Situs Newswatch 9/27/2017

Situs RERC Retail Market Investment Conditions 2017
Each quarter, Situs RERC surveys regional and institutional investors across the nation about investment criteria in their local marketplace and trends across the country. The results are collected, averaged and then included in our quarterly report. Last week, we looked at a broad overview of each sector; today we’re taking a closer look at the retail sector.

  • During second quarter 2017, the majority of Situs RERC’s institutional investment survey respondents recommended caution when investing in the retail sector. There was opportunity, but investors should be selective when looking at retail properties.
  • For the retail sector, half of the respondents recommended holding onto well-positioned and successful regional retail mall and neighborhood/community retail properties. With regard to retail power center properties, half of the respondents said that selling was the best option, while nearly 40 percent of respondents recommended holding onto retail power center properties.
  • Although required return expectations have not increased significantly, the perceived uncertainty centering around Amazon’s impact on the world of retail has rattled the market. During second quarter 2017, Situs RERC’s weighted average required pre-tax yield rate for the overall retail sector increased 10 basis points to 7.7 percent. The overall retail sector weighted average required going-in cap rate increased by 10 basis points to 6.2 percent, while the weighted average required terminal cap rate was stable at 6.6 percent.
  • Situs RERC’s expected rental growth rates for the neighborhood/ community retail, regional retail mall and retail power center sectors decreased to 2.6 percent, 2.7 percent and 2.5 percent, respectively. The expected expense growth rates for the regional retail mall and retail power center sectors were stable at 2.9 percent, while the rate for the neighborhood/community retail sector declined by 10 basis points to 2.8 percent. As can be seen by expense growth outpacing rent growth, NOI levels are viewed to be deteriorating.

Conclusion:

Many malls, especially the older traditional enclosed suburban malls, are becoming obsolete, that does not meant that people don’t still want to go out and shop. There has been a major shift in the retail sector toward lifestyle centers (e.g., theaters, restaurants, boutique retailers) with an exterior walkable design and a place to have fun and enjoy the experience. Trophy and Class A retail properties are being built or purchased with relatively low rates of return, while Class B and Class C properties are hard to sell and are being sold with distinctly higher rates of return. Major retailers are retreating from Class B and Class C locations and investors are factoring this tenant risk into their buying calculus. In general, the turmoil in the retail industry is leading investors toward quality assets.

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Regulator Wants Financial Industry to Self-Report Wrongdoing
A top U.S. markets regulator unveiled a new enforcement framework that relies more heavily on firms to self-report wrongdoing and gives them new incentives to cooperate with probes.James McDonald, the Commodity Futures Trading Commission’s enforcement director, announced the strategy during a speech at New York University on Monday. Though the agency already has incentives to encourage firms to cooperate with investigations, the new framework says that penalties will be reduced by a “substantial” amount in cases where the firm fully cooperates.

“No matter how much corporate leaders may want to foster compliance within the company, when they detect misconduct their decision whether to voluntarily report it often comes down to their perception of whether they’ll be treated fairly,” Mr. McDonald said, according to his prepared remarks.

The emphasis on rewarding cooperation was already evident toward the end of the Obama administration. In January, the CFTC adopted a set of policies for nonprosecution agreements to clarify what type of cooperation from individuals and companies the regulator could reward as part of an enforcement investigation.

“The CFTC, like the Department of Justice and the Securities and Exchange Commission, has long made incentivizing self-reporting by companies, and cooperation by individuals and companies, a priority,” said Aitan Goelman, Mr. McDonald’s predecessor as the CFTC’s director of enforcement who is now a partner at the Washington law firm Zuckerman Spaeder. “I actually don’t think that it’s that big of a change substantively.”

The CFTC’s move comes as Trump regulatory appointees take a more industry-friendly approach. Mr. Trump has appointed several top regulators with Wall Street pedigrees, including J. Christopher Giancarlo, the CFTC chairman, who has said he wants to simplify existing rules and reassess whether regulators went too far in their implementation of the 2010 Dodd-Frank Act.

read more: WSJ

Department Stores Cling to Power Over Landlords on Mall Upgrades
The owners of the Sunrise Mall in Northern California have a vision for updating the 45-year-old center. Tenants there are making it difficult to get it done.

Proposed changes have been held up by the property’s department stores, which include Macy’s, J.C. Penney and Sears. Shoppers in the area, meanwhile, are turning to other, more modern centers as the redevelopment stalls.

Department stores may be struggling to draw customers, but they haven’t relinquished their hold on America’s malls. The aging retail juggernauts are exploiting contracts with landlords that give them the power to dictate how a property can be developed, covering everything from parking to signage to what types of operators are allowed into a center.

Known as reciprocal easement agreements, or REAs, the contracts were put in place decades ago, when landlords relied on department stores to lure suburban shoppers. A majority of malls in the U.S. are encumbered by an REA, tying developers’ hands as they try to keep up with rapid shifts in retailing, according to Ryan Rivera, a partner at law firm Hartman Simons & Wood LLP.

“Twenty or 30 years ago, they made sense,” Rivera said. “Today they are a hindrance.”

read more: Bloomberg

Americans’ Confidence Eases After Storms Hit Texas, Florida
U.S. consumer confidence eased in September from the second-highest level since late 2000 as attitudes deteriorated in states affected by hurricanes Harvey and Irma, according to figures Tuesday from the New York-based Conference Board.

The results corroborate other economic data showing tempered confidence in the aftermath of Harvey and Irma. Data from the University of Michigan showed consumer sentiment eased in early September, while the Bloomberg Consumer Comfort Index has declined for three straight weeks.

Still, the pickup in the Conference Board’s measure of expectations shows Americans remain upbeat about the economy, employment and their incomes. The share of respondents who expected more jobs would be available six months from now advanced to a five-month high, while expectations of rising income were the strongest since June. Still-lofty household confidence will probably help underpin spending in coming months.

read more: Bloomberg

Virtual Reality Installations to Start Arriving at AMC Movie Theaters Next Year
America’s biggest movie theater chain is putting $20 million behind a Hollywood virtual reality startup and plans to begin installing its technology at cinemas starting next year.

AMC Entertainment Holdings Inc. is the lead investor in a $20 million series B round for Dreamscape Immersive, a location-based virtual reality company backed by Steven Spielberg.

AMC is investing $10 million in the round and is giving Dreamscape an additional $10 million to launch a content-development fund to help create VR experiences.

Dreamscape in February closed a series A with $11 million from a group of investors that included Time Warner Inc., 21st Century Fox Inc., Metro-Goldwyn-Mayer Inc. and IMAX Corp. Its technology is designed to be used outside the home and allows up to up to six people to interact in a single VR environment.

read more: WSJ

E-Commerce Mania Spreads To Warehouse Market
E-commerce is setting off a scramble for industrial real estate near urban centers, giving landlords of once-unglamorous properties a chance to push up rents to record levels.

Amazon.com Inc. and other online retailers, as well as fulfillment companies such as FedEx Corp., increasingly are seeking out “last-mile” locations in urban areas to feed consumer demand for ever-faster delivery of their purchases.

That, in turn, is giving landlords of such facilities pricing power they have never enjoyed before.

On average, U.S. industrial rents stood at a record $5.35 per square foot in the second quarter, up from $5.25 in the first quarter, according to data from real estate services firm JLL.

A well-located last-mile facility “has the functional equivalent of a high-end retail store,” said Hamid Moghadam, chairman and chief executive officer of industrial real-estate investment trust Prologis Inc. Such facilities are productive for the tenant and reduce transportation and labor costs.

read more: WSJ

Financial Service Firms Drive Leasing Activity
After years of taking a back seat to the booming technology, advertising, media and information (TAMI) sector, financial firms have gotten behind the steering wheel of Manhattan’s office leasing market.

Banks and financial services firms inked one-third of new leases in Manhattan during the first half 2017, up from their average of 24 percent between 2014 and 2016, according to Cushman & Wakefield. Meanwhile, TAMI firms accounted for roughly 20 percent of new office leases signed in the borough, a decrease from their 29 percent average over the prior two years.

Wall Street has had a rosier outlook since Donald Trump assumed office, mainly due to his promises to deregulate the financial markets and simplify the tax code — and the recent jolt in activity may be the result of pent-up demand.

“After playing defense for 10 years and shrinking their space, there’s very little room available at their current premises for growth,” said RXR Realty CEO Scott Rechler. “Now they’re thinking about playing offense.”

read more: The Real Deal

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