Charles Keenan

REITs Assess the Potential Fiscal Impacts of Climate Change

os@interactivestrategies.com — Wed, 24 Jul 2019 17:15:00 +0000

REITs Assess the Potential Fiscal Impacts of Climate Change os@interactive… Jul. 24 2019

Charles Keenan

publications@nareit.com

Charles Keenan is a freelance writer and regular contributor to REIT magazine.

REITs look to address rising risks of weather-related events.

Climate Change Resiliency

REITs look to address rising risks of weather-related events.

Aside from any debate about how carbon emissions affect global temperatures, it’s clear that hurricanes, other storms, and fires have been hitting the United States and elsewhere with an increasing frequency and intensity, leaving ever more costly cleanups and restorations. Storms have deluged major cities such as Houston and New York, mammoth fires have burned in the West, and this past winter, a polar vortex slipped down from the Arctic, plunging a big swath of the nation into record-breaking freezing temperatures.

These events have all had consequences in terms of human life and economic strain. The mounting costs are starting to motivate investors to demand more accounting by companies on how much risk they face with regard to climate-related events, and more information about what they plan to do about it. In other words, how resilient is a company to climate change?

Over the years, many REITs have successfully achieved LEED green-building certifications, reduced carbon emissions, measured utility use, and increased utilization of renewable energy sources. However, there is morework to be done in terms of communicating to investors in this new era of rising climate-risk awareness.

“The effort for a long time was focused on mitigation,” says Ben Myers, director of sustainability at Boston Properties, Inc. (NYSE: BXP). “Now there is compelling evidence supporting the case for proactively adapting for a changing climate. We should anticipate the risks associated with sea level rise, severe storms, and heat. We need to be prepared to manage the impacts of these events.”

As part of that future-proofing, the task before REITs and other companies is to come up with a way to communicate the true risk of their portfolios. The GRESB environmental, social, and governance (ESG) real estate assessment now includes a resiliency module. In addition, the Task Force on Climate-Related Financial Disclosures (TCFD) released recommendations in 2017, encouraging companies to disclose climate-related financial risk as they would other risks. It’s a challenging task, since REITs need to figure out how to disclose “what if” scenarios. Yet it will be important for REITs to get ahead of the curve in the coming years, as climate change risk is already one of the key environmental performance indicators tracked by the ESG reporting frameworks, according to Nareit’s Guide to ESG Reporting Frameworks published earlier this year.

“It’s important for REITs to control the narrative around climate change,” says Sara Neff, senior vice president for sustainability at Kilroy Realty Corp. (NYSE: KRC). “These questions are getting asked, and they are getting asked quite quickly. If you are not getting ahead of it, and defining your narrative, then someone else is going to define your narrative, and it is likely not going to be good.”

New Reality

In fact, climate change is already showing up in the form of the real estate pricing, according to a study by Four Twenty Seven and GeoPhy, which examined 73,500 properties owned by 321 global listed REITs.

At its Atlantic Wharf building, situated on a channel off Boston Harbor, Boston Properties stores panels on site that can be linked together to form a flood protection barrier.

About 35% of REIT properties are exposed to climate hazards such as inland flood risk, coastal floods and sea-level rise, and hurricanes and typhoons. Properties exposed to sea-level rise are selling at a 7% discount, the report notes. The discount includes accounting for higher capital expenditures to protect the properties, greater insurance premiums, more repair costs, and business disruption. All told, the discount is likely too low, notes Nils Kok, chief economist for GeoPhy, a firm that measures property valuations.

In another study, BlackRock looked at how CMBS loans performed in the wake of Hurricane Harvey, a Category 4 storm that dropped more than 40 inches of rain over some parts of Houston over a four-day period in August 2017. The resulting damage affected more than 1,300 CMBS loans, roughly 3% of the market as of late 2017, BlackRock noted in its research. About 80% of the commercial properties impacted by Harvey and Hurricane Irma—which hit Florida a month later—were outside of official flood zone maps, indicating they may have had inadequate insurance, the report noted. “These risks are present, and investors are not really thinking about it and fully appreciating that in their investment decisions,” says Andre Bertolotti, head of global sustainable research and data at BlackRock.

While future financial impact is hard to quantify, Kok adds that real estate owners need to prepare for at least an indirect impact to the bottom line. An extreme example, Pacific Gas & Electric Co. was found to be responsible for the cause of the 2018 Camp Fire, the deadliest and most destructive wildfire in California history, due to downed transmission wires. PG&E, just two months after the fire, filed for bankruptcy. Citing billions of dollars in liability and mass litigation, PG&E saw quickly that its ability to compensate those affected will be limited, leaving ratepayers and taxpayers to eventually foot the rest of the bill.

That eventually will filter down to real estate owners and tenants. So will all other sorts of consequences from disasters, including mitigation efforts, says Kok. “Whether it’s the utility, a local municipality, or the company itself, the cost of resiliency measures, and the bills on adaptation measures, will be footed by property owners or their respective tenants,” he says. “At the end of the day, it’s a zero-sum game.”

The greatest cost of all might be social-related. Things could get worse as sea levels rise, notes Kevin Hagen, vice president of ESG strategy at Iron Mountain Inc. (NYSE: IRM). “What happens when 100 million Bengalis have to leave Bangladesh because it’s under water?” he says. “The social ramifications of climate impact are another category of concerns from a business point of view.”

Resiliency Now A Key Part of ESG

Some REITs are already starting to incorporate resiliency measures into their development projects. Boston Properties placed critical equipment 32 feet above grade for its Dock 72 office building at the Brooklyn Naval Yard, which sits on the East River in New York. Its onsite generators also provide 1,500 kW of emergency power.

It isn’t only new development projects as REITs are also building resiliency into their existing portfolios. Flood barriers are one method. At its Atlantic Wharf building, situated on a channel off Boston Harbor, Boston Properties stores panels on site that can be linked together to form a flood protection barrier.

Resiliency also includes developing comprehensive plans for when a weather disaster strikes, from setting up the flood barriers, to keeping staff on site to troubleshoot, to generating power on premises. Verdani Partners, an ESG consulting firm focused on real estate, has helped portfolio owners form resiliency plans.

“With climate risks continuing to impact the real estate sector, it is critical for building owners to understand and mitigate the risks their properties face to protect occupants and minimize property and financial damage,” says Daniele Horton, founder and president of Verdani Partners.

Heavy Lifting Ahead

Much of the heavy lifting lies ahead in terms of better specifying climate change risk. At this point, those REITs that do mention climate risk on their annual 10-K filings discuss how it could affect the bottom line, but not in terms of potential outcomes. The TCFD’s recommendation to use scenario analysis in disclosure of climate-related financial risks and opportunities aims to get companies to list and describe how an organization is positioning itself.

“It is not a straightforward calculation,” Myers says. “Even at the asset level it can be subjective. At the portfolio level, we are trying to evaluate scenarios in a scientific and defensible way. As of yet, there is not a clear standard or established best practice for the real estate industry.”

For now, REITs that report on scenarios typically spell them out in a qualitative way. Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE: HASI), for example, has included potential impacts from two scenarios in its most recent sustainability report. One is for global action being taken to limit the global temperature increase to 1.5 degrees Celsius above pre-industrial levels beginning in 2020—a goal set by the Paris Agreement. A second scenario addresses an increase of more than 2 degrees.

“At the portfolio level, we are trying to evaluate scenarios in a scientific and defensible way. As of yet, there is not a clear standard or established best practice for the real estate industry.” –Ben Myers, director of sustainability at Boston Properties

It’s still early days, Neff notes, since there’s no available software that can adequately map out how resilient properties are in terms of location. This is because software on the market can’t yet account for variables such as how well a staff is trained for events such as storms and fires, and how well-stocked a site is with emergency supplies.

To that end, GRESB has come out with a resilience module for REITs to use. The module follows TCFD recommendations on transition risk, a set of vulnerabilities related to the ongoing shift to a low carbon economy, and physical risk, which includes discussion of possible shocks and stresses. “As institutional investors increasingly recognize the materiality of these broader portfolio risks, REITs are expected to be more sophisticated and accountable on their operational approach to risk management,” remarks Dan Winters, GRESB head of Americas.

Opportunity to Differentiate

Going forward, climate change adaptation looks to be a big business. For instance, Hannon Armstrong has financed $7 million in stormwater systems over four locations in 2018. “As we start to look at 100-year storms happening much more frequently, it became obvious that investing in resiliency and adaptation in addition to mitigation is potentially quite a large opportunity,” says Jeffrey Eckel, chairman, president, and CEO.

There’s no doubt also an opportunity for equity REITs. Investors see climate change as the best opportunity to generate alpha in the last two decades, Neff notes. “There’s this vast difference in impact on value between real estate companies who have thought about it and are protecting their assets, and those that haven’t,” Neff says.

“With climate risks continuing to impact the real estate sector, it is critical for building owners to understand and mitigate the risks their properties face to protect occupants and minimize property and financial damage.” –Daniele Horton, founder and president, Verdani Partners

To not invest is penny wise, pound foolish. The cost of meeting the most ambitious climate target of a 1.5 celsius increase over pre-industrial levels would be about $500 billion over the next 30 years, but would save $30 trillion in damage, according to Marshall Burke, an assistant professor at Stanford University.

In a sense, resiliency can be perceived as a liability, but also a chance for REITs to differentiate themselves. “Resiliency is important to us and is increasingly important to our current tenants and potential tenants,” Myers says. “This is an issue we definitely want to get ahead of, to assure business continuity and to protect our properties and communities.”

TCFD Targets Greater Disclosure

The Task Force on Climate-Related Financial Disclosures (TCFD) was spearheaded by Michael Bloomberg as a way to systematize reporting of climate risk by companies in order to give investors, lenders, and insurers greater insight into the true risks they face. The organization’s recommendations aim to encourage companies to disclose climate risk as they do other risks, using a similar structure used in financial reporting.

“We provide a framework that lays the foundation,” says Curtis Ravenel, a member of the TCFD secretariat and global head of sustainable business and finance at Bloomberg. “Industry needs to take that framework and begin experimenting with it, start disclosing, and work with investors to determine how to implement TCFD for their specific sector.”

As of May 1, more than 600 organizations worldwide had expressed support for the TCFD’s recommendations. Hannon Armstrong was the first REIT to become a supporter back in 2017, and Kilroy was the first equity REIT to sign on last September. Alexandria Real Estate Equities (NYSE: ARE) and Vornado Realty Trust (NYSE: VRN) have since signed on. The latest report is due in July 2019 and will show an increased amount of climate related disclosure aligned with the TCFD recommendations—and note that companies have a long way to go, Ravenel says.

“The central question we’re asking is, ‘Is your business strategy resilient to plausible future states of climate?’” Ravenel says.

Regulatory Risks

Real estate owners must be prepared for more regulations as municipalities react to climate change concerns. New York, Los Angeles, San Francisco, and Seattle all have either passed or are considering measures.

In San Francisco, for example, Mayor London Breed announced in April a plan for buildings to be 100% dependent on renewable energy. Buildings 500,000-square-feet or larger wold need to comply by 2022. Those less than that but greater than 250,000-square-feet would need to do so by 2024, and structures more than 50,000-square-feet would need to do so by 2030.

Los Angeles also announced in late April its own “Green New Deal,” which calls for every building in the city, including houses, to be emissions-free by 2050.

New York’s Climate Mobilization Act, also passed in April, calls for building owners to start reducing emissions in 2024, with a 40% reduction required by 2030. In years past, in various locales, proposed energy-saving rules that would involve costly upgrades and more expensive “clean” energy sources were regularly thwarted. But the political tide has shifted, and REITs need to plan for what it will mean for their portfolios.

“More regulations are coming. It is something that has to be anticipated,” Kilroy’s Sara Neff says.

Simon’s Culture of Innovation Keeps the Mall REIT Ahead of Retail Trends

os@interactivestrategies.com — Thu, 09 May 2019 18:00:00 +0000

Simon’s Culture of Innovation Keeps the Mall REIT Ahead of Retail Trends os@interactive… May. 9 2019

Charles Keenan

publications@nareit.com

Charles Keenan is a freelance writer and regular contributor to REIT magazine.

Simon’s culture of innovation reinforces long-term success.

Staying Ahead of the Trend

Simon’s culture of innovation reinforces long-term success.

Simon Property Group (NYSE: SPG), one of the largest REITs in the world, hardly acts its size when it comes to innovation. Its outlook resembles that of a smaller company, where size and bureaucracy aren’t obstacles to idea generation. Innovation efforts underway at the nation’s largest mall REIT include a steady stream of initiatives geared to getting more people to stay longer at its properties, as well as the active conversion of malls into mixed-use destinations that include entertainment, office buildings, hotels, and apartments.

“Innovation is embedded in our culture, and we proactively encourage creative, disruptive thinking,” says John Rulli, Simon’s president of malls and chief administrative officer. “By continuously investing in all aspects of our business, staying ahead of retail trends, and anticipating the future needs and wants of our communities, we’ll continue to reinforce our long-term success.”

Simon has turned its size into an advantage, building an internal culture to help marshal innovation, including an in-house creative agency dedicated to elevating Simon centers as modern, dynamic destinations. The team, called the Simon Innovation Group, is staffed by executives in areas such as marketing, omni-channel retailing, customer service, and loyalty program marketing. The group includes Mikael Thygesen, chief marketing officer; Andy Hutcherson, senior vice president of innovation and customer experience; and Chidi Achara, senior vice president and chief creative officer. It also includes Natalie Hwang, the head of Simon’s venture capital arm, Simon Ventures. The team meets regularly with other senior management to monitor its innovation progress across all of its business practices, Achara notes.

“We’re single-mindedly focused on developing, implementing, and scaling a range of innovative concepts that create best-in-class experiential destinations, encompassing shopping, dining, entertainment, living, and working,” Achara says.

At a time when many mall operators are struggling, Simon shows that it’s not just about having the best locations and massive scale. Its work to engage consumers serves as an example of what mall owners need to think about in order to position themselves for rapidly changing consumer demand trends and the continued, relentless rise of e-commerce.

“There is a need to proactively make those investments to be the top dog in each market, because in certain markets there’s overcrowding,” says Melina Cordero, global head of retail research at CBRE. “If you wait too long, you are going to lose.”

The Life Time athletic club at Phipps Plaza replaces a vacated department store.

Mixing It Up

Simon’s efforts to revamp its portfolio through redevelopment have had the most material effect on its operations. Over the past five years, Simon has invested roughly $1 billion a year in its portfolio to create the “live, work, shop, and play” destination, Achara notes. “Simon is at the leading edge of creating the mall of the future,” he adds.

Simon broke ground in October 2018 on a redevelopment of Phipps Plaza, a mall in Atlanta. The project will include a Nobu hotel and restaurant, a 13-story, 350,000- square-foot office building, and a 90,000-square-foot Life Time athletic club, which will replace the vacated department store. While other malls nationwide have signed up Life Time as a way to convert old department store shells, the club in Atlanta will take it up another notch to include a rooftop pool, beach club, and bistro.

For Simon’s Northgate Mall in Seattle, the REIT has plans to tear down about 60 percent of the structures and build 500,000 square feet for retail and commercial use, 1,200 apartments, and a park. The redevelopment will also feature 800,000 square feet of office space and will serve as the headquarters of a new NHL hockey franchise, which will begin playing in the fall of 2021, with practice rinks on site for the team. In a similar vein, last September Simon announced the opening of Homewood Suites by Hilton at Southdale Center, its mall in Edina, Minnesota. It follows a 232-unit luxury apartment complex, which opened there in 2015. At year-end 2018, Simon’s costs of all new development, redevelopment, and expansion projects currently under construction were roughly $1.3 billion, according to its 10-K filing for 2018.

Good to Know

Simon celebrated its 25th anniversary as a publicly listed REIT in December 2018. Simon’s IPO in 1993 raised $840 million and was the largest REIT IPO to date at that time.
At year-end 2018, Simon’s total market capitalization was $90 billion and its equity market capitalization totaled $60 billion.
Simon owns or has an interest in 234 retail real estate properties in North America, Europe, and Asia.
Over the past 25 years, Simon has delivered a total return to shareholders of 2,752 percent. In the past five years, Simon has recorded an annual dividend growth rate of 11.18 percent.
Simon is the only real estate company in the S&P 100 Index.
Tenants in Simon’s U.S. portfolio generate annual retail sales of more than $60 billion.
Simon has reduced electricity usage across its portfolio by 37 percent since 2003.
Simon holds a 21.3 percent stake in French shopping center REIT Klepierre.
At year-end 2018, Simon’s share of the costs of all new development, redevelopment, and expansion projects currently under construction was approximately $1.3 billion.
Simon increased annual FFO generation by more than 25 times since its IPO.
Simon has paid more than $28 billion in dividends over its 25-year history as a public company.

Overall, Simon’s renewal efforts translate to real value. Historically, redevelopment across the portfolio typically yields 6 to 10 percent, according to the company’s 10-K. In all, Simon’s development pipeline had 19 projects in early 2019, up from 11 in 2018, according to discussion during its year-end earnings call in January.

“We don’t feel compelled to do it,” David Simon, chairman and CEO, said during the call. “We do it with the lens of what the consumer expects, what the retailer wants, and what the value of that asset is in our minds. And that’s when we pull the trigger.”

Wall Street appears to like the approach. “There’s this constant activity of redevelopment going on in their portfolio, because with today’s mall, you can’t sit on your hands,” says Haendel St. Juste, an analyst with Mizuho Securities. “You have to make sure you bring in the newest concepts, making the best use of the land [and] square footage, inside and outside of the mall.”

Recruiting E-Retailers

In conjunction with its revamping strategy, Simon has ramped up recruitment of innovative e-retailers. At six malls, the REIT has debuted a concept dubbed “Launchpad by Simon,” where it uses space to showcase emerging technology-oriented products from wholesalers around the globe.

“Savor”—essentially a rebranding and upgrade of the food court, a now-taboo phrase—was rolled out in two malls, featuring trendy dining options such as Shake Shack, Sweetgreen, Little Beat, and Mighty Quinn’s. Simon also expanded its Happy Returns service, where customers can bring back e-commerce orders from select online retailers to Simon guest services for immediate refunds.

While many of the initiatives are hard to measure in terms of bottom-line relevance, they all show a Simon that’s always testing and experimenting. Its website lists 24 initiatives to “elevate and reinvent the shopping experience.” That kind of spirit is a key trait for any company to have, especially in retail real estate, where transformation is vital just to survive, let alone thrive.

Simon is also leveraging its vast footprint to court e-retailers that are expanding rapidly into brick-and-mortar locations. Its malls now house popular internet names such as Warby Parker, Bonobos, Fabletics, Indochino, and UNTUCKit. Simon is working with roughly 40 brands, according to discussion during the earnings call.

“These retailers value the ability to offer new shoppers a physical expression of their brand experience,” Achara says. “They typically benefit from both the additional sales in their physical locations and increased online traffic and sales in the surrounding market.” He notes that the Innovation Group is currently developing bespoke new platforms to help Simon’s tenants bridge the physical and digital worlds in more cost-effective and efficient ways.

Many retailers are eager to tap brick-and-mortar, because physical locations can offer better margins, given the high return rates of e-commerce. “They are realizing they can only grow so much market share by selling purely online,” says James Cook, Americas director of retail research at Jones Lang LaSalle.

Simon can attract the best e-brands, given its size and reach of its national platform, Cook adds. “Simon is in a great position to partner with these retailers and say, ‘Hey, there’s all kinds of different high-traffic, high-end shopping locations that we own across the U.S. Wherever you want to go, we can do it,’” he says.

Savor takes the traditional mall food court concept to a new level.

Curating for Customers

Simon is also looking to other ways to harness the latest retail trends. With Launchpad, items that sell well can migrate outside of the dedicated space, and items that don’t are removed. More popular products have included 360-degree cameras and robotic dogs, Achara notes. “It’s a place to discover and enjoy fun, new, fresh merchandise from around the world,” Achara says.

Similarly, The Edit @ Roosevelt Field, a retail incubator, uses a store space at Simon’s Long Island mall in Garden City, New York, to showcase emerging brands. Recent retailers featured include EGG New York, a children’s clothing boutique, Revtown USA, a men’s casual-wear brand specializing in denim, and Winky Lux, which sells natural-based cosmetics. The concept offers emerging brands a unique opportunity to grow their business by tapping shoppers at one of the nation’s most productive and highly-trafficked shopping destinations, while shoppers “gain access to new and exciting apparel, beauty, and lifestyle brands before they would typically have a presence in a shopping center,” Achara says.

And Simon is willing to embrace entirely new retail categories. In February, the REIT signed a deal with Green Growth Brands to open as many as 108 kiosks at 95 malls that will sell about 40 beauty and personal care products with cannabidiol, a chemical found in cannabis that was recently legalized by Congress. Green Growth is led by Peter Horvath, a veteran executive of retailers among Simon’s portfolio, such as Victoria’s Secret, American Eagle Outfitters, and DSW.

Meanwhile, the list of innovative ways to engage customers goes on. Over time, Simon has rolled out service add-ons such as a parking reservations app, a Facebook Messenger bot, and more powerful electric vehicle charging stations. Simon teamed up with Booster to allow shoppers at Great Mall in Milpitas, California, to have fuel delivered to their cars while they shop. In addition, Simon has tapped Apple Maps and Mappedin, an indoor map platform, to help customers navigate to the retailers they’re seeking.

While Simon might not hit on everything it tries, its focus on innovation should bode well for its future in an ever-changing world of retail. “We believe that a creatively-curated tenant mix, cutting-edge marketing, compelling programming, and digital technology all combine to ensure our centers remain thriving gathering places for communities around the world,” Achara says.

ShopPremiumOutlets.com Marks Simon’s Innovative Entry into e-Commerce, with an Omnichannel Twist

Simon recently announced the beta launch of Shop Premium Outlets (SPO)— a new online outlet shopping platform designed to drive incremental business both online and in the stores of participating retailers. SPO will enable the highly engaged Premium Outlets customer base to shop 24/7 for their favorite fashion, luxury, and lifestyle brands, all in one place.

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Camden Property Future-Proofs Parking Garages for Adaptive Reuse

os@interactivestrategies.com — Fri, 22 Mar 2019 15:45:00 +0000

Camden Property Future-Proofs Parking Garages for Adaptive Reuse os@interactive… Mar. 22 2019

Charles Keenan

publications@nareit.com

Charles Keenan is a freelance writer and regular contributor to REIT magazine.

Residential REIT Camden Property plans ahead for fewer drivers.

Outside the Lines

Residential REIT Camden Property plans ahead for fewer drivers.

Editor’s note: Innovative Ideas is a new series for 2019 looking at some of the specific ways in which REITs are thinking creatively to remain leaders in their field.

When Camden Property Trust (NYSE: CPT) opened its Lincoln Station apartment complex in 2017, it had one eye on the current market and one looking to the future. The 267-unit building, situated in suburban Denver, has all the amenities to attract high-income renters: quartz countertops, stainless steel appliances, dual-vanity sinks, walk-in closets, and views of the Rockies. Less obvious to renters, however, are the unique aspects of its parking garage, which could enhance the asset’s income stream down the road—a day when part of the structure could be converted to apartments.

The clearing heights on the ceilings are 10 feet on the first floor and 9.6 feet on the three floors above, instead of a typical height of eight feet. The columns are spaced 27 feet apart to allow an apartment to fit comfortably between them. Concrete was poured in place to customize the site with additional utility conduit for future use. Overall, the garage was more expensive to build, but it gives Camden the option to maximize the space for a day when fewer renters will need parking spaces, as more people abandon car ownership for ride shares and car rentals.

“In the next five years with autonomous cars, you could have far fewer vehicles on the road and less demand for that parking space,” says Ric Campo, chairman and CEO of Camden. “We’re going to be able to adapt and reuse those garages.”

While many real estate developers are reluctant to add adaptable features to garages due to the higher construction costs, there are signs REITs like Camden and other owners are warming to the idea. Ride sharing continues to gain prominence, and advances in technology have brought the idea of ordering up a driverless car for local trips no longer a far-flung idea. Paying more for the additional raw materials and labor to make garages adaptable could be money well spent, reducing the costs for demolition of possibly unused parking floors in the future.

Eyeing Future Needs

Camden has been making its garages adaptable ever since opening Flatirons, another apartment complex in suburban Denver, in 2015. Meanwhile, Hudson Pacific Properties, Inc. (NYSE: HPP) has included adaptability features in its EPIC office project under construction in Los Angeles, and AvalonBay Communities, Inc. (NYSE: AVB) is planning to do so for the garage underneath a 475-unit apartment building that could begin construction late this year in downtown Los Angeles.

Like Camden, Hudson Pacific is also future-proofing. Its EPIC project will house a six-floor garage, with floors above grade that can be converted to office space. (Source: Hudson Pacific)

Architects are working closely with REITs and other developers to make garages more adaptable for re-use. Gensler, a global architecture firm, has been encouraging clients to pay the higher construction costs now.

“We are working on major projects around the world that need to be future-proofed,” says Andy Cohen, co-CEO of Gensler. “If we are not going to need all this parking, how can we create adaptable, flexible parking structures that can be designed so that they can be changed for other uses?”

For one, make garage ceilings higher, Gensler tells clients. For Gensler’s work on 84.51 Centre, a 280,000 square-foot mixed-use building in downtown Cincinnati, Gensler designed the lower floors to be used for parking, with a façade that blends in with the rest of the building. The parking levels above grade are built to be converted to offices in the future. Gensler also designed Hudson Pacific’s 13-story EPIC, which will be occupied entirely by Netflix starting in 2020. EPIC’s garage will have four above-grade levels that will convert to two lofty office floors, with the potential for installing mezzanines. Two other floors are designed to be removed, and two below-grade levels would remain.

Higher clearing heights make all the difference for adaptability, in part because they allow for space to add electrical, plumbing, and ventilation.

Making Garages Adaptable

Standard parking garages today are usually built with slanted floors, which serve as ramps, but this doesn’t translate to conversion. That, instead, calls for building ramps in part of the structure or on the outside, so that there’s plenty of flat floor space. At Camden’s Lincoln Station, its garage is flat on the ends, with ramps on the inside. The ends could serve as future sites for conversion to more apartments.

Adaptable garages also need thicker floors. For parking structures, their live load requirements—the weight they need to support while in use—are about 40 pounds per square foot, notes Jess McInerney, a principal and engineer at Watry Design Inc., a parking consulting firm. That’s actually much less than what’s needed for other uses such as offices and apartments. These other uses can demand as much as 100 pounds per square foot, to account for furniture and a greater number of people. Traditional garages aren’t built for that, and there’s often a bounciness to the floors, due to long support beams of 60 feet or more. So, more concrete is needed to remove the flex.

Bike racks and lockers are among the alternative uses for garage space at The Camden in Hollywood, California.

“You need more mass to support the loads and control the noise and vibration,” McInerney says.

Designing the Future

At Camden, the move to make garages adaptable sprung from Campo’s attendance at conferences, and the growing chatter about the eventual arrival of driverless cars. Earlier this decade, Campo started to challenge his team to come up with ways to start thinking about a world with fewer cars. Uber and Lyft pickup areas were an easy thing to incorporate into building design, yet modifying the structure of the garages presented a tougher challenge. Camden’s first modifications came with Camden Flatirons in 2015, followed up by the Camden in Hollywood, Los Angeles in 2016.

For its new garages, Camden uses so-called conventional steel mats, where concrete is poured into a lattice of rebar typically spaced 12 inches apart. That takes more steel than conventional garages, which often use prefabricated concrete slabs.

For all of its new garages now, Camden favors cast-in-place concrete, meaning it’s poured on site, rather than arriving on a truck as a precast slab. That means higher labor costs, and generally more steel than with traditional garage floors. In some markets, an adaptable garage can cost two to three times more than its mono-use counterpart, depending on a market’s labor, concrete, and steel costs, estimates Steve Hefner, senior vice president of construction and facilities at Camden.

Developers also need to decide carefully where to put the parking ramps. Some of Camden’s new garages put ramps in the interior, designed to be removed later, with the flat floors surrounding it. Others, like the one at Camden Flatirons, are built in a “podium-style” format, with the garage underneath the units. There, the first level is a garage, with four floors above. The garage could be converted to more apartments since Camden has also provided open-air parking at the site.

Column spacing also needs consideration for adaptability. Camden is typically spacing out its columns in 27-foot intervals, allowing for three, nine-foot-wide parking spaces. Doing so creates a footprint of 27 feet by 30 feet or more for a future apartment that could be in the range of 600 square feet to 700 square feet, Hefner notes.

During construction at Camden Lincoln Station, its parking garage was built with higher ceilings and wider columns to enable future adaptation to living space.

Overall, all of the extra expenses from construction can add 5 percent to the cost of a project. But its adaptable garages will likely see conversions.

“We believe that is going to be a very viable solution, especially if you are building in these high-density, urban in-fill sites,” Hefner says.

While apartments and offices have yet to show big drops in parking demand, there has already been a marked decrease in the need for hotel parking, Cohen notes. Business travelers are opting for ride shares and forgoing the task of renting a car. For example, Uber was the most expensed vendor in 2018, accounting for 11 percent of all transactions among various spending categories, according to Certify, an expense management software vendor. That compares with 8.7 percent in 2017. Parking is also down at restaurants because people opt for ride shares to avoid drinking and driving, Cohen notes.

While builders see the need for less parking across the board, for now they’re mostly constrained by local building codes. Zoning and regulations of municipalities often mandate minimum parking ratios, whether or not the space is needed.

““Sometimes they need to actually get changed in order to permit the kind of flexibility innovative organizations want to employ,” says Ken Meyer, a principal at Deloitte. Cohen of Gensler calls the building codes “antiquated” for the coming drop in demand for parking.

Advantage, REITs

Still, building adaptable garages and waiting for people to change behavior is a tough sell for developers looking to quickly sell a completed asset and move on. REITs, on the other hand, have an advantage as they build new garages in their development pipelines. Yes, the cost is higher, but as long-term holders of real estate, it’s often worthwhile to spend more now than having to demolish a garage down the road.

The strategy fits into Camden’s plan to spend more upfront on amenities and quality of materials, so it can keep operating costs down over time with lower maintenance and less capital expenditures when upgrades are needed. That leads to higher funds from operations, higher dividends, and by extension, higher net asset values assigned to the company, Campo notes.

We’re putting in better infrastructure systems that lead to lower operating costs,” he says. “If you are growing your NAV and FFO at a faster rate than you would otherwise—because you are being smart about how you build to maximize the efficiency of operating costs in the first five to 10 years—then all of sudden you are driving value and your stock price goes up.”

So overall, building garages for the future is an attractive choice for Camden.

“I would rather have a lower yield going in and spend the money up front, and then have a growing cash flow that isn’t impeded by issues five to 10 years out,” Campo says.

REIT Warehouse Logistics Being Redefined by Prologis

os@interactivestrategies.com — Mon, 28 Jan 2019 14:45:00 +0000

REIT Warehouse Logistics Being Redefined by Prologis os@interactive… Jan. 28 2019

Charles Keenan

publications@nareit.com

Charles Keenan is a freelance writer and regular contributor to REIT magazine.

Prologis builds the first U.S. warehouse serviceable by trucks on two floors.

The Only Way is Up

Prologis builds the first U.S. warehouse serviceable by trucks on two floors.

Last October, at a former shipping container storage site about five miles south of downtown Seattle, the finishing touches were made on a three-story distribution center, the first in the United States to have a second floor serviceable by tractor-trailer trucks. The building, dubbed “Georgetown Crossroads,” is owned and managed by leading logistics REIT Prologis, Inc. (NYSE: PLD).

With 590,000 square feet of warehouse space, it offers more than double the capacity of what would have been possible for a one-story building. Yet perhaps most critical is the site’s central location in a metropolitan area of nearly 4 million people, and just a few miles from its ports.

The project’s completion is all part of an effort to meet the seemingly insatiable demand from e-commerce retailers to be closer to their customers to shorten delivery times. Prologis’ clients had been telling its leadership they need this type of class-A space, ensuring a shorter drive to retail consumers’ doorsteps. Such a large land parcel doesn’t come to market often these days in urban locations, where old manufacturing spaces can get converted for office or apartment use. So, if developers are going to answer the call of e-commerce for more infill space—urban parcels that get rededicated—there’s really nowhere else to go but up.

Challenges of scale

“If your customers are telling you, ‘We really need new product, and we want it in major urban areas,’ it’s a challenge to build anything of any scale,” says Hamid Moghadam, chairman and CEO of Prologis. “It just doesn’t exist. So, you have to densify the site.”

Of course, one big driver of demand for new space in close proximity to customers is Amazon, whose Amazon Prime service offers two-hour delivery windows for certain items. Other retailers have been pressured to follow suit.

However, this presents a problem with the old model of using class-A distribution centers built on greenfields on the outskirts of metro areas. Even in areas such as New York, much of its infill area won’t suffice. A large portion of the area’s warehouse capacity is situated in northern New Jersey, making a same-day delivery to the Bronx or Queens much more difficult within a two-hour window, given the distance and traffic.

“If they want to deliver inside their same-day delivery window, they are going to need to be in the city proper,” says Rob Kossar, international director and head of JLL’s northeast industrial region. “The only way to do it in the city, based on the cost and dearth of land, is to go vertical.”

The race to be closer to consumers has driven the likes of Prologis to acquire sites that are more central. “The large e-commerce companies have made a commitment to providing same-day delivery,” Kossar says. “We are on the precipice of some significant demand and it is extraordinarily supply-constrained.”

Despite the growth of e-commerce, it’s still just a fraction of all retail sales. U.S. e-commerce sales rose to $131 billion in the third quarter of 2018, a 15 percent increase from the same period a year earlier, according to the U.S. Census Bureau. Yet that still only represented 9.8 percent of all retail sales.

“We are still at the very early stage of conversion of business models from good old-fashioned brick-and-mortar to e-commerce delivery,” says Joshua Harris, a professor at New York University’s Schack Institute of Real Estate.

As e-commerce providers clamor for warehouses, they’ll need typically three times as much space as used by their retail counterparts to be able to sell the same wares, according to Prologis. Industrial real estate as an asset class can’t meet the demand fast enough, with vacancy at historically low levels nationally of 4.3 percent, according to CBRE. “There continues to be a supply-demand imbalance,” says Matthew Walaszek, a senior researcher at CBRE. “It’s sort of a perfect storm for an evolution of development.”

Source: Prologis

Maximizing a site’s potential

For Prologis, its Georgetown Crossroads project is part of its ongoing strategy to focus on infill locations. In addition to Seattle, the company is also planning to build a multistory warehouse in San Francisco.

“We have really decided to start to take our investing to the urban core,” says Dan Letter, managing director of capital deployment for Prologis’ northwest region. “That is where our customers are going. We want to be there before they are.”

Prologis bought the 13.5-acre Georgetown Crossroads site in 2015 for $24.5 million, which translates to about $42 per square foot. At first glance, that sounds pricey when compared with land purchased for warehouse development. The average land price for single-story warehouse development in the U.S. was about $30 per buildable square foot, according to October 2018 data published by CBRE.

For Prologis, the economics made sense. To start with, the site it bought was paved, lit, and fenced at the time of purchase.

Also, Georgetown Crossroads was unique given its relatively large size in the submarket of South Seattle, where vacancy for industrial has hovered around 1 to 2 percent for the last five years, according to Prologis. The company has bought warehouses in South Seattle over the years, but the challenge has been finding buildings with scale. This is in part due to high demand for existing parcels, but supply is also limited, exacerbated by how old manufacturing spaces in Seattle have also been converted to other uses, such as apartments and office space, Letter notes.

“We thought the market could handle literally two and a half times the amount of industrial space we could otherwise build on a conventional single-story design,” Letter notes. “Realizing where we were in the cycle and the market we were in, we had a strong belief that Seattle had a lot of runway for hyper-growth.”

Lessons from Asia

To build Georgetown Crossroads, Prologis tapped the expertise of its overseas colleagues in Japan. The company has already built 53 multistory distribution centers in Asia. One thing the Japan team stressed: There had to be two ramps.

“It’s really important for users to feel comfortable that if a ramp goes down because of an accident or what may be, that there is access to the other floors,” Letter says.

The ramps were also more of a challenge to build because they must support heavier truck loads and longer lengths in the U.S. versus those of Japan. Trailers in the U.S. are typically 53 feet—not including their 20-foot cabs—compared with a maximum truck length in Japan of 39 feet. That meant the spiral ramps used there are not practical in the U.S. Instead, wider, longer ramps that wrap around rentable building space are needed. It also meant higher-grade concrete and thicker rebar steel than it used in its Japanese warehouses. The ramps and the truck courts are two of the most expensive parts of the design, and U.S. office parking structures weren’t a good comparison as a guide, Letter notes. The ramps and upper docks have to be able to handle much higher loads than conventional office towers, for example.

“In a conventional design, you have concrete sitting on the ground in your truck court,” Letter says. “Here, we’re elevating it.”

Prologis also polled its customers in the U.S., asking them what other features were most important. Maximum clear heights—which can now soar as high as 40 feet for new warehouses—weren’t essential. More important was the column spacing, which is 50 feet by 45 feet on the first two floors.

Generally, tenants will have to make some sacrifices by choosing closer-in locations, Moghadam notes. For example, they won’t find class-A warehouses in the infill locations with 32-foot clear heights.

“You all of a sudden find yourself in a world of tradeoffs,” Moghadam says. “Do you find that brand-new facility, with all the key features, and if you do, where is that going to be? It’s likely to be way out of town, on the periphery, at the next place to develop new product. Or you have to compromise the quality and features of the building and get infill.”

That said, Georgetown Crossroads offers 28-foot clear height for the first floor and 24 feet for the second floor, and easy access to nearby interstate highways. The building’s first floor has loading docks on both sides. The warehouse’s first two floors are able to handle standard, 53-foot-long tractor trailers. Two ramps serve the second floor, with the third level accessible by freight elevators that can hold forklifts. The third floor, with 16-foot heights, is suited for light manufacturing, creative offices, and production.

Build it and they will come

The fundamentals for multistory warehouses in major U.S. cities look good in part from a strong macroeconomic picture for industrial. Overall demand exceeds new supply, with net asking rents nationally having increased to $7.21 per square foot in the third quarter of 2018, up 1.7 percent from the second quarter. The pricing is the highest level since CBRE began tracking the metric in 1989.

Hamid Moghadam, chairman and CEO of Prologis

However, in select infill markets rents can run much higher. CBRE estimates that Georgetown Crossroads is commanding $18 per square foot in annual rent, an 88 percent premium to the local market. Yet in the grand scheme of things, occupancy costs account for only 5 to 6 percent of total logistics expenses. Labor can represent 15 to 25 percent, and transportation, up to 75 percent. “Occupancy is marginal compared with everything else,” Walaszek says.

Population density will also certainly play a role in the economic viability of multistory distribution centers. Seattle has a density of 8,400 people per square mile, much higher than the next densest city of Dallas, at 3,900, according to CBRE research. The six other cities that are denser than Seattle include Los Angeles, Chicago, Miami, San Francisco, and New York, which tops out with a density of 28,000.

That said, developers pursuing multistory warehouses will need to have the capital to handle the expense of land acquisition and construction. The cost of facilities such as Georgetown Crossroads can run in the range of $150 million to $200 million, Moghadam notes. Prologis’ multistory project in San Francisco’s Bayview section, south of downtown, could total $500 million, with the addition of 1 million square feet to existing buildings there. “Our scale gives us the ability to try certain things that are very innovative, but more importantly, are vital to the success of our customers,” Moghadam says.

Build it and the tenants likely will come, Prologis and other developers are betting. While lots of e-commerce shipping is free, people will pay more to have same-day delivery, and more than 100 million customers globally already pay for Amazon Prime. This is all helping finance expensive land acquisition, building costs, and rents for retailers. It all bodes well for the nascent niche of multistory warehouses.

REITs Adjusting to the New Normal in Retail

os@interactivestrategies.com — Mon, 29 Oct 2018 15:45:00 +0000

REITs Adjusting to the New Normal in Retail os@interactive… Oct. 29 2018

Charles Keenan

publications@nareit.com

Charles Keenan is a freelance writer and regular contributor to REIT magazine.

Retail REITs aim to stay ahead of consumer trends.

Retail Reformation

Retail REITs aim to stay ahead of consumer trends.

When a Macy’s was shuttered two years ago at a shopping center in suburban Philadelphia, it marked the end of an era. For decades, the store had been an anchor of Suburban Square, a retail complex situated in Ardmore, Pennsylvania, a town along the affluent suburban corridor known as the Main Line. The art deco, limestone-clad building, constructed in 1930 for the region’s bygone department store chain Strawbridge & Clothier—bought by Macy’s in 2005—was once the big draw. Yet, by the middle of this decade shoppers were mostly skipping Macy’s, patronizing “newer” establishments such as Apple, Trader Joe’s, Starbucks, and Sephora.

Flash-forward to this year, when the building reopened after a complete renovation by its owner, Kimco Realty Corp. (NYSE: KIM). The old Macy’s building now includes an 80,000 square foot full-service fitness facility, and a West Elm home furnishing store. In a twist, Kimco worked with Life Time Athletic, the fitness operator, to convert the top floor of the old department store into a coworking space. Life Time is using the fitness facilities as a lure for office rentals. The office space sold out before it opened, and fitness enthusiasts have been flocking to the building, bringing in a whole new set of traffic to the complex at all hours of the day.

“People look at the shopping center and see it as really well-located real estate that already is a gathering place,” says Conor Flynn, CEO of Kimco. “Then you can add all these different uses to compliment what is already existing. So, the adaptability of our assets is really what is critical to drive the demand from all these different sources, not just retail.”

The New Normal

Kimco’s remake of an old department store reflects how REITs are adjusting to the new normal in retail real estate, which faces structural changes in consumer demand and the increasing use of e-commerce and mobile technology. Their success not only depends on shifting malls and shopping centers toward the most successful retailers and creating more of a consumer experience, but also to being able to convert parts of their sites to other uses. That includes nontraditional tenants such as gyms, urgent care centers, and retail incubators, and more extreme solutions, such as conversion to offices and apartments.

While e-commerce retailers have siphoned off sales from some types of retailers, that hasn’t changed the reality that people still want to go out. For all the talk about e-commerce hurting retail, it’s really the “old-fashioned” concepts of location and diverse tenant mixes that still drive sales, according to retail REIT executives.

“The best grocers and best retailers are not standing still,” says Hap Stein, chairman and CEO of Regency Centers Corp. (NYSE: REG). “They’re focused on meeting the evolving needs of today’s consumer by allowing customers to choose how and where and when they shop, and physical store presence is going to remain a critically important channel.”

Take T.J. Maxx, for example—the largest tenant for Kimco and Weingarten Realty Investors (NYSE: WRI). The retailer regularly connects with its customers via email and its mobile app, sending them alerts on new arrivals of everything from leather handbags to cashmere-blended scarfs. The approach creates “a treasure hunt mentality,” where people are coming back because the merchandise changes over so quickly, Flynn says.

The Driscoll, Weingarten’s luxury apartment building atop valuable retail real estate, is due to open in 2021.

T.J. Maxx, like other retailers, has been focusing on creating an experience for its customers where they don’t just go to a mall to shop. As longtime retailers such as Sears, Kmart, JCPenney, and Macy’s continue to close stores, they have been replaced in part by restaurants and entertainment. Gyms such as Orangetheory Fitness and Planet Fitness, and coworking spaces such as Life Time Work, draw new types of consumers.

Malls have moved toward providing more entertainment options. The internet has been blamed for this, but it’s more about the merchandise mix, notes Melina Cordero, head of retail research for the Americas at CBRE. About 50 percent of the gross leasable area (GLA) in the average regional mall is still devoted to department stores, and 58 percent of the inline space is apparel, according to the firm. “That’s a problem, because those are two of the slowest growing categories in retail, and among the highest for e-commerce growth,” she says.

“The mall is not an architectural or online problem,” she adds. “It’s very much a merchandise issue. The merchandise mix is one of the biggest things that needs to change.”

In this vein, REITs are investing to revamp their malls. PREIT (NYSE: PEI) and Macerich Co. (NYSE: MAC) are redeveloping what was a dated, declining mall in downtown Philadelphia. Dubbed “Fashion District Philadelphia,” the 650,000 square-foot project is scheduled to be finished by September 2019 at an estimated cost of $420 million, and will feature trendy retailers such as H&M, Forever 21, and Ulta Cosmetics. Retail discounters Century 21 and Burlington Stores have already opened at the site.

Also central to the mall will be its food and entertainment options. One tenant will be City Winery, a New York-based chain of wine bars featuring music concerts. The food lineup will also include Dallas BBQ, another New York-based restaurant. The mall will also feature an AMC Theatres multiplex, and a bowling alley. And in a bid to offer convenience to the community, retailers on the ground floor of the mall will open to the streets.

“You have a new model of the mall that’s being uncovered,” says Joe Coradino, chairman and CEO of PREIT. “We see it as style, dining, entertainment, arts, and culture.”

Internet Opens Shop

The new model also involves the rise of omnichannel retailing, where retailers offer customers the option of buying online or in store. Apple was a pioneer with this. Now retail REITs are also catering to a growing class of internet retailers setting up shop in brick-and-mortar locations. Amazon has opened stores, as have Bonobos, Warby Parker, and Rent the Runway.

“They are creating experiential places to visit,” says Bob O’Brien, partner and global real estate sector leader at Deloitte. “They are part of building a brand. It’s not necessarily generating sales at that location. It’s really creating a connection to the brand and brand loyalty. Sales [can] generate potentially later, online.”

While digitally-native tenants, or those that originate online, do not yet occupy a meaningful percentage of mall GLA, they seem to be playing an increasingly important role in the centers where they are migrating, says Green Street Advisors analyst DJ Busch in a recent report. “Aside from contributing to occupancy and a fresh tenant roster, these retailers are perhaps helping to pull in customers that have been disproportionately shopping online.” The malls that stand out as having the highest presence of digitally-native retailers are “typically the highest performing A++ centers that have recently undergone large renovations,” he writes.

And brick-and-mortar retailers are going omnichannel too. Grocers, for example, have experimented with ways to service consumers with click-and-collect, a feature that allows shoppers to pick up groceries at designated areas in the store’s parking lot.

“We are clearly at the point where part of the shopping journey involves our phone, iPad, or laptop to research a potential purchase,” Coradino adds. “If the customer wants to see, feel, and touch the merchandise, they go to a store. Or they purchase online and are willing to pick it up in store—either case it’s a positive for us.”

Choice of retailer mix is critical. Regency has even branded its efforts as “Fresh Look,” an initiative that identifies the best mix of operators that are going to drive traffic in a given trade area. “It places an emphasis on merchandising, of having the most relevant of our users in each category,” Stein says.

In some trade areas, the best coffee shop for traffic is Dunkin Donuts; in others it’s Starbucks or a local organic coffee shop, Stein notes. Yet new tenants also need to come with a trendy appeal. Flower Child, a fast-casual restaurant featuring fresh ingredients, opened in August at Regency’s Arapahoe Shopping Center in Boulder, Colorado. Freezing Cow, a Midwest chain of rolled ice cream shops, recently opened at Regency’s Bluebonnet Village Shopping Center in Baton Rouge, Louisiana. “These better restaurants are going to drive traffic,” Stein says.

Going Mixed-Use

In the race to offer more appealing locations, retail real estate owners and operators have also looked to turning their sites into mixed-use locations. It fits into a broader trend of people wanting more convenience in their lives, where ride shares take the place of cars, concierge services deliver information, and lounge areas offer places to relax. “These are people who want a live-work-play lifestyle, with good walkability,” says Drew Alexander, president and CEO of Weingarten Realty (NYSE: WRI).

Apartments are also being added to retail sites as part of a way to develop new revenue streams. Weingarten is constructing a 30-story luxury apartment building at its River Oaks Shopping Center in Houston, a property it has owned for nearly 50 years. Demolition work for the tower began in July, with completion scheduled for 2021. The apartments are aimed to appeal to empty nesters. Weingarten is also developing mixed-use projects with apartments in Alexandria and Arlington in Virginia, and it has partnered with homebuilder Lennar to construct its Whittaker site in Seattle.

Retail REITs have plenty of real estate to work with, especially if they build upwards. “A lot of the beauty of our shopping centers is that they have big parking fields that we can densify,” Alexander says. “In some respects, we are warehousing land.”

Flynn estimates 75 to 80 percent of Kimco’s land is comprised of parking lots. The REIT is raising ceiling heights on garages it builds, giving them more flexibility down the road, as it prepares for the possibility of plummeting parking needs as ride sharing increases and self-driving cars become a reality.

“Adaptability is critical for the long-term success of our shopping centers,” Flynn says. “That has been where we have been working tirelessly to entitle a lot of our assets to lending themselves to adding apartments, to adding density over the long term.”

In some instances, REITs are converting most of a mall to other assets. Macerich has partnered with Hudson Pacific Properties Inc. (NYSE: HPP) to redevelop Westside Pavilion—a mall in Los Angeles where a Macy’s closed in March—into mostly offices. Due to the influx of tech companies to the city, office space is in big demand. Macerich will control the retail portion of the site, which will represent about 20 percent of the space when it opens in 2021.

Continued Evolution

Regency Centers’ Market Common Clarendon in Arlington, Virginia

Coworking is also moving into retail. Similar to Kimco’s efforts to create the Life Time Work space, mall operators are also looking at the potential of converting some of their GLA to office use.

Macerich, for example, recently announced a national partnership with Industrious, a premium workplace operator that caters to small businesses and larger companies. Industrious will operate coworking locations at select Macerich properties, which offer upscale retailers such as Apple, lululemon, Sephora, Tesla, and Nordstrom. The first location is scheduled to open in January at Scottsdale Fashion Square in Arizona.

Retail REITs are also bringing in a cultural touch to their facilities. At Regency’s Market Common Clarendon in Arlington, Virginia, a professional art gallery run by the Artists Alliance opened in September. The space, dubbed “Gallery Clarendon,” has exhibits and classes, and can also be rented out for special events. Meanwhile, PREIT will include $1 million in commissioned art installations at Fashion District Philadelphia.

REITs are also experimenting with making their spaces more accessible to micro-retailers. PREIT has partnered with the Enterprise Center, a Philadelphia nonprofit that incubates minority entrepreneurs, to encourage promotion of products unique to the city. Simon Property Group Inc. (NYSE: SPG) last year introduced “The Edit,” a shared space that offers a rotating selection of diverse new brands at the Roosevelt Field mall in Garden City, New York.

“Mall owners are lowering the barriers that have traditionally hindered start-up retailers from setting quality space in a center,” Busch says. In addition, they are offering short-term, flexible leases and investing in tech-savvy startups that could turn into successful retailers or bring new technologies to malls, he adds.

Regardless of all the adaptation, in the end, it still comes down to the old principle of location. REITs need to still be in the best places. Some retail centers will fade away and others will be considered essential spots for retailers, Stein says. “There are the must-have locations, where retailers can be with other, better retailers, where there is strong purchasing power and they can conveniently service the customer.”

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REITs Meet Evolving Needs of Office Space Tenants

os@interactivestrategies.com — Thu, 13 Sep 2018 17:15:00 +0000

REITs Meet Evolving Needs of Office Space Tenants os@interactive… Sep. 13 2018

Charles Keenan

publications@nareit.com

Charles Keenan is a freelance writer and regular contributor to REIT magazine.

Office REITs answer tenant demand for top-notch space.

Upping the Ante

Office REITs answer tenant demand for top-notch space.

A REIT-owned office building under construction in the Hollywood district of Los Angeles epitomizes the evolution underway in office real estate today.

The Hudson Pacific Properties, Inc. (NYSE: HPP) project, dubbed “EPIC,” will eventually be a 300,000 square-foot terraced office building, situated on Sunset Boulevard, close to entertainment studios, eateries, coffee shops, theaters, and public transportation. Set to open in 2020, the interior will feature 15-foot ceilings and floor-to-ceiling windows. It will also have built-in flexibility, such as the option to link floors with open staircases. It will have electric car charging stations, bike storage, and a fitness center with showers and lockers. A street-side lobby will have a rideshare drop-off. Yet its biggest draw might be its outdoor space.

About 10 percent of the 13-story building will be dedicated to large terraces, with sweeping views of the Hollywood Hills, Pacific Ocean, and downtown. The patios will have cozy trimmings such as couches, trellises, trees, fire pits, and barbecues.

“These outdoor spaces are situated with a purpose of allowing for a unique indoor-outdoor experience,” says Chris Barton, executive vice president, development and capital investments, at Hudson Pacific. “They are built as programmed, functional, communal spaces.”

When looking to the horizon in the office real estate sector, REITs and other landlords are in a long-term competition to meet the evolving needs of the 21st century tenant, making older buildings of narrow windows and walled-off floor plates obsolete. All the disruption now happening in office real estate boils down to a critical strategy: catering to the employee. While companies used to dictate what types of work environments employees would have, now it’s the inverse, and it has revolutionized the way cutting-edge landlords think about how they build offices.

People Power

“What we now have is far more of a meritocracy as a culture,” says John Kilroy, chairman, president, and CEO of Kilroy Realty Corp. (NYSE: KRC). “The meritocracy is all about being able to attract and retain your most important asset, which is your people. It’s not about the power of the company, it’s about the power of the individual.”

More than ever before, technology companies are leading the way in this revolution, prompting traditional firms to follow them in pursuing more modern offices, so they too have bells and whistles to offer their talent. Most importantly, today’s tech workers, especially younger cohorts such as millennials and Generation Z, demand more amenities, more light, and more access to retail and transportation. They want to work near where they live. They want access to cool coffee shops, hip restaurants, and outdoor spaces.

This is leading to a supply problem for avant-garde space. It’s good news for REITs on the forefront of meeting the demands of supplying amenities, but not so good for owners saddled with older office buildings. About 80 percent of today’s office stock dates back to the 1980s or before, estimates R. Byron Carlock, Jr., of PwC.

“Landlords are having to play catch-up with some of these dramatic tenant requests that are becoming normative in the marketplace, but have not necessarily been broached in the past,” Carlock says.

Dan Ryan, a co-chief investment officer at Alexandria Real Estate Equities Inc. (NYSE: ARE), describes the nation’s office landscape as “a story of haves and have nots.”

“The more that buildings emphasize employee-centered design, the more tenants are out there saying, ‘I have to get on this.’”

Tech as a Catalyst

Compare the frenzy today with the office world a decade ago, before the Great Recession. “The biggest impact of technology on office this cycle is that the technology tenants are dominating growth and new-business activity,” says Owen Thomas, CEO of Boston Properties, Inc. (NYSE: BXP).

Technology is all-encompassing and includes areas such as medical and biotech, fin-tech, auto-tech, gaming, and cybersecurity. Robotics, artificial intelligence, the internet of things, augmented reality, and virtual reality will all drive future growth, Kilroy notes.

Currently, about 20 to 25 percent of all new office leasing comes from technology firms, according to a July report by Cushman & Wakefield. Most of that is driven by STEM-related occupations: science, technology, engineering, and mathematics. Computer and math occupations now make up 20 percent of major office leases, the firm says.

“Technology is a huge driver of growth, but it is also a huge disrupter,” says Revathi Greenwood, head of Americas Research at Cushman. “It’s driving commercial real estate demand.”

REITs have responded over the years, targeting tech and other high-growth industries related to tech, such as life sciences and media. About 43 percent of Kilroy Realty’s tenant base is made up of technology tenants, up from 11 percent in 2009. Its portfolio includes fast-growing companies such as Adobe, Riot Games, and biotech firm 23andMe. Alexandria’s roster includes Illumina, Eli-Lily, Uber Technologies, Stripe, Amgen, and Facebook.

Other fast-growing industries soaking up office space include health care, advertising and marketing, life sciences, media and entertainment, and coworking. All of these industries had “increasing” leasing activity for 50 percent or more of companies, according to a 2017 PwC report.

These companies will pay a premium for class-A space. Asking rents in the second quarter for class-A offices were $76.22 per square foot in San Francisco, compared with an average of $72.30, according to research by Cushman. In Boston they were $41.17 a foot for class-A, compared with an average of $36.54, and in Austin, Texas, $40.17, compared with $36.54.

Coworking space has become a major force in office demand, as tenants such as WeWork sign large leases in urban areas. The subsector has grown at an average annual rate of 23 percent since 2010, according to JLL. Coworking tenants absorbed 29 percent—about 18 million square feet—of the total U.S. office space over the last 24 months, according to JLL. Today, about 5 percent is controlled by third-party flexible space providers, yet that is expected to rise to 30 percent by 2030, JLL estimates.

In the Washington, D.C. metropolitan region, Washington REIT (NYSE: WRE) is responding to the national trend toward flexible office space by introducing a portfolio-wide program branded Space+ that is designed to meet tenants’ increasing demand for flexibility, speed to market, and competitive amenities. In a second quarter earnings call, President and CEO Paul McDermott said the program offers much of the flexibility seen in coworking, but that is still novel in the spec-suite market. The program offers flexible lease terms, high-quality customizable spaces, and options on level of service, “in recognition of the fact that with office tenants, one size rarely ever fits all,” he said.

Demand Drivers

Millennials are a big part of the push behind contemporary office offerings. This population cohort, now representing about one-third of office users, are reaching the key years of marriage, owning a first home, and child-rearing, notes a PwC report.

This means they want to live close to where they work.

That’s expanding what’s considered a hot area in terms of class-A office real estate. “The definition of the downtown and the traditional location is changing. Technology tenants are more flexible on where they are willing to go, and new areas of cities are becoming more desired,” Thomas says.

In this vein, Boston Properties is developing Dock 72, the “next generation waterfront workplace” at the Brooklyn Navy Yard in New York and a mixed-use property at Boston’s North Station. The REIT also developed the Salesforce Tower, which opened this year, in the South of Market district in San Francisco. Kilroy is developing a two-tower office project in South Lake Union, a neighborhood of Seattle, and last year acquired a full city block in San Diego’s Little Italy neighborhood. Alexandria has continued to develop properties in its cluster areas such as Cambridge, Massachusetts, and Mission Bay in San Francisco—a strategy it’s pursued since the mid-2000s.

In these hotspots, REITs are focusing on the live and work aspect, making sure that offices are amenity-rich. One big trend in recent years has been open floor plates, yet now landlords are getting requests to build out more quiet areas. In fact, two Fortune 500 companies that had transitioned to an open office format reported a decline in social interaction, according to a recent study by Harvard Business School and Harvard University. Employees spent about 70 percent less time face-to-face, increasing email and IM usage. Alexandria has received requests to build more quiet rooms, and “spaces dedicated to no technology,” notes Ryan. “People are looking at it and saying, ‘Maybe we went too far with the open office.’’

Yet when it comes to communal areas, the outdoors beckons. Alexandria is building an office building for Takeda Pharmaceutical Co. in San Diego that will have two outdoor conference rooms, fully wired with video screens.

Last year, Boston Properties completed a renovation of 399 Park Avenue, a 1.7 million-square-foot office building in Manhattan, adding a rooftop garden and a glass walled office space on a setback of the 13th floor. It added a landscaped outdoor plaza and new food hall space to One Five Nine East 53rd Street, a 222,000-square-foot building in New York.

Servicing Tenants

Amenities also involve service, and here REITs are taking a page out of the hospitality playbook, acting as a concierge of sorts.

Alexandria, for example, has a staff of about a dozen that focuses on organizing activities, including sports leagues in soccer, basketball, and badminton, walking clubs, cooking classes, and concerts. For one company, it arranged for a tent and a band to bring together two subsidiaries of a company wanting to better integrate its employees. “We think of ourselves as a city hall,” Ryan says. “We take advantage of the facilities that we have on our campuses to really create community.”

REITs aim to be a partner of sorts with their tenants when it comes to this kind of hospitality. If a tenant decides to have a party on a rooftop deck or building lobby at 6 p.m., then changes it to 4 p.m., Kilroy Realty responds, with staff embedded on site with the authority to make quick decisions, without having to run up the corporate chain. “Our job is to try to enable our partners to do the things they need to do to improve their enterprise and the bottom line,” Kilroy says.

REITs are also curating their retail and restaurant offerings. Alexandria Center for Life Science in New York has Riverpark, a farm-to-table restaurant. Kilroy’s 100 Paseo, a mixed-use project with office, retail, and apartments that’s under construction in San Diego, will have a Shake Shack and Tender Greens, as well as higher-end cuisine. “We think of it as an experience in our buildings,” Kilroy says.

Alex Goldfarb, an analyst at Sandler O’Neill + Partners, adds that office REITs are taking much more advantage of either bringing in some sort of restaurant, or some sort of quick serve “that’s more in keeping with what people want today.”

Sustainability Sells

Meanwhile, building sustainability is becoming more of a factor in leasing discussions. Tenants, especially those that skew toward younger employees, have a strong preference for buildings with LEED certifications and Energy Star ratings. “Those companies with a younger workforce are more likely influenced by sustainability and environmental factors,” Thomas says.

“We belabor this stuff a lot,” Ryan says. “We’re not just going to buy a table. We’re going to get the right reclaimed table that has the right sustainability features and provides a story to it and a great design all at once.”

Landlords incorporating these kinds of features certainly pay more for the development. Higher ceiling heights, greater load capacities, bigger windows, and extensive outdoor space all add to building costs. Yet the fastest-growing companies can pay higher rents. Meanwhile, there are more workers per square foot, driving down average costs per employee. Office space has declined to about 151 square feet per employee, down from 176 in 2012, and 225 in 2010, Kilroy Realty estimates.

For high-flying tech companies, where most of the assets are essentially wrapped up in the intellectual property and the employees, tenant decisions are all based on attracting and retaining workers. These companies tend to be less sensitive to rents because about 80 percent of their cost structure is their people, whereas real estate might account for 4 or 5 percent, Kilroy notes. “If you spend an extra 20 percent on real estate, but it influences 10 percent positively on productivity and attracting and retaining your best, it’s the best money you’ll ever spend.”

That kind of reasoning might be hard for tenants to resist, as office space continues to evolve to meet the needs of employees.

The Industrial REIT Boom

os@interactivestrategies.com — Mon, 16 Jul 2018 18:00:00 +0000

The Industrial REIT Boom os@interactive… Jul. 16 2018

Charles Keenan

publications@nareit.com

Charles Keenan is a freelance writer and regular contributor to REIT magazine.

A look into how industrial REITs are adapting to a future heavily shaped by e-commerce.

Staying Ahead of the Wave

A look into how industrial REITs are adapting to a future heavily shaped by e-commerce.

There is no doubt that one of the trends that has had the biggest impact on the real estate industry over the past decade has been the growth in e-commerce. While the rise in online shopping has clearly posed challenges for many retail real estate owners and tenants, it has been an absolute boon for other sectors—including industrial REITs.

To estimate just how much of an impact e-commerce has had, and will continue to have, Duke Realty Corp. (NYSE: DRE) released a report that showed for every $ 1 billion increase in e-commerce sales, another 1 million square feet of fulfillment space is needed.

Such a pace creates its own share of challenges and opportunities for industrial REITs as they seek to meet consumers’ insatiable appetite for rapid delivery right to their doorstep, along with being able to serve more traditional tenants in light manufacturing and distribution.

Part of the challenge is not merely building for today’s demand but planning for tomorrow’s needs. Through 2021, Duke estimates another 339 million square feet of industrial space will be needed. In other words, the market would absorb an average of 1.62 million square feet of additional warehouse space every week—the equivalent of more than 28 football fields—and that’s just to meet the demand for warehouses geared to e-commerce.

As Mike Landy, president and CEO of Monmouth Real Estate Investment Corp. (NYSE: MNR), puts it, “Buildings today are called industrial real estate, but in name only are they similar to what was built in the prior century.”

Bill Hankowsky, president and CEO of Liberty Property Trust (NYSE: LPT), says the industrial property of the future needs to be as flexible as possible. “We are trying to think not just about what’s the right building today, but what’s the right building 10 years from now,” he says.

The large regional warehouses most people identify with industrial REITs are being joined by smaller, local facilities aimed at speeding delivery times.

“Anything that can speed things up from the time a customer clicks buy to when it arrives at his or her doorstep, that’s where we’re heading as an industry,” says Marshall Loeb, president and CEO of EastGroup Properties Inc. (NYSE: EGP).

Demand for infill space

Duke Realty, whose tenants include e-commerce heavyweights Amazon, Wayfair, Blue Apron, UPS, and FedEx, has seen the most increased demand for urban, close-in industrial facilities.

“Tenants want to be as close to major metropolitan areas as possible, so they logistically can get product to their customers as quickly as possible—in many instances, in less than an hour,” says Jim Connor, Duke Realty chairman and CEO.

Duke Realty’s Camp Creek Business Center, south of Atlanta.

Property owners are well aware of this rapid delivery trend and that has created a dogfight for space in infill markets.

“The reality is that developing logistics space in these areas is difficult and expensive, which in turn is leading to a chronic undersupply in the most desirable places,” says Chris Caton, head of global research for Prologis Inc. (NYSE: PLD).

In the New Jersey Meadowlands, for example, less than 10 miles from midtown Manhattan, there isn’t much land left to develop. Office buildings are either being razed or converted to make space for warehouses.

“It’s tough to do new development because there’s very little land to develop,” says James Breeze, national director of industrial research at Colliers. “Occupiers are having to be creative.”

In addition to consumer preferences, the demand for infill space has also been driven by higher transportation costs. Van rates (an industry measure of enclosed tractor trailers) rose to $2.16 per mile in April, up 49 cents from the same period a year earlier, a 29 percent increase, according to DAT Solutions, a firm that tracks trucking data.

With higher costs, and worsening traffic, many industrial tenants can’t get away with just one distribution center per city, especially in fast-growing metropolitan areas such as Dallas, Atlanta, and Phoenix. “A lot of our markets are so geographically spread out, you need an east and a west location,” Loeb says. “Otherwise, drivers spend much of their day in the truck.”

That has helped contribute to the increased demand for smaller facilities, or those in the range of 100 million to 300 million square feet, notes Richard Thompson, international director, supply chain and logistics solutions at JLL. “When freight costs go up, companies say, ‘I have more facilities in more places,’” Thompson says.

In smaller cities, retailers are also using infill locations to supplement their larger warehouses. Best Buy, for example, recently leased a 40,000-square foot space from EastGroup for its deliveries in Charlotte, North Carolina, with a larger distribution center farther away. For the retailer, the warehouse options “are like tools in a toolkit,” Loeb says.

Demands on design

Shifting demands from tenants and consumers have also impacted warehouse design.

To start with, in many infill areas, there’s nowhere to go but up. In Seattle, Prologis is due to deliver a three-story, two-level, 590,000 square foot warehouse this year. Dubbed Prologis Georgetown Crossroads, the state-of-the-art facility will feature truck ramps leading up to an upper level and a third floor. It’s situated about a mile from Interstate 5 and five miles from downtown.

“We are looking around the corner at what our customers need and homing in on a strategy for competitive advantage that we can capitalize on for the long term,” Caton says.

Special features and amenities tailored to modern tenants are important to incorporate into the facility design, Caton adds. That includes better clear heights, mezzanine space, rooftop solar to meet higher power demands, and secure, attractive grounds. REITs can also consider adding amenities for larger groups of employees, such as wellness programs and car-sharing initiatives. “Logistics customers also want facilities that can flex with their evolving needs,” Caton adds.

Meanwhile, automation is also influencing industrial real estate space design and usage. Amazon bought Kiva Systems in 2012 and started using robots in its warehouses in 2014. It now uses robots extensively around the globe. The robots can move pallets, sort items and shift inventory around a warehouse.

With more automation, column spacing needs to be wider, and there’s a need for super-flat flooring to bear the increased weight loads of higher shelving, newer racking technologies, bigger conveyor systems, and mechanized forklifts. Meanwhile, so-called “cross-docking” allows delivery of supplies on one side and shipment on the other side.

“When you get storage up to 40 feet high, you have to have exceptionally flat flooring,” Thompson says. “If you are picking a big pallet high up on a rack, you can’t have any issues with that.”

In addition, warehouses must be adaptable to accommodate the office space of shipping facilities and showroom space for wholesalers and retailers.

In EastGroup’s portfolio, for example, some tenants use the front for showrooms and the back for shipping. “Because we are last-mile, we end up with showroom space,” Loeb says. “It’s a blurring of retail and industrial.”

Investing for the long term

As long-term property owners, REITs must anticipate what the market will need down the road and be prepared to invest appropriately, executives stress.

Connor has highlighted this at Duke’s Monday morning investment committee meetings, justifying the higher costs of building for the long term.

“If state-of-the-art today is a clear height of 36 or 40 feet, why aren’t we building 40-foot clear, why aren’t we investing in all of the features that are going to differentiate this building not only today, but over the long term?” he says.

Other REITs take the same forward-looking approach. Liberty, for instance, announced in March that it broke ground on an 840,000 square-foot facility in Butts County, Georgia, in the Atlanta-Savannah corridor. Scheduled for completion in the fourth quarter, the building will be able to serve as an e-commerce fulfillment center or a regional distribution facility.

The building will have 40-foot clear heights, which allows room for a mezzanine with conveyors, or for high racks. It will also include wide foot-column spacing—56 feet by 51 feet—to allow for larger order picking equipment commonly used in e-commerce. There will be 156 dock doors and wider 70-foot speed bays. The property will also have 176 trailer and 439 car parking spaces.

REIT executives stress the need to be flexible in the ever-changing world of industrial real estate. “Things evolve and you want to have the capacity to grow with your tenants,” Landy says. Case in point, he notes that a Monmouth facility near the Pittsburgh airport houses GE’s Center for Additive Technology Advancement. When the facility was first built for GE, they were not in the business of manufacturing 3D printers—now they are the second largest manufacturer, according to Landy.

Are There Workers Nearby?

And while investing in the physical attributes of a property is key, choosing a location is also critical because distribution centers need to be close to available labor pools, executives add.

A 1-million square foot auto-part warehouse might employ 200 people, notes Hankowsky. That same building might need 600 people for supplying a grocery chain. But for e-commerce, it could run to 900 people or more in the same space, due to the speed needed to get packages to market.

This comes at a time of record-low unemployment, which dropped to 3.9 percent for April, the lowest level since 2000, according to the U.S. Bureau of Labor Statistics. That makes placement of warehouses even more critical.

Duke now commissions labor analytics studies before it buys land or a building. That practice helps the company close lease agreements with tenants, whether it’s a dot-com or a logistics company, Connor notes.

For a deal that Duke struck with Amazon in the first quarter for a facility in the St. Louis area, the company handed over its study for the region, an aid that helped seal the deal. “You know what the labor analytics are for the surrounding 30-minute drive and how that’s going to work for your clients,” Connor says.

E-commerce's potential

When it comes to e-commerce, in a sense it’s still early days. Sales for the category grew 16 percent in 2017 to $454 billion, according to the U.S. Census Bureau. Yet that only accounted for 8.9 percent of all retail sales, leaving plenty of room for upside.

Internet retailers and logistics companies are bulking up for continued growth. Amazon now has 300 distribution centers in the United States, with another 30 planned to open this year, according to a report by Colliers International. Meanwhile, logistics companies such as UPS and FedEx have estimated large increases in capital expenditures for 2018, notes Green Street Advisors in an industry report.

Meanwhile, about 120 million square feet of big-box buildings, defined as having 200,000 square feet or more, hit the market last year, according to Colliers. Almost all the space was leased: net absorption last year totaled 116 million square feet.

Suggested Results

Off

Residential REITs Adapting to the Future of Housing

os@interactivestrategies.com — Fri, 11 May 2018 13:15:00 +0000

Residential REITs Adapting to the Future of Housing os@interactive… May. 11 2018

Charles Keenan

publications@nareit.com

Charles Keenan is a freelance writer and regular contributor to REIT magazine.

Residential REITs adapt to the evolution of how people live.

Housing The Future

Residential REITs adapt to the evolution of how people live.

(Editor’s Note: This is the third in a year-long series looking at the public’s evolving demands for space and how real estate companies are meeting their needs.)

Camden Property Trust (NYSE: CPT) has its eyes trained on the future. For the eight apartment projects in its pipeline, the company is making sure that parking areas will be able to accommodate electric cars and docking stations. At the same time, Camden is keenly aware that the advent of driverless vehicles is on the horizon and will likely decrease demand for car ownership—and garage space.

As a result, when Camden builds parking structures, it pays higher construction costs, favoring poured concrete over precast slabs so that it can add more sleeves and vaults for utilities. Camden also incorporates higher ceilings in the design so it can eventually convert garages for other uses, such as fitness centers or hydroponic gardens. In the long run, Camden will save money by taking these steps now.

“You have to build them that way,” says Ric Campo, Camden chairman and CEO. “You have to make investments in the future to be relevant with your customers. You have to make sure what their tastes are, how their tastes are changing, and how the disruptive technology is going to change your business.”

In the world of residential real estate, Camden’s approach underscores the public’s changing demands for space, and how those needs are being met. While the basic need for shelter won’t change, the way it is delivered—and who delivers it—will likely experience upheaval in the years to come. For residential REITs owning apartments, single-family rentals, manufactured housing or student housing, the big challenge will be adapting and staying competitive regardless of what changes arise.

Millennial Demands

REITs face a growing laundry list of must-haves from potential renters, who don’t just want, but expect, any residence to come fully equipped to facilitate their modern lifestyle—be that high-speed internet to secure ride-sharing pickup locations to 24-hour package lockers.

Common areas and high-speed internet access are staples at American Campus Communities’ properties. Pictured: The Callaway House Austin at the University of Texas.

“When you design real estate, you have to be thinking about all the consumer lifestyle activities and how they are going to transform your site plan, your program, your design,” says Bill Bayless, CEO of American Campus Communities Inc. (NYSE: ACC). “Almost all of these larger, technology-based lifestyle changes are a disrupter to how residential real estate typically has thought about bricks and mortar.”

In this effort to accommodate, residential REITs have a close eye on millennials, soon to become America’s biggest generational demographic. By 2019, millennials will overtake baby boomers as the largest living adult generation, according to research by Pew Charitable Trusts. Pew classifies the group as those aged 22 to 37. Millennials numbered 71 million in 2016, the latest figures for which U.S. Census data were available.

“There is a macro trend out there around a desire to have access to things rather than to own things,” says Bob O’Brien, global real estate and construction leader at Deloitte. “You see that pervade our society, but it has an impact on home-ownership and is a positive for rental residential.”

In response, new ways of delivering real estate keep appearing. Communal living for professionals in high-rent cities is one permutation. WeLive, an offshoot of WeWork, rents rooms in Washington, D.C. and New York for a night or more to try and capture market share of vacationers and business people, but also longer-term tenants. Starcity, a real estate startup in San Francisco, has carved out a niche by buying and renovating buildings, converting them into stylish dormitories for young professionals.

Amenities Entice

Yet in whatever way residential real estate is delivered, perks rule in today’s market. The Camden, a new apartment building opened last year by Camden Property in Hollywood, California incorporates some higher-end amenities to attract tenants: a lounge offers a gourmet kitchen and heated saltwater pool, and a dog park has two canine washing tubs. There is an outdoor exercise space and meditation area. Its lobby, decorated with mid-century modern couches and chairs, encourages communal gatherings.

Apartment owners are upping the stakes on amenities to attract and retain tenants. Pictured is an outdoor dog washing station at Camden Property’s The Camden in Hollywood, California.

“Today, millennials want experiential things,” Campo says. “You have to think through how they live, and then put in amenities and systems in place that adapt to that.”

One key offering for young professionals and millennials is high-speed broadband, cited by real estate firms as the most important amenity.

The younger the tenant, the greater the demand for technology it seems. So, while the appetite is the highest at universities, when these students graduate they want the same level of service.

At American Campus Communities, the demand has translated to super high-speed connectivity at some dorms, such as a 1,000-gigabit bandwidth circuit at a property near the campus of Texas Tech University in Lubbock. “You cannot overstate how big technology is in this equation,” Bayless says. “The absolute demand for broadband and wireless is unbelievable. Most multifamily residential complexes have never been built to the level of power users that students are. Once they graduate, they have those same demands.”

More generally, property owners are also adapting to the soaring volume of packages as a result of e-commerce, installing lockers and storage rooms in buildings. Package Concierge, Luxer One, Parcel Pending and Amazon Hub all are selling their services to overwhelmed property managers. Equity Residential (NYSE: EQR) now has lockers at about 80 of its 305 properties. Independence Realty Trust (NYSE: IRT), a REIT that focuses mainly on class-B apartments in middle markets, is using Parcel Pending for its rollout. Scott Schaeffer, CEO of Independence Realty, also points out that many millennial tenants barely use the kitchen stove, opting to eat out or order in. “We are living through a revolution in the way people live,” he says.

Getting Smart

In this race to meet the needs of residents, it’s difficult to overestimate the role of technology. REITs historically have differentiated themselves on revenue management systems. In fact, technology helped usher in a whole new REIT asset class in single-family rental homes after the financial crisis.

The social lounge at The Camden.

Geographic information systems, smartphones, and the internet of things have allowed REITs such as Invitation Homes (NYSE: IVH) and American Homes 4 Rent (NYSE: AMH) to prosper on what had been impractical to do on a large scale before. “It makes the ability to operate single-family home rentals very different than it would have been 10 or 15 years ago,” says O’Brien of Deloitte.

Now, smart-home technology is also starting to take hold. O’Brien notes that it will allow companies to manage maintenance and service calls and everything else in a much more cost-effective way.”

Invitation Homes, the country’s largest publicly traded single-family rental company with more than 80,000 homes nationwide, now installs a smart hub on any property that becomes vacant. This allows prospective tenants to see vacant properties on their own, without a salesperson. Interestingly, after instituting the service in 2016, the company quickly found that about 80 percent of prospects elected for self-service over a salesperson. Now, most prospects browse on a web portal, fill out an application, and communicate with Invitation using their phones. The company texts a one-time code for entry and the door lock connects to the smart hub inside the house, which is linked to its offices via a cellular network.

“We immediately learned customers are not only willing to self-show, they absolutely want to do it and enjoy it,” says Fred Tuomi, president and CEO of Invitation Homes. “It wasn’t a push, it was a pull. People don’t like being chatted up and sold to by a leasing person. They like to walk through the home themselves.”

Seeking Differentiation

Invitation Homes can also use the smart hubs to monitor the thermostat and provide access to maintenance workers and contractors. It soon plans to add surveillance cameras that will link to a security system and loop in smart appliances so workers can proactively visit a house where a refrigerator or dishwasher is underperforming.

“It gives us a differentiation in the marketplace,” Tuomi says. “It gives people something they want, and it makes us more efficient along the way.”

Invitation Homes’ rentals feature smart-home
technology.

For residential real estate owners, it will pay to get up to speed technology wise, experts say. In multifamily, for example, using technology to meet lifestyle demands will allow an owner to differentiate in crowded, competitive markets.

“There is so much product now in this class-A space,” says Rick Haughey, vice president, industry technology initiatives at the National Multifamily Housing Council. “These things matter because they can have an impact on your competitiveness in the market.”

Other phenomena related to technology are affecting residential REITs. Airbnb, which has siphoned off business from lodging, is still changing how apartments deal with the increasing rental volume of tenants subleasing units. It has pitted residents against municipalities and REITs themselves.

For its part, Equity Residential is trying to turn a potential headache into a positive, running a pilot that allows tenants to participate in Airbnb, where the volume gets monitored. “It gives you the transparency you need as an owner, to make the decision of what, if anything, you need to do differently,” says Michael Manelis, executive vice president of property operations.

The Data Revolution

Companies are also looking at analytics to better harness all the data they collect. In a sense, a big separator for the large players in the past—property management systems—are now widespread, having become a commodity in the business. The next phase involves artificial intelligence, which will play a role with chatbots, search, and lead-scoring models, experts say.

Equity Residential is looking at how it can use analytics on the sales end, such as deploying chatbots on its website and mobile interfaces to automate basic customer service functions, much like Amazon and other companies have done. A shared profile from Facebook or Instagram could help inform Equity about what kinds of amenities to upsell, or what kind of apartment to offer.

Equity is also looking at products that will help it better analyze the common space, such as cameras that can help generate heat maps on pool and treadmill use. All of this could help operators make more prudent investments, says Manelis. “It’s about trying to get smart with how you leverage this data technology to make sure you are making the appropriate design decision.”

Invitation Homes, like many REITs, already tracks visitor browsing on its website, including pages visited, time spent on a page, photographs viewed, number of homes viewed, whether school ratings were viewed, and the overall browsing sequence. Harnessing it could improve the leasing experience at a lower cost, Tuomi notes. “We have the data,” he says. “The next frontier is applying some of these new capabilities to analyze, distill, and then make actionable decisions based on that data.”

Watch The Demographics

Meanwhile, shifting generation demographics will also play a role in how residential real estate adapts and innovates.

A projected deceleration of the population of those aged 25-34 could trigger another potential disruption. Annual population growth of this segment was projected to peak in 2017 at 626,000, according to 2014 statistics from U.S. Census Bureau—the latest available. This growth rate was expected to decline by 16 percent this year, to 528,000, falling to 166,000 by 2023, notes Green Street Advisors. By 2025, growth is expected to be negative.

“The apartment REITs and operators of the past 10 years have had this huge demand boost, or support for operating fundamentals,” says John Pawlowski, an analyst on Green Street’s residential research team. “That tailwind will be slowing meaningfully in the next couple of years as tenants age.”

Yet an aging population stands to benefit manufactured housing REITs. UMH Properties Inc. (NYSE: UMH), for example, offers rentals or ownership in one of its 112 communities in eight states across the Northeast, Midwest and Tennessee. “If we have a high-quality community that is affordable and in good shape, that is exactly what they are looking for,” says Sam Landy, president and CEO.

Adaptability will be key, whether it’s a house, dorm or apartment, notes Haughey of the NMFC. “The more flexibility you can build into anything, the better—to make space convertible in some ways, to either address advances in technology or changes in demographics,” he says. “Is there any way you can build in more flexibility as the market changes? People are thinking about it.”

Are Malls Ready to Deal?

os@interactivestrategies.com — Thu, 08 Mar 2018 20:30:00 +0000

Are Malls Ready to Deal? os@interactive… Mar. 8 2018

Charles Keenan

publications@nareit.com

Charles Keenan is a freelance writer and regular contributor to REIT magazine.

After a major merger announcement, will more mall M&A come into focus?

Ready to Deal?

Despite concerns about the health of the mall business, one recently announced merger of two retail REIT titans could catalyze more deal-making in a sector going through major changes.

The agreement for Unibail-Rodamco SE (PAR: UL:PA) to purchase Westfield Corp. (ASX: WFD), announced in December and expected to close by June, should remind investors that malls are a still a viable asset class and that real estate still comes down to a familiar, inviolable law: location.

As valuations of class-B and class-C properties have declined, REITs holding mainly class-A space for malls have suffered in the downdraft. Institutional investors paring their holdings of REIT shares led to steep discounts to net asset value, ranging from 8 percent to

56 percent in mid-February among eight companies in the sector, according to Green Street Advisors.

“It’s clear what is going on in this sector is driven by value opportunities,” says Joseph Coradino, chairman and CEO of Pennsylvania Real Estate Investment Trust (NYSE: PEI), commonly known as PREIT. “There has been an overreaction in the mall space by institutional equity investors. As a result, there are some real opportunities to create value though mergers and acquisitions right now. We are seeing the early stages of it. You are beginning to see a shift occur from ‘the malls are dead’ to ‘malls are alive and well.’”

Malls Already in Motion?

The shift might have begun in earnest in November, when Brookfield Property Partners announced a $14.8 billion proposal to purchase the remaining shares of GGP Inc. (NYSE: GGP), of which it already owns a third. While the unsolicited proposal—a mix of cash and stock—was rejected by GGP, a potential higher bid might get the deal done.

Despite still trading at steep discounts to net asset value (NAV), mall REIT stocks rebounded late in 2017, in part due to all of the merger speculation. By year-end 2017, Simon Property Group Inc. (NYSE: SPG) was up 2 percent for the year, after having been off 9 percent year-to-date in early November, a week before Brookfield’s announced bid. GGP stock was down 20 percent for the year on Nov. 3; yet, it ended 2017 down just 1 percent. Stock in Macerich (NYSE: MAC) had been down 19 percent at one point, and at year-end it was off just 1 percent. Taubman Centers Inc. (NYSE: TCO), off 35 percent as of Nov. 3, ended the year down 6 percent.

Did investors overreact initially, selling off mall REITs in a panic? Perhaps, if looking at the strong fundamentals for retail REITs.

Occupancy rates in 2017 hovered at 95.7 percent, and funds from operations have risen at an 9.6 percent annual rate in the past five years, according to Nareit research. Amid all of the selling, net operating income (NOI) for mall REITs has remained steady in recent years. In the third quarter of 2017, NOI dropped 1.2 percent from the same period a year earlier to $1.92 billion. However, it was still up 6.3 percent from the same period in 2012.

Still, investors don’t appear satisfied, which could lead to more mergers and acquisitions. Third Point, an activist hedge fund run by billionaire Dan Loeb, disclosed in early November that it purchased a 5 percent stake in Macerich, boosting the mall REIT’s stock price and fueling speculation it could seek a buyer. Similarly, Elliott Management Corp. recently disclosed a 3.8 percent stake in Taubman Centers, joining activist Jonathan Litt in owning a piece of the global mall REIT.

High Bar

What might slow the pace of M&A in the mall sector is the price Unibail offered for Westfield: $7.55 for each share in a mix of cash and stock, about an 18 percent premium to Westfield’s closing price on Dec. 11, the day before the announcement.

The share portion of Unibail’s bid implies an effective issuance level in line with Green Street's spot NAV estimate. That translates to an implied net rental income yield just above 4 percent. So, this type of pricing puts pressure on Brookfield, and it sets a higher bar for other bidders for mall REITs, notes DJ Busch, managing director at Green Street.

“I think it’s going to be more difficult,” Busch says. “I’m not sure the Westfield transaction spurs other activity because the price Unibail paid looked pretty fair.”

In this environment, there are still plenty of malls that are well-desired assets, and they are tough to acquire. REITs own most of them (see sidebar), so the stars have to align for a deal to happen. Unibail’s bid was made possible in part by the higher valuation of its stock compared with its American peers, giving it a stronger “currency” in its shares.

The deal is also a case for size. A combined Unibail-Westfield (which is pending shareholder approval) would make it second only to Simon in terms of market capitalization and square footage.

“This transaction represents a compelling opportunity for both companies to realize benefits not available to each company on a standalone basis, and creates a strong and attractive platform for future growth,” said Christophe Cuvillier, chairman and CEO of Unibail-Rodamco, in a press release after the announcement. “It provides a unique platform of superior quality shopping destinations supported by experience professionals.”

The combined entity would have 104 assets with 1.2 billion visits annually. It would boast a net rental income of $2.6 billion for the 12 months ended June 30, 2017. Fifty-six of the properties represent 84 percent of its gross market value, including flagship properties such as Westfield London, Le Forum des Halles in Paris, Westfield World Trade Center in New York and Westfield Century City in Los Angeles.

“From a Westfield perspective, here was a chance to participate in some of the higher growth that was in Unibail’s malls, and for Unibail, Westfield had just renovated a lot of its properties,” says Schecky Schechner, managing director and co-head of real estate investment banking at Barclays. “There’s a lot of potential growth there.”

When it comes to size, one question about the Unibail-Westfield deal is how much does a bigger mall REIT have in pricing power with leases? For Unibail-Westfield, it will take several years to answer, Busch says.

“It’s a portfolio that’s going to have a global resonation with the best-in-class retailers, which could be appealing,” he says.

That said, many private companies still own some of America’s best malls and can demand top rents. Locations such as NorthPark Center in Dallas and South Coast Plaza in Costa Mesa, California, make them a must for retailers.

“Do you actually get any type of leasing leverage by having a global platform?” Busch asks. “I think there is some value to it. And maybe it opens up some avenues for Unibail-Westfield as a combined entity. But at the same time, quality trumps all.”

Regardless, size does matter when it comes to renovating existing malls in order to keep up with retailing trends. This will help mall REITs revamp existing mall portfolios in order to meet the shifting demands of consumers, away from apparel and department stores—a staple for malls—towards a greater mix of retailers.

“Malls are requiring a lot of capital,” Schechner says. “Therefore, there is a benefit to having a really strong balance sheet like Simon, Unibail or Westfield.”

For any REITs doing acquisitions, they will likely need to sell lower-performing assets to improve their balance sheets. In buying Westfield, Unibail’s leverage ratio will increase 500 basis points, to about 50 percent, and its debt will grow to 11 times EBITDA (earnings before interest, taxes, depreciation and amortization), up from nine times, according to Green Street. Unibail’s assets outside of its flagship group could eventually be candidates to sell; the company has issued guidance for selling $3.7 billion from its legacy portfolio, notes Busch of Green Street.

Less Could Be More

At the same time, Unibail and its competitors will still need to deal with a glut of retail space in the United States. That’s about 24 square feet per person, notes Steve Buller, a portfolio manager of Fidelity Real Estate Income Fund (FRIFX), more than twice that of European countries. While America is less dense and has lower land costs, he notes, it’s still high.

“There is simply way too much [retail] space in this country,” Buller says. “It’s going to be a multi-decade long process to reduce that amount per capita.”

Yet, as REITs continue to pare balance sheets and focus on their best performers, uncertainty remains regarding what prices they’ll get for dispositions going forward. It’s hard to glean from just the Unibail-Wesfield deal, which Buller characterizes as a merger rather than a sale. Buller says he fears that lower prices for malls could have started to have been reflected in the selloff of mall REIT shares.

“There’s not a lot of transactional evidence,” he says. “We need more price discovery of where malls will trade at in the future.”

In the process, REITs will need to innovate. Washington Prime Group (NYSE: WPG) has a portfolio of community centers that have had recent NOI growth, but its malls have fallen short, in part due to retailer bankruptcies. Like other mall REITs, Washington Prime is looking to diversify its tenant base: Food and beverage outlets now make up 13 percent of its portfolio. It’s adding theaters and fitness centers to its shopping centers. It has also installed Amazon lockers at various locations, a nod to the symbiotic relationship of e-retailing and brick-and-mortar shopping.

“The ultimate litmus test in this business is really who are the best operators,” Louis Conforti, CEO of Washington Prime, says. "This is not a rent collection business anymore."

The ABCs of Malls

When it comes to owning the best real estate in the mall sector, REITs lead the way. For example, REITS own 226 class-A malls, compared with 70 held by private owners, according to research by Brookfield Investment Management and Green Street Advisors. Class-A malls are located in higher-income areas with strong population density, and they can charge above-average rents. They have little exposure to retailers that have suffered the greatest impact from store closures.

On the other hand, pricing for assets quickly drops outside of the class-A group. Average nominal capitalization rates for the top 100 malls are about 4 percent, according to Green Street, and they are about 5.4 percent for the next 200. For malls ranked 301 to 500, cap rates average 8.4 percent, while for 500 and below, cap rates are 14.5 percent.

“Cap rates for the best quality centers tend to be lower than what otherwise should be the case, because there is a scarcity premium,” says DJ Busch, a managing director at Green Street Advisors. “There’s a finite amount of good malls in the U.S. Most of those are in public hands, so they are not going to trade that often.”

As long as owners of “A” properties make sure to keep up with renovations and retail trends, the location will do the rest of the work, Busch adds. “In the mall space, once a center is dominant, as long as you take care of that center, you can’t replicate it.”

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Economists See Strong U.S. Fundamentals Boding Well For Real Estate

os@interactivestrategies.com — Thu, 18 Jan 2018 14:30:00 +0000

Economists See Strong U.S. Fundamentals Boding Well For Real Estate os@interactive… Jan. 18 2018

Charles Keenan

publications@nareit.com

Charles Keenan is a freelance writer and regular contributor to REIT magazine.

U.S. real estate likely will continue to benefit from strong fundamentals, but the high valuations of properties across all sectors will make it harder this year to see any big gains in prices, according to Nareit’s recent conversations with a group of five leading economists.

Steady Progress

The key reason: an expected rise in interest rates, in part from the belief that the Federal Reserve will continue to raise the federal funds rate this year. That said, economic fundamentals remain decent: Annual growth in gross domestic product is expected to be in the 2 percent range, and unemployment could push down toward 4 percent, meaning more job growth. Real estate sectors such as industrial, suburban office and the condo market look especially promising in 2018.

Our panel also expounded on trends, structural shifts, sectors and cap rates in the coming year.

What’s your general economic outlook for 2018?

Mark Zandi: The economy is performing well. Near-term prospects next year are good. Job creation is double the rate of growth in the labor force. Unemployment and underemployment, which are already low, continue to decline, which means wage growth will accelerate further. That is the fodder for consumer spending, and American consumers make the economic engine move.

Eva Steiner: There are good reasons to remain confident about the U.S. economy: real wage growth, falling unemployment and cheap credit represent an encouraging environment for consumption. Having said that, economic growth of around 2 percent may be the new normal for the U.S. We’re more than eight years into the recovery from the crisis, without a significant boost to productivity or a huge improvement in the global economy.

Mike Fratantoni: We’re looking for GDP growth to average 2 percent for 2018, roughly where we have been in the post-crisis environment. We’re expecting the unemployment rate to drop a little further to just a little over 4 percent this year. We’re running out of workers to hire.

What are some trends either getting affirmed or undercut?

Jim Costello: Retail, in particular, might be a bit oversold. There are clear winners and losers. You are dealing with a structural downturn in the Midwest, with all of the old manufacturing jobs gone away, so the infrastructure there just doesn’t have the value it used to have. Yet, there are fantastic assets sold at very high prices in other regions.

Kim Betancourt: It’s a popular story line that baby boomers are moving into multifamily rentals, but it’s not this huge movement. In 2015, 12 percent of people 55 or older were renting multifamily apartments, up from 11 percent 10 years earlier.

Going forward it might increase another percentage point, but that’s not what is driving the multifamily market.

Steiner: Investors continue to be enthused by the story of industrial investment as a way to buy into the success of internet commerce. The industrial sector has delivered record results, with deal volume even higher than the previous peak levels seen in the third quarter of 2007.

Zandi: There are a lot of technologies on the horizon. But if history is any guide, it will take a long time to for them to diffuse through businesses and really affect productivity growth. These technologies create wealth, incomes and profits. People will spend that wealth, and that creates demand for other things and more jobs.

Fratantoni: Job growth is certainly being affirmed. We really are seeing ongoing strength in business demand for workers. Wage growth hasn’t picked up to the pace that we’ve expected, given all the survey evidence that employers are having difficulty hiring. Our forecast is that will happen in 2018.

What types of structural changes are affecting real estate and why?

Steiner: The growing preference for shared space is huge. We see the impact of technological progress in the office sector, where space per worker has been declining for some time. Telecommuting and working remotely have become real alternatives to going into the office.

Second, there is the trend toward the sharing economy, which includes shared space in office and rental living.

Costello: There’s a lot of buzz around this move toward urbanization. So far, we don’t provide the same incentives for millennials to suburbanize as have been given to past generations. We are saddling these folks with student debt and we are not giving them short commutes, or shiny new suburban infrastructure that our parents had. So, millennials are choosing urban locales.

Zandi: The technological changes are substantive and relentless, and have huge implications for real estate. Online retailers are really doing a number on brick and mortar. Airbnb is beginning to affect the hotel industry. People are not working in offices in the way they used to in the past—that has taken a long time to come to reality, but we are there.

Then you have other technologies seemingly on the horizon that can have real impacts: driverless cars could affect the transportation sector enormously, and the demand for warehouse and industrial space.

Given your overall outlook, what particular real estate sectors might perform well in 2018?

Fratantoni: Besides the single-family market, we do expect a lot of pickup in the condo market this year, with a lot of turnover of existing properties. Given this rise of millennials getting to prime first-time home-buying ages, condos are a natural first place, given the affordability.

Steiner: I see a positive trend for the industrial space, as it continues to serve logistics and delivery centers, especially the last-mile to customer delivery. They may be able to see further rent increases because there is little sign of over-building, in part due to the labor shortages from the reconstruction efforts after last year’s hurricanes.

Costello: Folks are hungry for yield, and in suburban office we are seeing growing deal volumes. There are some good locales in the suburbs, nice walkable business parks, with relatively higher yields compared with national average office cap rates.

Which areas face the most challenges?

Fratantoni: Many multifamily units under construction are going to come online in 2018. There are going to be certain markets that are going to see a big pickup in new units to be leased, especially with higher-end luxury rentals in cities such as New York and Washington. It might take a little bit of time for those to be absorbed.

Costello: The hotel sector continues to be a bit of an issue, and some pockets of the apartment sector as well. They are dealing with some of the same forces in terms of new construction coming into the market and competing with existing assets.

Steiner: I think malls and strip centers continue to be hit the hardest due to the Amazon factor. While the largest proportion of retail sales are still in physical stores, this is likely to change over time. Excess retail space will continue to disappear.

What are your thoughts on interest rates in 2018?

Betancourt: Everyone has been predicting a rise in rates for years. I expect a slowly increasing Fed funds rate, but nevertheless interest rates will remain fairly low over the next two years, with the 10-year reaching 2.5 percent to 2.6 percent by the end of 2018.

Zandi: I do expect rates to rise. A lot depends on tax policy. Regardless, there are many catalysts: a tight labor market, wage growth picking up, a stock market at or near record highs, housing values rising quickly, high commercial real estate prices, low cap rates and narrow credit spreads. The Fed needs to normalize rates.

Fratantoni: I don’t see us going into a long-term bear market for bonds. We keep hitting potholes such as sovereign debt crises or geopolitical events that lead to a flight to safety—meaning lower rates—but I do expect the trend is going to be upward, given the removal of central bank accommodation and growing U.S. deficits.

What do you see in the real estate market that seems out of whack?

Zandi: The only place where things seem to be getting frothy is the high-end multifamily sector. Regulators issued guidance to banks in 2016, and things seem to have cooled off. So, I see less worry about that.

Betancourt: There is a lack of affordable rental housing, especially at the lower income levels. As we add more and more of these class-A units, there are fewer units available to lower income residents. For example, in 2011, almost 38 percent of all rental multifamily housing units were affordable to people earning 50 percent or less of the area medium income. Today that supply is down to 30 percent.

Costello: One thing that seems odd is that you have a bunch of folks trying to start up debt funds. Just because you have borrowed money before doesn’t mean you know how to lend money. As a result, the proliferation of players there has me a bit concerned.

What are your thoughts on prices, cap rates and cap rate spreads?

Costello: For the most part, we have squeezed as much as possible out of current cap rates. There’s not going to be too much more compression. Really for about two years, there has been a disconnect of falling volume and rising prices. Buyers and sellers are just further apart. It just makes for a slower market than it was a couple of years ago.

Steiner: Prices have been on the rise all throughout the recovery from the financial crisis, and they now substantially exceed the pre-crisis peak. To the extent that price increases are driven by stronger income growth, that is good news.

Going forward, cap rates may rise, if and when the Federal Reserve raises its target for short-term interest rates.

Betancourt: Property sales are down for multifamily assets. But it’s not a slowdown in investor demand, but available supply for sale. We are at a standoff here. If I am going to sell my multifamily property, I want to get the highest possible price I can get. And if I want to buy a property, I don’t want to pay what I think is a peak price.

Fratantoni: Rates have been so low around the globe, you have foreign investors just looking for yield. Many of them have parked their funds in U.S. commercial real estate, which has pushed up property values. As rates begin to normalize globally, some of that property value increase could be reversed if you get capital outflows, but fundamentals in the sector remain strong.