Situs Newswatch 6/26/2017

CRE Investors Eating Up Restaurants

Investors have a large appetite and are forking over big bucks to get in on the latest CRE trend on the menu — restaurants.

NREI reports that investors are using 1031 exchanges in setting their sights on restaurants.

“It’s all a function of wanting to buy e-commerce-resistant retail, in this age of Amazon buying up everything, and restaurants are at the top of the list of what people are looking for,” says Situs Executive Managing Director Warren Friend. “Restaurants like the Cheesecake Factory, P.F. Chang’s, even Starbucks, are replacing Macy’s and J.C. Penney as anchor stores and are drawing people to the mall.”

Casual dining restaurants are trading at a slight premium compared to the retail sector as a whole, at 6.0 percent compared to 6.19 percent. That gap was even more pronounced a year ago, when casual dining restaurants were averaging cap rates of 5.75 percent, according to a June 2017 casual dining report released by The Boulder Group. However, a larger percentage of higher cap franchise-owned deals that have traded have pushed cap rates higher amid strong buyer demand.

In the first quarter of 2016, franchise-backed leases accounted for only 31 percent of the casual-dining sector compared to 49 percent in the first quarter of 2017. Casual-dining restaurant properties with corporate guarantee leases had cap rates of 5.75 percent, while franchisee-leased properties were priced 50 basis points higher, at 6.25 percent, according to the Boulder Group.

The restaurant category has been very active lately, and in many cases, demand is outpacing supply.

Although there continues to be a healthy supply of for-sale restaurants, some buyers are having a tough time finding exactly what they want in terms of price, location, credit and brand.

Click here to listen to Part 2 of Situs’ Jennifer Rasmussen on the Jim Bohannon radio show.

Mall Landlords Roll the Dice With Tech Investments
Mall landlords are investing millions of dollars in technology to help protect them from the changes buffeting the retail sector as internet shopping gains a stronger foothold.

Some of the investments aren’t faring so well.

Macerich Co., one of the biggest U.S. mall owners, last quarter wrote off $10 million invested in a startup that purported to help online and European retailers expand their physical store presence in the U.S.

Its investment in WithMe, a firm that designs pop-up stores with interactive features such as responsive display tables, led to store openings in six Macerich shopping centers last year: the Los Cerritos Center, the Oaks and Santa Monica Place in California; Washington Square in Portland, Ore.; Tysons Corner Center in Tysons, Va., and the Shops at North Bridge in Chicago.

But the two companies parted ways soon after. The costs of the build-outs were higher than anticipated, and WithMe said it would be better for Macerich to run the program by itself.

“They really billed themselves as being the bridge between clicks and bricks, which, had it turned out to be that, it would have been a wonderful business,” said Art Coppola, chief executive officer of Macerich, during an April earnings call. “We realize that we’ve made too big of an investment into one company. But the other takeaway was that we are going to be best served to have us as the facilitator for clicks coming to bricks and not think about third parties being the ones to get in the middle of that,” Mr. Coppola said.

Macerich’s decision to pull out “definitely hurt,” said Jonathan Jenkins, the founder of WithMe. The split enabled the startup to focus on other opportunities, such as prioritizing building experiences for the brands first, then finding the best location for that, he said.

Macerich, a Santa Monica, Calif.-based real-estate investment trust, has invested an additional $8 million in other ventures and retailers that have been more successful, such as b8ta, which sells tech gadgets, and clothes retailer Ministry of Supply.

As changing consumer habits and e-commerce squeeze mall tenants, landlords face growing pressure to remain relevant, and are investing more resources to understand the industry’s disrupters. Larger landlords with stronger balance sheets, such as Simon Property Group and Westfield Corp., have been setting aside millions of dollars for incubators to take on risks similar to venture capitalists.

Doing nothing could prove just as risky at a time when retail property companies face growing threats to their viability from Inc.’s growth and from competing neighboring shopping centers that are innovating.

But getting the technology right has proven to be a challenge.

Consider beacons, which are wireless devices that can be placed anywhere and emit a signal that is picked up by smartphones. Beacons placed in stores can activate apps on smartphones that offer shoppers personalized coupons or promotions.

Mall landlord CBL & Associates Properties ran a pilot program with beacons at three of its malls in the fourth quarter of 2015 and learned that, while the technology is viable, the pilot showed there are challenges in asking consumers to download the app. The Chattanooga, Tenn.-based REIT said it is now focusing on creating an excellent mobile web experience rather than developing apps that provide the same information and utility.

“We want to make sure we’re not jumping onto a bandwagon on technology that’s going to be obsolete in 18 months,” said Jim Ward, vice president of marketing, brand development and digital strategies at CBL.

read more: Wall St Journal

Situs’ Warren Friend is speaking at IMN’s 18th Annual U.S. Real Estate Opportunity & Private Fund Investing Forum in Newport, RI, June 25-27. Click here for the agenda and registration details.

Amazon May be Single-Handedly Killing Inflation

Amazon CEO Jeff Bezos has changed the way the retail world operates. He may be about to exert a similar level of pressure on the economy and expectations for future price trends at the supermarket.

At a time when central banks are starting to gird against an expected rise in inflation ahead, Bezos’ move to acquire Whole Foods looks to be a significant counterweight.

Analysts expect Amazon to rein in the famously high prices of the upscale grocery chain — “Whole Paycheck,” as it is often called — which then could have a ripple effect through the industry.

“Now Amazon is going to reshape the entire food retailing industry and it is highly deflationary — and this is an $800 billion grocery market we’re talking about,” David Rosenberg, senior economist and strategist at Gluskin Sheff, said in his daily note Monday.

Rosenberg sees “a supermarket war of historic proportions” that will have a significant effect on an industry “that had already been confronted with escalating competitive pressures from the Web as well as foreign entrants.”

While some economists disagree that the merger’s ramifications will be that dire, it certainly raises questions about how truly disruptive Amazon can be. Should the move put pressure on other chains, Wal-Mart and Target in particular, to lower their prices, it’s hard to say where it all could end.

If nothing else, it certainly adds a new wrinkle to the policy debate faced by the Fed and Washington lawmakers.

read more: CNBC

Don’t Look Now, But Amazon is Going After the Clothing Biz Too
Shares of apparel retailers took a dive Tuesday, after Amazon appeared to take aim with the launch of its new Prime Wardrobe service, which allows users to try on multiple items at a time at home and receive a discount on items that are kept.

Shares of Ascena Retail Group, the parent of apparel retailers including AnnTaylor, Charming Shoppes and The Dress Barn, tumbled 7.8%. Elsewhere, shares of Gap shed 3.8% and Abercrombie & Fitch slid 3.6%. Among clothes-selling department store chains, shares of Nordstrom gave up 3.5%, Macy’s lost 1.9% and Dillard’s declined 4.5%.

Amazon sparked a selloff in grocery store stocks after announcing a deal Friday to buy Whole Foods for $13.7 billion. Analysts fear Amazon’s move into a sector introduces a potential major competitor that will lead to lower prices and narrower margins.

read more: MarketWatch

Home Sales Skyrocketing

The housing market is taking off — new U.S. single-family home sales rose in May and the drop in sales in the previous month was not as steep as first reported

The Commerce Department says sales of newly constructed homes increased 2.9 percent to a seasonally adjusted rate of 610,000 units last month. April’s sales pace was revised up to 593,000 units.

“The housing market is benefiting from continuing  job growth and low mortgage rates,” says the Collingwood Group Managing Director Tom Booker. “The unemployment rate fell to a 16-year low of 4.3 percent in May and mortgage rates are still favorable by historical standards.”

New-home sales were up 8.9 percent on a year-on-year basis. May’s sales increase came after April’s sales were revised to show a smaller drop than previously reported.

But Collingwood’s Booker warns, “An increase in the cost of building materials and shortages of land and labor have crimped homebuilding. With demand outstripping supply, house prices remain elevated.”

The median house price rose to $345,800 in May from $310,200 in the prior month.

This follows Wednesday’s report on existing-home sales which were up 1.1 percent in May over April and 2.7 percent year-over-year, according to the National Association of Realtors. Existing-home sales last month rocketed to their third highest monthly level in a decade, but the news is not good for first-time buyers as chronic inventory shortages pushed home prices to new highs.

The median house price for an existing home increased to an all-time high of $252,800, a 5.8 percent jump from one year ago, reflecting the lack of homes on the market.

The number of homes on the market rose 2.1 percent, but supply was down 8.4 percent from a year ago. Housing inventory has dropped for 24 straight months on a year-to-year basis.

“Why was anyone surprised?” asks the Collingwood Group Managing Director Tom Cronin, appearing on Westwood One Radio Network. “Rates continue to be near historic lows, there are 6.5 million job openings, inventory is light and there is tremendous pent-up demand.”

Cronin adds, “Sure, the problems are still out there. Housing permits are down, housing starts are down, credit continues to be tight (albeit the GSEs are working responsibly to expand credit), regulation restricts lending on entry-level purchases (points and fees) and the cost of this regulation inhibits development in the low/mod/first-time buyer space. These problems exist across the spectrum; they are not all federal. We need a focused agenda to deal with this or we’ll still be talking about this in five years.”

Government Real Estate Investment Market Explodes 
President Trump’s campaign promise to leverage private capital to spur $1 trillion in new infrastructure spending over the next decade is thrusting this highly specialized investment niche into the spotlight.

Government real estate has exploded into a broad investment category that includes everything from toll roads and water treatment plants to single-tenant leased commercial buildings. Capital has been pouring into the space over the past five years with new funds and more new players that are putting more pressure on the supply of investment deals available.

The latest big addition is Blackstone, which launched its U.S. Infrastructure fund this year that it expects to grow to $100 billion. “Since the global financial crisis, people like real assets and they like infrastructure because the presumption is that these are business models and revenue streams that are secure,” says Joel Moser, CEO of Aquamarine Investment Partners, an institutional investor and manager of private equity in the real asset classes of energy, infrastructure and core real estate.

The challenge is that there is more capital than there are quality investment opportunities. “There is really not a big inventory of these traditional civil infrastructure assets,” says Moser. So what most infrastructure funds tend to invest in is energy, such as oil and gas pipelines. There is also a scattering of about half a dozen transportation projects that come to the market each year. “There is a huge disconnect between what investors think they want exposure to in North America and what is actually there,” Moser says.

Investors are now watching to see if the pipeline of investment opportunities might be poised to take a big leap forward. “There are a lot of people who are watching Washington to see if there is a real catalyst for infrastructure spending,” says Nathanial Sager, senior managing director, CTL and structured debt products, at Mesirow Financial in Chicago.

One factor that bodes well for new infrastructure development is that people generally recognize that there is a big need in the country to upgrade and replace critical infrastructure. “So regardless of whether this administration is successful, or the next administration, I think we are going to see increased activity in the (third-party) market, because there is going to be a huge demand for investment in infrastructure and essential government assets,” Sager notes.

Infrastructure has been an investable asset class globally for some time, but it has only taken off in the U.S. over the last decade. The first privatization of a U.S. highway occurred in 2005, with an investment group acquiring the 7.8-mile Chicago Skyway toll road.  That was followed by the Indiana Toll Road deal in 2006. “All of a sudden, the concept of infrastructure being an investable asset class in the U.S. exploded,” says Moser.

There have been numerous pilot projects around the country over the past decade, some successful and some failures, and the U.S. is still grappling with how to make privatization work, notes Moser. One challenge is that projects are not easy to finance. Lenders are wary about underwriting infrastructure projects with revenue risk, or those projects that are reliant on collecting revenue from operations, such as a toll road.

read more: NREI

Fed’s No. 2 Cautions Over Housing
Federal Reserve Vice Chairman Stanley Fischer says he is worried memories might be fading about the pivotal role that housing played in the financial crisis.

“House prices are now high and rising in several countries, perhaps as a result of extended period of low interest rates,” Fischer said in a speech to a DNB-Riksbank conference in Amsterdam. Fischer noted that U.S. government’s role in housing is increasing with Fannie Mae, Freddie Mac and the Federal House Administration “now the dominant providers of mortgage financing.”

The Fed’s  No. 2 said “there is more to be done” to strengthen the resilience of the housing finance systems. Just taking the possibility of severe stress seriously would help, he said. And government support for housing should always be made explicit, he added.

read more: MarketWatch

FinTech: Watch Out, Here Comes Goldman
Since Goldman Sachs was founded more than a century ago, Wall Street has adapted to everything from the invention of the automobile and the demise of the gold standard to the rise of the internet. More recently, bank CEOs have contended with regulations that are reshaping their businesses in the wake of the financial crisis, as well as technology startups that want to change the financial industry.

Goldman CEO Lloyd Blankfein suggested in a CNBC interview that both influences are behind its decision to branch out from investment banking and start its consumer lending arm called Marcus, which has lent out about $1 billion since it was created last year and is on track to double that amount in 2017. Goldman has traditionally aided mega companies and governments in raising money, but now it’s going after consumer loans ranging from $3,500 to $30,000.

As Blankfein told CNBC, one reason for the shift is that the world no longer looks kindly on some of its historic specializations, like trading on its own account, known as proprietary trading. Regulations instead tend to reward old-school banking activities such as … well, banking, and lending in particular. Financial technology companies, meanwhile, have figured out that you don’t need to build brick-and-mortar locations to attract consumers anymore — an app and a website can reach customers who probably don’t want to visit a storefront anyway.

read more: Quartz

Co-Working Comes to the Burbs
Communal co-working office spaces such as the ones offered by shared-office giant WeWork Cos. are red hot in big U.S. cities like New York. Now they are making inroads in the New Jersey suburbs.

Co-working startup Vi Coworking LLC opened a site in June at a redevelopment project at Fort Monmouth, after finding success with a 5,000-square-foot co-working space it launched a little over a year ago at the Bell Works redevelopment in Holmdel.

“The demand is stronger than we thought,” said Nick Shears, director of leasing at Hugo Neu. “We would get people looking for traditional office space and saw the co-working space and said, ‘This is better because I am not ready to commit on a multiyear lease.’”

Co-working spaces, which offer short-term commitments, are often associated with the technology and startup worlds, emphasizing community and a more casual office setting that sometimes comes with free beer and ping pong. Those in the suburbs vary, offering a more subdued décor and setting geared toward somewhat older professionals, but sharing an emphasis on networking.

The rise of the suburban shared-office facility, typically under 15,000 square feet in New Jersey, has been fed by a growing number of independent workers, said co-working operators, real estate developers and brokers. Many of them are leaving the corporate world to strike out on their own, eliminating a long commute and establishing more of a balance between personal and work life, said the experts.

read more: Wall St Journal

Have a prosperous day ahead!

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