Number of the Week

Every Monday, industry experts weigh in on current directions in commercial real estate, as reflected in a metric.

November 7, 2016  
$2.6 billion: POTENTIAL 2025 GLOBAL REVENUE FROM VIRTUAL REALITY USE IN THE HOUSING INDUSTRY

Dave Eisenberg, Floored Inc.

Dave Eisenberg, Floored Inc.

Virtual reality for residential real estate may generate $2.6 billion in revenue in 2025, according to Goldman Sachs Global Investment Research. Goldman derived this base-case estimate from its assumption of 300,000 potential users and the portion of commissions that can be captured by VR applications.

“I don’t think any institution, even the folks who are making these headsets, has a really concrete sense of the rate of adoption that is going to occur within this sector. I think what they do accurately capture, is that when virtual reality is adopted, it is going to shift dollars from a variety of traditional, two-dimensional interfaces into something brand new,” says Dave Eisenberg, CEO of Floored Inc.

“When I think about virtual reality in real estate, I think about, where does the application of virtual reality vastly exceed the quality of an existing experience?” he says. “Anytime that you are trying to explain the concept of a building that does not exist, virtual reality will be a superior mechanism to share that visualization versus a traditional rendered image.

“Another one is going to be in architecture construction and design. Virtual reality is a much faster way of communicating a design in 3-D than using two-dimensional floorplans or two-dimensional drawings. For those pieces of real estate, it is simply a matter of time before the computing power that is required to power a high-quality virtual reality experience drops in price to be at parity with existing computers that are used by real estate.”

Eisenberg points out that in retail, “a lot of the maxims of ‘location, location, location’ will go away when it becomes clear that you can use digital technology in terms of entertainment to attract people wherever you want them to go, as seen in the Pokémon phenomena.

“The biggest single possibility for virtual reality is its impacts on office real estate. Virtual reality could vastly improve on videoconferencing. You can do it from the comfort of your home. You can do it from any space in the world,” Eisenberg says. “It begs the question: will people have large offices in the future?

“There are also going to be a lot of new and odd business models. The way we think about real estate is not just going to be physical-world assets. It is also going to be digital real estate and digital places that exist in the meta-verse, where you could charge to have people spend time in your virtual meditation spa or virtual hotel.”

Eisenberg believes “we are going to increasingly see the digital world outcompeting the real world for people’s time and attention. It can drive human behavior in ways that we haven’t seen before.”
—Bendix Anderson

October 31, 2016  
2: AUSTIN AND DALLAS ARE THE TOP 2 U.S. MARKETS FOR REAL ESTATE PROSPECTS

CORP_HEAD_Matt_Khourie.jpg

Matthew Khourie, Trammell Crow Company

num-of-week_10312016Austin is the highest-rated U.S. market for real estate prospects and Dallas/Fort Worth is number two, according to real estate experts surveyed for Emerging Trends in Real Estate® 2017, a joint publication of the Urban Land Institute and PwC.

“Texas has a lot going for it. Austin has been in the 3 to 5% range job growth for the last few years. We think it’ll probably slow down to around 3% in the next three years. That’s still very good job growth. And the types of jobs that Austin is creating are well-educated jobs,” says Matthew Khourie, CEO of Trammell Crow Company. “Austin is really one of the few cities of its size that really created a 24/7 environment, and it is hard to do. A lot of cities have tried it. Austin has really pretty much got that done.”

However, “there are also concerns with Austin, which is why it is maybe too late to get something started,” says Khourie. “If you have something going now, I would be happy, but I don’t know if I would start a lot. It is a very small market. Even with 3% [job growth], that is just about 40,000 jobs, roughly. So absolute job growth is not huge, and it can be overbuilt easily. So I would be pretty cautious in Austin. I think it has probably seen its best times from a development-start standpoint. I would be cautious, but it’s a great city.”

Thomas Arnold, Abu Dhabi Investment Authority

Thomas Arnold, Abu Dhabi Investment Authority

“Our view on Austin is that it is going to moderate,” agrees Thomas Arnold, head of Americas real estate for the Abu Dhabi Investment Authority. “It is later in Austin’s cycle than it is in a lot of other markets. If it’s not too hot now, it’s close.”

“It is really going to be about targeting,” he says. “We are seeing a lot more softness in offerings on the upper end across product types. The middle market is holding up better. You could be investing in Austin and doing it really wrong, or you could be in Austin and getting it right.”

“Dallas probably has more legs than Austin, for a number of reasons,” says Khourie. “It has a much more diversified job base. You’ve got telecom driving it. You’ve got tech. You’ve got incredible job growth because of e-commerce here in the distribution side. You’ve got a great airport. It is a very friendly city for business. And it’s just bigger. You’ve got the same 3 to 5% job growth here, but that’s more like 75,000 to 100,000 jobs. So I think Dallas has a little more running room than Austin, and we are bullish on Dallas.”

“I am a huge fan of Texas for a lot of reasons, including the tax structure,” says Arnold. “But I think that if you are going to put Austin and Dallas one and two on the list of top cities for real estate prospects, you are fundamentally going to have to acknowledge that you are somehow optimistic that we are going to get our immigration policy figured out, as that is the state’s most critical issue.”
—Bendix Anderson

October 24, 2016  
2.5%: THE AVERAGE VACANCY RATE IN HIGHER-QUALITY RETAIL CENTERS

Andrew McCulloch, Green Street Advisors

Andrew McCulloch, Green Street Advisors

num-of-week_10242016The vacancy rate for higher-quality retail centers was just 2.5 percent in the third quarter of 2016, according to real estate management firm Heitman.

“Occupancies at ‘A’-quality centers are at or near all-time highs, and market rents in such centers are increasing despite lackluster retail sales growth. A historic lack of new supply growth remains a key driver of retail fundamentals,” says Andrew McCulloch, managing director of real estate analytics for Green Street Advisors.

“Additionally, the healthiest retailers continue to seek out strong locations to establish brand recognition and awareness and are therefore migrating to the better centers. Because of their omni-channel strategies, retailers at ‘A’ centers are increasingly willing to pay rents not necessarily justified by sales out of the physical location.

“A sea change is occurring in consumer behavior, and e-commerce will continue to capture market share from physical retail,” says McCulloch. “E-commerce consumes about 20 percent of retail sales for malls and 10 percent for strip centers. The e-commerce drag on mall sales growth could be as much as 300 basis points annually in the coming years, which could essentially wipe out sale growth. Strip centers, on the other hand, are a little more protected as they have less exposure to threatened retail concepts and more tenants that are service providers,” he says. “You can’t buy a haircut online—not yet, at least.

“Better-quality retail outlets are adapting to the changing environment and should be fine, but lower-quality centers have been struggling and will continue to face increasing headwinds,” McCulloch says. “Operating fundamentals continue to bifurcate between the haves and have-nots.

“Tenant bankruptcies and closures of both individual stores and anchor stores have been a dominant concern for retail property owners, but for the best centers. the current levels are not overly problematic. Some landlords at better-quality retail outlets will even pay to get prime space back from a struggling tenant because oftentimes getting space back allows landlords to bring below-market rents to market.

“This divergence in property fundamentals between high-quality and low-quality centers is especially evident when looking at changes in asset values. For example, Green Street’s Commercial Property Price Index for high-productivity malls is about 50 percent above its prior peak, whereas values for low-productivity malls are not much different than their prior peak,” says McCulloch. “The operating environment for retail properties is far from uniform.”
—Bendix Anderson

October 17, 2016  
2: BOISE AND DETROIT ARE 2 U.S. MARKETS WHERE LOCAL PARTICIPANTS ARE PARTICULARLY BULLISH ABOUT DEVELOPMENT AND REDEVELOPMENT

Derick O’Neill, O’Neill Enterprises

Derick O’Neill, O’Neill Enterprises

num-of-week_10172016Boise, Idaho

“We may be in the midst of Boise’s most significant development boom since the city’s founding 150 years ago—certainly in the post–World War II era,” says Derick O’Neill, founder of development firm O’Neill Enterprises and director of planning and development services for the city.

“Private investment follows public commitment,” he says. “The construction of City Center Plaza in the heart of downtown is a great example of a public/private partnership that is spurring much broader interest in downtown development. Construction projects worth more than $1 billion in public and private investment are now underway in Boise’s downtown core. That includes corporate headquarters, four hotels, condominium projects, and mixed-use commercial complexes that include a public transit hub and a major expansion of the local convention center.

“Public investment in parks has also sparked significant interest from developers in Boise’s West End neighborhood next to downtown,” says O’Neill. “Boise is known for its amazing parks. We want to bring some of that magic to our urban core. Developers recently bought sites on the West End for a downtown community college campus that could ultimately be the academic home to 10,000 students.”

Boise also supports development through what O’Neill terms a “Planning and Development Services Department geared to let great development happen and get partners the entitlements they need quickly.” For example, SkyWest Airlines recently built a 135,000-square-foot hangar at Boise Airport that went from concept to completion in just 18 months.

Detroit

Jim Ketai, Bedrock Detroit

Jim Ketai, Bedrock Detroit

“There is more interest than ever before in downtown,” says Jim Ketai, CEO and cofounder of Bedrock Detroit. “Developers are pouring in from all over the world to get a piece of Detroit.

“Demand far outweighs the supply in both the residential and office markets. Large and small companies are relocating to downtown to attract top talent,” he says. “Detroit, along with the entire state of Michigan, is transforming from a muscle economy

into a brain economy. We are only scratching the surface of this long expansion and entrepreneurial growth period.

“Because Detroit has such a rich architectural history, there is already phenomenal infrastructure in place,” says Ketai. “New residential and commercial developments and investments like the new QLine streetcar line will create new experiences that are unique to Detroit’s urban environment. Our redevelopment strategy is all about honoring the historic integrity of the city while giving these properties new life using modern technology.”
—Bendix Anderson

October 10, 2016  
5: THE NUMBER OF U.S. CITIES AMONG THE 20 CITIES GLOBALLY WITH THE MOST GDP AT RISK FROM FLOODING

mollymccabe

Molly McCabe, HaydenTanner LLC

num-of-week_10102016Five of the 20 cities in the world with the most GDP at risk from flooding are located in the United States, according to Lloyd’s City Risk Index. Those cities are Los Angeles, with $13.3 billion of GDP at risk; New York City, with $13.1 billion; Houston, $7.8 billion; Chicago, $6.2 billion; and San Francisco, $5.5 billion.

“Extreme weather will increase in frequency and severity as the climate continues to warm,” says Molly McCabe, president and founder of HaydenTanner LLC. “This will be especially devastating to markets where a high proportion of real estate assets are in low-lying, coastal areas.” McCabe cited National Oceanic and Atmospheric Administration (NOAA) data to demonstrate the point. “According to NOAA, almost 40% of the U.S. population lives in a county with direct ocean frontage. Another 22% live in a county that is connected to the ocean through a major river.

“If sea levels rise by three feet within the next several decades, scientists estimate that during high tide approximately 4 million U.S. homes would be flooded,” she says. “During storms, entire central business districts could be repeatedly flooded in cities including Boston, New York City, Baltimore, and Washington, D.C. Some low-lying cities, especially in the Southeast, would be completely inundated and need repeated evacuation,” she says.

“Hurricane Sandy was a clear wakeup call to many, including those of us in the real estate industry,” says McCabe.

“The combination of increasing population, more severe weather events, and rising water levels forces us to rethink how and where we invest. Cities—particularly those that are coastal and subject to major weather events—give themselves a competitive advantage in attracting capital if they are futuristic in their planning and are early adopters of a wide range of sustainability and resilience initiatives.

“Real estate owners can benefit if they integrate green space into developments, retain and restore natural ecosystems, upgrade stormwater infrastructure, and design buildings to allow for flooding of the basement and first floors,” she says.

“A wide range of sustainability and resilience initiatives can address changing climate and resource issues,” she says. “We live on a single blue planet—one that is facing rapid and extraordinary change. What happens on a global scale is also reflected in unique impacts for real estate at the local level.”
—Bendix Anderson

October 3, 2016  
10,000+: THE NUMBER OF BICYCLES OFFERED BY MOBIKE, A STATION-FREE SHARED BIKE SERVICE 

Davis Wang, Mobike

Davis Wang, Mobike

num-of-week_10032016In April, Mobike, a technology company, began offering a bicycle sharing service that has already expanded from its launch in Shanghai to two other Chinese cities. Mobike, which reportedly had more than 10,000 bicycles in service a few months ago, now has several times that number on the road, according to company CEO Davis Wang.

What does the Mobike approach mean for urban planning?

“Mobike has the potential to achieve utilization rates three times higher than traditional bike-share systems,” says Zheng Di, head of the Science and Innovation Lab at the Shanghai Urban Planning and Design Research Institute.

Zheng Di,

Zheng Di, Shanghai Urban Planning and Design Research Institute

“That’s in part because unlike traditional bike sharing systems, Mobike does not rely on docking stations. Instead, the bicycles can be parked and picked up from any location within the urban core. The company’s goal is to have a Mobike ready to be rented within 100 meters whenever and wherever one of its users searches for a bike in an area where the service is active,” Wang explains. Users deploy a smartphone app similar to the one created by the car-sharing service Uber to locate the nearest bike, unlock it, and pay for the service, which costs 1 renminbi, or about 15 cents per half hour.

“Mobike is not merely a technology product; it is a lifestyle,” says Zheng. Mobike is one component of what Zheng calls the future “smart city,” which will be enabled by timely and in-depth sharing of information. “That sharing leads to the effective allocation of transportation and devices. In this case, the high utilization rate reduces the society’s needs for the amount of assets and their related space.”

“The future of urban planning will be based on Big Data, sharing, and the Internet of Things,” Zheng says.

Zheng has initiated a Sharing City project based on his early research of selected high-density areas in Shanghai. “The initial stage of Sharing City comes in four parts: transportation, safety, ecosystem, and living,” he says. “The system would collect information on resident behavior and forecast out future demand. Based on that demand, city products like shared cars, shared bikes, and ‘smart’ road signs will be linked together to form an ecosystem.”

“Thirty years from now, maybe we would not ‘own’ a home, because people are going to travel for work and live from multiple locations. Maybe our buildings will no longer need parking lots, because most of the cars are going to be on the road,” he says. “The fast acceptance of Mobike is an indication of Sharing City’s operational potential.”
—Bendix Anderson

September 26, 2016  
18: THE NUMBER OF FLOORS IN THE UNIVERSITY OF BRITISH COLUMBIA’S WOODEN DORMITORY 

Grant McCargo, Urban Villages

Grant McCargo, Urban Villages

num-of-week_09262016The first wooden building in the world taller than 14 stories is under construction at the University of British Columbia in Vancouver, the university says. When it is completed in September 2017, the $51.5 million Brock Commons student residence will stand about 174 feet (53 meters) tall—18 stories. Its prefabricated components include cross-laminated-timber floors supported on glue-laminated wood columns.

“Mass-timber technology is the future of urban high-rise construction,” says Grant McCargo, chief executive officer of Urban Villages, a Denver-based development company exploring mass-timber construction. Through mass-timber technology, composite wood is created from multiple wood pieces to increase their compressive and tensioned strength.

“Mass-timber construction allows us to offer a truly climate-positive building when it is paired with the latest operational technology,” he says. “That’s because unlike building materials like concrete and steel, timber acts as a carbon sink, further enhancing global carbon sequestration in the process.

“Mass-timber construction also offers a suite of efficiencies not found in traditional construction,” he adds. “Projects can take significantly less time to construct because mass-timber products are prefabricated and relatively easy to assemble.” That can create considerable savings. Mass-timber products also have an exceptionally high strength-to-weight ratio. “That allows foundation loads to be decreased, resulting in further cost savings,” he says.

“These cost savings will allow downtown areas to densify more quickly and can encourage the construction of high-quality, market-driven affordable and workforce housing,” he says. “In addition, for rural areas struggling with the decline of extractive industries, mass-timber production can act as an economic development engine.

“While mass-timber construction represents the future, there are still barriers to its implementation in the U.S.,” says McCargo. “The 2015 International Building Code places a very high bar for code acceptance of mass timber, though it does make provision for it as an ‘alternative means of construction.’”

Also, only a very limited number of mass-timber panel and panel connection products have been fully tested to earn the industry-standard certification from UL, a global independent safety science company. “This is an issue for jurisdictions nationwide—even in jurisdictions that have adopted the 2015 code and embrace the concept of mass-timber construction,” he says. “Insurance providers are generally uncomfortable with any new technology, let alone one that lacks operational history and complete fire testing.

“But these barriers are not insurmountable,” says McCargo. “Once the first generation of timber buildings is established, the barriers to implementation will begin to fall away, permitting widespread adoption of this important technology.”
—Bendix Anderson

September 19, 2016  
33%: THE PREDICTED DECLINE IN AVAILABLE RETAIL SPACE IN CHINA OVER THE NEXT FIVE YEARS

ken-rhee

Kenneth Rhee, Huhan Advisory

num-of-week_09192016Over the next five years, China will lose one-third of all its physical retail stores, according to a report on China’s business development issued by the Social Sciences Academic Press, the publishing wing of the Chinese Academy of Social Sciences.

“Real estate developers have taken on large-scale retail development projects in recent years. These projects are often required by local governments’ zoning rules that stipulate retail and office space well in excess of the market needs,” says Kenneth Rhee, founder and CEO of Huhan Advisory.

“The oversupply of commercial properties is closely tied to tax rules. Commercial properties represent an important source of steady tax revenue for local governments, providing a strong incentive to encourage or require the development of commercial properties. The owners of commercial properties pay property tax amounting to roughly 17 percent of rent revenues. In contrast, local governments do not levy tax on residential properties except at the time of title transfer,” Rhee says.

“The oversupply of retail space has been exacerbated by the growth of e-tailing, which represents around 12 percent of all retail sales in China,” Rhee says. That number is expected to grow to 20 percent in the next four to five years. “As a result of the expanding e-tailing and a slower economic growth [at 6.5 percent a year], as well as fast-evolving consumer trends, retailers are becoming more cautious about opening new stores and are significantly reducing the size of the typical store format.”

“Recognizing the oversupply of both retail and office properties in most cities, the central government earlier this year encouraged greater flexibility on the part of local governments to allow design changes to convert retail and office space to other commercial uses,” Rhee says. “Some underperforming retail properties have already been converted to office use in Beijing, which has a strong office property sector.”

“The oversupply of retail and office properties is mostly found in second-tier cities in the Chinese mainland, though economic and real estate market conditions vary greatly by city and region. It is not economically feasible to convert retail properties for office use in many second-tier cities that suffer from an oversupply of both retail and office buildings,” Rhee says. “Also, though office buildings can be relatively easily converted to for-rent residential use, retail shopping centers have limited options, given their design and size.”

Still, the oversupply of retail space will be made easier to handle by the fact that many cities are still growing quickly in terms of infrastructure, population, and household incomes, Rhee says. “Incomes are still growing at a healthy rate for middle-class households in Mainland China. Cities in the Chinese mainland will absorb 300 to 400 million new migrants in the next few decades,” he says.

For more information and city-level analysis, see the Chinese Mainland Real Estate Markets 2016 report, ULI’s annual survey and summary report, which will be released on September 22.
—Bendix Anderson

September 12, 2016  
35: THE NUMBER OF U.S. JURISDICTIONS WITH MANDATORY ENERGY BENCHMARKING POLICIES FOR BUILDINGS

chrissa-pagitsas_photo

Chrissa Pagitsas, Fannie Mae

num-of-week_09122016Thirty-five U.S. jurisdictions have laws or executive actions mandating energy benchmarking, according to the Institute for Market Transformation. Although ten pertain just to public buildings, most (25) cover other property types, including commercial properties, multifamily buildings and single-family homes.

“This is a trend that really started picking up in the last year or so,” says Chrissa Pagitsas, director of the Multifamily Green Initiative for Fannie Mae.

Benchmarking tracks the energy use at a property over time, Pagitsas says. For example, the U.S. Environmental Protection Agency’s Energy Star scoring system gives each property an annual score from one to 100 representing the property’s energy performance compared with other properties nationwide. A score of 75 indicates that the property performs better than 75 percent of its peer properties.

“Owners may not be aware of the valuable information they can get through benchmarking and that they can access incentives from utilities and financing sources,” says Pagitsas. For example, “benchmarking allows financing institutions like Fannie Mae to reward energy performance,” she says. “When you get an Energy Star certification above a certain score, Fannie Mae will give you a lower interest rate on your loan. Incentives such as the ones Fannie Mae offers may also help you improve your property.”

Benchmarking can also make a difference when it is time to buy or sell a property. “The residents are probably overpaying for energy and water on a low Energy Star–score property,” says Pagitsas. “I don’t think that benchmarking is going to make or break a deal, but it is an increasingly requested data point.” Some benchmarking policies even require that energy performance data be disclosed—for instance, to potential buyers at the time of sale.

One remaining challenge in implementing benchmarking requirements lies in the multifamily sector. “Utilities have not provided multifamily owners with the whole property’s energy data. They will not release the tenants’ utility bills or the retail tenants’ bills,” she says. “That has limited the multifamily owners’ ability to get a whole, accurate picture of the energy use in their buildings.

“So you’ve got a blind spot. It’s only the utilities who can lift the fog, and they have not,” says Pagitsas.

“New benchmarking policies can help solve this problem,” she says. “These new benchmarking policies force jurisdictions to work with the utilities and get energy data that property owners have been asking for for years.

“Everyone focuses on the negative impact, the potential cost of reporting. I focus on the power of solving a problem for real estate and filling in that puzzle piece.”

This same motivation has led to the creation of voluntary energy benchmarking initiatives, like ULI’s Greenprint Center for Building Performance.
—Bendix Anderson

September 6, 2016  
13%: THE INCREASE IN THE ARCHITECTURAL BILLINGS INDEX FOR THE SOUTH—FAR HIGHER THAN FOR OTHER U.S. REGIONS

Bruce Erhardt v2

Bruce Erhardt, Cushman & Wakefield

num of week_09062016Architectural billings have grown faster in the U.S. South than in the rest of the country for the first seven months of 2016. The Architectural Billings Index in the South measured 56.9 for July, a 13 percent increase from January, according to the American Institute of Architects. That compares to scores of 50.1 or lower in the Midwest, West, and Northeast and an average 1% decrease for those regions for the same period. (Any score above 50 indicates an increase in billings.) Architecture billings are often considered a leading indicator for new development.

“Architects and engineers and land brokers are the first to see new business. The brokers who are having activities are all in the southern U.S., from Tampa to Phoenix to Texas,” says Erhardt, executive director and head of land practice group for Cushman & Wakefield.

The South is outperforming the rest of the country “because of population and job growth,” says Bruce Erhardt. “If you have job growth and population growth, then you have a real estate industry. If you have stagnant growth, if people are moving out and the jobs aren’t there, you aren’t going to build anything new.

“The population growth in Tampa is in the range of 50,000 to 55,000 a year. If you divide that by 2.4 people per household, you will need 20,000 new units of housing a year just to meet the inbound population growth.

“You also have job growth in the South compared to the North, the Northeast, and Midwest,” says Erhardt. “Where are the new automobile companies going? The South. Where did Boeing go? The South. In Florida, for example, our job growth has been outstanding for the last several years.

“People and companies are relocating from high-price areas to low-price areas. It’s about the total cost of occupancy. Rent is just part of it. Cost of living and what you need to pay your employees are also part of the all-in costs,” he says. “Weather, lifestyle, and the cost of doing business—all those things benefit the South.”

Erhardt adds that he believes that “the South may miss the next recession.”
—Bendix Anderson

August 29, 2016  
6x: THE DIFFERENCE BETWEEN THE GROWTH RATE OF PRICES AND RENTS FOR U.S. OFFICE PROPERTIES SINCE 2009

MarkWilsmann

Mark Wilsmann, MetLife

num of week_08292016Between the fourth quarter of 2009 and the second quarter of 2016, overall prices for U.S. office properties increased 106 percent, according to the Moody’s/RCA Commercial Property Price Indices. Yet office rents have risen only about 15 percent for the same period, according to CBRE.

“The primary driver for the rise in office prices has been yield compression due to the low global interest rate environment rather than improvement in fundamentals,” says Mark Wilsmann, managing director and head of real estate equity strategies for MetLife’s Real Estate Group.

“From a relative-value context, office values look ‘fair’ compared to bond and stock values, but we are in a historic low-yield environment,” he says. “We are facing the risk of asset price bubbles in most sectors, including office buildings.”

“For the past couple of years we have been advising our investors that future value growth will come from increasing property-level income, not yield compression. Yet since the implementation of negative interest rate policies in Japan and Germany and the Brexit announcement, rates have fallen further, and we may well see further cap rate compression in the next six to 12 months,” Wilsmann says.

“The good news is that thanks to healthy supply/demand fundamentals in most markets, office incomes are now rising in the range of 4 to 6 percent per year as occupancies improve and rents roll to higher rates. So if cap rates stay steady, we will see value growth driven by income, which is exactly what most investors want to see.”

“Ironically, while many feel core pricing is ‘rich,’ core office investments may be a safer bet than value-add office plays where prices have been bid up as investors search for yield. Perhaps the biggest risk of the low-yield environment is that investors are lulled into not appropriately differentiating risk and in turn accept small yield premiums for investments that entail significantly more risk,” says Wilsmann.
—Bendix Anderson

August 22, 2016  
93%: THE SHARE OF U.S. FEMALE CEOS IN THE REAL ESTATE INDUSTRY WHO OVERSEE FIRMS WITH FEWER THAN 100 PEOPLE

WendyRowden

Wendy Rowden, 42nd Street Development Corporation

num of week_08222016About half of all real estate firms have more than 100 employees but 93% of female CEOs in the U.S. real estate industry oversee firms with fewer than 100 people, according to a survey of the women members of the Urban Land Institute (ULI) conducted by ULI’s Women’s Leadership Initiative for its report Women in Leadership in the Real Estate and Land Use Industry.

“There is no question that larger, more institutional organizations need to make great strides in elevating talented women leaders to C-suite positions,” says Wendy Rowden, president of 42nd Street Development Corporation.

“In a perfect world, female CEOs would be split evenly between smaller and larger companies,” says Rowden. “

“It’s really about remaining competitive and attracting top talent,” she says. “Our research shows that women who are frustrated by a lack of opportunity ‘jump ship’ to firms with better prospects. This is not only costly in terms of replacing the departing executive — it is also costly to integrate that person’s replacement. This issue really hits to the bottom line,” she says.

“Institutional investors and publicly-traded companies are increasingly focused on this issue,” says Rowden. “The conversation about the business imperative for diversity (as broadly defined) has become front and center for the real estate industry. An organization’s workforce, executive ranks and boards need to reflect the demographics of our population.”

“I’m so delighted to see the next generation of women leaders entering our industry,” says Rowden. “They are laser focused on their careers and ready to take on challenges.”
—Bendix Anderson

August 15, 2016  
11.6%: THE SHARE OF U.S. HOUSEHOLDS THAT RENT SINGLE-FAMILY HOMES, UP FROM 9% IN 2005

John Burns, John Burns Real Estate Consulting

John Burns, John Burns Real Estate Consulting

num of week_08152016The percentage of households that rent single-family homes is now 11.6 percent. That’s up from 9 percent in 2005, according to Demographic Strategies for Real Estate, a report from John Burns Real Estate Consulting that ULI plans to release in October.

“Homeownership is still desired, but no longer viewed as positively as it once was,” says John Burns, founder of the consulting firm. “We estimate that 58 percent of the net new households formed over the next decade will rent, and many of them will rent single-family homes.”

Burns believes this will drive the overall rate of homeownership down to 60.9 percent over the next ten years, a further decline from the already historic low of 62.9 percent in the second quarter. “That sounds bearish, but more than 13 million households are going to pass away or enter assisted living, and they have almost an 80 percent homeownership rate today,” says Burns. “Few people have done the actual math.

“Renting is a great way to live in the neighborhood you want to live in where you cannot afford to own,” he says. “People value their time now more than before and are willing to sacrifice homeownership or pay more in rent in order to live closer to work and their friends.”

The emergence of the sharing economy has also shifted many decisions from buying to renting. “The stigma against renters has dissipated,” he says. “People rent prom dresses, pay for rides in other people’s cars, and share whenever they can because it is financially smarter.”

Also there is now less of a tax incentive for homeownership. “The combination of a rising standard deduction [$12,600 for a married couple] and falling interest rates [less than $10,000 per year in interest and property taxes on more home purchases] no longer creates the financial incentive to become homeowners that it once did,” says Burns.

“Renters can now live in a single-family rental home that is professionally managed. While still just a small percentage of the single-family landlords are professional landlords, the opportunity to rent from a professional company with a 24-hour call center and a strong brand helps alleviate the concerns of many.”
—Bendix Anderson

August 8, 2016  
62.9%: U.S. HOMEOWNERSHIP RATE IN THE SECOND QUARTER, A FIVE-DECADE LOW

Suzanne Mulvee, CoStar Portfolio Strategy

Suzanne Mulvee, CoStar Portfolio Strategy

num of week_08082016The U.S. homeownership rate fell to 62.9% in the second quarter of 2016, its lowest level in more than 50 years, according to the U.S. Census Bureau.

“The decline in the homeownership rate has been a windfall to the rental market,” says Suzanne Mulvee, director of research and a real estate strategist for CoStar Portfolio Strategy.

“The number of households who rent their housing has grown by almost 11 million since 2004, when the homeownership rate peaked. The overwhelming majority of this increase is a direct result of the decline in the homeownership rate,” says Mulvee.

“More than 7 million of the 11 million new renter households created during this period resulted from either foreclosure activity or ‘a failure to launch,’” says Mulvee. “Younger households did not buy homes at the rate of the previous generation. If the market had to rely on population growth alone, then the increase in renter households during this period would have been much shallower at 3.5 million.”

“With foreclosure activity abating, the continued decline in the homeownership rate seems more peculiar,” she says. “However, it is likely that the massive dislocation of owners in the market is aging forward. For example, young households, 35 to 44 years old, have seen the greatest decline in their homeownership rate, which fell from about 70% in 2004 to 58% today. In recent years, this decline has been driven by the induction of millennials as renters into this cohort.”

“Millennials have failed to become first-time homebuyers at the same rate as previous generations, dragging down the overall average,” says Mulvee. “The homeownership rate will continue to slip unless the capacity and desire of this group to buy homes change.”

“Surveys of young people suggest that they desire to be homeowners like the generations before them,” she says. “However, that desire needs to be coupled with both a downpayment and a ready supply of for-sale housing stock to buy. The latter requirement, building entry-level housing in locations that millennials desire, has proven very difficult for homebuilders. In the meantime, the rental market continues to benefit.”
—Bendix Anderson

August 1, 2016  
30%: THE INCREASE IN HOME PRICES IN DALLAS OVER THEIR PREVIOUS PEAK—ONE OF THE TWO LARGEST INCREASES IN THE COUNTRY

PaigeShipp

Paige Shipp, Metrostudy

num of week_08012016Home prices in Dallas are now almost 30% higher than their previous peak in 2007, according to S&P/Case-Shiller Home Price Index as of May 2016, released July 26. In contrast, the index’s 20-city composite home price is still 9% lower than its previous peak.

“Home prices in Dallas didn’t have as much to recover from,” according Paige Shipp, regional director for Metrostudy. “When the downturn hit, Dallas/Fort Worth experienced little to no depreciation since we had had virtually no appreciation during the run-up. Our supply and demand had remained in check.”

But “Dallas home demand has risen quickly since 2012 due to job growth,” says Shipp. Total nonfarm employment in the Dallas/Fort Worth/Arlington metropolitan statistical area stood at 3,523,400 in June 2016, up 528,900, or 18%, since January 2012, the U.S. Bureau of Labor Statistics reports.

Dallas’s housing supply had not kept pace with the strong demand. “Our construction-related labor market was not prepared to meet the demand—including engineers, municipalities, as well as the contractors who develop the lots and the contractors who build the homes. The lot development process took longer and cost more than usual because of the labor constraints. In 2015, Dallas/Fort Worth had one of its rainiest springs on record, which further hampered lot deliveries and delayed home starts and closings,” says Shipp.

“All builders were neck-and-neck in constructing homes. They were pouring slabs simultaneously, so there wasn’t enough concrete. Then they were all framing at the same time, so there weren’t enough framers. In November of 2015, framing costs went up 50% just because of the lack of labor.”

Dallas’s home price appreciation “just covered costs; it didn’t increase the builder margins,” Shipp explains. “Since 2012, land sellers’ prices and lot prices appreciated much more rapidly than new home prices—about 20% to 30% higher.”

The metro area now has enough lots where developers can build houses to last about 19 months. “A 24-month supply of lots is equilibrium,” she says.
—Bendix Anderson

July 25, 2016  
4x: U.S. REITS SOLD NEARLY FOUR TIMES AS MUCH PROPERTY AS THEY PURCHASED IN THE FIRST QUARTER OF 2016

Capture_LaurieBaker

Laurie Baker, Camden Property Trust

num of week_07222016U.S. real estate investment trusts (REITs) sold $23.7 billion in properties in the first quarter of 2016, nearly four times the value of properties they bought during the same period, according to Jones Lang LaSalle.

“In this low-cap-rate environment, acquiring properties in today’s market is more challenging for REITs than private buyers,” says Laurie Baker, senior vice president of fund and asset management for Camden Property Trust. “REITs have been net sellers for the past few years.”

That’s because “private companies can better take advantage of low-interest-rate-mortgage loans and higher levels of debt than their publicly traded peers,” says Baker. In addition, “REITs have a great opportunity to sell assets right now, with multiple bidders in the market and strong demand for quality real estate.”

“Investor demand for well-located, quality real estate assets continue to be very strong, with interest coming from multiple sources of capital,” she explains. “For example, we received numerous offers for our recently marketed Las Vegas portfolio at prices higher than we expected.”

Baker states, “Camden has sold approximately $2.6 billion of older, non-core properties, improving the quality of its portfolio and increasing its total revenue per occupied apartment home.”

“We are taking advantage of market opportunities to be a net seller again in 2016,” says Baker. “We plan to use sales proceeds to fund our development pipeline, pay down debt, and return capital to shareholders in the form of a special dividend.”
—Bendix Anderson

July 18, 2016  
60: THE NEW STOCK MARKET INDUSTRY CODE FOR THE REAL ESTATE SECTOR, STARTING AUGUST 31

Alan George, Equity Residential

Alan George, Equity Residential

num of week_07172016Publicly traded real estate companies such as real estate investment trusts (REITs) will soon have their own classification on key stock market indices run by S&P and MSCI. Starting August 31, the Global Industry Classification Standard (GICS) for real estate will place REITs and real estate management and development companies in their own category with their own industry code—60. Previously, REITs have always shared a category with financial companies like banks and insurance companies.

“The new GIC code will be beneficial for publicly traded real estate,” says Alan George, chief investment officer for Equity Residential. “We certainly like the additional exposure.”

The new classification is likely to bring additional investment to publicly traded real estate companies. “Many benchmark-sensitive investors are under-allocated to real estate,” says George. “Fund managers who were willing to be underweight real estate because we were a small part of financials will no longer be able to do so. Long term, this is a beneficial change.”

“The new classification is a wonderful recognition of how far publicly traded real estate has come in the last 20 or so years,” says George. “Ours is a sector full of large, liquid companies run by some of the best management teams in any industry.

“The sector has always attracted interest from generalists, and that interest will only grow with the new sector categorization,” he says.

“That could mean additional investment in the stocks of real estate investment trusts, which could mean higher prices. However, Equity has not altered any of its forecasts for this year because of the new classification,” George states.

“We do expect there to be an increase of activity and funds flow to the sector, but believe it will take place slowly over time and do not think you will see the seismic shift on August 31 that some have predicted.”
—Bendix Anderson

July 11, 2016  
16.7%: THE ESTIMATED SHARE OF THE GLOBAL POPULATION THAT WILL BE 65 YEARS OLD OR OLDER IN 2050, UP FROM 8.5% IN 2015

Leanne-lachman_244x320

Leanne Lachman, Lachman Associates

num of week_07112016By 2050, 16.7% of the global population will be 65 years old or older, up from 8.5% in 2015, according to An Aging World: 2015, part of the U.S. Census Bureau’s International Population Reports series.

“All types of senior housing will experience strong demand—in the U.S., more so in 15 years when the first baby boomers turn 85,” says Leanne Lachman, president of Lachman Associates, an independent real estate consulting firm based in New York City. “By then, U.S. developers and operators will be able to learn from senior housing innovations tested in Japan, Singapore, and Hong Kong.”

“Once people reach 65, their life expectancies will extend well beyond the averages. In 2014, America had 72,200 centenarians, up from 15,000 in 1980. The number will mushroom,” says Lachman.

“We need affordable assisted living now—and demand is growing. The Illinois Housing Development Authority has dealt well with this issue for a decade, and Indiana, Minnesota, and New Jersey have programs in place. Other states need to get on the bandwagon, probably incorporating low-income housing tax credit allocations,” she says.

“Discussion will certainly continue on empty nesters and their adoption of alternative lifestyles. Although the majority of boomers will remain in their current homes, their generation is so large that small percentages behaving differently can create meaningful trends.”

“We are seeing—and will see more—sales of primary, suburban homes as the sellers divide their time between smaller in-city units and second homes,” says Lachman. They may buy or rent pieds-à-terre in U.S. and foreign cities and resorts. “There is a focus on second homes as family gathering places,” she says.

“Multigenerational housing is also in demand worldwide,” she says. “In many such cases, retirees provide child care, which liberates working women.” A Lachman Associates survey in 2014 found that 14% of American millennials were living in households containing three or more generations.

Builders in northern New Jersey and southern California have been creating multigenerational homes for some time. “This concept will see serious growth,” says Lachman. “Multigenerational townhouses adjacent to American Chinatowns are popular for older people who are more comfortable speaking their native languages—and their grandchildren can easily become bilingual,” says Lachman. “The same is true in other ethnic enclaves. Other empty nesters now consider cooperative housing options so as to age in the company of like-minded peers,” she says.

Lower birthrates are also affecting the balance between seniors and the rest of the population. “Globally, in countries with low birthrates we will see declining populations,” says Lachman. “Japan’s population is already declining. China’s will start dropping in the next 15 years. Russia and southern Europe are well below population-replacement levels in terms of birthrates. In all these geographies, rural towns have emptied out, and infrastructure maintenance is challenging.”

“Because population growth is a crucial variable for real estate demand, this has implications for both development and the value of existing stock,” she says.
—Bendix Anderson

July 5, 2016  
10,000: THE ESTIMATED NUMBER OF GLOBAL COWORKING LOCATIONS BY THE END OF 2016

Whelan

Julie Whelan, CBRE

num of week_07052016There will be 10,000 coworking locations around the world by the end of 2016, according to Deskmag, an online magazine about coworking, its people, and its spaces. An average of 76 people worked at each coworking location at the end of 2015, it reported.

How will coworking affect the supply and demand for office space?

“Although timing is early, the sector is growing rapidly and should be watched,” says Julie Whelan, head of occupier research Americas at CBRE.

“In New York City, the largest coworking market in the U.S., the coworking industry was among the ten most active leasers over the 12 months ended in the first quarter of 2016,” says Whelan. “WeWork was the single largest leaser of space in any industry in Manhattan during that time, with more than 750,000 square feet of space leased.”

Even with that fast growth, however, the coworking industry is still a small part of the demand for office space. According to Whelan, in New York City, shared workplace providers occupied only 1.5% of the leased office space for the first quarter. “That’s by no means an overwhelming number,” says Whelan.

“Structural shifts in the workforce may help coworking grow and challenge the traditional space model,” she says. “Independent contractors are expected to comprise 40% to 50% of the U.S. workforce by 2020, bolstering the potential sustainability of the shared workplace model in the future. Larger corporate users are also beginning to use coworking arrangements to help them assuage occupancy costs and bring flexibility to their portfolios.”

“Coworking spaces offer a diversity of environments that give occupants options to choose where and how they want to work,” says Whelan. “Optionality is a key value for modern mobile employees.”

“A recent survey of large corporate occupiers by CBRE Research revealed that today’s labor force places a high degree of importance on the desire for a great ‘work experience’—encompassing the functionality of the workplace, the freedom of work style, and the sense of community among related organizations,” says Whelan.

“Coworking spaces offer a unique opportunity for employers to provide the work experience much of their talent base is calling for,” says Whelan. “They provide options in office location while embracing progressive designs that include functional workspace, common areas, a vibrant aesthetic, and amenities such as high-end coffee bars, which highlight the hospitality these models convey to their occupants.”
—Bendix Anderson

June 27, 2016  
75%: THE RELATIVE DIFFERENCE BETWEEN WHAT CHINESE AND CANADIAN INVESTORS HAVE SPENT ON U.S. COMMERCIAL REAL ESTATE SO FAR THIS YEAR

Jim Fetgatter

James Fetgatter, Association of Foreign Investors in Real Estate

num of week_06272016Chinese investors have been the most active foreign buyers of U.S. commercial real estate so far this year—spending even more than Canadian investors, historically the top foreign investors. Through June 21, Chinese companies have spent (or are in the process of spending) $10.3 billion to buy 55 U.S. properties, 75% more than the $5.9 billion invested by Canadian companies to buy 221 properties, according to Real Capital Analytics.

“I don’t think it is a temporary blip,” says James Fetgatter, CEO of the Association of Foreign Investors in Real Estate. “The Chinese have just started.”

China has been poised to become the leading source of investment in U.S. real estate for some time.

“A majority of our investors said in our survey a few years ago that they thought China would become the top investor in U.S. real estate,” Fetgatter says. “Chinese investors are motivated to allocate capital out of China to diversify their risk profile. The Chinese government has allowed some of their insurance companies and pension funds to invest in the U.S.”

Despite the emergence of Chinese investors, Canadian investors continue to be active. “I don’t perceive that the Canadians have stopped investing,” says Fetgatter. “The Canadians have been the top investors in U.S. real estate since 2009. That’s a long run. I’m guessing by the end of the year, it will be a closer race.”

“The Canadians are now considering other markets in addition to the U.S., turning their attention to Europe, England, Australia, and Brazil.”

Canadian investors also “have a few more arrows in their quiver,” Fetgatter says. “Chinese insurance companies and pension funds typically purchase core real estate and are very conservative. Canadian investors, on the other hand, are a lot more familiar with the U.S. and are thus more comfortable going out on the risk spectrum. They have the ability to vary their real estate investments to go a little further afield than core—to include a wider variety of development projects and projects in secondary cities.”

“Foreign investors are benefiting from a change in the U.S. tax laws,” he adds. “Some qualified pension funds are now exempt from taxes imposed under the Foreign Investment in Real Property Tax Act. More foreign capital is moving into the U.S. in 2016 compared to 2015,” he says. “This is especially impressive since 2015 doubled the amount of international investment in 2014 already. We are the best place globally for real estate investors to put their money.”
—Bendix Anderson

June 20, 2016  
15%–20%: POSSIBLE INCREASE IN DEVELOPABLE LAND IN U.K. CITIES ATTRIBUTABLE TO AUTONOMOUS VEHICLES

John Miles Photo

John Miles, University of Cambridge

num of week_06202016Use of autonomous vehicles could increase the amount of developable land in U.K. cities by 15% to 20%, according to a white paper by WSP/Parsons Brinckerhoff in association with Farrells.

“I am not surprised by those figures,” says John Miles, professor of transitional energy strategies for Arup/Royal Academy of Engineering Research at the University of Cambridge. “I think that would actually happen. Those figures would also apply to other major cities in the world.

“Eventually, the car you own is going to be autonomous-capable. It is inevitable, and it could happen much more quickly than most people think,” he says. “In five years, autonomous-capable cars will be available in the showroom.”

People will use automated driving technology simply because it is convenient, Miles says. “Driving in a traffic jam is a horrible experience. No one would say they would rather do it themselves than have a machine do it for them. The same is true for most freeway driving. There is going to be very little resistance in the places where driving is least enjoyable.”

These autonomous cars will require less space on the road. “Autonomous cars will have fewer fender benders,” says Miles. “It’s randomness and human error that gives you fender benders. A machine is incapable of inattention.” As a result, cars could travel more closely together. “Instead of two lanes of traffic, you could get three lanes in there; you could pack the roads more densely,” Miles explains.

“The increased flow could allow for more people to live and work in cities. Thus, the economic activity enabled by greater traffic flows will create an uptick in the property development sector,” he says.

The advent of automated cars may also reduce the number of parking spaces needed—if car owners give up owning cars themselves and embrace car sharing. “I don’t think we know that they are going to be shared,” says Miles. “In London, we might well see sharing. Ownership of cars is not such an attractive thing. In other cities, the mass transit situation is dire. People hang on to their cars.”
—Bendix Anderson

June 13, 2016  
64%: THE SHARE OF HOMEBUILDERS WHO SAY THERE IS A SHORTAGE OF LOTS—THE HIGHEST PERCENTAGE EVER RECORDED, ACCORDING TO THE NAHB

Greg Vogel, Land Advisors Organization

Greg Vogel, Land Advisors Organization

num of week_06102016A higher percentage of homebuilders than ever, 64%, say there is a shortage of available lots where they can build new houses, according to the May survey for the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index. That’s the highest rate since the survey began in 1997.

“We are seeing builders staring down a lot shortage,” says Greg Vogel, CEO of Land Advisors Organization. Many are now reluctant to pay the high prices sellers demand for lots. “Homebuilders are having a very hard time making gross margins and returns. This in turn is creating a supply issue,” he says.

Homebuilders are still digesting their overzealous buying of lots in 2012 and 2013. “That did not prove up the returns they projected,” says Vogel. “This has caused the worst inhibition and second-guessing for new lot acquisitions that I have seen in decades.”

“Increasing costs are furthering the issue. Labor is one of the culprits; the other is government,” he says. “Officials are adding expensive requirements before they allow development to proceed. Many local governments continue to increase impact fees and add design related issues that further increase costs.”

The growing preference of homebuyers for locations near services is also adding to the price of lots where developers would like to build. “The so-called ‘A’ areas are not just infill, but are in areas that have good access to jobs and services and amenities,” says Vogel. “Infill, while desirable to many, has affordability or ‘bang for the buck’ issues.”

“We are faced with a very difficult proposition to deliver new, affordable-enough lots, especially to be within Federal Housing Authority limits for financing for the end consumer.”

Homebuilders are unlikely to hold out forever. “We expect this shortage to become acute in the coming two to four quarters, which will result in panic buying to maintain top-line revenue growth,” says Vogel. “I project increasing lot prices. We are also seeing builders go back out to the fringes to find less-expensive lots to serve first-time buyers.”
—Bendix Anderson

June 6, 2016  
21.4 MILLION: THE SQUARE FOOTAGE OF INDUSTRIAL PROPERTY UNDER CONSTRUCTION IN DALLAS/FORT WORTH DURING THE FIRST QUARTER OF 2016

Colloredo-Mansfeld, Cabot Properties

Franz Colloredo-Mansfeld, Cabot Properties

num of week_06062016rIndustrial developers were building 21.4 million square feet of new space in Dallas/Fort Worth in the first quarter of this year, according to CBRE.

“E-commerce is certainly driving demand in Dallas and many other major markets,” says Franz F. Colloredo-Mansfeld, CEO and cofounder of Cabot Properties. “Over 30% of recent leasing activity is driven by e-commerce requirements.”

“Dallas and other major U.S. distribution markets are seeing quite a lot of construction,” he adds. “Over the past four quarters, Dallas developers have completed about 16 million square feet of new space, according to CoStar. This is a lot in relation to the existing stock; the level of new construction is well above the national average. But the demand for space still exceeds the new supply, and the vacancy rate is well below 7%.”

According to Colloredo-Mansfeld, major retailers—not just internet businesses—are responding to the challenges and opportunities offered by e-commerce and reconfiguring their logistics networks. “Some major retailers are trying to use their store networks to support their e-commerce operations. Others are creating dedicated logistics operations,” he says. As a result, “we are experiencing a major shift of inventory from retail formats to warehouse formats.”

Recently, the focus on “last mile” facilities has intensified as Amazon and others compete on service and speed of delivery. “In certain situations this has driven demand for locations near city centers, including new parks in outlying locations as well as existing properties in infill locations,” Colloredo-Mansfeld says. “A select number of large urban areas have experienced very strong rates of growth as millennials and other segments of our population move back to revitalized urban areas. These consumers will drive demand for goods that are increasingly being bought online.

“Warehouse properties located near vibrant, growing major cities—such as Dallas, Chicago, New York, San Francisco, Denver, and Boston, just to name a few—will do well,” he says.
—Bendix Anderson

May 31, 2016  
~20%: THE SHARE OF CURRENT U.S. MALL ANCHOR SPACE THAT WOULD NEED TO CLOSE IN ORDER TO ACHIEVE THE SAME SALES PER SQUARE FOOT AS IN 2006

John Bucksbaum, Bucksbaum Retail Properties

John Bucksbaum, Bucksbaum Retail Properties

NoW_5_31_16Department store chains would need to close about 20% of their U.S. mall anchor space just to achieve the inflation-adjusted sales-per-square-foot productivity level they had in 2006, according to Green Street Advisors.

“The department stores were such a one-stop shop. But as new specialized and focused competitors developed, they did not react as quickly as they could have,” says John Bucksbaum, CEO and founder of Bucksbaum Retail Properties. However, “department stores do have their loyal following; they still produce a tremendous amount of sales. I don’t think they are done.” Bucksbaum believes “there will be more separation between the good operators and those that continue to struggle.”

Still, the vacated department store spaces are desirable. “Mall owners and operators are usually enthusiastic about getting that space back because they can find uses that are more productive than what the department stores were doing,” he says.

Creative approaches can be taken with the vacated spaces. “Sears for example, went into partnership with larger mall owners and converted some floor areas into leased space to add other retailers,” Bucksbaum said. He believes more in the industry will take this approach.

And the downsizing of the department stores can boost productivity. In certain situations, the department stores are too big to start with, says Bucksbaum, “Two hundred thousand square feet? Many department stores would be better off with 100,000 square feet.” Also, “do they need seven stores in a market? Can they do with four?”

The existing department stores may need reinvestment. “It doesn’t make for the best experience if there are stained tiles and broken doors,” Bucksbaum says. “Customer service has also declined. The stores were cutting back on staff. If the store is hardly profitable, it’s hard to make the kind of investments needed to bring the level of experience back up.”

As is the case with much retail business, “the ability to integrate brick-and-mortar stores with online will decide department stores’ success going forward,” he says. “It is a more challenging environment for retail now. There are so many more choices.”
—Bendix Anderson

May 23, 2016  
1.2 MILLION: U.S. HOUSING STARTS IN APRIL (SEASONALLY ADJUSTED ANNUAL RATE); CONTINUING GROWTH WITHIN THE SAME RECENT NARROW BAND

Ken Rosen is Chairman of Rosen Consulting Group

Ken Rosen, Rosen Consulting Group

April’s total housing starts (both single- and multifamily) were up 6.6 percent from March, though the total is down 1.7 percent from April of last year. “There is a continuing, good recovery, but it’s slow,” says Ken Rosen, chairman of the Rosen Consulting Group.

Single-family housing starts continue their measured rise, according to the latest data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. “It is a much weaker recovery than we have seen in any housing cycle,” Rosen says. Single-family starts were at a seasonally adjusted annual rate of 778,000 in April, up from 746,000 the year before. That is much lower than the historic rate of single-family housing starts of roughly 1.1 million before the financial crisis, according to Rosen.

“Single-family is lagging behind,” says Rosen. The difficulty that first-time homebuyers have finding financing is part of the problem. “Growth will be slow and steady until we change our credit policies; this would require a change of policy in Washington.”

Another challenge is that “the millennial generation would rather be renters than homeowners. A lot of people learned they don’t need to own in the last cycle.” In addition, millennials are making home purchase decisions later in life and there are delays in marriage and household formation, according to Rosen. As this young demographic gets older, a few of them will eventually buy their own homes. Rosen states that “homeownership is very affordable now; we are going to continue to see a slow, steady recovery in homeownership.”

In contrast, even with monthly fluctuations, multifamily is at very strong levels of production—the strongest in 30 years,” Rosen says. Builders started construction on privately owned, multifamily housing units (buildings with five units or more) at a seasonally adjusted rate of 373,000 a year.

Going forward, Rosen expects to see “slow and steady increases for single-family, but slower rent growth and flat multifamily housing starts.”
—Bendix Anderson

May 16, 2016  
65.4%: U.S. HOTEL OCCUPANCY RATE IN MARCH, JUST SHY OF THE RECENT ALL-TIME HIGH OF 65.5% (ROLLING 12-MONTH AVERAGES)

num of week_05162016 III

Gadi Kaufmann, RCLCO

Gadi Kaufmann, RCLCO

The hotel occupancy rate for the 12 months ending March 31 was close to the historic high of 65.5%, reached in December 2015, according to the latest data from STR Inc.

With growth in the hospitality sharing economy, why is occupancy so high? Couldn’t more people finding rooms through sharing websites like Airbnb be expected to hurt the traditional hotel business?

“While it has a high growth rate, Airbnb still has a small market share,” says Gadi Kaufmann, managing director and CEO of RCLCO. “Airbnb and their ilk are only cutting into the growth rate of traditional hospitality market, and only on the margins.”

According to Kaufmann, higher hotel occupancy is explained by an increase in all types of travel—leisure, business, and group. The sharing economy currently serves only a small portion of leisure travelers and almost no business or group travelers—the latter two being the key drivers of hotel occupancy. As companies like Airbnb grow, they may have a more measurable effect on occupancy rates, especially at hotels serving leisure travelers and lower-cost business travelers—and particularly when the economy slows.

However, “Airbnb may also be creating new demand through the supply of new products, locations, and services that increase the overall size of the hospitality market,” says Kaufmann. “Since sharing options also introduce both a compelling alternative experience and a lower price point, they actually contribute to expanding the market rather than just competing for the same amount of spending.”

Further, many rooms and houses shared through businesses like Airbnb do not compete with conventional hotel rooms. Airbnb says 74 percent of its properties are outside main hotel districts, Kaufmann notes. When Airbnb does compete with conventional hotels, it affects lower-priced hotels and leisure travel much more than business travel. “The sharing economy has had a greater impact on RevPAR (revenue per available room); hotels in areas where Airbnb has an established presence have responded to increased competition by lowering their prices,” says Kaufmann.
—Bendix Anderson

May 9, 2016
9.4%: SHARE OF CRE TRANSACTION VOLUME IN THE U.S. ATTRIBUTABLE TO CROSS-BORDER INVESTMENTS (1Q16)

5_9_16_9.4

Bill Maher, LaSalle Investment Management

Bill Maher, LaSalle Investment Management

International investors were the source of 9.4% of total U.S. commercial real estate (CRE) transaction volumes in the first quarter of 2016, according to Real Capital Analytics. That’s well above the five-year average of 8.4%, though it’s much less than the 17.4% share for all of 2015.

Why did the share of international investments fall? “The real outlier is the 17%; below 10% foreign transaction volume is more normal,” says Bill Maher of LaSalle Investment Management. “2015 was a record year, both in terms of gross amount and as a percentage, for this cycle.”

But Maher expects continued foreign investment volume to grow. He says the increase in foreign investments will be driven by the relative strength of the U.S. economy; the limited availability of investment-grade CRE assets in some foreign markets; the recently relaxed tax policies through the Foreign Investment in Real Property Tax Act (FIRPTA); and new development in the gateway markets that have proved attractive to Asian and European investors.

Jim Clayton, Cornerstone Real Estate Advisers

Jim Clayton, Cornerstone Real Estate Advisers

“The U.S. accounts for more than one-third of the invested global property universe,” adds Jim Clayton of Cornerstone Real Estate Advisers. “Investors forming global real estate portfolios on a market-neutral basis, with portfolio weights equal to those in the global real estate market portfolio, should be heavily exposed to the U.S. market. Moreover, the size, diversity, and depth of the U.S. market translate into liquidity and strong diversification power. Today, foreign investors recognize the strong relative value of U.S. real estate in a global context. This applies to the underlying real estate investments and also the strength and potential further appreciation in the U.S. dollar as the Fed normalizes monetary policy over the next few years.”
—Bendix Anderson