Situs Newswatch 10/27/2017

Amazon The Disruptor
On April 20, 2017, Amazon announced plans to bring its online shopping platform to Australia in 2018. While Amazon has been a player on the continent since 2012, its scope of services has been limited. The announcement has far-reaching consequences for Australian real estate, particularly for the retail and industrial sectors. In other parts of the world, the Amazon powerhouse has taken the retail industry by storm. Retailers, even traditional industry darlings, are struggling to compete. As a result, many commercial real estate investors are worried that they will have difficulty finding or retaining tenants. Amazon’s typical offering of expedited delivery service means that supply chains and infrastructure have had to adapt at a record pace.Given the behemoth that is Amazon, many retailers in Australia will have to ramp up their strategies to compete. According to a recent report from Commonwealth Bank of Australia, more than 40 percent of retailers view Amazon as a threat, but only a few have a strategy in place. Most retailers plan to provide superior customer experience and better products to outcompete Amazon. The Chinese firm Alibaba is also setting up shop in Australia, although its operations will be significantly smaller than Amazon.

The impact of Amazon on commercial real estate has been well-documented in the US, Canada and Europe and it is reasonable to assume that Australian CRE will encounter similar challenges. As many retailers in the US announce bankruptcy and shutter stores, certain types of retail properties, such as Class B and Class C malls, are becoming obsolete. However, many real estate experts believe the US retail market was overbuilt and that shedding stores reflects a natural cyclical shift for retail commercial real estate. The US has the greatest amount of shopping center space per capita, followed by Canada and Australia.

According to the Wall Street Journal, the “Amazon effect” has been more pronounced in the US than anywhere else due to a glut of retail stores, thousands of which have been closed in recent years. American brands are also more dependent on selling products through department stores, and they have been harder hit by struggles at big chains. Stock prices for European and Australian retailers have fallen this year because investors are becoming more worried about the “Amazon effect.” Australia should start feeling this impact over the next three to five years, according to the Wall Street Journal.

However, it is important to distinguish between Amazon’s effect on retail merchandising and its effect on retail real estate (i.e., brick-and-mortar establishments). The challenges facing the retail industry do not necessarily translate into troubles for property owners or private equity investors. No doubt, Amazon will rattle the retail industry, but assuming that properties are in prime locations with adequate infrastructure and amenities, and the ability to easily be repurposed, the space will continue to be in high demand. The tenants may come and go, but the space itself remains.

There is a bright side to Amazon for commercial real estate. As evidenced in both North America and Europe, industrial distribution centers have benefited from the surge in e-commerce. Demand for space has overtaken supply, and competition in the market is fierce. E-commerce retailers typically require a greater amount of space than traditional retailers, and supply chain constraints, such as last-mile delivery, pose challenges for owners and occupiers in the sector. The lack of existing distribution centers in Australia (especially those that will meet the needs of giant e-commerce retailers) will mean that the sector will be strong for the foreseeable future.

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October is Breast Cancer Awareness Month, when we come together to recognize the threat that this disease poses and pledge our support to helping those who battle breast cancer and helping organizations eradicate breast cancer. If you’d like to get involved, we at Situs encourage you to start with the Susan G. Komen foundation and learn about how best to make an impact.


Investors Maintain Healthy Appetite for B-piece CMBS
New CMBS risk-retention rules that went into effect late last year have not put a damper on B-piece buying. That continued liquidity for the riskiest tranche of CMBS loan pools is good news for borrowers as it helps maintain steady issuance across the broader CMBS market.

However, it is not completely business as usual. Risk-retention rules have had a big impact on the B-piece segment of the market, with more restrictions that have resulted in a highly concentrated group of key players.

Private equity firm KKR announced earlier this month that it had closed on a new $1.1 billion fund that focuses primarily on investing in newly issued CMBS B-pieces. In fact, it was the new risk-retention rules that prompted KKR to launch the KKR Real Estate Credit Opportunity Partners fund and take a bigger step into the B-piece space.

“We started thinking about the rules and how it might impact the market,” says Matt Salem, director and co-head of real estate credit at KKR. KKR recognized that there would be an opportunity to relieve banks of the risk-retention burden if it could deliver on providing more capital and “more patient” money.

Typically, the B-piece is the bottom or most junior debt in a conduit deal. The sponsor or majority-owned affiliate of the sponsor must retain a 5 percent slice of a horizontal (bottom) piece, a vertical (top down) piece or a mix of both. However, the CMBS industry successfully negotiated a request in the new regulations that allows a third-party purchaser (TPP) to satisfy the obligation of the sponsor to retain the 5 percent B-piece in a CMBS issuance.

read more: NREI

Amazon Receives 238 Proposals for its Second Headquarters
Amazon.com Inc. has received 238 proposals from cities and regions across North America vying to host the company’s second headquarters, it said on Monday.

The number of applicants underscores the interest in the contest, which Seattle-based Amazon announced last month. The world’s largest online retailer said it would invest more than $5 billion and create up to 50,000 jobs for “Amazon HQ2.” The deadline for submitting proposals was Oct. 19.

Amazon said 54 states, provinces, districts and territories in the United States, Canada and Mexico were represented in the bids.

Some said this month they could offer Amazon billions of dollars in tax breaks if they were chosen. New Jersey proposed $7 billion in potential credits against state and city taxes if Amazon locates in Newark and sticks to its hiring commitments, for instance.

read more: Reuters

Lord & Taylor Building, Icon of New York Retail, Will Become WeWork Headquarters
From the moment its doors opened more than a century ago, the Lord & Taylor building on Fifth Avenue in Manhattan has stood as a monument to old-school retail.

Complete with a grand entrance arch and copper cornice, the 676,000-square-foot store is a temple of urban commerce — and was named a New York City landmark a decade ago.

But now, the forces buffeting the retail industry are diminishing Lord & Taylor’s presence as a New York institution. The company that owns the department store chain, Hudson’s Bay, said Tuesday that it was selling off the flagship store to WeWork, a seven-year-old start-up whose office-sharing model is helping to reinvent the concept of work space.

Lord & Taylor will rent out about a quarter of the building, where it will operate a pared-down department store. WeWork will use the rest of the building for its global headquarters and to lease shared office space to its customers. The redesign is expected to come after Christmas of 2018.

In selling its Italian Renaissance-style building to a WeWork joint venture for $850 million, Lord & Taylor and Hudson’s Bay are acknowledging that even the grand physical shopping spaces of old are now worth more as office space catering to millennials.

read more: NYT

Job Growth Keeps Market Steady in Miami
Miami’s multifamily market is fully packed. Although enjoying solid fundamentals, one of the market’s biggest challenges is the substantial amount of new supply. This has put a damper on rent growth, which started decelerating in late 2014, going from a 6.1 percent increase to 2.0 percent as of August 2017. Population and job gains even out the situation, producing a healthy demand and ensuring that new units are slowly but steadily absorbed. However, the availability of low-cost housing is still an issue. Complicating things is a new South Miami ordinance that requires solar panels on all new residential projects, which will increase construction costs and make it more difficult for developers to pencil out low-cost units.

The metro’s economic profile is diverse, but education and health services; leisure and hospitality; and trade, transportation and utilities continue to drive job growth. Construction activity and industrial expansions are also strong, with Amazon’s new 855,000-square-foot fulfillment center a telling example. The list also includes major infrastructure projects like the Fort Lauderdale Airport revamp and the upcoming Brightline Express train that will connect Miami to Orlando.

read more: Commercial Property Executive

Nordstrom Thinks Half Its Business Could Be Online Within 5 Years
Nordstrom’s big investments in e-commerce in the last two decades have paid off handsomely, making the upscale department store a leader in the digital realm among brick-and-mortar retailers.

The company was among the first, and most efficient, in blending stores and online sales for such things as using stores to help fill online orders to speed up delivery and developing a leading shopping app.

Nordstrom now garners 26% of company sales online, strong enough to buoy the overall company to growth: same-store sales at its physical department stores fell 4.4% last quarter, while rising nearly 20% and its discount Rack chain showing a similar contrast between stores and e-commerce.

That clip led Peter Nordstrom, a member of the retailer’s founding family and one of three co-presidents (Nordstrom does not have a CEO), to say digital sales could very well represent 50% of more of company sales in short order.

“It’s reasonable to assume that we could probably be doing half of our business online in the next five years or so,” Nordstrom said at WWD’s Apparel and Retail CEO Summit in New York.

Only Neiman Marcus, which operated a catalog business for years giving it an e-commerce head start, gets a bigger proportion of sales online among department stores, garnering 31% of sales there, according to eMarketer. Macy’s gets about 18%.

read more: Fortune

What to Do With Dead Malls
Just when you think you have a handle on the brick-and-mortar retail crisis, the prognosis gets worse. More than 8,600 stores will close their doors in 2017, according to Credit Suisse analysts — a number that exceeds store closures during 2008, when America was in recession. One quarter of all shopping malls are expected to shutter in the next five years, according to the same report.

This downward spiral has severe economic implications, although some are less apocalyptic than they seem at first. In fact, there’s some evidence that automation and e-commerce actually create more — and better-paying — jobs than they destroy.

But there’s one issue that no one has figured out how to solve: what to do with all those vacant stores. And America has more of them than anyone. Retail square feet per capita in the U.S. is more than six times that of Europe or Japan. As our physical stores continue to lose market share to e-commerce, more than one billion square feet of commercial real estate could be gathering dust by 2022. Because blight begets blight, that number could climb even higher.

If these predictions hold, America’s retail landscape could look a lot like the residential landscape of Detroit.

To find a solution, retailers need to face the failings that landed them here. Blaming Jeff Bezos doesn’t change the fact that many companies have spent years with their heads in the sand. Sales have been migrating online for almost two decades, and millennials prefer to splurge on experiences — tasting menus, concert tickets, trips to Iceland — rather than flat-screen TVs. Faced with a crisis, traditional retailers responded by iterating an outdated model. Chains like Sears and Kmart used loyalty programs as Band-Aid solutions. Guess and Payless played a discount game but couldn’t keep up with their online competition.

read more: WSJ
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