Expectations & Market Realities in Real Estate 2017: Intersection of Global Change – Embracing a New Era
Situs RERC, in partnership with Deloitte and the National Association of REALTORS®, publish their annual Commercial Real Estate forecast report for 2017. While many economic scenarios are possible in 2017, Situs RERC presents our most likely scenario given current conditions. To see our predictions for an upside and downside case, please download the full report.
“The CRE market is in a dynamic and ever- changing landscape. Political, demographic and technological changes are converging to challenge and forever change the CRE industry,” states Ken Riggs, President of Situs RERC.
Riggs further states, “In 2017, while we expect that CRE total returns will decrease relative to recent levels, CRE will remain an attractive real asset class that provides a solid income return. Expect the commercial real estate market to continue to reflect strong fundamentals, but CRE values may begin to face pressures relative to the prices paid.”
For CRE, it is important to remember that we are long in the cycle. Therefore, we anticipate that CRE prices will level out and transaction volume will slow. This is particularly the case for large markets. Prices in smaller markets are expected to improve throughout 2017 due to high demand and weak supply. Investors may move into infrastructure and niche assets in search of yield.
As Lawrence Yun, Chief Economist and Senior Vice President of Research with the National Association of REALTORS®, explains, “The U.S. economic momentum still appears to be in place from continuing job gains. The falling unemployment rate should begin to help boost wages and further strengthen the commercial market fundamentals of rising occupancy and rent growth. However, with monetary policy committed to higher interest rates, commercial real estate property prices may undergo a minor downward adjustment.”
Situs RERC’s most likely scenario for CRE in 2017 is that cap rates will stabilize and begin an upward trajectory, but spreads will remain healthy. According to Situs RERC’s value outlook, total expected returns are approximately 5.0 percent to 7.0 percent for institutional unleveraged properties.
Matt Kimmel, Principal at Deloitte Transactions and Business Analytics LLP, remarks, “During the upcoming year, expect ongoing global change that presents opportunities in the commercial real estate markets as they continue to perform well across most asset types.”
Also, please join us on March 2, 2017 at 2p.m. ET for the Deloitte Dbrief Commercial Real Estate Series webcast. This live webcast will discuss the results of the Expectations & Market Realities in Real Estate 2017 report and provide practical tips for navigating market uncertainty.
Commercial Real Estate Booms For Second Straight Quarter
The Ten-X Commercial Real Estate Capital Trends report concludes investment activity increased during Q4 2016, the second straight quarter to record growth. Overall transaction volume jumped 7.3 percent from the third quarter to $129.7 billion, according to Real Capital Analytics, with the increase driven by growth in the apartment, office and industrial sectors. Though down nearly 20 percent from its cyclical peak, deal volume has now topped $100 billion during each of the last ten quarters.
Commercial real estate continues to benefit from a healthy labor market, as labor force participation is on the rise and the national unemployment rate is below 5 percent. However, the economic stability the country has enjoyed for several years is now in question due to uncertainty created by a number of paradigm shifts, including rising interest rates and a new presidential administration that has promised radical policy changes.
“For years, a slowly expanding economy has been a boon to commercial real estate, driving unprecedented periods of growth in many areas of the market. After years of smooth sailing, however, the industry could be headed for stormier waters,” said Ten-X Chief Economist Peter Muoio. “The Fed’s stated plans to raise rates in 2017 and the prospect of wholesale changes to trade, immigration and tax policies are contributing to a level of uncertainty the market has not witnessed for years. While commercial real estate remains in a period of steady growth at the moment, investors should be aware that this enduring stretch of stability may be nearing its end.”
Office Madness: NYC Reaches Record Number of Office Jobs
New York City reached a record number of office jobs in 2016, according to a report released on Monday by state Comptroller Thomas DiNapoli.
The city has over 1.5 million office workers, more than a 100,000 above the previous peak during the economic boom that crested in the year 2000. The city reached nearly 1.4 million office jobs in 2007, about 150,000 short of the current level.
The job growth has been driven by employment gains primarily among tech, advertising, media and information companies, a group commonly referred to by the acronym TAMI. TAMI firms, along with business services companies like law and accounting firms, drove about 87% of the 202,000 office jobs that have been added in the city since the end of the recession in 2009, according to the report.
“The city’s economy is doing well and it has become a magnet for a lot of tech and TAMI tenants,” said Kenneth Bleiwas, the state’s deputy comptroller. “TAMI has been the big driver. It’s an industry that thrived under Mayor Michael Bloomberg and that has continued to grow.
read more: Crain’s
Mall Madness: JCPenney Is Latest Retailer Leaving
JCPenney joins the growing list leaving some shopping malls.
The 114-year-old chain, which had avoided mass closings despite years of losses, said it would shut as many as 140 of its 1,000 stores by June. The company said it was also offering a voluntary buyout program to 6,000 of its employees.
Penney eked out its first annual profit since 2010, but executives said they were closing weaker stores so they could focus their investments on revamping those in stronger markets. Penney said it would identify the locations that are set to close next month; executives said many were smaller stores in rural locations.
The company joins a parade of department stores announcing plans to close locations this year after struggling to draw shoppers during the holiday season as more shopping moves online. Macy’s Inc. has plans to close 100 locations and is exploring options for the rest of its real estate, while Sears Holdings Corp. is closing 108 Kmart and 42 Sears stores.
read more: Marketwatch
Here’s why Shoppers aren’t Frequenting JCPenney
At T.J. Maxx, shoppers relish the hunt for a bargain-priced designer dress. Visitors to a Nike store in Manhattan can try out sneakers by taking a virtual jog through the park. And Ulta customers can sample an array of makeup without assistance from a sales representative.
Some retailers are developing success formulas that are helping them thrive while department stores like J.C. Penney, Sears, and Macy’s are shuttering dozens of locations and struggling to lure shoppers away from their mobile phones and laptops and into stores. J.C. Penney said Friday that it will close up to 140 locations, a move that mirrors a decision by rival Sears, which plans to shutter 150 stores, and Macy’s which closed 66 locations last year and intends to close 34 more.
The new recipe for retail success entails offering immediacy, experiences that can’t be found on a screen, bargains galore and speedy, specialized service. While some chains are executing better than others, industry watchers say stores, in the hands of the right operator, still play a key role in satisfying shoppers.
“People still want to feel, touch and look to make a decision,’’ says Farla Efros, president of HRC Retail Advisory, a retail strategic firm. “It’s just the role of the store is different. It needs to be more experiential than it has been.’’
But against that backdrop, some other chains are soaring. TJX, operator of discounters T.J. Maxx and Marshalls, said this week that the company envisions opening roughly 1,300 more locations in the U.S. and Canada. Nordstrom, famous for its high-touch service, saw an earnings boost in the last three months of its fiscal year that was buoyed in part by $4.5 billion in sales at its off-price division, Nordstrom Rack. Riding the home-buying wave, Home Depot earned $1.7 billion in its fiscal fourth quarter, up from $1.5 billion.
read more: USA Today
Eurozone Madness: Biz Confidence Grows Despite Impending Elections
Eurozone businesses grew more optimistic about their prospects in February, as a measure of confidence among service providers rose to its highest level since before the global financial crisis.
The pickup in business sentiment is consistent with the results of other recent surveys, which suggest the eurozone economy has gained fresh momentum in early 2017, despite heightened uncertainty about future policies ahead of key elections across the currency area.
In a separate release that carried a similar message on Monday, the European Central Bank said lending to households increased in January, though credits to businesses grew at the same pace as at the end of 2016.
The European Commission said its Economic Sentiment Indicator, which aggregates business and consumer confidence, rose to 108.0 from 107.9 in January, reaching its highest level since March 2011.
However, that increase occurred despite a drop in consumer confidence. Among businesses, manufacturers were at their most upbeat since June 2011, while the measure for service providers rose to 13.8 from 12.8 in January, reaching its highest point since October 2007, almost a year before the collapse of Lehman Brothers.
read more: Wall St Journal
Fashion House BCBG Max Azria Prepares for Bankruptcy: Reuters
BCBG Max Azria Group, whose form-fitting party dresses have been worn by celebrities Selena Gomez, Drew Barrymore and others, is making preparations to file for bankruptcy as soon as next week, people familiar with the matter said on Friday.
The fashion house is the latest casualty in the struggling U.S. retail sector, as shoppers abandon malls in favor of internet shopping. BCBG has already informed mall owners of its plans to shutter most of its approximately 200 U.S. stores.
BCBG is working with its financial and legal advisers to prepare the bankruptcy filing, the people said, asking not to be identified because the plans are confidential. It is possible that some companies, including brand licensing firms, may seek to buy BCBG’s assets in bankruptcy, the people added.
read more: Reuters
Clothing Retailer J.Jill Going Public
J . Jill, a Quincy, Mass.-based women’s apparel retailer acquired less than two years ago by TowerBrook Capital Partners, has set its IPO terms to 11.67 million shares being offered at between $14 and $16 per share. It would have an initial market cap of approximately $656 million, were it to price in the middle of its range. The company plans to trade on the NYSE under ticker symbol JILL, with BofA Merrill Lynch serving as lead underwrite.
read more: Axios
Silver Lake Considers Moving to NYC’s Hudson Yards
Office manager: Silver Lake is in talks to move its global headquarters from 9 West 57th St. to the new Hudson Yards project, Axios has learned. No contracts have yet been signed, nor is it clear if Silver Lake would actually pack up its offices before its current lease expires in two years.
This may sound like a minor piece of housekeeping, but 9 West 57th has been private equity and hedge fund central for years, serving as global HQ to such firms as Silver Lake, Apollo, KKR, Och-Ziff, Tiger Global and more. It is to NYC private equity what Sand Hill Road is to Silicon Valley venture capital (or what Bay Colony used to be to Boston venture capital).
KKR already signaled in late 2015 that it planned to leave for Hudson Yards, and Silver Lake’s departure would begin to look like something of a trend. Moreover, while the Silver Lake discussions with Hudson Yards began before last November’s election, word is that traffic and security issues related to nearby Trump Tower have only served to make them more intense. No comment from Silver Lake.
read more: Axios
Here Come More Robots
Wendy’s says it plans to install self-ordering kiosks at about 1,000 locations by the end of the year.
A typical location would have three kiosks, The Columbus Dispatch reported Higher-volume restaurants will be given priority for the kiosks.
Wendy’s chief information officer, David Trimm, said the kiosks are intended to appeal to younger customers and reduce labor costs. Kiosks also allow customers of the fast food giant to circumvent long lines during peak dining hours while increasing kitchen production.
Trim estimates the company will see a return on its investment in less than two years.
“They are looking to improve their automation and their labor costs, and this is a good way to do it,” said Darren Tristano, vice president with Technomic, a food-service research and consulting firm. “They are also trying to enhance the customer experience. Younger customers prefer to use a kiosk.”
Kiosks are also valued by the Dublin, Ohio-based company for their ability to provide data about customers.
“This move puts them at the forefront of the kiosk and tech movement,” Tristano said.
Kiosks already have been installed at several central Ohio locations, where the company first tested the technology.
Customers will still be able to order at the counter for now, although Tristano predicts that mobile ordering and payment via smartphones will one day overtake self-ordering kiosks and cash registers.
read more: Business Insider
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