Special Report: CRE — U.S. Primary, Secondary, 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 Two: Secondary Market
Austin, TX tops Situs RERC’s list as the best so called “secondary market” in which to invest particularly for office properties.
The reasons: People are flocking to the “Live Music Capital of the World” in droves; Austin had the largest population growth of all the secondary-metros measured by Situs RERC and that population is forecasted to continue to grow over the course of the next year. The employment rate in Austin continues to outpace national levels.These favorable economic conditions have added to the value component of Austin’s commercial real estate landscape. Yet, pricing in the Austin market is still reasonable helping to make Austin our number one secondary market.
Coming in second Orlando, FL
The reasons: Orlando’s job creation boosted its rankings for retail and apartment property types. Increasing job creation is expected to continue in Orlando for the next several years, meaning a sustained increase in demand for commercial properties and boosting long-term investment viability.
In third place in Situs RERC Secondary Market Rankings: Raleigh, NC
The reasons: short-term growth in the manufacturing and distribution sectors is expected in the near future, leading to an increase in absorption. Raleigh had strong fundamentals leading to an appreciation in value and slightly below-average pricing translating into good investment opportunities.
On the other side of the scale, Honolulu, Philadelphia and Newark, NJ commercial real estate markets were ranked by Situs RERC as having the least favorable value vs. price characteristics among the secondary markets. Population growth and job creation in these markets were below the national average leading to a drop in demand for commercial real estate space. In addition, income growth for Honolulu has tumbled over the past two years and prices have remained high resulting in the lowest rankings for apartment and retail sectors among the secondary markets from a value versus price perspective. Newark and Philadelphia both have greater-than-average per capita income, but higher pricing and relatively unimpressive fundamentals place them in the bottom of the secondary markets for investment for the office and industrial sectors. These three metros are riskier from a value vs. price perspective and investors should be cautious about venturing long-term into these markets.
Situs RERC monitors 48 metros that are split into primary, secondary and tertiary markets based on the statistical distribution of value and price metrics. In order to determine the best opportunities in a given market, we analyze the lasting, sustainable value characteristics compared to pricing levels within each of the metros. In today’s edition of the Newswatch, we examine the biggest movers and shakers in the 26 metros comprising the secondary market.
The key to sound investment decisions is getting a high return without taking on unnecessary risk. By their very nature, secondary markets typically hold greater risk versus the primary markets. However, extreme competition in primary markets, particularly for class-A properties, is driving investors toward secondary and tertiary markets where higher yields can be found. At the same time, the risks associated with the secondary markets have been tempered by a strong population growth and improving economies, particularly for metros in the South and West.
For more information on valuation and data analysis, click here to visit Situs RERC.
>Stay Tuned for the Last Installment of the Series on Friday: Part Three – Tertiary Markets
Booming Property Auctions Lift Brexit Gloom in British Real Estate
Commercial property auctions are proving an unlikely bright spot in Britain’s real estate market where a steep drop in sterling has attracted overseas buyers and local investors are as yet unfazed by potential fallout from Brexit.
Britain’s 900 billion pound commercial real estate market was an early victim of the financial market turmoil that followed Britain’s vote in June to leave the European Union.
Retail investors quickly pulled money out of commercial property funds just after the vote, causing a temporary freeze on 18 billion pounds ($22.38 billion) in assets.
In July, British commercial property values fell by 2.8 percent, according to the IPD real estate index compiled by MSCI , the biggest fall since March 2009, highlighting a sharp drop in investor confidence.
Average commercial property values have fallen around 3.5 percent since the June 23 vote and year-to-date returns tracked by the IPD index are hovering below zero.
But for commercial property auctioneers who focus on smaller properties rather than trophy assets like London’s skyscrapers or regional shopping malls, it is a different story.
Allsop, Britain’s biggest auctioneer, achieved its biggest sale volume in a decade at a sale on Oct. 10. Rival Acuitus on Oct. 13 recorded its largest-ever auction since spinning out of Jones Lang LaSalle in 2010.
Average rental yields at both sales fell sharply compared with July. A fall in yield – the ratio of the annual rent to the purchase price – shows demand is on the rise.
Around 500 people attended the Allsop sale at The Berkeley, a luxury hotel near London’s Hyde Park, while a further 6,000-odd investors were plugged in by phone or internet, including overseas buyers, the company said.
One hundred and fifty-four shops, offices and industrial properties went under the hammer in less than seven hours, and 11 lots sold in the hours after the public event. Some properties in the 231-lot catalogue sold ahead of the auction.
The Allsop sale, its second since the referendum, fetched more than 115 million pounds ($143.00 million). The average yield of property sold was 7.1 percent, down from 8.1 percent in July, despite uncertainty over the impact of Brexit on the wider economy in Britain.
read more: Reuters
Big Winner From London’s Brexit Exodus Isn’t Even in Europe
The ultimate winner if Brexit forces banks to flee London may lie 3,500 miles away, far beyond the borders of Europe.
New York, even more than Frankfurt or Paris, is emerging as a top candidate to lure banking talent if London’s finance industry is damaged by Britain’s divorce from the European Union, according to politicians and industry executives.
That’s because the largest U.S. city, rather than European finance hubs, is the place that rivals the depth of markets, breadth of expertise or regulatory appeal boasted by London. Continental Europe will win some bank operations to satisfy regional rules ensure time-zone-friendly access to its market, but more may eventually shift across the Atlantic to the only other one-stop shop for business.
“There is no way in the EU there is a center with the infrastructure or regulatory infrastructure to take the role London has,” particularly in capital markets, John Nelson, chairman of Lloyd’s of London, said in an interview. “There is only one city in the world that can, and that is New York.”
For many global investment banks, London is their largest or second-biggest headquarters. If the benefits of scale are diminished by having to move roles to Europe, banks may look to shrink their London operations even further by moving any workers able to do their job just as well from a different time zone, including global-facing roles in merger advisory, trading and back-office technology and finance.
read more: Bloomberg
WeWork Wants to Become a Real Estate Investor
WeWork is preparing to launch an investment vehicle to buy its own real estate properties, in a major strategic shift for the $16.9 billion co-working company.
“The moment WeWork comes into a building, you’re creating value,” Michael Gross, the firm’s vice chair, said at the Cornell Real Estate Conference Friday morning. The company is “right now in the process of working on a vehicle” that would acquire buildings for WeWork and WeLive, Gross said, adding that such a vehicle could be created in partnership with outside investors.
“We’re looking at multiple companies where we’re looking at sale-leasebacks,” he said. “They’re looking to sell us buildings. We would come, refit it out and give it back to them.”
WeWork has always touted its so-called “asset-light” model: The firm doesn’t actually buy any of the spaces it builds out and then rents to short-term office tenants, meaning it spends less on up-front capital investments for every dollar of revenue it makes. It also hasn’t had to deal with acquisition costs, interest payments on mortgages, and so on.
The new vehicle doesn’t necessarily mean a departure from that model. If WeWork ends up buying properties through a dedicated investment fund with outside capital – much like fund managers like Blackstone Group already do – it wouldn’t actually spend its own capital. A WeWork spokesperson declined to comment.
Such an investment vehicle could, however, put WeWork in direct competition with some of the office landlords it partners with. These include Rudin Management and Boston Properties at the Brooklyn Navy Yard, where the developers are planning a 556,000-square foot building anchored by WeWork, property records show.
WeWork has certainly shown a prodigious ability to raise money. On Thursday, the Wall Street Journal reported it picked up another $260 million from investors, bringing its total venture funding to $1.7 billion and valuing the company at $16.9 billion
read more: The Real Deal
Goldman; Bank Earnings Shine
Goldman Sachs Group Inc., once the most profitable firm on Wall Street, reported a 47 percent increase in third-quarter earnings as revenue from bond trading surpassed analysts’ predictions.
Net income rose to $2.09 billion, or $4.88 a share, from $1.43 billion, or $2.90, a year earlier, the New York-based company said in a statement Tuesday.
Chief Executive Officer Lloyd Blankfein, 62, has cut jobs, given responsibility to more junior employees and lowered compensation to reduce expenses and preserve flexibility to ramp up trading when activity returned. This quarter shows the benefit of the strategy, which attracted some skepticism among analysts as competitors such as Morgan Stanley decided to retreat instead.
“We saw solid performance across the franchise that helped counter typical seasonal weakness,” Blankfein said in the statement.
Fixed-income trading revenue rose to $1.96 billion, beating the $1.7 billion estimate of five analysts surveyed by Bloomberg. Equities-trading revenue of $1.78 billion surpassed the $1.69 billion estimate. The sales-and-trading division is overseen by Isabelle Ealet, Pablo Salame and Ashok Varadhan.
Goldman Sachs is the fifth of the six biggest U.S. banks to report results, with Morgan Stanley set to announce earnings on Wednesday. JPMorgan Chase & Co. kicked off the U.S. financial industry’s earnings season Friday, topping analysts’ profit estimates on a 48 percent surge in fixed-income trading. Citigroup Inc. and Bank of America Corp. surpassed predictions, too, as fixed-income revenue jumped 35 percent and 39 percent, respectively. Wells Fargo & Co., contending with a scandal in its consumer business, also beat estimates.
read more: Bloomberg
Developer Sees Manhattan Office Tower as a New Landmark
The mammoth East Midtown office tower to be known as One Vanderbilt will rise 1,401 feet and taper into a slender pinnacle intended as an emphatic addition to the Manhattan skyline.
“It is what announces we are embarking on a new age of what will become the next generation of the city’s landmarks,” said Marc Holliday, chief executive of SL Green Realty Corp., the tower’s developer.
The desire to create a new landmark is only one of the story lines associated with the construction of One Vanderbilt, which will be built next to Grand Central Terminal and, when completed, soar over the Chrysler Building.
New York City planners also see the $3 billion tower as the first step in modernizing the area around an important gateway—Grand Central—and throughout the aging East Midtown office district.
read more: Wall St Journal
Trump’s Business Declines with Campaign Woes
When Donald Trump announced his presidential run last year, many brand experts called it a giant marketing campaign aimed more at his boosting his businesses than winning the White House.
But now, Trump’s campaign troubles could be spilling over into Trump Inc.
Even before the political controversies of the past week, some of Trump’s hotels, golf courses and properties were showing signs of pressure.
According to Foursquare, the share of traffic going to Trump-branded hotels and golf courses fell 17 percent in June and 14 percent in July. A separate analysis by Hipmunk found that bookings to Trump hotels fell more than 50 percent in the first half of the year.
Granted, the outside estimates are only a partial snapshot. The Trump Organization — Trump’s umbrella company — is privately held and doesn’t disclose sales or traffic at its properties. In his financial filing to the Federal Election Commission in May, Trump said revenues at his various businesses were up $190 million, to $557 million, over the previous year.
Revenues from the Trump National Doral Miami, for instance, more than doubled to $132 million, from $50 million a year earlier, the filing says. Revenues at Mar-a-Lago, his Palm Beach resort, nearly doubled to $30 million. His branded businesses and book sales also surged.
But these numbers are Trump’s numbers — and they don’t capture the more recent stage of the presidential race, when his brand has come under fire. Since a tape was released last week showing the nominee making lewd comments about women, his so-called brand strength has deteriorated, according to Brand Keys.
A spokesperson for the Trump Organization did not respond to CNBC’s requests for comment. But a rally in Florida Thursday, the candidate denied new allegations that he had inappropriately touched women.
read more: CNBC
Manhattan on Track to see Negative Office Absorption
For the first time in seven years, the Manhattan office market is set to have a negative absorption rate, as leasing activity through the third quarter hasn’t been able to keep pace with additional supply.
Absorption year-to-date sits at negative 2.2 million square feet, according to Colliers International’s third-quarter office report. Unless the fourth quarter delivers some unexpected surprises, this will be the first year Manhattan sees negative absorption since 2009.
“Unless several large blocks of space are leased, or otherwise removed from the market to counter the year to date negative absorption, Manhattan will have negative yearly absorption for the first time since 2009,” said Franklin Wallach of Colliers’ research group.
By the third quarter of 2009, the absorption rate plunged to negative 9.09 million square feet as tenants shed space amid the financial crisis. This time around, the rate is negative due to additional supply, namely in places like the Far West Side and the Financial District.
Despite the addition of new supply, however, the Downtown market shows positive absorption of nearly 570,000 square feet, while both Midtown and Midtown South were negative.
The average asking rent in Manhattan climbed to $73.85 – surpassing its 2008 peak – primarily on rising rents in Downtown and Midtown South. For the past two quarters, Midtown South has been the most expensive office market in the city, the Wall Street Journal recently reported.
read more: The Real Deal
Macy’s & Malls Stick with Thanksgiving Hours
Macy’s is holding firm with its decision to open on Thanksgiving Day, and is expected to greet shoppers an hour earlier than it did in 2015.
BestBlackFriday.com, which tracks retailers’ holiday deals and hours, received confirmation from five U.S. shopping centers that their Macy’s locations would open at 5 p.m. Thursday. That compares with 6 p.m. in both 2014 and 2015.
A spokeswoman for Macy’s did not immediately respond to CNBC’s request for comment. She said last week that the company would not announce its Black Friday hours until later this month.
Retailers have been kicking off their holiday sales earlier in recent years, as they try to get an edge on the competition. Macy’s opened for the first time on Thanksgiving in 2013, at 8 p.m. J.C. Penney and Kohl’s, among others, followed suit.
But the tide looked like it was beginning to turn this year, after several retailers and major mall operators said they would once again close their doors for the holiday. That includes the Mall of America, in Minnesota, and Tennessee-based CBL & Associates, which is shuttering 73 of its properties until 6 a.m. Black Friday.
The following five shopping centers confirmed Macy’s Thanksgiving hours to BestBlackFriday.com via phone and email. (Copies of the first two centers’ emailed responses were shared with CNBC):
Ala Moana Center in Honolulu, Hawaii: 5 p.m. Thanksgiving to 10 p.m. Black Friday
Scottsdale Fashion Square in Scottsdale, Arizona: 5 p.m. to 2 a.m. Thanksgiving and 6 a.m. to 10 p.m. Black Friday
Cherry Hill Mall in Cherry Hill, New Jersey: 5 p.m. Thanksgiving to 10 p.m. Black Friday
Moorestown Mall in Moorestown, New Jersey: 5 p.m. to 2 a.m. Thanksgiving and 6 a.m. to 10 p.m. Black Friday
Christiana Mall in Newark, Delaware: 5 p.m. Thanksgiving to 10 p.m. Black Friday
read more: CNBC
Dick’s Tees Up For Golfsmith
Dick’s Sporting Goods Inc is preparing a bid for the U.S. business of bankrupt Golfsmith International Holdings Inc, challenging an offer by rival retailer Worldwide Golf Shops, people familiar with the matter said on Monday.
While bids for Golfsmith, owned by OMERS Private Equity Inc, the buyout arm of one of Canada’s largest pension funds, were due earlier on Monday, Dick’s was given an extension until Tuesday morning to submit its offer, the people said.
The bankruptcy auction will the test the value of Golfsmith, which suffered because of competition from discount retailers Wal Mart Stores Inc and Amazon.com Inc, as well as golf’s waning popularity among younger customers. Interest in golf has dropped in line with the fading career of star golfer Tiger Woods, who once attracted many young fans to the sport.
Spokespeople for Dick’s, Golfsmith, Worldwide Golf and Great American’s parent company, investment bank B. Riley Financial Inc, did not immediately return requests for comment.
read more: Reuters