Situs Newswatch 4/10/2017

‘Second City’ Scores Second Highest Rent Rise in the World

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The “Second City” proved worthy of its name in 2016 as its high-end office rents rose 20 percent – the second highest increase in the world.

Only Belfast, Northern Ireland, boosted by “strong demand and a chronic shortage of prime space,” saw a larger increase in 2016 than Chicago — 25 percent — according to a Global Prime Office Rents survey cited in the Chicago Tribune.

“Chicago’s great results recently are sending the message that now is the time that money can be made in the office market,” said Ken Riggs, President of Situs RERC. “It’s especially good news considering the ‘Windy City’ is typically known for less-dramatic fluctuations and underperformance in the office sector for property values and rents than those seen in coastal markets such as New York and San Francisco. The data help explain why developers continue drawing up plans, even though tenants just began moving into two brand-new towers along the Chicago River. It is still a relative inexpensive office market, as Chicago office rents average $38 per square foot versus NYC at over $100 per square foot.”

Rents in Chicago’s newest and best-located office buildings rose to $38.84 a square foot in 2016, up from an average of $32.40 in 2015, according to the study in the Tribune.

The study shows why developers, already known for their optimism, continue jockeying to launch the next office high-rise in Chicago’s skyline even amid concerns about shadow space — big holes created by tenants moving.

Situs RERC finds that when analyzing all grades of office properties in Chicago from a relative value vs. price perspective:

  • Chicago is ranked third in metro rankings for Office out of primary U.S. markets;
  • Economic indicators such as the employment rate, population growth and wage growth are fair (e.g., total employment has grown about 1.5 percent over the last few years while the U.S average is 1.8 percent, per CBRE Group Inc.);
  • Chicago’s pricing remains relatively favorable compared to other primary U.S. metros;
  • The current low prices, relative to other primary metros, combined with decent fundamentals, create an environment suitable for growth. In other words, Chicago’s current office market pricing is less than what the fundamentals indicate it should be (more potential value compare to the price);
  • The lower relative prices in the office market should stimulate further demand in Chicago, and the city is seeing some companies move their operations into Chicago in search of greater talent.

To paraphrase Frank Sinatra: “Chicago is Our Kind of Town.”

Situs Women Hear Warnings and Promises Ahead for CRE 

A number of key Situs employees attended the CREFC Women’s Forum in New York this past week and heard warnings and promises about the future of Commercial Real Estate.

In attendance at the event were Situs’ Mary Wang, Associate, Business Development; Connie Li, Analyst; Shanika Gunawardena, Marketing Associate; Lindsey Heines, AVP, SRS AUP; Sonali Dhall, VP, Human Resources; Laura Gunning, VP, Talent Sourcer/Researcher, Human Resources; Duang Fouse, Operations Manager; Dana Fleming, VP, Human Resources; Amrita Ganguly, VP Planning, Analysis & Corporate Development, C-Suite; Navi Kaur, Associate, Business Development; and Bria Bailey, AVP, Strategic Platforms.

Many of the Forum’s trends have been explored in our Situs Newswatch, including new warnings of “Mall Madness”  — fears that malls are non-starters at least in the form we know them in today. In addition, there were concerns that multi-family (apartments) are over-constructed and rents are coming down — meaning less profit for landlords.

On the upside, forum participants were assured that new technologies promise to bring fast change to the industry. These could bring new efficiencies that we have yet to even think of. Participants were advised to think “outside the box,” and told there’s still plenty of money to be made in CRE to those brave enough to reach for it.

Virtual Offices Cutting Into CRE Biz

A growing number of business clients — ranging from solitary millennial entrepreneurs to multinational companies — are turning to the services of “micro” or “virtual” office providers in a quest to either establish themselves, impress clients or backers or set up branch offices on the cheap.

For as little as a $50 monthly membership fee and a $250 month-to-month lease, Marcus Moufarrige, chief operating officer of Australia-based Servcorp, says that the next Elon Musk can set up a “virtual office,” just to receive mail.

If they want to enjoy genius-inducing creature comforts like cappuccino, couches and free WiFi at the so-called “co-working spaces,” that’s an additional $450 a month at either financial district locales like the World Trade Center and 17 State St., or Midtown meccas such as the Seagram Building and 1330 Sixth Ave.

In an automated update of the old dodge of renting a mailbox at a high-class address, “virtual offices” provide a business with its own dedicated receptionist guaranteed to respond promptly to every one of your leads and with the special attention you want each one to get, Moufarrige says.

Beyond that, and of course higher up the price scale, companies can secure actual mid-sized offices and even conference rooms and executive suites starting at $1,000 monthly.

“It’s often said that nine out of 10 small businesses go under,” says Moufarrige. “But what kills small businesses that are not household names is the cost of hiring people and the cost of rent. It’s not necessary to have your own lobby and your own office.”

Servcorp started in Australia in 1978 and only began establishing a presence in this country in 2010. It now has 22 sites around the US, including the four New York City locations, and 150 around the world.

In the Big Apple, this presence is dwarfed by the much larger footprint established by WeWork, which has 38 locations in the city (including four in Brooklyn and one in Queens) and offers similar sets of amenities (e.g., a private Madison Avenue office for as little as $850 monthly, or $650 if you just want your own desk).

read more: NY Post

Investment Forecast for the Office Sector Is Optimistic

The Federal Reserve’s higher interest rate will have little impact on U.S. office building values, mainly because of dramatically low new office construction over the last seven years, notes John Chang, first vice president of research services for brokerage firm Marcus & Millichap Real Estate Investment. Their U.S. Office Investment Forecast reported that 82 million sq. ft. of new office space will be delivered nationally in 2017, the peak for new office construction in the current cycle.

While a significant amount of new space will be delivered this year, it is nearly all pre-leased, according to Chang. According to Robert Slatt, a principal at the mortgage banking firm Newmark Group based in San Francisco, most of the development activity he is seeing involves adaptive reuse of obsolete structures, like old warehouse buildings.

The biggest setback to sales velocity right now is uncertainty about fiscal policy and proposed changes in the tax structure, says Chang. Investors worry that if they sell a property now they will lose out on any advantages provided by the GOP’s proposed lower tax structure and are holding off selling, which is slowing transaction activity. Buyers are cautious at this point too. The office market peaked in 2015, Chang points out, flattening out last year, but remained in peak-level range through 2016 until the election and initial 25 basis point spike in the Fed rate.

“People are starting to adapt to the new environment, with investors factoring the rising cost of capital into negotiating deals,” Chang says. “There’s a modest softening in sales, but lot of things can happen to change that, like cost of available capital and strength of the dollar and stock market.”

Chang adds that commercial real estate investors favor a high-inflation environment because it pushes up rental rates.

There is still plenty of capital available for deals, but lenders are exercising discretion in favoring urban properties with a secure tenant base, the Marcus & Millichap report notes, while exercising greater scrutiny and more conservative loan underwriting for suburban office assets.

read more: NREI

Brexit Weighs On U.K. Banks

A surge in consumer lending means British banks are at risk of incurring losses, the Bank of England said, warning that some might be letting credit standards slide as they compete to offer debt to households.

Consumers ramped up their borrowing by more than 10 percent late last year, the fastest growth in a decade, which helped drive strong economic growth despite June’s vote to leave the European Union. Rates of saving fell to their lowest in more than 50 years.

But the economic outlook is now darkening as households face rising living costs in the wake of sterling’s tumble against the dollar and the euro, and wage growth is expected to remain below its long-run average.

Last week the BoE said it was taking a closer look at consumer borrowing, and on Tuesday it gave more details.

“An easing in credit supply conditions appeared to have contributed to the growth in consumer credit, with intense competition in some segments of the market,” the BoE said in a summary of the latest meeting of its Financial Policy Committee, which looks at financial stability risks.

Credit card companies were offering longer interest-free periods to entice borrowers, while other lenders were offering larger unsecured loans and had cut the interest rates they charged by more than for less risky mortgage rates.

The Financial Conduct Authority, a separate regulator, proposed on Monday that credit card companies should freeze lending to some of the 3.3 million Britons who paid more in interest and charges than they have repaid debt.

The BoE is now also looking into the risks from Britain’s lending boom, and could take steps before the end of the year.

read more: NY Times

Boost to Florida Real Estate: China President’s Visit to Trump’s Mar-a-Lago

Chinese President Xi Jinping’s visit to Mar-a-Lago will boost the already surging interest in Florida among Chinese homebuyers, according to the CEO of an international property portal in China.

The spotlight on President Donald Trump’s club — which has an annual membership fee of $200,000 — has transformed Mar-a-Lago into a status symbol for rich and ambitious Chinese seeking to follow the footsteps of their country’s most powerful man, according to Charles Pittar, CEO of Juwai.com.

Xi’s visit, he said, sends a strong message to China’s domestic audience that Mar-a-Lago is a “wonderful” destination in which they should have confidence.

“Historically, Los Angeles and New York have been the mainstays of (Chinese) demand,” Pittar said, adding that Florida is quickly taking the spotlight, spurring on a Mar-a-Lago mania.

Juwai.com’s database, which calculates the number of inquiries as buyer interest, shows a 62.5 percent jump of Florida property inquiries from Chinese buyers in 2016 compared to 2015, and a 48 percent rise from 2014 to 2015.

With its sun, sand, sea and sprawling golf courses, it’s perhaps little surprise that the Chinese are flocking to the Sunshine State. Other triggers for the spike in Chinese demand include the possible upcoming direct flights between Florida and China, and the boost of confidence within the community when Chinese developers start building at a particular location, Pittar told CNBC’s “Squawk Box.

read more: CNBC

Mall Madness, but Retail Property Market Holds Steady

Despite a wave of retail store closings and mall vacancies across the U.S., the national retail-property market is holding steady.

Vacancy rates in shopping centers increased in 28 of 77 U.S. metro areas in the first quarter from the same period a year earlier, according to data from real estate researcher Reis Inc. That was a slight improvement from the fourth quarter, when 30 metro areas recorded year-over-year increases.

For regional malls, which typically are enclosed retail centers, vacancy rates rose slightly, to 7.9% in the first quarter from 7.8% in the fourth quarter of 2016. Asking rents increased 0.4% in the first quarter, matching the fourth quarter of 2016.

“The overall retail real estate statistics recorded very little change in the quarter,” said Barbara Denham, an economist at Reis.

The vacancy rate of neighborhood and open-air shopping centers remained unchanged at 9.9%, the same as the fourth quarter and the first quarter of 2016.

Many retailers and department stores have been battered in recent years by the rise of e-commerce and changing shopping preferences, and have been forced to close stores. Shares of mall real-estate investment trusts have also taken a beating since early 2016.

But tenant demand is likely to soften. “Most retailers are focusing capital investments on the e-commerce rat race, desperately trying to capture market share. This has left physical retail — the core to most mature retail businesses — neglected for some time,” said D.J. Busch, an analyst at Green Street Advisors, a real-estate research firm.

read more: Wall St Journal

Polo Match Over

Ralph Lauren  has said it will close its Polo New York City flagship clothing store at 711 Fifth Avenue between East 55th and East 56th Streets on April 15, but its Polo Bar Restaurant at the location will remain open.

“We continue to review our store footprint in each market to ensure we have the right distribution and customer experience in place,” Jane Nielsen, Ralph Lauren’s chief financial officer, said in a news release. “The decision will optimize our store portfolio in the New York area and allow us to focus on opportunities to pilot new and innovative customer experiences. The Polo brand remains strong, and we expect it to further strengthen as we continue to evolve the Polo product and marketing.”

The company will also be revamping its e-commerce platform, shifting “to a more cost-effective, flexible e-commerce platform through a new collaboration with Salesforce‘s Commerce Cloud,” the company said. All told, these changes will save the company $140 million on an annual basis (on top of $180 million to $220 million in expense savings announced last June), but will cost the company $370 million to implement.

Retailers have been buckling under the pressure of online sales, less dollars being spent on apparel and accessories and high rents among other issues. Bebe, a 1990s favorite for women’s fast fashion, is shuttering its ground-floor store at 1 West 34th Street between Fifth Avenue and Avenue of the Americas, as CO reported last week, which is part of a plan to close all of its 170 stores nationwide. Others making similar moves include Macy’sKenneth ColeJ.C. PenneySears and Kmart.

read more: Commercial Observer

Have a productive day ahead. To our Jewish readers, happy first night of Passover.

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