RENTS PUSH RETAILERS TO FRINGE LOCATIONS 

Retail tenants are moving out into fringe-street locations–locations that are parallel or perpendicular to a high street–to avoid rising rents.

LOS ANGELES—Retail tenants are moving out into fringe-street locations—locations that are parallel or perpendicular to a high street—to avoid rising rents. According to a new report from JLL, which GlobeSt.com has seen exclusively, high-street rents have increased as much as 100% in some markets. It is a trend that happens often in peak market conditions when rents begin to crest, and the fact that it is starting to happen now, indicates that we are at or approaching the peak of the cycle.

“Our business is as cyclical as it gets,” Jason Charms of JLL, tells GlobeSt.com. “When rents start to crest and break through levels of previous ‘peaks’ in the cycle, retailers are going to look at areas that can give them a bit more bang for their buck. There’s always going to be a trade off between sales volume and occupancy cost. For example, if the marketing exposure of being on a Rodeo Dr. isn’t important, the lower occupancy cost of being on Brighton Way may well offset the drop in sales.”

In Los Angeles, retail tenants in Santa Monica and Beverly Hills, where high street rents have skyrocketed, are looking for fringe spots where retail sales better justify rents. “We are starting to see retailers consider “fringe” areas due to purely economic reasons. Smart retailers are constantly on the lookout for the new, upcoming areas, in part due to price,” says Charms. “It’s becoming quite difficult to make money at some of the rent numbers we are beginning to see. The larger corporations can write off the occupancy cost as a marketing/advertising expense but the smaller companies don’t have that luxury.”

Charms is currently marketing a space at 420 North Camden, a fringe location of Rodeo Drive, near the Golden Triangle. Retail tenants who fall into this category—someone who is concerned about or can’t afford the high rents on Rodeo Dr. but want the prestige of the area and the traffic that overflows from Rodeo Dr., would be the perfect fit for the location, says Charms, who has been advising his retail clients to find these spots as a solution to the rental increases.

Outside of fringe street locations, Charms says that retailers don’t have many options for avoiding high rents. “The easy answer here is to talk ‘online presence this, digital sales that,’ but we are seeing strong data show that consumers still enjoy a full retail experience,” he says. “Downsizing their retail footprint is always an option. It says more about the overall economy than anything else.”

Savvy retailers are finding multiple ways to adapt at this point in the cycle. In addition to leasing fringe locations, some retailers are also leasing multiple spaces within a single dense urban submarket to control the path of travel and gain more market share.

 

 

 

 

Source: Rents Push Retailers to the Fringe – Daily News Article – GlobeSt.com

Continuation of Pessimism Not Warranted

By Natalie Dolce
GlobeSt.com

LOS ANGELES—With the amount of money the government was putting into the economy, it was inevitable that things would recover. We have regained 8 million jobs added since the bottom of the recession and the continuation of the pessimism and uncertainty isn’t really grounded. That is according to Hessam Nadji, SVP and chief strategy officer of Marcus & Millichap.

Nadji joined moderator Michael Desiato, moderator and VP and group publisher of ALM’s Real Estate Media Group, and other industry leaders at the recent RealShare Los Angeles event here on Tuesday. According to Nadji, “the notion that the US economy was out of the game is always wrong. We do find a way to come back.”

Having said that, Nadji says the growth rate isn’t anything to write home about. “But this moderate level of growth is here to stay.”

 

Panelists on the industry leaders panel say the moderate level of growth in the economy is here to stay.

 

Panelist Marc Jacobs, managing director of Oaktree Capital Management, agreed, noting that the real estate market is on solid footing, at least in the near term. But there are early signs of caution out there, he warned. “It may not be real estate in general, but it might be corporate America that is loading up on cheap debt and will struggle to pay that debt back,” he said. “What will happen once the Fed starts pulling back?”

According to Eric Paulsen, CEO at Auction.com, property values are still below their peaks, so there are still opportunities there. “An improving transactional market is always a better market. We willcontinue to see more and more sales with moderate improvement in the coming year.”

On the apartment side, according to Nadji, if you look at the recovery, “you are on the money about the apartment recovery being the only one for a long time.” But what’s interesting, he said, are to look at the fundamentals. “We should be seeing a slow down, but we aren’t really seeing that. The math still works for the most part but the big question mark is exit cap rates.”

 

We have regained 8 million jobs added since the bottom of the recession and the continuation of the pessimism and uncertainty isn’t really grounded, said Nadji (right) with Xceligent’s Doug Curry (left) and Oaktree’s Mark Jacobs.

 

There are some overbuilding on the high-end apartment side, warned panelist Mark Jacobs, managing director of Oaktree Capital Management.

“You will still see rent growth on the apartment side,” added Paulsen, but you are seeing more on the retail and office side, he said. Investors are chasing yields, with a lot of money chasing fewer assets. So what do they do? They go to a different market, he said. “One of the reasons you are seeing a bigger movement in secondary is the availability of information out there among other things.”

One of the companies with that information is Xceligent. Panelist Doug Curry, CEO of the company, said that his company is trying to bring a different level of transparency to the market with data collection.

The biggest laggard in this recovery has been office, according to Nadji, because of the excess space that was never put back on the market, and companies are now growing into that space. But that is the place to now invest, he said. “The demographics in job creation look strong… It is the year of the office market. The turning point is there. You will see the office market come back fast from this point forward.”    [emphasis added]   

Paulsen agreed that office is the place to go right now, but what’s important to consider, he said, is what the product will look like. “You are going to have to cater to a different demographic.”

EPA Imposes New Energy Efficient Rules on Commercial Property

If you own commercial property, or intend to own commercial property you should read the following from Joseph Cobert, attorney, at The Cobert Blawg.

This is yet another example of the over-burdening of the private sector through excessive regulations by agencies of the Federal Government.   The government is asserting itself into every aspect of commerce at an unprecedented rate of expansion

DISCLOSURE OF ENERGY EFFICIENCY WILL SOON BE REQUIRED BY LAW WITH RESPECT TO COMMERCIAL BUILDINGS THROUGHOUT THE NATION

By: Joseph M. Cobert

 2013 must be commercial real estate’s year for new disclosure obligations.  Earlier this month, California’s certified access specialist inspection statutes, including disclosure requirements, went into full effect.

On the horizon, nonresidential realty owners will be facing compliance mandates from some federal environmental legislation and interpretive regulations.  The Environmental Protection Agency (“EPA”) spearheaded the effort which will make commercial building owners have to do the following:

  1. open an account with the EPA for each commercial real estate building;
  2. by means of on-line access to the account for the building, request a printout of data detailing energy consumption from that site during the immediately preceding 12 months; and
  3. disclose the data to (a) a prospective purchaser not later than 24 hours prior to execution of the purchase agreement, (b) a prospective tenant for the entire building not later than 24 hours prior to execution of the lease and (c) a prospective lender for the whole building not later than the date on which the owner submits his, her or its loan application.

Compliance with these rules is being phased in based on commercial property building size.  Structures exceeding 50,000 square feet of floor area must begin compliance beginning on September 1, 2013.  Buildings with 10,000 to 50,000 square feet of floor area have until January 1, 2014 to be in compliance.  Those with 5,000 to 10,000 square feet of floor area get a delay up to July 1, 2014.  Buildings having less than 5,000 total square feet of floor area are currently exempt.

How will the disclosures be used by purchasers, tenants and lenders?  Besides the raw data showing energy consumption, the report which will be sent to an owner will specify an efficiency rating on a scale from 1 to 100, with 100 being the most efficient.  Factors considered will include building size, usage of energy and location.  In theory, the rating is to reflect how the building ranks in energy efficiency compared to other commercial structures across the country.  For example, a rating of 60 would mean that the building so rated is in the 60th percentile among all buildings analyzed and a rating of 90 would put the building in the 90th percentile.

Owners should not wait until the deadlines for disclosure to open their EPA accounts because the utilities which are to furnish the requested data have 30 days to supply same.  Late action in opening an account could delay a deal.  For instance, if you are an owner who expects to lease out a commercial building of 60,000 square feet to a single tenant and that lease is to be signed on September 1, 2013, you have to open the account by August 2 to comply and still avoid delay.

For the specifics of how to comply, owners can look at the EPA’s “Energy Stars” website.  For legal advice as to these new energy consumption requirements, do not hesitate to contact Joseph M. Cobert, A Professional Corporation.

Demand for Apartments and availability of mortgages are fueling the start of a Commercial Property Recovery

When Arenda Capital Management LLC bought an Atlanta apartment complex whose owners defaulted on a $26 million loan, they did something distressed investors rarely do: They paid full price, deciding not to wait for lender LNR Partners to foreclose and face competition from other acquirers.

“If I don’t buy the deal, then it may be 12 to 24 months before I’d have another chance to buy it, and they still may not be selling unless I make them whole,” said Ryan Millsap, managing principal at Los Angeles-based Arenda, which bought the 592-unit property in October.

Demand for U.S. apartment buildings is surging as the homeownership rate hovers near the lowest level since 1998 and government-supported mortgage companies provide record levels of financing for apartment properties. That’s fueling a rush by investors to buy buildings and helping lenders recover 75 percent of the value of defaulted mortgages tied to multifamily housing, the highest recovery rate on all commercial property.

Sales of U.S. apartment properties totaled $3.8 billion in January, a 53 percent increase from the same month a year earlier, the strongest start to the year compared with offices, and shopping centers, according to Real Capital Analytics Inc., a New York-based commercial property data firm.

Read more

Expect cap rate spreads to narrow

Two years ago, the real estate investment market was completely shut down. Nobody expected to see pre-recessionary cap rates again for many years. Over the next year, capital started to flow into the sector, hoping to capitalize on the market’s distress. However, the anticipated level of distress never materialized and investors needed to adjust their return expectations. As financing became available, underwriting standards loosened, and interest rates came down, more capital flowed into the real estate sector. The fundamentals side of the market, however, has been moving considerably slower, focusing investors and lenders on Class A product in Class A locations. The accompanying chart segments markets into three tiers: Tier 1 consists of the nation’s top five investment markets, Los Angeles, Chicago, New Jersey, Atlanta and Dallas; Tier 2 includes the next 11, mostly primary markets, such as Houston, Miami and Seattle; Tier 3 covers 15 secondary markets, such as Denver, Minneapolis and Ohio. While cap rates in Tier 1 markets are already back to their pre-recessionary levels, Tier 2 markets still have about 50 basis points to decline, and Tier 3 markets remain 100 to 150 basis points above their peaks.

The two primary drivers of this aggressive decline in cap rates are the low cost of capital and rent growth expectations. Today, a private REIT that is paying a 6.5-percent dividend yield can offer sub 6-percent cap rates and still cover its cost of capital. Stronger rent growth that will follow the unprecedented declines of the last two years can elevate 6-percent cap rates to double-digit unleveraged IRRs. However, cap rates in Tier 1 markets are approaching the floor and the increasing spread over Tier 2 and 3 markets is becoming very attractive. Expect this spread to narrow by the end of 2011.

Source: RCA, Grubb & Ellis

NNN Investment Group Affiliates With KW Commercial

KW Commercial, a division of Keller Williams Realty, Inc., today announced that it will partner with the National NNN Investment Group to offer triple net lease real estate investments to the company’s 73,000 realtors and brokers in the United States and Canada.

KW Commericial

Triple net, also known as NNN (net, net, net), real estate refers to commercial leases where the tenant pays the property taxes, insurance, and maintenance (the three ‘Nets’). Typically, these types of NNN investments are most attractive to long-time apartment property owners and passive investors seeking “hands-off” real estate to provide themselves a long-term and stable income. Many owners sell their current management-intensive properties and purchase an NNN investment as part of a “1031 tax-deferred exchange.”

“Based on current demand, we know that the National NNN Investment Group will significantly contribute to the success of agents throughout Keller Williams Realty,” said Buddy Norman, president of KW Commercial. “Our ultimate objective is to ensure that KW Commercial clients acquire the best quality triple net properties with the fewest surprises and National NNN Investment Group has the experience and track record to make this happen. Keller Williams’ agents can now offer their clients comprehensive end-to-end real estate solutions.”

Managing Director Andrew Barnes, a ten-year veteran of the triple net brokerage business, oversees a constantly changing inventory of available NNN properties at National NNN Investment Group. The group works directly with commercial developers who build retail and industrial properties for the largest US companies. A sampling of tenants includes Walgreens, CVS, Wal-Mart, Publix, Lowes, Sam’s Club, Best Buy, AutoZone, Advance Auto, O’Reilly Auto Parts, KFC, Jack-in-the Box, and Taco Bell.

In today’s changing market, the National NNN Investment Group continues to lead in its area of expertise. Closings this month include the sale of a property NNN leased to Walgreens in Jackson, Mississippi for $3,775,000. A prime location due to a hard corner site and surrounding population density, the property featured excellent assumable financing with a strong tenant credit on a 25-year lease.

“A triple net investment offers an exit from management-intensive real estate into properties that provide long term, passive income” stated Barnes, “This is particularly important to our clients nearing the end of their investment life cycle. For instance, they may have started out with a residential duplex twenty years ago, gradually traded-up along the way, and can now be proud owners of a commercial property leased for 25 years to Walgreens. In many ways, an NNN investment offers features similar to a corporate bond, with the continuing benefits of real estate ownership.”

Prior to joining KW Commercial and the National NNN Investment Group, Barnes was Senior Vice President with the triple net development, investment and brokerage firm Sansome Pacific Properties and prior to that, was Managing Partner and Co-Founder of the San Francisco-based real estate investment firm, Kyodai Holdings. He has been involved in over $575 million in real estate transactions and brings both buy- and sell-side expertise to his brokerage transactions.

Barnes holds an M.B.A from Waseda University in Tokyo and a B.A. from Penn State University. He is fluent in Japanese. He has completed graduate work at the United Nations in New York and undergraduate economics work at Universitat zu Koln in Germany. Additional studies at U.C. Berkeley have included advanced Real Estate Finance and Investment. He is a member of the International Council of Shopping Centers (ICSC), lives in San Francisco with his wife and is an active member of his community.