Commercial Real Estate: Atlanta, Seattle, San Jose lead major metros for CRE investment

Atlanta, Seattle, San Jose lead major metros for CRE investment

Atlanta, Seattle and San Jose ranked at the top among major met­ros for commercial real estate (CRE) investment in 2Q 2018 from a relative value vs. price perspective while New York and Los Angeles were near the bottom, according to recent research from Situs RERC.

Atlanta’s low prices relative to other major met­ros, along with strong population and income growth, put the metro among the top major markets across all property types. The thriving job market, along with relatively afford­able housing, will continue to provide support.  A growing tech talent pool is a strong point of attraction for Ama­zon as it decides where to locate its second headquarters.

The Seattle CRE market benefitted from strong population growth, new jobs and robust trans­action volume to remain near the top of the rankings. Many technology companies, including Amazon, Microsoft and Google, continue to support the Seattle office market. These corporate giants attract highly educated talent to the metro, who are likely to earn higher-than-aver­age wages. However, Seattle is in danger of losing some of this attraction if the cost of living and construction costs keep rising.

Technology jobs also continue to drive San Jose’s high ranking from a relative value vs. price per­spective, but it is running out of supply to meet the high demand by tech companies for office space. In addition, the median price of a single-family home in San Jose surpassed $1 million in April 2018, and that will continue to spur demand in San Jose’s apartment market.

The Boston CRE market is hyper-cyclical (simi­lar to the San Francisco market), experienc­ing some of the highest highs and lowest lows. Development in the seaport district and a strong employment base coming out of Cambridge are supporting Boston CRE. But the market will suf­fer more when the correction occurs, as com­pared to New York CRE, which holds its value longer and more consistently.

New York and Los Angeles found themselves at the bottom of the metro investment rank­ing. Both have suffered from tepid population and income growth, but both enjoy high trans­action volume. Affordability is another major issue for the residents. Experts are seeing increased risk and lower val­ues in the apartment sector in New York and Washington, D.C. Prices for top-quality apart­ment assets in major markets (especially New York) are coming in below value, even though values have been declining by as much as 25% over the last couple of years. Additionally, the new US tax code limits federal deductions for state and local taxes, making high-tax states like New York and California less attractive for investors.

In the next Newswatch, we’ll provide a summary of Situs RERC’s research about the nation’s middle markets for CRE.

To find out more about Situs RERC research, visit our website.

The Situs RERC Metro Investment Rankings Index presents the top investment opportunities for each of the major property types, within market stratifications, from a relative value vs. price perspective. We stratify these metros into groups (labeled major markets, middle markets and smaller markets) that are comparable in terms of size, inventory, transaction volume and construction, among other metrics, and then rank the metros within these stratifications. The rankings of metros are to be compared only within each stratification, not between, because of large differences in current pricing and market fundamentals for metros in each stratification. The final rankings for each stratification are driven primarily by quantitative analysis, but also incorpo­rate qualitative sources. The rankings are based on value vs. price and do not necessarily imply that these metros offer great investment opportunities in and of themselves. The rankings are relative, not absolute.

NCUA one-ups bank regulators in easing appraisal limit

Bank regulators doubled the appraisal threshold for most commercial real estate loans to $500,000 earlier this year. Now, the National Credit Union Administration (NCUA) plans to take things several steps further.

NCUA’s board last Thursday proposed a rule to increase the appraisal threshold for non-residential properties to $1 million from the current $250,000 level.

Federal credit unions and other interested parties have 60 days to comment on the proposal.

In addition to the higher CRE threshold, NCUA is also seeking comment on a plan to increase the $250,000 appraisal threshold for residential real estate loans.

“Much like an Advance Notice of Proposed Rulemaking, we’d like comments on whether we should consider changes to the residential real estate appraisal standard,” Larry Fazio, director of NCUA’s Office of Examination and Insurance, said.

Read more: American Banker

Co-working firm grows North American footprint with push into Canada

IWG’s co-working unit Spaces is making its biggest expansion in North America with deals to rent large chunks of office space in Toronto and Vancouver.

In its largest-ever lease, Spaces is taking 127,158 square feet at the Well, Allied Properties Real Estate Investment Trust and RioCan Real Estate Investment Trust’s office project in the heart of Toronto’s technology district. In Vancouver, the Amsterdam-based company will rent 120,393 square feet at a building under development by Allied and Westbank. Both locations would be open by 2022.

“On the Canadian side, we’re seeing an incredible surge of demand when it comes to the desire for collaborative workspaces,” Wayne Berger, CEO of IWG Canada and Latin America, said by phone. “Toronto and Vancouver are two cities that are not just leading that demand in Canada, but some of the fastest global leaders in terms of cities when it comes to collaborative workspace.”

Spaces has locations in Fulton Market and on the Near North Side in Chicago. In a span of 10 years it has opened 137 locations in 94 cities globally, is expanding to help feed an increasing appetite for flexible offices – a segment of the real estate industry that’s dominated by fast-growing companies such as WeWork. Brokerage Cushman & Wakefield estimates that “in the foreseeable future,” co-working space will represent as much as 10 percent of the office inventory in many markets.

Read more: Crain’s Chicago Business

Retailers could ring up more than $1.1 trillion in holiday sales, topping last year

Retailers appear to have the odds in their favor this holiday season, with record-low unemployment across the US, strong consumer confidence and building sales momentum so far in 2018.

“We think most retailers will have a good holiday season if they have a distinctive value proposition,” Rod Sides, vice chairman of Deloitte’s US retail and distribution practice, told CNBC. “We think off-price will continue to do well, and there will be a rebound in luxury.”

Retail sales are expected to grow between 5 and 5.6 percent from a year ago, according to Deloitte’s annual forecast for the holiday season, which was released last week. For comparison, sales between November of last year and January 2018 climbed 5 percent, totaling $1.05 trillion, according to data from the US Commerce Department. This year, Deloitte says holiday retail sales could top $1.10 trillion.

E-commerce sales, meanwhile, are expected to rise as much as 22 percent through the holidays, Deloitte said. That would be higher than the 16.6 percent online retail sales growth from November 2017 to January 2018. Deloitte is predicting e-commerce sales by themselves could reach as much as $134 billion this holiday season, compared with about $110 billion a year ago.

Read more: CNBC

Forecasters unanimous: US-China trade war bad for economy

The US economy will expand at a robust pace in coming quarters but slow to 2 percent by the end of 2019, according to forecasters polled by Reuters who unanimously said the escalating trade war with China was bad economic policy.

In a sign the trade war is not likely to end any time soon, President Donald Trump last week imposed a 10 percent tariff on about $200 billion worth of Chinese imports and threatened duties on around $267 billion more if Beijing retaliates, which it has.

In the meantime, the US economy was forecast to grow at an annualized pace of 3.1 percent this quarter, up slightly from 3.0 percent forecast last month, followed by 2.8 percent in the fourth quarter, according to the latest poll.

All 70 economists who answered an additional question in the Sept 12-19 survey said the trade conflict between the world’s top two economies is bad for US growth, posing downside risks to what is otherwise an upbeat outlook for the near term.

Read more: Reuters

Amazon investment in India ties into retail chain

Amazon has upped the ante in its battle with Walmart in India, by teaming up with a local private-equity firm that is acquiring one of the largest retail chains in the South Asian nation for more than $500 million.

The deal could give Amazon a claim to the more than 500 stores of Aditya Birla Retail, which runs the More chain of supermarkets and hypermarkets. It comes just months after Walmart paid $16 billion for a 77% stake in Flipkart, one of India’s top e-commerce sites.

Amazon said it had joined with India-based Samara Capital to invest in Witzig Advisory Services Pvt., a company that focuses on training and providing facilities staff.

Witzig, which is controlled by Samara, has bought a 99.99% stake in Aditya Birla Retail, according to an announcement at the Mumbai stock exchange last week. The deal had an enterprise value of about 42 billion rupees ($583 million), a person familiar with the matter said.

“Both Samara and Amazon see significant growth potential in the area of facilities support and management and valued-added services in the coming years,” an Amazon spokeswoman said in a statement.

Read more: Wall Street Journal

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