Retail sales continue growth as availability declines across all major segments

Retail and food sales posted a 6.1% year-over-year gain in Q3.

The power and the lifestyle & mall segments rebounded with positive net absorption in Q3 after posting negative absorption in Q2. Increased availability is expected for the lifestyle & mall segment in Q4 due to Sears’ recent Chapter 11 filing.

Consumer sentiment remained historically high despite a small decline from previous quarters.

Availability rates declined across all retail segments, reflecting both buoyant consumer sales and positive net absorption.

Net asking rent increased slightly in Q3 to a 4.3% year-over-year gain.

Consumer spending is expected to post healthy growth for the holiday season, driven by low unemployment and rising incomes from tax cuts.

Source: "Retail sales continue growth as availability declines across all major segments". CBRE. Q3 2018 U.S. Retail Figures. Web Nov 7, 2018.

Commercial Lending: A Second Wind?

Lending volume, as measured by the CBRE Lending Momentum Index, closed in September well above June’s level. Compared with a year ago, the index is up by 13.1%.

Despite the trend of higher interest rates and lower loan refinancings, demand for CRE debt remained strong, supported by an increase in sales transactions in Q3.

The Fed’s additional short-term interest rate hike in September to a target range of 2.0% to 2.25%, along with investors’ concerns over rising inflation and deficits, caused an expansion of the yield curve. Another short-term rate hike by the Fed is likely in December. 

The benchmark 10-year U.S. Treasury settled above 3.2% in early October, approximately 40 basis points (bps) above its close at the end of June. Despite this, credit spreads on seven-to 10-year fixed-rate commercial and multifamily loans held steady. 

After a favorable start to 2018, CMBS issuance slowed by midyear. As of mid-October, year-to-date issuance totaled $63 billion, down from $68.2 billion for the same period in 2017. 

The agency multifamily sector remains stellar. Year-to-date through September, combined Fannie Mae and Freddie Mac multifamily loan purchase volume totaled $90.7 billion, just shy of the record-setting pace of $91.6 billion for the same period in 2017. 

CBRE’s broad loan underwriting measures were slightly more aggressive in Q3. Overall debt service coverage ratios fell slightly, while LTV ratios inched higher. Debt yields and underwritten cap rates fell. In addition, the percentage of loans carrying either partial or full interest-only terms increased to 66.2% from 61.0% in Q2.

Source: "Commercial Lending: A Second Wind?" CBRE. Q3 2018 U.S. Lending Figures. Web Nov 7, 2018.

International buyers boost overall U.S. investment volume

Commercial real estate investment volume rose 17.4% year-over-year to $152.7 billion in Q3. Total year-to-date investment was $394.2 billion, a sizable increase of 10.6% from the first three quarters of 2017. 

Excluding entity-level transactions, which is a better way to gauge the velocity of transactions, year-to-date investment volume was still up by 5.5% from last year to $351.6 billion and Q3 volume was up by 6.8% year-over-year to $122.8 billion.

Greater New York, Greater Los Angeles and the San Francisco Bay Area attracted the most investment in Q3, accounting for 24.5% of all acquisitions. The top-15 markets accounted for nearly 61.4% of total Q3 investment volume.

Industrial, hotel and multifamily cap rates decreased modestly year-over-year in Q3, while office and retail cap rates were essentially unchanged. Industrial cap rates remained lower than office for the fourth consecutive quarter, a new record. 

Pricing for all property types except retail is at an all-time high, with mild deceleration in recent months. Increases in multifamily and office pricing continue to lead the national index, while industrial continues to have decelerating growth. 

Overall, commercial mortgage production year-to-date is slightly softer than in 2017, with combined CMBS and GSE lending down by 3%. CBRE’s Lender Momentum Index is up 13.1% year-over-year. 

Source: "International buyers boost overall U.S. investment volume". CBRE. Q3 2018 U.S. Capital Markets Figures. Web Nov 7, 2018.

Why DFW was named top real estate market to watch in 2019

With a relatively low cost of living and population growth projections that outstrip other U.S. cities by two times, Dallas-Fort Worth has been named the top real estate market to watch in 2019.

The Emerging Trends in Real Estate for 2019 report from PricewaterhouseCoopers and the Urban Land Institute ranked the Metroplex as the number one market for overall real estate prospects in 2019 out of 78 other cities.

Austin and San Antonio also made it into the top 20 for overall real estate prospects in the annual forecast report, which is compiled from thousands of interviews with real estate experts across a spectrum of industries.

Mitch Roschelle, a partner at PwC, said the economic data points analyzed for the report suggest the strength of the economy and the discipline being practiced in the real estate market.

“If there is a downturn ahead of us, it won’t be real estate that caused it,” he said. “Right now there's way more discipline in all activities in real estate than there has been in any other time in the modern era. We haven’t gotten ahead of ourselves in terms of real estate development. I hope that real estate folks remain as conservative as they have in creating new supply.”

Roschelle said he's seeing that conservative behavior in Dallas-Fort Worth and it has kept the market from getting ahead of itself despite the ever-growing demand and push for growth.

As for what makes North Texas the one to watch next year, he said several factors come into play.

“The things that have been important in years past have been markets that have low cost of living and low, relative to the national average, cost of doing business. That’s where companies want to be and that’s where people want to be,” Roschelle said.

The low cost of living, low cost of doing business and tax efficiency continue to draw people to Dallas-Fort Worth, he said. And so much so that the area’s population growth rate is projected to be more than two times the national average in 2019.

“The growth in the population is skewed towards younger folks in Dallas,” Roschelle said. “The growth in the 0 to 24 age category is high and in the 25 to 40 category. [The population] is becoming younger, and those people are all the workers for the future.”

But as the population in the Metroplex grows, affordable housing is becoming more of an issue. Although affordable single-family homes are a contributor to Dallas-Fort Worth’s success, there aren’t enough of them, according to the report.

The report says focus group respondents in the Dallas area pointed to an increasingly prevalent “not in my backyard” mentality as the reason for the slow down in available workforce housing.

“Dallas traditionally was a place where there was a piece of land, and if someone wanted to build on it, they just built on it,” Roschelle said.

Now, though, developers are often met with a “you’re not building that thing near me” attitude, which tends to add hurdles like cost and time, he said. This contributes to the problem that Dallas-Fort Worth is facing with additions to housing supply not keeping pace with demand.

What the Dallas area has going for it, though, is a diverse and stable employment base thanks to the wide spectrum of industries represented in the area, Roschelle said. The report indicates that the market is expected to have high growth and low volatility when it comes to employment in 2019.

Here are a few things the report says to keep an eye on in 2019:

Best bets

• Industrial development investments: With the expansion of the e-commerce industry, industrial facilities, which are seeing historically low vacancy rates, will continue to be in high demand. "Barring a trade war of serious proportions, industrials offer great risk-adjusted returns," according to the report.
• Garden apartments: "While the multifamily sector registered an overall NCREIF total return of 6.38 percent, the garden apartment component was near a double-digit total return at 9.33 percent," the report says. Appreciation in value is what accounted the over-performance for such properties. And the pricing for garden apartments, or low-rise complexes typically with direct access to outdoor space, reflects a higher-yield 5.7 percent cap rate compared to the 4.9 percent cap rate for mid-to-high-rise properties.
• Quick-flip, value-add deals: Timing with these deals is key, the report says. They should be executed by 2020 to maximize late-cycle opportunity, "and the geographic focus needs to be in markets where assets have not yet been priced to perfection."
• Redeployment of retail properties: "Many shopping center properties are just not going to come back as successful retail assets," the report says. But many have a potential for alternative uses like mixed use for properties in close-in suburbs or distribution centers that can capitalize on the e-commerce trend.

Issues on the horizon

• Insurance costs related to increasing natural disasters: The report says the volume of natural disasters in 2018 is evidence that the risk of such catastrophes – "mostly due to climate change" – has been intensifying. Because of this, insurers and reinsurers are experiencing massive payouts and will be pricing this into premiums in the future. "Having adequate coverage and budgeting for increased operating expenses should definitely be high on the list of items that property owners need to watch in 2019," according to the report.
• Cybersecurity vulnerabilities: Cybersecurity issues that come with increasing interconnectedness have become more and more obvious and have affected many industries including real estate. "One REIT interviewee highlighted a need to establish industry norms and best practices for both primary defense purposes and for evaluating risk/reward parameters stemming from technology," the report says.
• Infrastructure: Deficiencies in infrastructure are impactful for real estate. The report pulled data from the American Society of Civil Engineers, which shows the multitrillion-dollar shortfalls in investment in key assets and the associated costs that affect businesses. "By 2025, the United States sacrifices $3.9 trillion in GDP and $7 trillion in reduced business sales. Failure to address the issue means 2.5 million fewer jobs created and a shortfall of household income of $3,400 annually," according to the report.
• Immigration: "The draconian approach to border security is a massive self-inflicted wound with immediate negative economic consequences and long-term weakening of our national growth potential," the report says. The impacts on demand growth, the reduction in the baseline for real potential GDP growth and the implications for bringing the country's fertility rate below population replacement level should be reasons for pause, it says.

 Source: Ballor, Claire. "Why DFW was named top real estate market to watch in 2019". Dallas Business Journal. Oct 10, 2018. Web Nov 1, 2018.

Asian Capital Powers Record Global Growth in Real Estate Investment

The highest level of real estate investment on record was achieved in 2017 with a global total of $1.62 trillion (US), compared to $1.43 trillion (US) in 2016, according to Cushman & Wakefield’s “The Global Investment Atlas 2018” report. The investment climate is anticipated to further improve in 2018.

Cushman & Wakefield’s Carlo Barel di Sant’Albano, says, “Global real estate performed exceptionally well in 2017 with volumes up sharply and increasing valuations. This has provided good momentum going into 2018, and the balance of pricing, supply and demand all point to a further healthy year.”

Asian investors were the major driving force behind the record levels of real estate investment, with money from the region accounting for more than half of all capital deployed, and 46% of all cross-border activity. What is more, with the range of sources of capital within the region still increasing, this is likely to signal a period of sustained dominance.

Global investors from APAC increased their exposure to most markets, with the U.S. a notable exception. North America’s loss was Europe’s gain however, as investment from Asian sources grew by 96% year-over-year, primarily a result of several very large-scale transactions.

Sources: Hutchings, David. "Global Investment Atlas 2018". Cushman & Wakefield. Mar 14, 2018. Web Apr 30, 2018.

U.S. Food Hall Market Expected To Triple By 2020 - Retail

U.S. Food Hall Market Expected To Triple By 2020

Food halls have become the hottest trend in retail, and a new report projects the market will nearly triple in size by 2020. 

Courtesy of Forest City

A rendering of the Quarter Market food hall in Forest City's Ballston Quarter redevelopment

When Cushman & Wakefield first began tracking food halls, open eatery concepts developers across the country are putting into mixed-use projects, in 2015, it found 70 projects across the U.S. That number had grown to 118 by the end of 2017. Based on under-construction and planned projects, the firm's 2018 report projects there will be 180 food halls by year-end and 300 by the end of 2020. 

That projection represents a conservative estimate, according to Cushman & Wakefield Vice President of Retail Intelligence Garrick Brown. Since the report's publication Monday, he has been sent information on at least eight additional projects, and there were some he could not include in the report because owners did not want to make their plans public. "For retail concepts, I can't think of anything that's exploded in growth this way," Brown said. 

Courtesy: Cushman & Wakefield

Cushman & Wakefield projects an explosion of new food halls over the next three years.

The trend is driven by a confluence of factors, Brown said, such as the emergence of foodie culture, the headwinds facing other types of retail and the urgency of developers to drive activity to mixed-use projects. 

"In the past, malls had the view that people were going there for shopping and food was an extra amenity," Brown said. "What we're seeing in the last two to three years is that it's been flipped completely. Shopping center owners are realizing that you've got to do everything you can to get people to your stores, and food brings people out. It has the same draw of retailers, if not greater. There's urgency with developers to get in on the food hall craze."

The rise of food halls has also been driven by their own success. Of the more than 100 that have opened, Cushman & Wakefield found just three across the U.S. that have failed. Of the roughly 25 food halls that have opened in Manhattan, not a single one has failed. 

Since they are composed of several small users, the struggling of one concept does not doom the whole project as it might for a new restaurant. And the wide range of users, from food truck operators to celebrity chefs, gives food halls a bevy of options to fill open stands. 

"Because it's such a small bit of space and startup costs are low, they are very easily replaced," Brown said. "It's a whole different ballgame." 

Having food halls as an anchor has not only helped drive leasing for other components of mixed-use projects, it has also made properties much more valuable and sought-after for acquisitions. Brown cited Google's recent $2.4B purchase of Manhattan's 75 Ninth Ave., the building that houses Chelsea Market, which he said was a deciding factor in the deal. 

"Google could have chosen any building in Manhattan," Brown said. "They chose a location their employees are going to love working at. Having that amenity for their employees is outstanding." The food hall movement started in busy downtown locations, but has recently begun to expand to the suburbs, Brown said. 

"If you're a Class-A mall in a suburban location, it's a perfect fit," Brown said. "One of the things that kept it from the suburbs initially was density, you need considerable foot traffic for these things to be successful. If you're dealing with a mall setting, especially a Class-A mall where foot traffic decline has been the least, that's something that you already have." 

In the suburbs of Washington, D.C., for example, multiple food halls have recently opened or are underway. Celebrity chef Mike Isabella opened a 41K SF food hall at Tysons Galleria in December, though recent sexual harassment allegations against Isabella have created challenges for the concept.

The National Market food hall at MGM National Harbor in Maryland opened in late 2016, and the 25K SF Quarter Market food hall at Forest City's redevelopment of the Ballston Common Mall in Arlington, Virginia, is expected to open in September. 

As food halls have exploded, Brown said finding quality operators has become a challenge. Landlords often do not want to manage the food halls themselves so they seek out third-party operators to lease the space, but the list of reliable companies is short. 

"Once you get away from a handful of names, what we're finding is there are a lack of operators that have all of the goods," Brown said. 

The localized and authentic nature of food hall users makes it difficult for national companies to emerge, but Brown said he is beginning to see large investment groups traversing the country with plans to operate in five to 10 markets. 

The most common question Brown gets from developers about the rapid rise of food halls is if the concept will become overbuilt. His answer? Of course, but overbuilding will happen market-by-market and no cities are there yet. 

Brown described New York City as in the seventh inning of its food hall growth, while cities like Denver and Miami are in the fifth and Washington D.C. is in the fourth. Others like Phoenix, he said, are still singing the national anthem. The nation's sixth-largest city does not have a single food hall concept, he said. "There is a whole lot of unexplored terrain out there," Brown said. "I don't see this going away any more than I see co-working going away. I think it's here to stay, and it's really in its infancy." 

Connect Media Presents the Winners of Our 2018 Top Broker Awards

Connect Media presents the winners of our 2018 Top Broker Awards sponsored by Buildout.

Based on more than 500 nominations received, we recognize 40 leading commercial real estate brokers, or teams of brokers, in property sales and leasing for this honor. Transactions considered included 2017 total dollar volume, total deal square footage and total number of transactions.

We chose 10 National winners, as well as 10 leaders from each of the three areas covered by our regional newsletters: California, Texas and New York. 

Thank you to all who submitted and congratulations to this elite group of CRE professionals.

CONGRATULATIONS TO THE WINNERS

7 Key Retail Property Valuation Considerations

Unsplash/Alessandro Sparato

As retail evolves and adapts to a new competitive landscape, so do the criteria used for assessing property values. Retailers face new pressure to refine, differentiate and Amazon-proof their business models, often by combining excitement, digital integration and a high level of service. 

Here are the top seven factors investors, appraisers and landlords should weigh when considering existing and potential retail properties. 

1. Highest And Best Use 

In some cases, a property may no longer be financially feasible to continue operating as a retail property. A growing number of landlords are realizing retail may not be their property's maximally productive use, according to RSM Real Estate Valuation and Advisory Director Kenny Kim. 

Symbolic of this shift is the repurposing of the 676K SF Lord & Taylor flagship store in Manhattan into WeWork’s new global headquarters, with plans to convert all but the lower three levels to office. The co-working giant acquired the iconic property from Hudson’s Bay for $850M. 

2. Tenant Mix 

Investors historically sought retail properties with traditional anchors like Macy’s and Nordstrom because they drew a strong consumer base, Kim said. There were 34 billion visits to U.S. stores in 2010, nearly twice as many as the 17.6 billion recorded in 2013. 

Some forward-looking landlords are hoping to attract customers, refresh their malls and, in some cases, quadruple their rental income, by replacing these struggling department stores with a number of smaller, experiential shops. 

“As investor demand shifts toward malls with more experiential tenants, such as movie theaters and food and beverage, real estate appraisers or investors need to have a fresh mindset in how the preferred tenant mix impacts value,” Kim said. 

Unsplash/Shravan Vijayabaskaran 

3. Retail Category 

According to Kim, some property types, such as lifestyle centers, entertainment-centric malls and Class-A regional malls may continue to thrive, while big-box retail may transform into a combination of store and distribution/warehousing space. 

“As the integration between online presence and retail stores evolve, so too will the retail physical spaces,” Kim said. “These changes may have a material impact on rent and expense levels that drive the valuations.” 

4. Co-Tenancy And Go-Dark Clauses 

Kim said leases should be examined for co-tenancy and go-dark clauses, which can dramatically impact the rental income collected. 

A major tenant’s departure can have a devastating effect on surrounding retailers’ foot traffic and sales. Co-tenancy clauses protect remaining retailers by lowering their rents in this instance. But because the stores’ sales may decline as a result of the overall property occupancy fluctuations, the rent paid to landlords as a percentage of store sales can also diminish, Kim said.  

Depending on the overall health of the mall and its anticipated response to store closures, future cash flows may be significantly lower and difficult to estimate. 5. Lease-Up And Downtime Newly developed retail properties may take longer to lease up vacant space as the uncertain competitive climate inspires greater caution, according to Kim. Historical property data and assumptions may no longer be valid forecasting tools. “Downtime and re-leasing assumptions of vacated space will require reconsideration,” Kim said. 

Unsplash/Tom Sodoge 

6. Tenant Improvement Allowances And Capital Expenditures 

Landlords may need to allocate more money for tenant improvement allowances to incentivize new tenants. 

As ambience becomes increasingly necessary to lure shoppers, additional capital expenditures may be required to update common areas and building exteriors, Kim said. 

7. Investment Rates 

The capitalization and discount rates are key assumption drivers of value in the discounted cash flow analysis. 

“As e-commerce continues to challenge retail properties, many retail assets will be in a state of being nonstabilized, and the estimation of the capitalization and discount rates will require much greater consideration,” Kim said. “An appraiser or investor will need to evaluate the risk inherent in the cash flows projected, such as the net operating income growth over the analysis period, and properly reflect market and execution risk in the investment rates.”

Sources: Berkman, Alec. "7 Key Retail Property Valuation Considerations". Bisnow National. Nov 13, 2017. Web Nov 28, 2017.