the hardest hit cities in the country,” said Ten-X Executive Vice President Rick Sharga. “The city’s strong underlying economic fundamentals – high employment, growing wages and increasing population – bode well for continued growth in the housing market.”
“Compared to other major metropolitan areas, Phoenix real estate remains relatively affordable, even as prices continue to rise,” noted Sharga.
Ten-X, the nation’s leading online real estate transaction marketplace, has released its Second Quarter 2016 Economic and Single-Family Housing Market Outlook Report for Phoenix, which reveals that the metro’s home ownership rate rose to 63.4 percent, meeting up with the national average for the first time since 2010 as home prices in the area continued to rise.
Home price appreciation slowed down slightly in the second quarter, but the metro still outpaced the national average, pushing the median existing home price in Phoenix to $222,194, 8.4 percent higher than a year ago. Prices remained well below the metro’s prior peak, suggesting additional room to grow.
Goldman’s Online Consumer-Lending Platform Goes Live
Goldman Sachs Group Inc.’s online consumer-lending platform, known as Marcus, went live Thursday, allowing regular Americans for the first time to borrow from the Wall Street powerhouse.
The service puts Goldman in direct competition with so-called fintech upstarts, such as venture-funded online lenders LendingClub Corp. and Avant Inc. The upstarts have arisen since the financial crisis to fill the void when banks stepped back from parts of the personal-loan market after 2008.
Goldman’s online platform is offering loans of up to $30,000 and is targeting people with high levels of credit-card debt that a fresh loan could consolidate. Its creation is among a series of changes at Goldman—which has long catered to corporations and the uberwealthy—to court the everyman.
read more: Wall Street Journal
NYC Considers Changes in “Air Rights” Policy
The city is looking into changing the way property owners across the five boroughs buy and sell unused air rights.
Tens of millions of square feet of unused development rights currently exist in the city, and the Department of City Planning recently sent out a survey to community groups and land-use lawyers asking what they would like to see change about long-standing policies. The air rights, which have been used to assemble tall luxury towers, tend to be trapped above landmarked properties, whose owners simply can’t find a qualified buyer.
City officials who met with stakeholders Sept. 30 to discuss some of the results said the de Blasio administration plans to release some policy recommendations in the near future, according to a source who attended the meeting. Exactly what the city has in mind is unclear.
A spokeswoman for the planning department indicated the current effort is a follow-up to a 2015 conference, “Trading High in the Sky,” where the city’s planning director, Carl Weisbrod, said the city was looking to “begin a period of analysis and stakeholder engagement and start to reconsider our current policy and mechanisms for air rights.”
If the city decides to adopt any reforms, they likely would fall into two broad areas that were discussed at the meeting. The first would involve private transactions, which allow developers to buy unused square footage from owners on the same block. Developers including Gary Barnett have conducted such deals to construct a series of skyscrapers near the southern edge of Central Park.
read more: Crains NY
Ulta Salon Cosmetics & Fragrance Inc. has been on a tear opening new stores and plans to keep it going, a rare brick-and-mortar expansion as beauty retailers buck retrenchment elsewhere in retail.
On Thursday, the Bolingbrook, Ill.-based company said it plans to increase its store locations to between 1,400 to 1,700, from about 900 now. That is beyond Ulta’s previous target of having 1,200 storefronts in the U.S. by 2019. Ulta Chief Executive Mary Dillon said she aims to double the company’s market share over the next several years and increase online sales to $1 billion. The company also raised its financial forecasts for the year.
read more: Wall St Journal
Some Retailers and Malls Plan to Close on Thanksgiving to Save Black Friday
It turns out that opening stores on Thanksgiving Day wasn’t just bad for family dinners. It was bad for business, too.
A growing number of retailers and shopping malls are reversing course, including mall operator CBL & Associates Properties Inc., the Mall of America, electronics chain Hhgregg Inc. and Office Depot Inc., all of which said they would close on Thanksgiving this year.
They say closing will allow employees to celebrate the holiday, but also help refocus sales on the day after Thanksgiving, known as Black Friday. Once the busiest shopping day of the year, Black Friday lost that ranking in recent years as shoppers turned to the web and store visits were increasingly spread across the weekend—and even the entire month of November.
“The more and more we encroached on that holiday, I don’t know that we got a lot of benefit out of it,” said Robert Riesbeck, Hhgregg’s chief executive, who decided to close all of the company’s 220 stores on Thanksgiving. “You look back a few years, I think it lifted sales. The last two, three, four years, it has shifted sales.”
CBL will close 72 of its 89 regional shopping malls on Turkey Day, although department stores, movie theaters, restaurants, and retailers with exterior entrances will have the option to open. Malls that will close include Oak Park Mall in Overland Park, Kan., and Hamilton Place in Chattanooga, Tenn.
read more: Market Watch