According to a recent article by the Massachusetts Institute of Technology (MIT), things are moving fast in the Asian real estate market. More specifically, MIT outlines that: “Every 40 days, a city the equivalent size of Boston is built in Asia.”
And while this means exciting development prospects for anyone involved in Asian commercial real estate (CRE), it also means that sustainability, and an innovative approach to growth, are becoming ever more important.
With those issues in mind, MIT’s Center for Real Estate (MIT CRE) recently launched the Asia Real Estate Initiative (AREI), with the goal of “connecting sustainability and technology in real estate.”
Addressing climate issues through innovation
During 2021’s United Nations Climate Change Conference, the real estate sector was identified as a key target for reducing global emissions, and one of the sectors Asian governments are aiming to transform to meet environmental targets.
Zhengzhen Tan, director of AREI, puts it like this: “One of the most pressing calls is to get to net-zero emissions for real estate development and operation.”
As a part of that goal, AREI is focusing on research across three main themes:
The future of real estate and live-work-play dynamics;
Connecting sustainability and technology in real estate; and
Innovations in real estate finance and business
Tan points out that the choices investors and developers make in the region now will “lock in environmental footprints” for the next decade and adds: “We hope to inspire developers and investors to think differently and get out of their comfort zone.”
Sustainability in mind in 2022
The initiative comes in the midst of a strong recovery trend for Asian CRE markets, with PwC’s Emerging Trends in Real Estate® Asia Pacific 2022 report noting that: “Transactions are rebounding after nearly two years of lockdowns and travel embargoes.” The report also adds, however, that the investment landscape in Asia has changed, particularly in terms of how different real estate assets are used.
One of the key trends highlighted in the report is a move towards renovating buildings to change usage or upgrade their environmental performance to a higher standard.
Speaking to the impact AREI is expected to have on this developing landscape, faculty director of MIT CRE and AREI faculty chair, Professor Siqi Zheng, had this to say: “The research on real estate sustainability and technology could transform this industry and help invent global real estate of the future.”
He adds that merging tech and real estate can help developers build out strategies that are “green, smart, and healthy.”
Global climate concerns
In the coming years, it’s likely CRE will see a larger global shift towards these types of sustainability initiatives as developers and investors become more environmentally conscious, and aim to address climate change challenges. For the savvy CRE professional, it’s a space worth keeping a sharp eye on as we move to make green initiatives part of the broader real estate picture.
Seoul is the capital of South Korea – officially the Republic of Korea. It is a massive, bustling city known for its amazing street food, pop culture influence, and cutting-edge technology, but it’s also an ancient city with many sites of historic significance.
This clash of the new and old – temples and skyscrapers, street markets, and teched-out headquarters – is one of the many reasons that Seoul remains a popular destination for global and regional tourists, while its robust and advanced infrastructure keeps it a business hub too.
Geared for industry and export
South Korea’s economic success is one for the textbooks – countless case studies have been done on the rapid transformation that took this economy from a “developing nation” to a global leader in record time. These days, South Korea is one of the top five largest economies in Asia, and within the top ten in the world – or 14th by some estimates.
Today, the gross domestic product (GDP) hovers around the $2 trillion mark – driven by an emphasis on research and development, value chain dominance, exports, and a highly-skilled workforce. Seoul is the epicenter of the economic activity in the country, especially in terms of electronics and finance.
Leading industries in Korea include electronics (especially semiconductors and mobile phones), telecommunications, vehicle production, shipbuilding, steel, and chemicals. Additionally, the economy of South Korea is largely export-oriented.
According to NAI Global’s partner in Seoul, NAI Korea, the country’s economy showed “clear signs of rapid recovery in 2021 with the economy expanding 4% year-on-year and is expected to be about the same in 2022”.
Residential market factors
In terms of population, Seoul has been designated a mega-city for having more than ten million residents. Residents typically enjoy high levels of education and employment, but housing does come with a certain premium – as in any large city.
To address this, the city government recently agreed to lift the 35-story restriction on residential buildings. Property prices tracking in the city is a mixed bag, but largely steady — with some parties recording a 0,03 percent decline recently and others a 0,01 percent increase.
Commercial property outlook
Office space, logistics, and warehousing remain “top of the pops” for Seoul commercial real estate, with major companies like Samsung, chip maker TES, Hyundai, and LG, as well as offices of Amazon, Deloitte, and IBM, all maintaining a considerable presence in the city.
Significant portions of Seoul have been earmarked for rejuvenation, while other regions – such as Gangnam – have enjoyed lengthy periods of consistent interest and investment. Where public spending on rejuvenation has been undertaken, significant public and commercial benefits have been realized.
For example, greening and restoration of the Cheonggyecheon district had a dramatic impact on land prices therein. As the World Bank notes: “Before the restoration, land prices within a 100-meter radius of the Cheonggyecheon were only 15 percent higher compared to those within a 600-meter radius. However, after the transformation to a green space, the gap in value doubled by 30 percent.”
Recent data from the Mortgage Bankers Association’s (MBA) latest Commercial/Multifamily Mortgage Debt Outstanding report shows that the level of outstanding debt on commercial/multifamily mortgages – during the final three months of 2021 – was $287 billion (7.4 percent) higher than the level seen at the end of 2020.
The MBA releases this data on a quarterly basis and this provides a snapshot of debt and market health at the time. Released at the end of March 2022, this report focuses on the last quarter of 2021 – and compares figures to the preceding quarter and the corresponding quarter of the previous year.
For the purposes of this research, the four major investor groups considered include: “bank and thrift; commercial mortgage-backed securities (CMBS), collateralized debt obligation (CDO) and other asset-backed securities (ABS) issues; federal agency and government-sponsored enterprise (GSE) portfolios and mortgage-backed securities (MBS); and life insurance companies”.
Their data shows that “total mortgage debt outstanding rose by 2.9 percent ($116.0 billion) in fourth-quarter 2021” and specifically that “multifamily mortgage debt grew by $42.1 billion (2.4 percent) to $1.81 trillion during the fourth quarter, and by $121.9 billion (7.2 percent) for the entire year”.
Understanding the data
MBA’s Vice President of Commercial Real Estate Research Jamie Woodwell commented: “Strong borrowing and lending backed by commercial and multifamily properties drove the level of mortgage debt outstanding to a new high at the end of 2021.”
This was evident in every major capital source, he said, adding: “The 7.4 percent annual increase in outstanding debt compares to a 19.5 percent increase in underlying property values.”
As Yield Pro points out in their analysis, government-sponsored enterprises (GSE) “continued to have the largest share of multifamily mortgages outstanding”.
In related material, MBA confirmed that commercial and multifamily mortgage delinquencies in the US also declined in Q4 2021, characterizing the rates as “down or flat for every major investor group”.
The general feeling seemed to be that 2022 will build on the overall strong figures from 2021, carrying forward the market momentum despite concerns from some about headwinds from the current rates environment. As with last year, specific asset classes are again expected to steal the show in terms of growth metrics.
Multifamily and industrial: Still real estate darlings
One of the strongest performers is multifamily, with a large part of the one trillion USD forecast attributable to properties in this class. Lending for multifamily is expected to make up 493 billion USD of the overall total, a 5% increase on 2021’s 470 billion USD.
The ongoing demand for these asset classes is unsurprising, given their recent performance. In 2021, both classes recorded record-breaking metrics for rent growth according to Moody’s Multifamily and CRE in 2021 analysis.
For multifamily, Moody’s reported that: “asking and effective rents grew by 7.5% and 7.9%, respectively.” These figures present the highest growth rates on record since the start of quarterly data recording in 1999. Multifamily vacancy rates also dropped to pre-pandemic levels by Q3, making these properties an increasingly sure-footed investment.
The third quarter also posted some strong gains for industrial, with vacancies falling to 8% and effective rents reaching 1.9%, the strongest quarterly growth for the class in five years. In particular, warehouses turned out to be one of 2021’s savviest investments.
Moody’s reports that vacancies for warehouse properties dropped to 7.5% by Q3 and effective rents rose a staggering 3%, the highest upwards shift in over 10 years.
Looking ahead to 2023, MBA predicts similarly high numbers, with commercial borrowing and lending expected to exceed 1 trillion USD for the year. Multifamily remains their top contender and with around 474 billion USD in lending anticipated.
Worth bearing in mind, however, is that there’s always the potential for a market shift, so we’ll be keeping a close eye on incoming predictions as we move ahead in 2022.
SOCIAL: How are multifamily vacancy rates and rentals adjusting in your area? And do you anticipate that the trend will continue?
In a recent NAI article, we looked at the advent of the metaverse[SR1] and what this new tech might mean for commercial real estate (CRE). Though we concluded that the answer to how the metaverse might impact the real world remains uncertain, since then, there have been some interesting virtual developments.
To be clear, the “mortgages” in this case are funded entirely by TerraZero itself, rather than an external financial institution, but employ a system of down payment and instalments, much like the real thing. The first one was issued for a piece of land on a platform called Decentraland, where users can own, and sell, virtual assets. And as strange as this all sounds from a real estate perspective, there have recently been several big players setting up shop in the virtual world.
Perhaps the biggest, from a credibility point of view, is global financial leaders JPMorgan who recently launched a “virtual bank”, though at the moment it’s only being used for marketing purposes. In tandem with the purchase, JPMorgan issued a report, where they discuss their expectations for the metaverse’s development, saying:
“The success of building and scaling in the metaverse is dependent on having a robust and flexible financial ecosystem that will allow users to seamlessly connect between the physical and virtual worlds.”
They added that, in just the last six months of 2021, the average price for a virtual plot of land jumped from $6,000 to $12,000.
Despite this apparent endorsement from one of the world’s leading financiers, there are still plenty of metaverse critics urging caution. One of the main points raised is that, unlike physical real estate, metaverse purchases can’t satisfy both property value fundamentals: namely scarcity and location.
Or as Louis Rosenberg, CEO of Unanimous AI and a veteran Augmented Reality (AR) developer, puts it:
“We don’t even know which platforms are [going to] be popular, let alone which locations… so it’s like somebody buying a piece of land anywhere in America and hoping that it becomes San Francisco or New York.”
For many companies though, hedging bets is taking the form of securing their own piece of the virtual pie. The Wall Street Journal reports that accounting firms PricewaterhouseCoopers and Prager Metis have also recently snapped up virtual sites, with the latter spending $35,000 on its purchase of a virtual HQ.
Is the metaverse here to stay?
Though it’s still early days, and impossible to say how the virtual property trend might play out, the recent developments in the space suggest it’s certainly worth keeping an eye on. At the very least, the metaverse poses an interesting proposition, and one a lot of people seem to be willing to speculate on.
SOCIAL: Do you think there’s a future for metaverse property? And if so, how do you see it unfolding?
Over the past few years, the use of drone technology in the commercial sector has seen massive growth, with drones being used for everything from agriculture to law enforcement.
In the commercial real estate (CRE) context, the value of drone technology is also rapidly becoming apparent. Drones deployed for site inspections can save time and money, in addition to keeping personnel out of harm’s way. In the event of disasters and damage to premises, drone photography provides accurate images for insurance purposes and a detailed catalog of damage.
In this latest blog in our ongoing tech series, we explore these applications in more detail, along with other smart technologies that are changing how we approach real estate development and management.
One of the main areas where drones add value is by enabling fast and accurate building inspections. Processes that would normally take a long time for a human team, such as surveying rooftops, can be completed in a single programmed flyover. There is also potential for the technology to be deployed for façade inspections and other critical, but time-intensive, maintenance operations.
The advantage of using drones for these tasks is that they can access areas that are difficult, or even dangerous for human crews. And they do it in a fraction of the time.
When equipped with the appropriate hardware, like thermal imaging cameras, drones can also check on a building’s heat loss profile, potential gas leaks, and even expedite operations during construction, all while making the overall project more sustainable.
Easing insurance and investment
Drone surveys can also add value during dealmaking, with detailed drone imagery that lowers investment risk when properties are changing hands. With a flyover, it becomes a matter of a few minutes to figure out whether a property shows signs of external structural issues. The task of valuation also becomes easier, allowing property sales to proceed smoothly.
As a recent Wall Street Journal article points out, there’s also been wide-scale adoption of drone technology in the insurance industry. The use case here is rapid assessment of claims and the ability to respond to critical situations, such as assessing property damage after a natural disaster.
Quoted in the article, Travelers Insurance VP, Jim Wucherpfennig, puts it like this:
“The technology allows us to write damage estimates more quickly for our customers, pay them more quickly, so that they can begin the repairs to their property and get back on their feet.”
As with maintenance inspections, he adds that deploying drones to these sites ensures that claims professionals are kept out of harm’s way in potentially dangerous areas.
Smart glasses and CRE
A second technology that is gaining traction for site inspections is Augmented Reality (AR) “smart glasses”. In essence, smart glasses allow the user to combine what they are seeing in the real world with superimposed virtual tools, making it easier to measure and quantify key parameters during construction and development.
As an example, on a building site, an inspector equipped with smart glasses could take measurements just by looking at a doorframe or window and then compare their findings to virtual plans. They would also be able to photograph, record and stream what they’re seeing, ensuring no details are missed during an inspection.
Like drones, smart glasses also enhance on-site safety. In this case by ensuring personnel can focus on what’s in front of them, rather than the tablet or smartphone in their hand.
What’s important to bear in mind is that these technologies don’t negate the need for human intervention. Rather, they shift the human element to the controller’s seat.
The photographic surveys undertaken by drones, for example, still need to be interpreted by human experts. Similarly, the video feed from a pair of smart glasses still streams back to the team at the office, who are then enabled to support decision-making processes at the site. So instead of replacing human expertise, these technologies supplement it, providing the means to optimize routine operations.
For CRE professionals, these technologies offer another tool to add to the toolbox. And some extra options for making deal negotiations as smooth and seamless as possible.
Social: Are smart tech and drones already part of your CRE environment? And how do you see this space developing?
One of my favorite types of cuisine is Thai food. I love the variety, flavors and especially the spiciness. Like many, I have my favorite go-to location but was recently in Scottsdale, came across a Thai restaurant and had to give it a try.
While the curry dish that I ordered was fantastic, I made a classic blunder that rendered it almost inedible. With Thai food, it’s common to be able to select a specific spice level, typically expressed as a range from one to 10. At my Lakewood go-to, I always chose a four, which hits me just right. And of course, I did the same thing at this Scottsdale establishment – after all, a four is a four is a four, right? After almost having my eyeballs melt, I was quickly reminded of the danger of assumptions and how a four in Lakewood, Ohio can mean something very different as compared to a four in Scottsdale, Arizona. I know what you are thinking right about now; how is Pacella ever going to tie red curry to real estate? And by now, you likely know the response – read on! The next day on that Scottsdale trip, I met with a developer that was building a flex-warehouse project. The discussion soon settled on economics and this developer quoted a figure that was preceded with the phrase “modified gross.” I immediately hit the brakes on the conversation, as the memory of my scorched tonsils was still very fresh. I needed to understand exactly what the developer’s definition of modified gross was, as this is one of those terms that can mean dramatically different things to different people. This month, we are going to discuss the terminology used to describe the most common lease structures. Along the way, I will point out specific items to be aware of and components that can vary. Leases generally fall into two camps: net and gross. The term “net” is an indication that, in addition to rent, the tenant is also responsible for a portion of the related occupancy expenses such as real estate taxes, insurance, common area maintenance, repairs, etc. The term “gross” is an indication that the rent includes landlord contributions to at least some portion of occupancy expenses.
The following is a hierarchy of lease types, ranging from the types with the greatest tenant responsibilities to the types with the greatest landlord responsibilities.
Absolute net lease This lease structure requires the tenant to pay for any costs related to the premises, including real estate taxes, property insurance, repairs, maintenance, utilities, etc. It also requires tenant to pay for large-scale items such as a roof replacement or new HVAC unit or even rebuilding the structure should it be damaged or destroyed. The best example of this type of lease is a ground lease, where a tenant pays rent associated with the underlying ground and is also responsible for all other types of occupancy cost, including constructing, maintaining, repairing and replacement of any improvements. This type of lease can also be referred to as a bond lease and is most often seen in single-tenant retail properties, especially restaurants.
The term “net” is an indication that, in addition to rent, the tenant is also responsible for a portion of the related occupancy expenses…. The term “gross” is an indication that the rent includes landlord contributions to at least some portion of occupancy expenses.
Triple net lease This is by far the most widely used lease term and, like the term “cap rate,” it is often thrown around with reckless abandon. While some may assume this type of lease to result in the tenant paying for everything, that’s not usually the case. Let’s talk about what the tenant does pay for – in addition to rent, the three “nets” are real estate taxes, insurance and common area maintenance. These can be paid either directly (the tenant contracts for and pays the snow plowing expense) or indirectly (the landlord contracts for and pays the snow plowing expense and then sends a bill to the tenant for reimbursement). Now let’s talk about what the tenant does not pay for. Top of the list is replacement of major items, such as roof, mechanicals, structure or parking lot. And some gray can creep into this, as the lines between maintenance and replacement can be blurry. For example, an HVAC unit may need the belts replaced and a control unit swapped out. Would that be considered a repair (and thus an expense borne by the tenant) or a replacement (and thus an expense borne by the landlord). Another item is rebuilding expense. Suppose part of the property’s façade is damaged due to high winds – is this the tenant’s responsibility to repair or the landlords? While a well- constructed lease document will make situations like these clearer, one cannot simply rely on the term “triple net” as a catch-all. This type of lease is most often seen among multi-tenant retail properties, as well as single-tenant retail, industrial and office properties.
Modified gross lease If ever there was a catch-all term, this would be it. Also known as a double net or a hybrid lease, this structure connotes that some of the expense responsibility falls on the tenant and some falls on the landlord. Unfortunately, that’s as clear as things get. Sometimes, it means that the landlord pays for insurance and common area maintenance and the tenant pays for real estate taxes. Other times, it can mean that the landlord pays for real estate taxes and the tenant pays for insurance and common area maintenance. And still other times, it may mean that the landlord pays for maintenance and real estate.
Full service gross lease typically implies that the tenant pays for all operating expenses, such as real estate taxes, insurance, repairs and maintenance of the grounds and building, etc. up to a set threshold. Future increases in these collective expenses that exceed the threshold are the responsibility of the tenant.
Full-service gross lease
This is a very common structure in multi-tenant office properties in our market. It typically implies that the tenant pays for all operating expenses, such as real estate taxes, insurance, repairs and maintenance of the grounds and building, etc. up to a set threshold. Future increases in these collective expenses that exceed the threshold are the responsibility of the tenant. The tenant is also responsible for electricity usage within their premises, sometimes referred to as “lights and plugs.” But even this common structure has some pitfalls. One is janitorial – sometimes the landlord contracts and pays for cleaning of the tenant’s premises and other times the tenant will be required to contract for cleaning directly. Another is electricity. As electrical usage can be directly metered to the tenant’s premises, it can be sub-metered to the tenant’s premises, or it can be fed via a master meter and then charged on a pro rata basis.
Absolute gross lease This structure is rarely seen, save for one type of tenant. And if any of you have ever been involved with a lease for the U.S. Government, you know exactly what I’m talking about. In an absolute gross lease, the landlord pays for everything for the entire term of the lease. There are no pass-throughs, escalations or separately metered utilities. The day the lease is signed, the tenant will know exactly what they will be paying each month for the entire duration of the lease. There is not a “one size fits all” lease structure and even when we hear a common term, there can still be nuances. As I was painfully reminded in Scottsdale, assuming you know something based on a commonly used term can be a sure way to get burned!
Vancouver, in British Columbia, is one of Canada’s most well-known and densely populated cities. It is positioned on the west coast, just 45km north of the border with the United States. Some 650 000 people live in the “city proper”, while the larger metropole (bearing the name “Greater Vancouver”) is home to almost 2.5 million people. Vancouver is reportedly Canada’s most cosmopolitan city, with an ethnically and linguistically diverse population.
The city is a popular destination for the film industry (nicknamed “Hollywood North”), and for tourists, as well as enjoying a reputation as a cultural hub with many galleries, museums, and theatres. With a busy port, rail network, and as a nexus for the transcontinental highway, Vancouver’s economy was built on trade, and has expanded to include film and TV, tourism, raw materials, construction, and technology. Recently digital entertainment and the green economy are also driving GDP growth.
Like most of the world, Vancouver was rocked by Covid-19, with business shutdowns and job losses. However, it was relatively more resilient than other Canadian metros. The region’s gross domestic product (GDP) is expected to bounce back by 6.8% in 2021, and forecast to grow by 4.1% in 2022.
By September 2021, however, the Vancouver region’s employment figures had recovered in absolute terms. The Vancouver Economic Commission says: “Some jobs have migrated sectors; retail & hospitality are still recovering, while other sectors – such as tech and construction – have gained jobs.” Employment in the Metro Vancouver area hit 101.3 in September 2021, the highest figure in the country and “finally surpassing pre-pandemic levels”.
Vancouver is the country’s most expensive residential market and the most expensive place to live, which means that while it enjoys high scores in quality of life metrics, it has priced a lot of younger buyers out of the market. It enjoys high demand, and is considered a strong commercial real estate (CRE) market – especially for the multifamily and office sectors.
Software and data provider Altus Group says CRE investment in the Vancouver market area “saw a significant surge in the second quarter of 2021”, adding that the robust multifamily and apartment market is “fueled by the highest apartment rental rate in Canada, a shortage of rental product in the construction stage, and the anticipation of border openings to international students and immigration in the near future”.
Commercial vacancies naturally increased during the pandemic (increasing from 4.4% in late 2019 to 7.5% in late 2020) and the “return to office” expectations of 2021 was tempered by news of variants and secondary outbreak waves.
Companies seeking space in the city are increasingly looking to develop former industrial space in the east, according to Business in Vancouver, with particular interest from firms in high tech and the medical and life sciences. They are however competing for space with a powerhouse industrial segment. In Q1 and Q2 2021, investment in the industrial market in Vancouver surpassed $1.1 billion, and lease pricing reached a new record high of $15.50 per square foot.
According to The Washington Post – drawing from the studies presented at the world’s largest climate science conference in December 2021 – extreme weather events as a result of climate change are here to stay, and will get worse. The word from researchers is brace yourselves for a “new era of climate disasters”.
Extreme weather has already had huge ramifications for residential property – planning, building, and critically insuring – and the global commercial property sector must grapple with the same set of issues.
Residential and commercial
In the US, a new report from nonprofit, First Street Foundation and engineering firm, Arup suggests that an estimated “730 000 retail, office and multi-unit residential properties face an annualized risk of flood damage”. The risk assessment they used did incorporate fundamentals like sea-level rise, but – the researchers told CNBC – “focused more on flash floods, also known as pluvial flooding”.
First Street Foundation previously worked with Realtor.com to enable flood scoring for all US-based residential properties, and tools like this and other research models are increasingly going to be a part of the real estate developer’s toolbox.
Harvard finance lecturer John Macomber – writing in the Harvard Business Review – says that “climate risk has become financial risk”, and he argues that owners and developers have five options open to them for risk mitigation or “in investing in resilience” as he calls it. These are “reinforce, rebuild, rebound, restrict, and retreat”.
The challenge, he concludes, is “to look ahead, not behind, and to make these choices with intent”.
New York City (NYC) is virtually synonymous with commercial real estate. It’s a mega sector there, with legendary dealmakers and eye-watering costs. With an incredibly dense population and as a home to a huge number of global headquarters, the city was not only hit hard by the Covid-19 pandemic, but also responded with some of the strongest mitigation tactics seen stateside and in the world. A report from the New York State Comptroller Thomas DiNapoli (published late 2021) now shows the true costs of Covid on NYC’s iconic commercial real estate (CRE).
Setting the scene
In 2019, reads the report, the office sector in NYC employed 1.6 million people, or a third of all city jobs. In the preceding decade, office market property values and billable values (on which property taxes are levied) had “more than doubled”. Off this incredibly strong base, employment in the office sector shrunk by 5.7% in 2020 – certainly a blow, but less than the 11.1% drop in total employment.
The gap here lies in remote work as a mitigation strategy, but that resulted in reduced office space demand. “Asking rents are down 4.2% in the second quarter of 2021, while vacancy rates are at 18.3%, a level not seen in over 30 years in New York City,” according to the report.
Market values down
The result is a steep drop in the full market value of office buildings (463 million square feet of inventory), which fell $28.6 billion citywide – based on the 2022 financial year (FY) final assessment roll. This is the first decline in total office property market values since FY 2000.
In turn, Market Watch’s analysis says, the declines “cost more than $850 million in property taxes in the city’s fiscal 2022 budget.
Charting the return
What the ledger numbers don’t indicate, though, is “what next?”. Partnership for New York says that while the labor market recovery “remains sluggish”, NYC saw “strong income and sales tax revenues and pandemic-era highs in hotel occupancy and transit ridership” during Q3 2021.
The New York City Recovery Index – a joint project of Investopedia and NY1 – puts the state of the city’s recovery at a score of 85 out of 100, or “over four-fifths of the way back to early March 2020 levels”.
The CRE shakeup has also led to some much needed strategic thought and speculation about the future for NYC, including suggestions that empty office space be converted to residential to address the city’s need for affordable housing.
Despite the ongoing uncertainty of the new virulent Omicron variant of Covid-19, there are a lot of positive signs that we can expect in 2022 for commercial real estate (CRE), according to a round-up of sources.
The case for optimism
First, however, an important caveat: Of course, all of these predictions are opinion. No matter how great the historical data used to inform those opinions, they are still not to be considered “financial advice”. Having said that, after a difficult two years (for global business, not just real estate), a little optimism is a welcome break.
“Eighty percent of respondents [to their survey] expect their institution’s revenues in 2022 to be slightly or significantly better than 2021 levels,” writes the report’s authors.
…And so does the data
Meanwhile, Forbes real estate contributor and economic analyst Calvin Schnure has done a list of predictions for the year ahead, starting with this one: “Property transactions will rise further in 2022 as the economic recovery gains momentum, and CRE prices will maintain growth in the mid-single digits. REIT mergers and acquisitions could top 2021 as well,” writes Schnure.
How does he come to this conclusion? It’s a matter of looking at the bigger (data) picture trends, he says – plotting this graph from RCA, Bloomberg and NAREIT data.
Finally, in December 2021, investment and commercial analysis publication The Motley Fool issued a “rare ‘all in’ buy alert” for CRE, offering three key points of their bullish positioning:
“Industrial and multifamily sectors look the most promising in the new year.”
“Retail and office CRE should have its good performers but see more headwinds.”
“REITs remain a promising avenue for overall returns.”
For the nitty-gritty in how they came to this conclusion, read the full analysis by author Marc Rappaport here.
As we said above, a prediction isn’t a guarantee, a forecast isn’t fact, but we think these bold analysts make a great case for optimism and a solid-looking year ahead for commercial property and investing.
From us to you, happy new year to our CRE network and peers!
Extended uncertainty about the anticipated return to the workplace will have ramifications in the securities markets, but commercial mortgage-backed securities (CMBS) are holding strong… for now.
Commercial mortgage-backed securities (CMBS) are a financial product, a type of bond issued in securities markets, and built on the cash flow from pooled mortgages on commercial properties. They are often grouped by region or type of property, such as office CMBS or multifamily CMBS.
Vacancy rate effect
Naturally, the health of the underlying category influences the CMBS itself, although, unlike direct investment, these have a degree of diversification built into the asset which represents a bundle of loans.
In the US, the office sector currently accounts for almost a third of the underlying value within CMBS, and this has institutional investors wary, despite the 38.6% improvement in office occupancy in late 2021, investment specialist Jen Ripper told Commercial Observer.
This means “upcoming lease rolls and loans” would be “under heavy investor scrutiny”, she added.
Trends over time
CMBSes have, however, been resilient throughout the Covid-19 pandemic. CRED iQ – a data company – told the publication that CMBS office debt has remained relatively unscathed, with only 2.89% in “either delinquency or special servicing”. In December, the delinquency rate declined made for a 17-month streak of improvement.
“By property type”, they added, “individual delinquency rates for lodging and retail exhibited modest month-over-month improvements but still remain the two most distressed sectors.
This is largely in line with the results from data provider Trepp, who found the delinquency rate across categories dropped 20 basis points from October to 4.41% in November 2021. Within Trepp’s report, though, lodging and retail “saw the biggest improvements”.
Beyond its relevance for investors, keeping an eye on the strength of CMBS loans can help commercial real estate (CRE) professionals in spotting opportunities and even leads – as it forms part of property debt research.
by Alec Pacella for Properties Magazine January 2022
The dust has finally settled on 2021 and, for better or worse, it looked a lot like 2020. It’s that “better or worse” part that will be the focus of my annual wrap-up column.
I’ve used this theme a few times in past columns, sometimes I termed it “best of times, worst of times’ while other times I called it “glass half full, glass half empty.’ As has been said several times in the recent past, COVID has accelerated trends that were already present and the concept of ‘better or worse’ is no exception. To see what fared better and what fared worse, read on.
So far in this blog series, we’ve looked at some of the most cutting-edge emerging technologies: The Internet of Things (IoT), robotics, and virtual reality. We’ve discussed the potential these developments have to revolutionize the way we do business and work in the real estate space.
While each of those has its applications, none hold quite the same promise for changing the fundamental aspects of how we make, and document, commercial real estate (CRE) deals as blockchain. In this fourth entry in the emerging tech series, we have a look at the implications of this pivotal technology.
Nowadays, blockchain is a term everyone’s hearing with increasing regularity. To start, it’s worth having a brief recap of exactly what the tech is. At its simplest, a blockchain is a ledger – a record of information. Not all that different from the databases you’re already using to record details of properties, clients, or transactions.
The feature that makes blockchain unique is the way that information is recorded. Each “block” can hold a certain amount of data. Once a block is full, a new block is started and the previous block forms part of an immutable chain – essentially a timeline extending outwards from the first block to the current one.
Information on the blockchain is public and distributed across a network of computer systems – meaning that it’s very, very difficult for one person to hack or alter the information stored in the chain.
The opportunity blockchain presents for the CRE space, is the ability to streamline a lot of time-consuming tasks. Imagine having all of the paperwork for a given property digitized, accessible to everyone involved in the deal, and confirmed as accurate by multiple parties.
“There are two areas where I think the blockchain is. There’s going to be the intersection with legal tech, so that’s land registry and recording and ownership, and all of that paperwork that exists in the system… the other is the intersection with fintech.”
Of course, an issue that comes up here is how this system can be used with potentially sensitive information – client details that shouldn’t be a matter of public record. For business networks, private blockchains can be set up to only allow access to specified parties. In this case, the identity of participants is verified in the network as well, unlike public blockchain where users can remain anonymous. Private blockchains function more like a traditional database in this sense, trading off some of the immutability of their data for privileged access.
Sealing the smart deal
Maybe the most promising application of blockchain for CRE deals is being able to deploy “Smart Contracts” for things like tenancy agreements. Smart contracts hard code the details of an agreement on the blockchain, and are uniquely suited to real estate deals, because they can handle conditional clauses.
As an example, startups like UK-based Midasium are already providing a prototype platform that replaces traditional landlord-tenant agreements. Using smart tenancy contracts, clauses of the agreement are automatically enforced when certain conditions are met. This can include paying rent, returning a security deposit, and directly deducting maintenance costs from the rental amount paid across to the landlord.
It’s a system designed for transparency and rapid settlement, and the concept is gaining traction in other parts of the world. An added bonus of using smart contracts for tenancy is the possibility of building up a database of real-time data for rental prices and trends in the rental market.
A growing sector
Overall, enterprise reliance on blockchain is set for rapid acceleration. Forbes, quoting an International Data Corporation (IDC) report notes that:
“Investment in blockchain technology by businesses is forecast to reach almost $16 billion by 2023. By comparison, spending was said to be around $2.7 billion in 2019, and we will see this acceleration ramping up over the coming year.”
Blockchain adoption in CRE, however, is still in the early stages. The tech still needs to overcome a few growing pains – in terms of privacy concerns, operational complexity, and a lack of standardized processes – before we’ll necessarily see it forming the backbone of CRE transactions.
That said, it’s a space well worth keeping an eye on. There’s been growing interest, for example, in CRE tokenization – splitting the value of a given asset into separately buyable blockchain-based tokens. What this means in practice is that instead of looking for one buyer for an expensive asset the value gets subdivided and opened to a much broader market. Which in turn may actually boost the value of the underlying asset.
There’s a lot of potential and little doubt that blockchain will make its way into CRE one way or another. But, like many things in the cryptocurrency and blockchain space, the real challenge will be separating the wheat from the chaff, the fact from the hype, and identifying functional applications of the tech rather than purely fanciful ones.
We’ve all seen how the Covid-19 pandemic gave the industrial sector the shove it needed to go from well-poised to interstellar. Now research from the Commercial Real Estate Development Association (NAOIP) suggests there is no slowing down for commercial real estate’s (CRE) newest darling sector.
The NAIOP’s Industrial Space Demand Forecast for Q3 2021 shows that “sustained growth in e-commerce [and] demand for industrial real estate continues to outpace supply”. This, they say, puts the sector in a state of net absorption that will continue throughout the year and into 2022.
Digging into the numbers
The authors of the report are Hany Guirguis, PhD, Manhattan College and Michael J. Seiler, DBA, College of William & Mary. They write that “the demand for industrial real estate still outpaces supply” even with “nearly 100 million new square feet delivered nationally since the beginning of the year, 450 million square feet currently under construction and another 450 million planned”.
Their data then boils down to net absorption of some 162.6 million SF in the second half of the year, and they state that they’ve “returned to their pre-pandemic confidence levels”.
Triangulating more data The demand has of course been driven primarily by the boom in e-commerce. GlobeSt.com reports that e-commerce sales hit “a quarterly record of $222 billion in the second quarter of this year”, accounting for 13.3% of all retail sales. But there are contributing factors, such as growth in cold storage, materials and construction, manufacturing and medical industries.
With the combination of factors, CRE data analysts such as YardiMatrix are predicting the growth to stay buoyant through 2026. Yardi’s predictions include delivery of 348 million SF next year, 360 million SF in 2023, and up to 370 million SF in 2026.
New growth There are other blooming products and industry categories that will only increase this demand. The cannabis processing industry is hungry for space in deregulated regions and in countries with widespread legalization like Canada and Latin America. Finally, there are superlative predictions for the industrial square-footage needs of the commercial space industry too.
No wonder, NAIOP CEO Thomas J. Bisacquino calls industrial “a bright spot in the CRE industry”.
Reporting in the Evening Standard, based on data from Remit Consulting, indicates improvements in the UK’s commercial property sector. The firm’s data shows that rent collection in the last quarter reached its highest level in the pandemic period, which is partially due to the easing of lockdown regulations in the country.
Data from their REMark Report shows that “…an average of 72.1% of rents due in the UK had been collected with seven days of the September quarter rent day, which covers payments for the three months ahead”. This includes rent for retail and dining establishments, bars, and warehouses. Comparatively, in the previous quarter, 66.5% of rentals due were collected by the same point. Retail rents were sitting at 68.8% (up from 62.3%) and leisure at 57.2% (up from 40.1%).
This is in keeping with a general upward trend, the firm told the newspaper, “which is good news for investors and landlords such as pension funds and other institutions, particularly as the upward trajectory of payments from tenants is similar to the previous quarters of the pandemic.”
…but not all good
Despite the strength of this news, it’s not a unilaterally positive picture, as the data also indicates that this ‘record high’ is still considerably lower than pre-Covid levels. Altogether, since the start of the pandemic, there is a shortfall in rent from commercial occupiers amounting to nearly £7 billion – a considerable chunk for property owners and investors, including institutional investors such as pension funds.
Managing the fallout
The matter of the “missing rents” is something the industry and public service are keeping a close eye on. This report from the International law firm Morrison & Foerster LLP gives an excellent rundown of the public consultation that the UK government has done around trying to establish a way forward for both struggling commercial tenants and landlords.
The policy paper published in August 2021 can be found here, and outlines the government intentions to “legislate to ringfence rent debt accrued during the pandemic by businesses affected by enforced closures” and their intent to formalize a “process of binding arbitration to be undertaken between landlords and tenants”.
Meanwhile, a number of the large and influential property industry associations have called on the government to end the moratorium on evictions that came into effect during the height of the pandemic and lockdown measures.
The way the modern world interacts with physical space is changing. We’ve gone from “bricks and mortar” to “bricks and clicks” as the e-commerce revolution transforms retail, and all our devices are now talking to us and to each other.
The increasing utility of virtual and augmented reality is another contender for our attention as their applications in the commercial real estate (CRE) space become more apparent. These technologies promise to revolutionize the way we do business and interact with both our clients and real estate itself.
In this latest part of our series on emerging tech, we take a dive into some of the applications of these new tools and how they can be used to enhance CRE operations.
For many of us, the difference between virtual reality (VR) and augmented reality (AR) is a little fuzzy, so let’s start there. Augmented reality, according to the brains over at MIT: “superimposes virtual enhancements on real-world scenes in real-time.”
Virtual reality is a little different in that it creates an entire world or scene that you can explore, usually with the assistance of techs like VR headsets and haptic gloves. So, think about viewing an entire virtual mall or building site, or the interior of a space you are leasing out.
The terms are often used interchangeably, and they do overlap to some degree, but they aren’t synonyms. Fortunately, splitting them into neat little boxes is not a prerequisite for understanding how AR and VR can be used to enhance real-life CRE.
Space that virtually sells itself
One of the biggest advantages VR and AR offer is the ability to virtually show spaces, even before they’re built. This means marketing efforts can kick off earlier in the development process, and potential clients get a better, more immersive sense of what a property might look like before there’s even a door to step through.
Existing spaces are also increasingly being digitized through the tech produced by companies like Matterport which specialize in 3D capture. Properties can be staged and shown as a digital, interactive experience that really gives potential buyers a sense of what a space looks like. Recent studies on residential properties using the tech showed that having a virtual tour meant that, on average, a property closed 31% faster and sold for 9% more.
Aside from the obvious financial upshot of those numbers, VR tours also mean less time spent physically traveling to and from sites. That can be a huge bonus for both CRE professionals and clients. Brokers can guide prospective tenants towards a higher number of property options and help those clients curate a shortlist of candidates they’d like to see in person, raising the likelihood of making a deal.
Built to (digital) spec
Other areas where VR is making an impact are in architecture and construction. Modeling buildings under development in VR means that any potential problems can be identified before they’re, literally, cemented in place. Plans can also adapt and change easily, and creative solutions can be “tried on for size” before committing to them. Having a digital model also serves as a point of truth that a team can return to during lengthy development projects. All of which translates into savings in time, money and materials.
Once construction is complete, buildings outfitted with appropriate sensors can also generate a digital twin – a virtual copy of the building and its systems. This is a real-time model of the building and can include information like power usage, air quality, temperature, and occupancy, among other factors. Using this data, it’s possible to streamline a building’s operations to meet energy efficiency goals and once again, reduce costs.
Of course, this is much easier to include as part of a new development. One of the challenges to the wide-scale implementation of this tech is aging building stock, which is costlier to outfit or retrofit with the necessary hardware.
Meanwhile, returning to VR’s more grounded cousin, augmented reality has some interesting applications of its own. Large furniture suppliers like IKEA are already using the tech to help buyers model furniture, or entire room designs, through an app. In CRE, this kind of functionality could see use when staging a space – along with the option to present multiple versions of the room or site to potential buyers.
As mentioned above, AR is also being used for wayfinding. Using digital sensors, a busy mall or office space can be outfitted with virtual markers that visitors can follow to their desired destinations. Retail, in particular, stands to benefit from the ability to guide shoppers to specific areas or products – all while providing additional information and support through a phone-based app.
Steady growth on the cards
As far back as 2016, Goldman Sachs predicted that the global AR and VR market would be worth $80 billion by 2025. While current estimates from Statista are a little tamer – with VR predicted at $12 billion and mobile AR at $26 billion – the trajectory of the industry is clear.
Consumer demand for AR and VR enhanced experiences is likely to climb as these technologies gain traction, and the value to CRE professionals is obvious. All of which makes this a curve well worth getting ahead of for the savvy brokerage.
The National Council of Real Estate Investment Fiduciaries’ (NCREIF) latest report on the performance of daily-priced fund indices (NFI‐DP) indicates remarkable strength in the sphere. The report covers the September 2021 period – the latest at the time of going to print – and the data shows the asset class had its highest monthly returns in a decade.
This would put year-to-date (nine months) returns for this group of daily-priced funds at 13.08%
Performance and make-up
The NFI‐DP at the end of Sept 21 was at 2.36%, up from 1.68% in the preceding month. According to the NCREIF, the index represents “the performance of a group of daily‐priced open‐end funds that invest predominantly in private real estate, generally ranging from 75% to 95% allocation”. The balance of allocation for these funds sits in liquid investments (including cash and securities). This makes for a “small universe of qualifying funds” and returns that are equal-weighted and gross of brokerage fees, as well as advisory and incentive fees.
NCREIF’s data is used by various media and industry analysts as one element (of many) in the determination of market health. They put together various data products, of which this is one, by collecting property and fund level information drawn directly from members – usually on a quarterly basis. The NFI‐DP however is drawn monthly. They have data from over 35 000 properties and 150 funds on their database, which dates back to 1977.
National property index
The decade-high record for daily-priced fund indices (NFI‐DP) noted above is not the only record-level they have noted this year. The last results from the quarterly NCREIF Property Index (NPI) (published in August 2021, representing Q2 2021) show the highest return in the past ten years, sitting at 3.59% up from 1.72% in the previous quarter. This is the top return result since the second quarter of 2011 (3.94%). NCREIF writes, these “are unleveraged returns for what is primarily ‘core’ real estate held by institutional investors throughout the US”.
SOCIAL: What industry facts and figures do you use to inform your understanding of the state of the market?
Digital transformation as a concept incorporates advances in technology and how these are integrating into and changing all aspects of our work and personal lives. With commercial real estate (CRE), digital is truly transformational and CRE professionals and companies are grappling with the myriad ways that it is upending established processes.
This is the thinking behind a series of themed blogs, looking at the emerging technologies that have a bearing property specifically – right from construction all the way to property management. This is the second blog in the series and will delve into artificial intelligence (AI) in the context of CRE.
AI is essentially machines and computer systems simulating “thinking” – not just recording and storing information, but analyzing that info and responding to it. This is built on a base of machine learning too, in which machines are “taught” what to search for and what kind of responses are required.
A practical example is a machine that is “taught” to recognize an object using a (large) database of photos. Another common type is a chatbot, a little piece of software – that has “learned” to recognize what is being asked, and has a system for deciding what info to provide in response. Siri is AI-powered too. There are plenty of other examples and nuances, but those are typical examples that most people have encountered.
Smart or intelligent?
For context, in the first blog in this series, we introduced the idea of “smart things” or the Internet of Things (IoT). A boiler that can be controlled remotely is “smart”. If that system dynamically controls itself, however, and produces insights into energy consumption correlated with use and weather patterns, then it’s crossed into AI territory.
According to Analytics Insight, AI has even been used to independently transact. Specifically, a “soon to market” algorithm that analyzed “large sums of data that included potential economic value, KPIs, property characteristics, and risk factors” selected and completed a property transaction, purchasing two buildings for $26 million.
Customer relationship management (CRM) and sales
The chatbot example mentioned above is one way in which AI can be used to manage and nurture your relationships with existing and potential clients. With both residential and commercial letting, a chatbot is a great early engagement tool as it can answer simple questions and even make appointments for viewings or meetings.
Not all chatbots are created equally, some simply are more capable than others, so be sure you understand what you’re buying before signing on the dotted line for implementation.
In the same vein, not all CRM packages have AI built into them, but as companies glean and store more customer info through their engagement with people, AI tools in CRM are expected to be more affordable and more mainstream. This includes things like lead qualification, credit memo creation, and sentiment analysis, where the system isn’t just capturing information but transforming it into useful and actionable insights.
It is precisely this – insight – where we see AI really shine, and why so many companies are investing in forms of AI on-premises and via the cloud. For example, AI tools can turn mounds of data into performance analytics for your properties. Combined with market conditions data, this can go from deep understanding to far foresight, through predictive analytics.
Furthermore, it is this kind of insight that many believe is needed, firstly to bolster post-pandemic recovery, but also to take CRE to the next level as a sector.
From smart buildings and smart cities to AI and machine learning, there’s little room for doubt that the world is rapidly moving towards a fully tech-enabled society. Forward-looking commercial real estate (CRE) professionals are embracing these new capabilities, and revolutionizing the way we add value to commercial real estate operations.
In the previous article, we discussed the impact of IoT (the Internet of Things) and Artificial Intelligence (AI) in CRE. In part three of this ongoing series, we examine the role robotics plays in moving real estate into the future.
One of the areas where the use of robotics in CRE has really taken off is drone-assisted operations. Drone technology is being used to target some key challenges faced in the industry.
Processes that used to be far more complicated and expensive, like aerially mapping a property, can now be accomplished in a fraction of the time, and at a lesser expense. Part of the benefit is that drones allow developers and marketers to tell a story, as the development unfolds week by week in stunning images from on-high. Large construction sites can also be more easily managed when material stocks and inventory are being monitored with drones.
Another use of the tech is cutting down the time spent on surveying properties for maintenance and compliance purposes. Aerial surveys can easily reveal damage or deterioration and allow owners to address the problem sooner.
Drones equipped with specialized imaging cameras can also detect major issues like gas leaks or help pinpoint areas of heatloss for energy optimization. Given the drive towards cleaner, more energy-efficient buildings, this is a technology that is likely to become a cornerstone of future CRE operations.
Robots have also gained some traction working in building interiors. Machine technology can be used to map interior spaces and even, to present them to prospective tenants.
San Francisco-based operator Zenplace uses small telepresence robots to show properties, complete with a screen for the realtor to interact with clients – all from the convenience of the office. This means a more convenient process for prospective tenants, who can gain access to a property using an app on their phone while cutting down travel time for the agent.
A bot by any other name
Another area where robotics is taking CRE by storm is software robots aka “bots”. Robotic Process Automation (RPA) is the use of bots to automate mundane and repetitive tasks that would otherwise need to be done by human workers. This means time-intensive work like document management or invoice processing can be outsourced, leaving brokers free to focus on larger strategic goals and more creative problem-solving.
Using RPA, brokerages can also extract large amounts of untapped data from existing databases. This is likely to be an increasingly useful application in years to come, as digitization in CRE increases and large volumes of new data start pouring in from a slew of smart buildings being added to existing portfolios.
What the bots can’t currently do is analyze that data – the creative interpretation that task requires is best left to humans.
Reimagining Logistics Assets
On the back of a burgeoning e-commerce industry, robotics is also adding value through streamlined logistics processes. The landscape of logistics assets is changing, with a movement towards micro-distribution centers and multi-purpose retail spaces opening up new opportunities.
In a research report from the Commercial Real Estate Development Association (NAIOP) these new trends, and the robotics enabling them, are explored in detail. Some key findings are that previously underutilized spaces, including areas in malls or old parking garages, are finding new purposes as distribution sites that help solve the Last Mile problem of logistics.
Given their location in urban and suburban centers, these new types of logistic assets are blurring the lines between logistics and retail. Landlords and owners can now install logistics mini-sites in existing buildings, largely thanks to automated storage and retrieval systems that shrink the operational footprint. It’s a new way of imagining space and how assets can best be put to work.
An additional interesting trend is that larger logistics assets are now often being established further away from city centers. While this may sound counter-intuitive, with greater automation the need for on-site staff decreases, and companies can take advantage of cheaper land and operations costs in more remote areas. The NAIOP report goes on to quote ABI Research’s projection that, by 2025, some 4 million commercial robots will be hard at work in over 50 000 warehouses.
The human face of robotics
By now, you could be forgiven for thinking that this sounds like the start of a robot revolution that will put a lot of people out of work in the long run. The truth is, we are far from independently functioning robotics and AI.
Advances in these technologies allow people to do their jobs faster and more easily, taking a lot of the monotonous aspects out. As rapid-fire data-handling, logistics, and site management become the norm, there will also be an even greater need for people to oversee those processes. And the potential robotics offer for improving CRE operations means more ways to add value for customers and CRE professionals alike.
Nestled on Panama’s Pacific coast, Panama City is a bustling commercial hub that houses the regional headquarters of multinational giants like Caterpillar, Dell, BMW, and Philips. The city combines an eclectic mix of towering high rises, commerce districts and old, colonial areas like the charming Casco Viejo.
An international trade hub
Progressive tax laws and the ease of setting up a business in the country have contributed to robust growth. The country is a top economic performer in Latin America and holds a unique position of global trade importance due to the presence of the recently-expanded Panama Canal and the world’s second-largest free trade zone.
Panama has therefore established itself as a trade and logistics hub, with a lot of the resultant economic activity concentrated in, or near, Panama City. Thanks to this focus on a services-based economy, Panama also attracts large amounts of foreign direct investment (FDI), leading the Central American region in 2019 with $4.835 billion claimed.
The flip-side of having an economy rooted in world trade and foreign investment is that the pandemic hit Panama particularly hard. The country recorded a 17.9% GDP contraction in 2020.
CRE crunch through the pandemic
Due to the hard lockdown measures implemented from March 2020, real estate sales in Panama City came to a halt. As in many other cities, industries like tourism also took a hefty hit, and the retail sector faced challenges as the hard lockdown extended into June.
For Panama City’s office market, the pandemic came at a particularly inopportune moment, hot on the heels of an oversupply phase in 2019. The boom in office construction was the result of a period of sustained growth during 2013-2015, which saw a large amount of development undertaken in subsequent years.
At the end of 2020, the office property sector recorded a vacancy rate of 24.2%, with increasing competition between rentals. This includes Class A and A+ offices, which showed a 25.7% to 26.5% increase in vacancies quarter-on-quarter by Q4 2020.
Similarly, in the first quarter of 2021, general property prices in the city have dropped, following a 10-15% drop-off in rents in 2020.
A strong recovery expected
Despite the hard impact of the pandemic, the overall investment sentiment in 2021 is positive. Early in the year, Panama gained a vote of confidence with the extension of a $2.7 billion precautionary credit line by the International Monetary Fund (IMF).
The city has also resumed key development projects, like a twin cruise ship pier that will open up new tourism opportunities to bolster the local economy. And as far back as May 2020, Forbes listed Panama City as a strong contender for an investment with a short-term horizon, even in the midst of the pandemic downturn.
Charting a course
This strength is reflected in the extensive measures being taken by the Panamian government to encourage investment and build confidence.
According to President Laurentino Cortizo: “We have an economic recovery plan that has five pillars. We cannot talk about economic recovery if we do not have a good vaccination strategy […] that’s the base of that. We do have programs for small, medium-sized enterprises. We have infrastructure projects that generate quite a lot of employment. We have also […] some resources for our financial sector, and the bigger economic activities, for example construction. And the last one […] is related to the attraction of foreign direct investment.”
The reopening of international travel in October 2020 also saw an influx of FDI, as buyers jumped at the lower prices on offer in the Panama marketplace. Property tax exemptions and the opportunity to obtain resident status through real estate investment are additional contributing factors to the country, and Panama City’s, appeal.
IoT in CRE: The smart development, and smarter CRE professional
It is a well-established fact that digital transformation and the integration of technology have impacted almost every aspect of human life including our workplaces – and commercial real estate (CRE) is no exception.
With this in mind, we’re taking a look at the emerging technologies that are changing property in a new series of blog posts. This is the first, and in it we will look at the current and future possibilities of internet of things (IoT) technology in CRE.
Smart things 101
First off, let’s start with a basic definition of IoT. IoT makes “dumb” things “smart”, or disconnected things into connected ones. It includes a range of sensors and communication modules so that physical things – doors, parking booms, lighting arrays, heating, ventilation, and air conditioning (HVAC) systems, boilers, etc. – can be monitored and controlled remotely.
IoT also supports further digital transformation, such as machine learning in which data can be used to teach a system to the point of a high degree of autonomy.
Green ambitions and controls
IoT has a large number of applications in our CRE developments already, but one of the most common (and commonly understood) is how they can aid in managing energy and systems like lighting and HVAC – from the simplest option of running on a thoughtful schedule to dynamic adjustment in response to factors like the weather and footfall.
SpaceIQ is a company that offers a suite of software solutions for companies that want to improve workplace productivity. They talk about the efficiency these types of systems provide, explaining: “sensors that integrate with your lighting system can track room occupancy and activity. Based on the occupancy data, the sensors can automatically turn lights on and off. Having lights automatically turn on only when rooms or spaces are in use can translate to significant energy savings”.
These types of sensors can be used to adjust cooling and heating too, based on the real-time occupancy of a building. This is not just efficient energy use but can boost the experience of a space, for workers in an office and for shoppers in a retail center.
This is why IoT in facilities management is becoming an exciting area, as well as a means to maximize profit and curtail costs. With well implemented data collection, we are now able to produce “digital twins” to our buildings, or a virtual representation of a building that can show in real time the state of that building and its systems.
Forbes has a recent article on this, quoting John D’Angelo, US real estate leader from Deloitte Consulting. D’Angelo explains that insights gleaned from using IoT data can be used to track “how the building operates to make [..] operations more efficient, improve occupant (shopper, resident and patient) experiences and identify issues or potential issues”.
Wide use potential
Yahoo Finance – quoting from a new market study published by Global Industry Analysts Inc., (GIA) – says that the “IoT Analytics Market” is expected to be worth some $40.6 Billion by 2024. The breakdown of the in-demand IoT functions to watch over the next two years as “demand response, distributed energy generation and storage, smart meters, and fleet management” predicting these “will emerge as largest IoT spending categories”.
“Applications with medium-term potential include automated inventory management, and predictive equipment maintenance,” they add.
Although the potential for these systems is almost limitless, we must caution that connecting a boiler – for example – to the internet for remote monitoring and maintenance, also means opening that boiler and system up to the possibility of bad actors or “hackers”.
One needn’t look beyond the headlines for multiple examples of how important this factor is – as the recent Colonial Pipeline attack so clearly illustrated.
Any connected system will require security too, ideally from an expert in IoT systems – as the connection protocols for physical objects (whether retrofitted with comms tech or designed to be smart) can be vastly different from those of our phones and computers.
Data from the seventh annual industrial market report by WealthManagement.com Real Estate (WMRE) remains clearly bullish on the industrial sphere of commercial real estate (CRE), particularly on the points of sentiment, occupancy, and rent growth.
The report is based on an April 2021 survey distributed to readers of Wealth Management Real Estate. Respondents include private investors, financial intermediaries, developers, lenders, occupiers, and service providers, with over 50% of respondents in senior management and ownership roles.
It is in keeping with other market analysis sources. The industrial deal volume was up 18%, in comparison with 2015 to 2019 averages, according to RCA’S most recent U.S. Capital Trends report
Ecommerce at the core
The prospects of e-commerce and fulfillment, they write, were strong drivers before Covid-19: “The demand for home delivery of more types of goods and services provided extra fuel for fires that were already burning even before COVID-19… The strong and consistent performance also caught the eyes of new investors looking for a safe haven.”
The report draws from the U.S. Census Bureau information which shows how e-commerce made up 14% of total retail sales in Q4 2020 (up from 11.3% in Q4 2019), and from other sources that suggest e-commerce is to grow to some 21% of global sales by 2025.
Around the world, top corporates seem to be continuing their acquisitive streak in this space:
A mid-Aug release from Amazon announced their plans for a robotics fulfillment center and five new delivery stations in Florida.
Australia and the UK are also seeing news of large industrial deals, as companies seek strategic assets for “e-commerce, on-shore manufacturing and a desire to be positioned close to the end-consumer”.
Expansion is expected to last
Even with the need for social distancing measures on the decline, the WMRE report’s respondents show faith in “a lot of runways to go for what’s already been a long run of expansion for the sector”.
Frankfurt is one of Germany’s largest and most economically significant cities. With just under a million inhabitants, it’s the fifth most populous city in Germany. It is also an economic center for the country, with the sectors of finance, education, events, tourism, and transportation being particularly well represented therein.
Economic and travel hub
Frankfurt is considered the financial hub of Germany, and an internationally significant finance hub at that. Many global and multinational corporations maintain major offices and are even headquartered in Frankfurt, including Deutsche Bank, The Frankfurt Stock Exchange, and the European Central Bank.
In addition, it is a major transport connection, with Frankfurt Airport being the busiest in the country. As home to the world’s largest internet exchange point too, it is fitting that many European and German startups and digital-focused firms have chosen the city for their base.
The flipside of this is that it has high exposure on the office space side of CRE, which understandably took a hit under the lockdown measures during the Covid-19 pandemic.
According to Bloomberg, for example, reports the financial district in particular, remained “eerily deserted” in June and this was expected to continue until high vaccination rates are achieved: “The proportion of people fully vaccinated in Frankfurt was only at about 25% as of June 20,” Bloomberg says.
Logistics and warehousing in the region are on the up, however, the uptake of space in industrial and logistics in the first half of 2021 exceeding 300,000 m2 for the first time since 2018. Among other deals, DHL Supply Chain confirmed in July 2021 that they are building a 32,000 m2 logistics center just north of Frankfurt.
Recover on the cards, but slow
Its long history, established markets, and central position mean Frankfurt has been a relatively safe haven for developers and investors for years. Thankfully, it was largely spared from the worst of the flooding seen in the country in 2021.
Still, it has a way to go before returning to pre-Covid activity, Bloomberg argues: “Weekday workplace mobility data from Google for the region is still down 17%, while passenger numbers at Frankfurt airport—one of Europe’s busiest hubs—remain less than half their pre-crisis level”.
NAI Apollo is the NAI Global partner on the ground in Germany, with offices in three locations including Frankfurt where they are headquartered and have operated for over 30 years.
The New York City (NYC) property market has long been the most expensive and competitive in the country and often the world, the bleeding edge of commercial real estate (CRE). Not only is it the most populous city in the US, but it is a center of industry and commerce, synonymous with big deals, ambitious developments, and the American dream.
There are so many contributing factors at play here, but this info sheet from Crexi provides a fantastic summary for Manhattan and other boroughs and counties, including some insight into why the NYC market is the trend-leader that it is:
“The New York MSA is the unofficial capital of the world, the most populous MSA in the U.S., and has a GDP larger than many first-world nations”;
Some “73 of the Fortune 500 Companies are located in the New York MSA, including JPMorgan Chase, Verizon Communications, Citigroup, MetLife, Pfizer, Goldman Sachs Group, and Morgan Stanley”.
The costs of 2020
When the shine came off the Big Apple ever so slightly in 2020, it caused major ructions and ripples across the broader CRE sphere – nationally and abroad.
As CNBC has reported: In Q2 2020, “Manhattan apartment sales saw their largest percentage decline in 30 years, as residents fled the city during the Covid pandemic and brokers were largely unable to show places to prospective buyers”. It was the worst sales quarter on record for the city, and even media prices decline some 18% – the biggest dip in a decade. Developments were stalled and offices emptied out.
According to Curbed, among others, the origins of the slump pre-date the pandemic though. They write: “…beginning in 2017, a series of changes to state and federal tax law put a chill on the city’s sales, particularly at the high end in Manhattan”. This includes the 2019 state law that levied a one-time sales tax on homes over $1million. By the end of 2020, offices had a vacancy rate of over 15% – another three decade high.
State of 2021
The 2020 pandemic then effectively shut down the property sector, causing a crash in the data trendlines, and a strong correction as the sector opened up again.
In July 2021, the mood seems to shift towards sustained optimism, with some declaring “New York is back”. Data from appraisal firm Miller Samuel says average sale prices (residential) rose 12% in the quarter, topping $1.9 million. Plus, the Real Estate Board of New York’s latest quarterly Real Estate Broker Confidence Index shows that commercial brokers are feeling positive about both current conditions and expectations.
Reading the signs
Clearly, this is still a shifting story as the economy recovers and people and workplaces adjust. Some trends that may still shape the CRE market include ongoing rent concessions and eviction moratoriums, as well as office-to-residential conversions and office subleasing. As we know, however, the re-opening of the economy hasn’t been linear, so the CRE data continues to show pockets of sunshine and considerable volatility.
Dublin – the capital of the Republic of Ireland – has been making a name for itself as a center of finance and tech excellence for a number of years. Companies like Google, Accenture, Stripe, SAP, HubSpot, and Microsoft all maintain big offices there, and this has driven demand in both residential and commercial real estate (CRE) over the years.
In fact, the average disposable income per person in Dublin is 110% of the national average – but Dubliners need that extra cash because it’s also one of the most expensive cities in the European Union (EU). In fact, this was becoming a major talking point about the city in 2019.
So how are they faring now with the effect of the pandemic? Here’s what you need to know about CRE trends and news in this region…
Dublin is both the biggest city and the economic hub of Ireland. Because it is the seat of the Irish parliament, civil service is a big employer in the city. It is considered a magnet for technology-related businesses too, hospitality, retail, financial services, education, and more.
Like most major cities, the effect of Covid-19 on the economy was profound – especially on customer-facing businesses like retail, dining, and tourism, with considerable job losses at the peak of 2020 lockdown. The government is instituting a robust recovery plan aimed at mitigating the effects.
State of recovery
There are positive signs though that Ireland has positioned itself nicely to see good recovery signals in the second half of 2021. Significantly, more than two million people in Ireland are now fully vaccinated (two doses), reports the BBC.
About 70% of the adult population has had at least one of their vaccination injections, and 50% of the adult population has received two or two injections.
Despite this, the government is being responsible and cautious in reopening. Many major events, including the Dublin Marathon, are being pushed out. Dublin is considering the use of the proposed EU digital certificate (for fully vaccinated people) as part of their efforts to facilitate regional travel again.
Taking the CRE pulse
After a dismal 2020, Dublin is showing signs of vigor again. Independent.ie reports: “This year has seen health insurance rises, home-heating oil increases, rents surging and property prices increasing at rates last experienced during [boom times]”.
Residential housing prices in the EU are already gaining comfortably, with Ireland seeing 3.1% growth year-on-year, but being such an expensive city for living, Dublin has been rocked by the remote work movement which has led to record low occupation rates.
Irish Times, quoting a Virgin Media survey, reports that 43% of people surveyed want to work at home three days a week with two days in the office. This, they predict, will drive an even tighter crunch in office real estate, but that’s not scaring off the big businesses still interested in Dublin.
Salesforce, for example, recently told Diginomica it plans to invest more in these offices, with a view to changing how they use the space at hand. Bret Taylor, president, and COO of Salesforce explained he’s thinking of the office as “a place that you go to collaborate with your team…That’s changing the shape of our real estate, you know, more team spaces and fewer individual desks.”
It’s been a rollercoaster 18 months for everyone including market analysts who have had to provide insight and predictions on an unprecedented event, as the world bounded through recession, recovery, and reconfiguration. As it stands now, the US recovery has been swift, if uneven.
GlobeSt’s latest piece on this makes the argument for understanding this recession in different terms from so-called traditional ones, writing: “The COVID-19 recession was not caused by monetary factors, rather it has been a disruption akin to an unanticipated natural disaster which typically temporarily interrupts economic activity while leaving intact the underlying demand and supply of goods and services.”
The above forms part of their outlook reporting for hotel sales, and as has been well-established hotels, tourism, and hospitality were dramatically affected during the peak of the pandemic travel-bans and “shelter at home” orders.
GlobeSt points to some encouraging signs, including the volume of startup businesses launching, low levels of household debt-service burdens (in relation to net income), rising house prices, increases in personal savings, and the Dow Jones Industrial Averaging gaining some 18% compared to Feb 2020 (a pre-pandemic peak for the index). Altogether, these are positive signs that the American consumer may well have additional discretionary spending in the coming months, and the tourism space could be on the receiving end.
Corporate travel is expected to increase in the second half of the year, on top of the increases already evidenced in daytrippers and weekend travel. As schools reopen, they are anticipating patterns to shift from leisure to work trips.
Early 2021 winners
The Wall Street Journal reported earlier this year that real estate investment trusts (REITs) and companies with holdings in retail and hotels “mounted a first-quarter comeback”.
“Real-estate investment trusts overall rose 9% during the three months, beating the S&P 500’s 6% gain,” according to data-analytics firm Green Street. Fueling the REIT rally was an 18% rise in the shares of lodging owners and a 32% gain by mall owners.
Creative strategies Additionally, according to CNBC, distressed hotels were in demand from buyers looking for possible redevelopment and conversion projects, and other creative solutions to the low supply of affordable housing. “So-called Class C housing stock is now 96% occupied nationally and 99% occupied in the Midwest, according to RealPage, a property management software company,” CNBC writes.
And for hotels with no intentions of conversion – the vast majority – the pandemic also provided a kind of reset that allows for model innovation. “Similar to the airline’s ala carte approach, the hotel industry is attempting to move guests toward an opt-in choice for various services, such as daily room cleaning,” reports GlobeSt.
Counting the deals This article provides a deep dive into specific deals and statistics from hotel sales and performance in 2021 so far and is a recommended read for those CRE professionals servicing the submarket.
It will also make for interesting reading from a capital markets perspective as it details funding activity: “As the U.S. hotel industry continues to emerge from the carnage induced by the global pandemic, an abundance of capital is beginning to fuel increasing activity with lodging sector mergers, acquisitions, and spinoffs,” they wrote.
Since April 2020, the National Association of Industrial and Office Properties (NAIOP) has been keeping track of the pandemic’s impact on CRE with their regular COVID Impact surveys. NAIOP’s June 2021 survey collected data from 239 US-based members, including brokers, building managers and owners, and real estate developers. A recurring theme in this latest survey was the increasing challenges commercial real estate (CRE) is navigating associated with supply chain disruptions and materials costs.
Supply and delay With more than 86% of developers reporting delays or materials shortages, it seems the impact of COVID on supply chains is set to become one of the longest-lasting effects of the pandemic. Adding to difficulties, 66% of those surveyed reported delays in permitting and entitlements, a figure that hasn’t changed since June 2020.
Fixtures and equipment for stores are also in short supply, with order backlogs stretching into months for some retail sectors. While this isn’t necessarily surprising, given setbacks in manufacturing in key suppliers such as China, the CRE market shows promising signs of being on-track for continued recovery nonetheless.
Development despite setbacks Despite the issues highlighted in the report, the survey still showed an increase in retail prospects. New acquisition of existing retail buildings was indicated by 39.1% of respondents, while 31.3% mentioned new development going ahead. Both of these figures represent a strong improvement from a previous survey in January. Deal activity was also noted to be on the up, with figures doubling for office and retail properties over the course of a year, and industrial deal activity increasing over 20% since June 2020.
“Bricks and clicks” International industry players have also noted that, though larger spaces are still facing delayed rental uptake, 20,000-30,000 square-foot sites are garnering increasing interest. The potential for these spaces is as part of a multichannel retail/warehouse approach – the “bricks and clicks” strategy. As the demand for online retail increases, logistic assets, and storage spaces become more valuable, contributing to an overall uptick in both virtual and brick-and-mortar marketplaces.
A promising prognosis Even with the supply chain challenges facing the industry, the Federal Reserve agrees with the trend data gathered from NAIOP participants. In their June 2021 Beige Book, the Fed noted upward movement in industrial output and consumer demand. Though economic gains were noted to be slow, the outlook remains steady and positive.
President and CEO of NAIOP, Thomas J. Bisacquino, puts it like this: “The materials and supply chain issues are lagging effects of the pandemic, and they are affecting every industry. While the pandemic’s impact was deep, there’s a sense of optimism among NAIOP members, with deal activity rising and an increase in people returning to offices, restaurants and retailers.”
Your new build might pack the best-of-breed technologies and energy solutions – but did you know that it would take roughly 65 years for an energy-efficient new development (with as much as 40% recycled input materials) to save or recover the equivalent energy lost through demolishing? This is according to the United States Environmental Protection Agency.
Viewed through that lens, our approach to green buildings and energy efficiency may need a serious rethink. There is another approach to take, of course, and that is adaptive reuse. A strategy that although not strictly new, is quickly becoming a conversation starter and “darling” of sustainable commercial real estate (CRE) circles.
Adaptive reuse is not just about redesigning or redeveloping, it can be viewed as breathing new life into buildings, updating their use case as much as their construction, and a smart green step to take. They can also be beautiful, and simply “cool” – as this article in Architectural Digest details in its review on Cool Is Everywhere: New and Adaptive Design Across America, by photographer Michel Arnaud.
With adaptive reuse, developers and architects are starting on a green foot – using an existing building shell, rather than having to construct right from scratch. That means less material use, often less waste, and can reduce the number of shipments of materials needed, which contributes significantly to a building’s carbon footprint.
Adaptive reuse can also contribute to a neighborhood – in feel and in service provision – and is a popular way of making space for more offices and workplaces in an area with a declining manufacturing industry, or unlocking dining and entertainment offerings as the demographics in a neighborhood change. Urban Stack, for example, is the oldest standing building in Chattanooga. It was previously the Southern Railway Baggage Depot.
The old drill hall in Guelph, Ontario, Canada, is another such example. The local press describes it as “a building without a purpose – at least not a contemporary one”, in this report on the City’s plans to repurpose the building which has stood empty for over a decade.
And on campuses, like that of Boston University, adaptive reuse enables a strategy of densification and reuse, rather than trying to expand in this already bustling and developed city.
News broke in late July that Apple was pushing back its ‘return to the office’ expectations by at least a month. CEO Tim Cook had previously flagged September as a likely date for the majority of its office-based staff to resume in-person, on-site work – based largely on the availability of the vaccinations.
Now Bloomberg – citing unnamed sources – says the technology giant is feeling less confident in this push to return as many in the US remain unvaccinated and new variants continue to plague health services.
This is a blow to the “return to the office” rhetoric which has dominated the news in recent months and may have knock-on effects for the commercial real estate (CRE) industry – in terms of development planning, new builds, and investor sentiment.
Mask up orders
This decision is informed by government mandates, according to the sources. Drawing from the New York Times stats, Bisnow writes: “The average number of new daily coronavirus cases in California, where Apple is headquartered, has tripled in the past two weeks”. In addition, they report, Cupertino – Apple’s ‘home city’ – and the Santa Clara County in which it sits has issued a statement calling for the return to mandatory mask-wearing.
The county’s collective statement reads: “[we] recommend that everyone, regardless of vaccination status, wear masks indoors in public places as an extra precautionary measure for those who are fully vaccinated, and to ensure easy verification that all unvaccinated people are masked in those settings.”
This, as well as news on the effect of the Delta variant of Covid-19, has seemingly subdued sentiment on the markets, with the S&P500 taking a knock – dropping the most it has in two months, according to an additional Bloomberg report.
Despite this, many real estate investment trusts (REITs) and related investment vehicles are rallying. A contributor on the Nasdaq website takes a look at this counter-intuitive trend, pointing out that: “Vanguard Real Estate Index Fund ETF Shares (VNQ) added about 24.1% this year compared with 16.1% gains in the SPDR S&P 500 ETF (SPY)”. They argue that inflation, housing price increases, “booming cloud business” are among the factors underpinning this resilience.
Finally, the relatively high yields of real estate are setting them apart from other investments, writing: “The benchmark U.S. 10-year Treasury yield was 1.38% on Jul 1. Against such a low-yield backdrop, dividends offered by real estate ETFs are quite sturdy.”
A standout memory of my youth was going to the movie theater to see “Caddyshack.” While I’m sure some of you are rolling your eyes right now, others are smirking as you picture Judge Smails and the gang. The movie was one of the hits of 1980, grossing $40 million. Seeking to capitalize on this success, “Caddyshack II” was released a few years later. My memory of that was much different. To read the fully article, click here http://digital.propertiesmag.com/publication/?m=15890&i=714009&p=46&ver=html5
We’ve been on a mission lately, to share best practices and some of our favorite commercial real estate (CRE)-related technology tools in a series of blogs. This is our fifth in the series, and explores the uses of Salesforce. For clarity, this is NOT a paid or sponsored blog. We are motivated only by sharing information with our network. We want to hear from you too: What are your favorite tech tools? Is there a CRE digital solution we should know about?
Below we provide just a few reasons why they make our top tech list, and you can also visit them directly on http://www.salesforce.com/.
What is Salesforce?
First off, the basics: Salesforce – the company – is listed on the New York Stock Exchange, and Salesforce – the platform – is essentially a customer relationship management (CRM) tool. It is enterprise-focused, providing companies with the means to streamline all their sales and marketing functions, in order to promote goods, services and more sales – and because it is cloud-based, it’s accessible to anyone anywhere with a browser.
It is, we’ve read, the top CRM platform in the world. If you need to communicate with customers and manage your customer base, automate processes, or manage events, these are all to be found under the Salesforce umbrella.
Real estate is a field that has traditionally been seen as high customer touch and low tech – especially on the residential side of the industry. The scope of the CRE market however demands a lot more than a mental rolodex. A CRM strategy informs how you manage your stakeholder engagements and a CRM system, like Salesforce, brings together all customer touchpoints – email, website, phone, social, and more – and gives you a single, smart view of all interactions with an individual.
For both clients and for customers, you can see how powerful that would be. No more wondering if your colleague followed up or what the last status of your discussion was. It will all be viewable and linked in one place.
In June 2021, Salesforce also announced the launch of their Einstein Relationship Insights (ERI) tool which makes use of artificial intelligence (AI) research to gather meaningful insight into the relationships you enjoy with companies, customers, and prospective clients. This will be a very interesting addition to watch. Venturebeat says “ERI can help sales reps close deals faster by acting as a virtual agent for salespeople in all industries, scanning news articles, social media, collaboration apps, email, and other online sources to uncover and deliver account and contact information”.
The kind of data that goes into a CRM – and can be extracted from one – can give your marketing and communications the edge. For example, you can capture a client’s personal contact preferences, so you always know what’s the best way to start a chat on their preferred medium.
Salesforce also offers things like an email studio so you can send gorgeous and relevant mailers – as well as mobile, social, and advertising studios – and a journey builder so you can guide customers through the steps, channels, and departments as needed.
What is your top tech tool for CRE? Share your favorites with us.
Real Capital Analytics (RCA) has released their latest US National All-Property Index data for industrial, apartment, retail, and office sectors, which shows index growth of 8.4% year-on-year to April 2021.
The biggest gains were evident in Industrial (up by 9.4%), which we all know has been one of the few spaces for which Covid-19 proved to be a boon. But GlobeSt analysis of Crexi data and Moody’s Analytics suggests that a “market correction” may be on the cards
In the monthly Crexi National Commercial Real Estate report, they write, ‘for industrial… prices dropped 6.68% over April Figures, forcing cap rates up slightly in response”. However, occupancy rates in Industrial have increased over six months, by some 11.59%, and the asking rate per square foot is not at its highest levels since before the pandemic.
Multifamily prices, by contrast, increased some 10,5% but their occupancy rate declined slightly.
Moody’s data also shows that rent for warehouse/distribution was “positive nationally for every quarter” of 2020, and they anticipate it will also prove to be the “strongest rent of all asset classes this year”, with rental growth of 2.8% predicted.
Areas that are particularly well placed for Industrial and warehousing spaces – or those that have higher demand – will reap the rewards of this ongoing strength.
Florida, for example, reportedly has much need of at-home deliveries. Lawyer Bruce Lowry in a recent article said: “This area has spiked. The vacancy rates are extremely low, if not at zero, for warehouse space.”
He argues that this trend will hold for the immediate future as older consumers have become comfortable with delivery services “rather than having to go into a store”, and that the need for warehouse space to address this is not yet up to demand.
Other factors to consider is the rise of “subcategories” like eWarehousing, fulfilment, outsourced or third-party logistics. As smaller companies adjust to offer robust online sales and delivery, or through microfulfilment, shared space providers are having to grow and accommodate newcomers.
Those who have run on a “just in time” model, are having to find space for large stockpiles, and the last mile means that industrial is coming into closer proximity to the city centers and suburbs they’ve never featured in before.
For a rundown of the options, this GlobalTradeMag article offers an accessible guide to the types of industrial sub-categories that are going to be of increasing interest.
Say “Bahamas” and you probably have a mental image of cocktails on the beach – which is not a bad association at all – but there is much more to this island destination than being a vacation hotspot.
The Commonwealth of The Bahamas – the official name – is located in the West Indies. It is the richest country in the region, with a GDP ranked 14th in North America – built primarily on tourism and financial sectors (specifically offshore banking). The nation is renowned as a tax haven, with no income, corporate, wealth, or capital gains tax – a strategy that has earned them both fans and critics.
Here’s what you need to know about commercial real estate (CRE) trends and news in this region…
Travel restrictions easing
The Bahamas is one of the first countries to lift the restrictions on international visitors who are fully vaccinated. In May 2021, the new regulation became effective which means those travelers “who are fully vaccinated and have passed the two-week immunity period will be immediately exempt from testing requirements for entry and inter-island travel”. Fully vaccinated travelers must still apply for the Bahamas Travel Health Visa with proof of vaccination, at travel.gov.bs.
This is a welcome relief for the hotel and tourism sectors which is a critical part of the economy – making up some 51% of GDP – and it should provide a kick start for tourism related CRE deals that were stalled or delayed as a result of the global Covid-19 pandemic.
Thinking outside the box
The government is keen to incentivize land sales at the moment, and is using fresh techniques to promote business, such as offering discounts on land parcels to young professionals in the western area of New Providence.
Prime Minister Dr. Hubert Minnis announced in December 2020 that new development was on the cards in this region which constitutes “crown land”. “Crown land is really the people’s land, it’s not individuals, it’s the people and we just want to ensure that the people receive their land,” he said, adding that the government would promote duty-free building and automatic mortgage qualification for applicable targets of the development.
The Bahamas Real Estate Association’s (BREA) president Christine Wallace-Whitfield has spoken in support of the proposal which would put homeownership within reach for more Bahamas residents. This would also likely create development opportunities down the line which is a positive for the construction and CRE industries.
On a slightly lower note, there is currently a robust debate around plans recently proposed in the House of Assembly (during the 2021-22 annual budget presentation) that the government could potentially recoup outstanding property taxes directly from the tenants of commercial office and retail properties. The Tribune reports that this would involve paying monthly rentals directly to the Department of Inland Revenue (DIR) rather than the “delinquent landlord – until the debt is settled”. A collection of prominent CRE professionals have spoken out in criticism of the proposal, and it is an ongoing matter.
Also among the budget updates were new tax provisions that would see VAT on realty transactions increasing. The BREA said that the “sector would accept the tax hike if it was accompanied by an improvement in the ease of doing business”.
These are the kind of legislative and regulatory matters that require robust local knowledge, which is why NAI Global always advocated dealing with regional experts, like NAI Bahamas Realty Commercial.
Australia is certainly feeling the effects of the global climate crisis in recent years. The sensitive and beautiful ecosystem enjoyed by the “Aussies” has been ravaged by heat waves and wildfires and drowned in record-breaking floods – not to mention the tragedy that is the widespread bleaching of corals on the Great Barrier Reef, the result of rising ocean temperatures.
Perhaps this is why Australians are getting serious about cracking down on common pollutants and regulating the ecological impact of the industry. The latest news in this regard is the tough energy standards introduced by the City of Sydney (the government of Australia’s most populous city), and support for these coming from the leading property companies in the region.
Zero net emissions
Commercial Real Estate Australia published an article in late May 2021 detailing how the commercial real estate (CRE) and property leaders in the city have come out in support of the tough new energy standards that will apply to all development applications – from as early as the start of 2023. Specifically, the City[MOU1] is targeting zero net emissions for the entire local government area by 2035.
The report reads: “For the first time, City of Sydney is proposing that DAs to build or redevelop hotels and shopping centers must achieve a minimum National Australian Built Environment Rating System (NABERS) environmental rating, in this case, four stars. It also wants to increase the existing NABERS rating for office buildings from five stars to 5.5 stars by the start of 2023.”
Sydney Mayor Clover Moore says this makes economic sense, as well as environmental, and will help “save more than $ 1.3 billion on energy bills for investors, businesses and occupants between 2023 and 2040”.
Lead by the people
What’s particularly interesting about this, and other eco-friendly news emanating from Down Under, is that these gains appear to be driven at a regional and personal level, more than from the incumbent government which has been described as “one of the most climate-skeptical political groups in the developed world”.
For example, green energy is a big talking point in residential and commercial real estate (CRE) spheres, with considerable demand from consumers. One in four Australian homes now have rooftop solar energy supplies, says Recharge News. Clean energy is now almost a third of the power mix in the country.
The real estate industry is considered a thought leader in this space in Australia and has been recognized by bodies like the Global Real Estate Sustainability Benchmark (GRESB), in which they have topped the charts for a decade.
Australia’s Green Building Council calls GRESB “the global benchmark for environmental, social and governance (ESG) performance of real assets, defining and measuring standards for sustainability performance”, explaining that this assessment metric includes not just property, but also real estate investment trusts (REITs), funds, and developers – representing assets in excess of AUD $6 trillion.
Australian companies are also prominent in the Dow Jones Sustainability Index – another indicator, perhaps, of how the [professional and personal] tail can wag [government] dog in pursuing greener CRE.
Although many sectors and consumers are sighing in relief that the worst may be over, some media and analysts fear a bankruptcy boomerang effect may yet still shake capital markets. Bankruptcy is both a blow and an opportunity in terms of commercial real estate (CRE) capital markets, but either way, forewarned is forearmed.
Sounding the alarm
Specifically, reporting from Bloomberg Law makes the case that remote work may drive more defaults in the office space market, despite retail and hospitality being the main areas of concern for respondents to their latest Commercial Real Estate Bankruptcy Survey.
Analyst Jeffrey Fuller delves into the numbers and says that “cancellation of office leases and potential vacancies caused by permanent moves to remote work might be behind this” selection by survey respondents.
Still, he thinks the hard stats disagree with the above qualitative data. He writes: “Analyzing the percentage of 90-day delinquencies in each CRE property type using Bloomberg Terminal data reveals that hospitality and retail are at the top of the list, although the rates for both have decreased somewhat since January. Meanwhile, the office delinquency rate has stayed far below those for retail and hospitality.”
Mall collections on the up
Separate data, drawn from Pennsylvania Real Estate Investment Trust, is quoted in a second Bloomberg Law article. They had filed for bankruptcy in November 2020 citing deferred rent payments, but later exited bankruptcy in December.
The first quarter of 2021 painted a vastly different picture from 2020, as “rent collections grew to 119% of what it billed in the three months through March 31”. They were expecting an even better April, with collections expected to hit some 140% of monthly billings, which indicates that deferred rents are now coming back in.
Not totally out of the woods
Before you pop the champagne though, estimates still put CRE debt coming due this year at some $430bn. And there is a “$450bn market for mortgage loans bundled into securities”, explains ConnectCre.com, based on Bloomberg and data firm Trepp’s figures. Trepp adds that “About 7.58% of the total were at least 30 days late on a payment in January, led by 19.19% of hospitality loans and 12.68% of retail loans.”
An eye on opportunities
As mentioned above, the default and bankruptcy rates are devastating for individual businesses, but do represent a significant opportunity for those looking to get assets at discount rates.
GlobeSt.com points to a portfolio of 15 US hotels “with a floor price of $470 million” that is going to be the subject of a “stalking horse auction” in May. This is when a bid (specifically for a bankrupt company) is made in advance of an auction, serving as a reserve bid.
“Stalking-horse auctions are a routine part of many Chapter 11 bankruptcies, but for investors that have been waiting for distressed assets to come to market, this news was extraordinary,” writes GlobeSt.
[call for social]: What CRE assets or sectors do you think are ripe for renewal as the dust settles in 2020?
The US has been a ‘low move’ country for a while. The Census Bureau keeps statistics on how many Americans move to new residences each year, and their data shows that the national mover rate has been on the decline for almost 40 years. It peaks at just over 20% in the mid-1980s and has been trending down since. Then came the Covid-19 pandemic and its remote work revolution.
According to a new Apartment List report, published in May 2021, the pandemic has “sparked a rebound in residential migration”. This comes out of their recent remote work survey which drew qualitative comment from some 5000 Americans, and used the US census data, to establish that 16% of Americans moved between April 2020 and April 2021 – “the first increase in migration in over a decade”.
Wealth has legs
The research finds that the largest increase in this residential migration rate over the last year can be seen in high-income households (earning over $150,000) which is particularly interesting as people in this segment have been the least likely to move in the last decade.
Remote workers, specifically, were a whopping 53% more likely to move than on-site workers – making remote work “one of the major drivers in this trend”, a trend they expect to “remain prevalent even after the pandemic wanes”.
“Wealthy movers in 2020”, the report says, were “more likely to move further from job centers in order to buy homes, enjoy more physical space, and live in places with lower cost-of-living” as a result of their flexible and high-wage jobs.
Six-figure households, the survey concludes, were “twice as likely to purchase a home” and “more likely to have gained additional physical space” because they are able to put greater distance between themselves and their previous place of work/employer.
Heavy burdens to bear
This is a trend turned on its head, as traditionally wealth and likeliness of moving have had an inverse relationship, where low earners move more often than high earners. In 2010, for example, there was a 27% movers rate among workers with household incomes less than $25 000 – compared to a 9% rate in the segment where household earnings were $150 000 or above.
This data further underlines how the Covid-19 pandemic had a disproportionate effect on low earners. That is not to say that low earners didn’t move in 2020 – they certainly did in droves. We see that this group had a movers rate of 28% according to the survey, and the Apartment List argues these workers moved “in search of more affordable living arrangements” in the face of income insecurity.
While the increase in moving can be seen in a positive light, for the real estate sector and the recovery of suburbs and remote work spots, there is also the worry of a growing divide: what Business Insider calls a K-shaped graph – describing the different trajectory of “professional workers” and “everyone else”, a trend also seen starkly in the millennial generation.
Social: Have you recently moved or is your employer looking at continued remote work options? What do you look for in finding your ideal area or city?
Recently, we at NAI Pleasant Valley have been sharing some of our top commercial real estate (CRE)-related technology tools in a series of blogs – the kinds of tools that help us perform at the top of our game. This series is about sharing best practices and fit-for-purpose tools, but, please note, this is NOT a paid or sponsored blog. We are motivated only by sharing information with our network.
This is our fourth blog in the series, and here we will be looking at VTS – a platform built specifically for commercial real estate (CRE) leasing and asset management. Read below to see why we love them, and you can explore them directly at www.vts.com/.
What is VTS?
VTS was founded by real estate professionals for real estate professionals because – they say on the website – “they have experienced the challenges facing today’s landlords and brokers first-hand” and want to “empower commercial real estate professionals to work smarter not harder”. Sounds good to us! And to loads of others, apparently, as VTS platform is used to manage some 12 billion square feet.
Additionally, with so many users and properties on the platform, this cloud-based provider is also a data and insights producer, releasing a monthly Office Demand Index. CEO of VTS Nick Romito recently spoke to BisNow’s Make Yourself at Home podcast about his optimism for a return to the office.
According to Romito, based on conversations with some 25 CEOs: “… 95% of folks are going to say, ‘It is mandatory you’re in the office in September.’ Is it three full days or four? No one’s doing less than three that I can see.”
Of course, our main concern is the platform itself which is really a multi-tasker with three main components: lease, data, and market. The former (VTS lease) is the workhorse including online deal execution and tenant management, and the latter (VTS market) is all about marketing CRE in a digital-first world. VTS data is probably self-explanatory, offering real-time market data, and fascinating forward-looking data.
Their target market is, thus, just about the whole CRE value chain: tenant reps, brokers, and landlords.
Although it isn’t their core offering, we also like the active blog that VTS runs which includes company news and their thought leadership-style content. Recent posts that we found interesting include a look at medical offices, retail’s recovery, and market predictions.
What is your top commercial real estate tech? What do you use to track deals and stay on top of leasing? Share your tips with us here.
The commercial real estate (CRE) reporter Konrad Putzier recently published a fascinating article in the Wall Street Journal (WSJ) about the sector’s resilience, and specifically investors’ confidence in that resilience. Published in May 2020, the article unpacks the factors that have worked into the sentiment analysis, showing that despite the hard knocks of the pandemic, there is a lot of positivity about the future of CRE.
No small troubles
In many ways, CRE was a prime candidate to be severely impacted by shelter-at-home orders and the migration of workers to their homes. High-rise office buildings, the report starts, stood largely empty, and around a half of hotel rooms went unoccupied. Retail was also under severe pressure. Despite these layered burdens, the CRE market in the US remained relatively strong and is looking up in 2021.
“Prices fell far less than after the 2008 financial crisis and are already rising again,” he writes. “The number of foreclosures barely increased. Pension funds and private-equity firms are once again spending record sums on buildings.” This is, the article argues, partly due to the federal government taking bold measures to support landlords and protect them from “suffering steep losses”.
According to Green Street analytics quoted in the piece, CRE prices did fall some 11% in the March to May 2020 period (compared to 37% after the 2008 crash), but have rebounded by 7% – “erasing more than half their pandemic declines”.
The sector’s other saving grace is that it remains a darling of investors. The WSJ points to “big global pension funds… raising their allocations to commercial real estate”. Private investment funds with a real estate focus had $356 billion in cash reserves in April, and a study from Cornell University and Hodes Weill & Associations found that 29% of large institutions said they planned to increase their CRE exposure.
Analysis from Globe St underlines some of the same findings as the WSJ report, specifically in that real estate is profiting from its perception as an inflation hedge, and despite a high vacancy rate for offices, it describes analysts as “still bullish on the sector”. In fact, real estate investment trusts (REITs) have been the best performing asset class in 2021 so far.
Moody’s however takes a more cautious view. Also speaking to Globe St, they say, “while industrial will remain steady and multifamily family rents and vacancies will turn around in the short term, the future of office, retail, and some hotel subtypes is uncertain”.
Part of the package
The contemporary CRE investor can however bet on both outcomes through diversification. Writing for the Forbes Real Estate Council, Andrew Lanoie of The Impatient Investor has penned an even-handed explanation of the divergence of real estate and CRE prospects in tough economic times, and how CRE in the investment portfolio – diversified by type and region – can still carry its weight in your wealth strategy.
In fact, he concludes “investing in commercial real estate the right way can shield your portfolio from the next downturn.”
Social: Are you bullish or bearish on the CRE investment prospects? Tell us what’s driving your investment choices in this volatile time…
In a recent series of blogs, we have been sharing some of our top technology tools for use in commercial real estate (CRE) – the kinds of tech we use to give us an edge. Please note, though, this is NOT a paid or sponsored blog. We are motivated only by sharing the tools of the trade with our wide network of partners and peers.
Here, in the third such post in the series, we are exploring CoStar – which bills itself as the largest commercial real estate information and analytics provider. Below we get into the specifics of just why we use them. You can find CoStar at www.costar.com.
What is CoStar?
CoStar is a supplier of information and information-powered tools, and they have the kind of data volume that can unlock nuanced analysis of trends and market movers – with 129 billion square feet of inventory tracked and data points on over six million commercial properties.
Their portfolio includes several products, offering a tool for just about any CRE stakeholder you can think of, including brokers, owners, lenders, appraisers, and more.
Currently being a “big data business” is very trendy, but CoStar are not a new operation. Rather, founded in 1987, they have been an information and research provider for over three decades.
The platform includes millions of CRE comparative statistics or “comparables”, such as transaction notes, rent, occupation, cap rates, and that ever-important pricing information. You can also use the tool to access data on the status of a property (for sale, under contract, or sold). They also offer the functionality of aerial and map overlays, so you can explore market activity data in direct relation to its location, so you have both content and context.
You can also customize reports, manage your own listings, and access their regular indices and research materials and forecasts.
The connections you want
Over and above crunching the numbers on all things CRE – like inventory, valuations, and more – CoStar maintains a professional directory on almost six million industry contacts in order to foster connections and enable collaborations. Through this, you can not only get the low down on a listing, but also link those deals with names, and those names with means to get in touch.
[Call for social] What are your go-to tools for commercial real estate? And what is the one set of property data you wish you could lay your eyeballs on? Share your ideas with us here.
The youngest of my family is an interesting sort. While all of my children are different, this one is an outlier. A few years ago, when he came home to proudly announce he had gotten a job at a local pizza shop, I wasn’t surprised.
In a recent announcement, LightBox principal analyst Dianne Crocker predicted that as many as 25% (a quarter) of America’s malls can be expected to close down within the next three to five years.
This is, obviously, a trend that commercial real estate (CRE) professionals – like us within NAI Global – have been aware of and tracking for many years, but the LightBox prediction goes on to offer some idea of what we can expect to see filling these spaces in future and what investors see as the opportunities created by this trend – both projections worth exploring.
The “death of retail” has been hanging over the industry’s head for the better part of a decade, but what is more likely – Crocker and NAI agree – is a move away from brick and mortar towards e-commerce, with a hybrid model in future. This trend was merely heightened by the Covid-19 pandemic.
The Amazon effect
This is in line with what trend analysts and futurists like Doug Stevens are forecasting. Stevens told RetailDive last year that by “2033 the majority of our daily consumption will be transacted online”.
“In the future, all but the most convenience-based retailers will begin to use their stores as media to acquire customers and their media platforms as stores to transact sales…” – Doug Stevens, author of “The Retail Revival: Re-Imagining Business for the New Age of Consumerism”.
This tracks: Our most recent Real Estate Outlook study, Q42020, found that over half of the survey respondents (57%) said the “Amazon effect” was expected to have an even larger impact on their CRE markets than the pandemic itself.
A buyer’s market
Crocker argues that the slowdown in deal volumes initiated by the pandemic has left a supply gap, and described the demand from investors as “pent up”.
“Institutional capital right now is focusing its repurposing investments on the safest benefits, the suburban metro areas that have seen meaningful growth in the past year…” – Dianne Crocker, LightBox principal analyst.
Multifunctional malls with a lifestyle component are not only the darling of consumers, but of investors too including private equity firms looking to score a bargain on a distressed CRE asset.
We are seeing this interest spiking too, and not just for straight sales. There is much interest in reusing these generously sized spaces in novel ways.
There are many such developments on the cards around the country. In Benton Harbor, Michigan, plans have been suggested to reconfigure the Orchards Mall with some 116 luxury two-bed apartments, with six-month leases to attract business travelers. Chapel Hill Mall in Akron, Ohio – which was foreclosed – expects to see new life as a business park.
There are also some less-traditional buyers in the market for malls these days. Gaming giant Epic Games recently bought up an almost 90-acre defunct mall in Charlotte, NC, that will be refitted into their new international headquarters.
Repurposing and extended life
The malls that outpace the trend will be those with a strong anchor tenant and those that offer the live-work-play balance. Crocker argues that malls that are grocery-anchored, or those “featuring medical services, pharmacies, gyms, and lifestyle amenities are more likely to survive in their current forms.” This is the kind of mall that will become a hub of urban life, she says.
An anchor tenant with a multichannel presence and a pandemic-proof loyalty is a gamechanger for mall and retail leasing.
Malls also have, we believe, a long life ahead of them as places to showcase goods and establish brand experiences. Raydiant makes digital experience tools for real life spaces. Writing for Forbes in 2020, Raydiant CEO Bobby Marhamat wrote that “in-store experience defines retail for people”.
“Touching products is part of that experience, but helpful staff, well-organized showrooms, unexpected activities, smart technologies and other components all combine to create exceptional experiences…” – Bobby Marhamat, Raydiant.
These factors combined are why smart money is betting on not ‘a death’, but ‘an evolution’ for our malls.
One of the hardest pandemic-hit sectors in the last 12 months is travel and tourism, a space with significant overlap with commercial real estate (CRE). For those who trade in and invest in hotels and hospitality CRE, it has been a dark time – and sadly analysts aren’t promising a rapid bounce back. Rather, we are hearing estimates in the region of two to three years for a return to pre-Covid-19 levels – or longer, if major markets are affected by further “waves”.
According to research by Northern Trust, tourism and travel are worth an estimated10% of global GDP, and provides jobs for 330 million people. Forecasts from Oxford Economics and theUnited Nations World Tourism Organization (UNWTO) in 2020, predicted that international arrivals would drop by “over 70%, contributing to about 200 million job losses”.
That was their “worst case scenario” last year, but with multiple waves of this health crisis still being felt around the globe, the final impact is still to be assessed.
There are many things contributing to this, not least of all the correlation between travel and the spread of the coronavirus. Because this link was so immediately clear, international travel was all butshut down in 2020, and for many countries that remains the case with borders closed for anything other than essential travel.
As investors at Northern Trust explain, hotels are a “highly cyclical sector that experiences an overnight collapse in demand”. That speaks to the viability of tenants and operators in tough times, as well as the investment prospects that flow thereafter.
The acceptance for work-from-home will also keep more business travelers away and for longer, so areas that have economies built on conferencing and eventing are unlikely to see an uptick in business soon. Tourism recovery will, instead, start in cities that have clearpandemic-mitigation measures in place and those that can promise a safe “bubble” for tourists.
A handful of destinations are expected to buck the trend, with sharper tourism increases, and a swifter hospitality CRE recovery in conjunction. Parts of Australia, for example, are already seeing a shift towardsnew inventory.
Hotel shares movements also reflect optimism. As Million Acres reports, “As of March 19, 2021, Park Hotels and Resorts (NYSE: PK) was up 33.4% YTD, Pebblebrook Hotel Trust (NYSE: PEB) 35.4%, and Hersha Hospitality (NYSE: HT) up 47%”.
“That makes a good case for real estate investment trusts (REITs), says Steven Vazquez, NAI Global Capital Markets Hotel Expert, “and shows a willingness to buy in now as people think the bottom was reached and things looking up.”
A quick reminder to NAI Professionals and clients: NAI Global’s reach is, well, global. We are proud of all NAI Offices around the world as well as their regional and local insight. For today’s edition of the ‘What’s happening in…’ blogs, we turn our attention to Seoul, the capital of South Korea – and specifically its office real estate vertical.
Located in the north-west of the country, Seoul is home to some nine million people (including over 400,000 non-nationals), and is the largest city in Korea. It is strongly associated with technology, finance, and business, and some 14 companies from the Fortune Global 500 are headquartered here, including Samsung, Hyundai, and LG.
In Seoul, our local experts and partners describe a commercial real estate (CRE) and office space environment that is relatively stable despite the hardships of the Covid-19 pandemic, with a limited amount of new supply expected to come on to the market in 2021. In early Feb 2021, Korea, as a country, had some 80,000 infections and a death toll of 1464, and Seoul was a key concern for pandemic management because it is such a densely populated city.
Still, there have been considerable social and work-life changes in Seoul as a result of the pandemic. The Korean Herald reports that residents of Seoul worked less and relaxed more during 2020. This comes from the findings of a city government survey that shows a 12-minute decline in daily working time compared to 2019.
Seoul itself offers a vibrant and diverse community, and it is a regional center of economic activity, in easy travel distance of many of Asia’s highlights. Industrial action has however led to a decline in working days, and tourism has been greatly slowed by Covid-19 fears. As the vaccination efforts roll out, these are some of the economic areas where analysts are hoping for a recovery in 2021..
Despite the pressures of lockdowns and distancing, 2020 was reportedly a record-breaker year for office investment volume. Analysts suggest that this is underpinned by a healthy investor appetite for stable real estate assets and see Seoul as offering this.
According to the NAI Korea [HM1]monthly data analysis focusing on its market, published in January 2021, the average vacancy rate of office buildings in Seoul’s central business district (CBD) is 7.62%, with the average net occupancy cost (NOC) at $52.39 as of December 2020. NOC is the cost that 1㎡ of gross floor area incurs to a tenant who rents the property. NOC can be useful to compare different types of office buildings.
On the residential side, driven by low supply, there has been strong growth in prices, and this is likely to see policymakers relaxing some restrictions.
For a detailed breakdown of NAI Korea’s Seoul data, click here.
We all know the old real estate adage – “location, location, location” – but economies in the 21st century are tending towards “as a service” thinking, a trend characterized by a handful of big-name disruptors like Uber (transport-as-a-service) and Airbnb (accommodation-as-a-service).
In this model, the hassle and upkeep, the peripheral add-ons, are all rolled into the cost for clients and can make a compelling ‘sales pitch’ for would-be buyers.
“The other downstream effect of this is the emphasis on service itself – the quality thereof, more than its existence,” says Cliff Moskowitz, EVP, NAI Global. “Commercial real estate (CRE) professionals and firms that offer competitive, value-adding services can set themselves, and their listings, apart.”
A partner in time
For the owner and occupants of a retail property, having access to smart, speedy services as part of your property contract is a game-changer.
Services for occupiers include the obvious (like group marketing, facilities management, and lease administration), and then superior service offerings (such as omnichannel real estate solutions and supply chain advisory).
With services for investors, this category might include property marketing, valuation, and advisory services, and project management, which all exceed the traditional-but-still-essential landlord representation and leasing, and property management.
Next generation services
Retail properties can now include considerable benefits to occupants and tenants on the “as-a-service” model, including technological infrastructure, security, renewable energy generation and management, event management, and even click-to-collect services.
The increasing availability of these kinds of options means that retail property managers can offer far more for their clients without intense capital expenditure on their part or the client’s part, as these are now shifting to the operational expenses column in the books.
X marks the spot
When we pivot to thinking of ourselves as CRE service providers, we shift from a “sales first” approach to one of “service first”, and we also see the corresponding language shift from “renter” to “customer”.
This encapsulates the contemporary approach to business which centers the customer experience (CX) above everything.
With CX as a guiding principle, CRE professionals can position themselves for longer-term partnerships with their retail clients, and as premium providers, achieving both better numbers for themselves, and a higher return on investment for their clients – and that is the definition of a win-win deal.
The cliché of “Location, location, location” applies in commercial real estate (CRE) as much as residential, but what factors you bundle into that assessment are, naturally, vastly different and should be explicitly tied to corporate strategy. That’s the realm of corporate real estate management (CREM).
A savvy corporate client on the hunt for premises will be asking whether a proposed site will support their corporate goals.
When considering a potential position for offices or logistics, for example, an assessor might ask about the transport links, the nearby shops and facilities. They may consider perception and whether the location is in keeping with brand identity.
They will need to understand the current and future demands the company will make of a location, and how the lease or sale terms will be perceived by a board or management team.
Access to (human) resources
There is another oft-overlooked location factor that NAI argues should form part of a CRE strategy: talent and access to the right people.
This is the nature of cities or areas that become hubs for specific industries and sectors: they have a rich pool of workers with the right mix of skills to draw from. If you’re looking for the top geologists in the world, you probably want to focus on an area associated with mining. Want people who are passionate and knowledgeable about the ocean? Try Hawaii. Silicon Valley, and increasingly Texas, are meccas for the technically minded.
There’s remote work and transferable skills to consider, of course, but generally speaking a talent pool linked to an area is self-sustaining, in the way that Silicon Valley and Stanford will always be linked in their mutual development paths.
What type of staff you envision filling your hallways and boardrooms will also inform other location considerations: like access to good schools, parks, or public transport.
Property as an asset
Last but definitely not least, the right property is an asset and an investment with future dividends. This is why a smart broker, or their corporate client isn’t just looking at what is now, but what could be, what’s on the horizon, and any prevailing trends that need to be considered.
A client with explicit return on investment (ROI) expectations or a particular appetite for risk – as just two examples – should place that information on the table from the get-go, as premises can be (and often are) serving the dual purposes of functional and financial.
Remember: business strategy should drive a real estate decision, not the other way round.
The Covid-19 pandemic might have been an unforeseen crisis that sent the world spinning but, general volatility and the incidence of global or major crises are expected to rise in the coming decades. This is the result of a complex matrix of overlapping issues, including climate change, globalization, population growth and urbanization, and migration.
Against this backdrop, analysts have been warning that companies need to relook at their plans and forecasts through an ESG criteria lens. ESG stands for environmental, social, and governance.
According to a McKinsey report on the topic (published in Nov 2019), “ESG-oriented investing has experienced a meteoric rise. Global sustainable investment now tops $30 trillion—up 68 percent since 2014…” They ascribe this sharp acceleration to “heightened social, governmental, and consumer attention on the broader impact of corporations, as well as by the investors and executives who realize that a strong ESG proposition can safeguard a company’s long-term success.”
ESG in CRE
ESG is a rising concern for all businesses, and commercial real estate (CRE) is not exempt. ESG within this context would include matters such as the energy footprint of a property or development, its carbon emissions, ethical and local supply chains, labor relations, diversity, and inclusivity, and then the governance procedures and controls in place to comply with the law and meet the needs and expectations of all stakeholders.
A solid ESG strategy creates opportunities for partnerships, strengthens ties with communities, and links back directly to things like corporate missions and visions, for the way you want to operate and the changes you want to make in the world. On the other hand, failing to account for ESG in your property or development plans can become a material risk for your business.
ESG platform Goby looks at these issues specifically within CRE, and they believe having an ESG strategy is a competitive advantage for CRE professionals and brokerages. There are, they say, many tangible benefits to this – such as lowering your energy costs – but moreover, emphasize the intangible benefits that flow from a solid ESG strategy.
Goby’s ESG in CRE report (hosted on HubSpot) argues: “Intangible benefits are harder to measure directly, and include metrics like tenant comfort, word-of-mouth advertising from tenants about building improvements, and a reduced environmental impact.
Attracting investment through ESG
Over and above “doing the right thing”, ESG advocates believe that these holistic sustainability matters can make a compelling investment case within CRE investing.
As the Goby report outlines, when asked what they considered essential and important elements of ESG investments some 79% of investors cited ethical parameters and values, 78% mentioned positive environmental and social impacts, and 77% reported that they believed ESG factors could play a critical role in broader financial performance.
This echoes the McKinsey investment growth story, and with those numbers, it’s not a leap to say that that’s the final word on the bottom line.
The capital markets function within commercial real estate (CRE) is such a huge part of the property industry these days but is still quite poorly understood by those on the outside. Yes, there is a certain magic to bringing all the right elements together to support a smart capital market deal, but that doesn’t mean it’s a mystery or unknowable. Conquering capital markets is a matter of strategy and value. You just need the right partners to guide you.
Let’s get back to basics: If you are talking about capital markets as a general term (not necessarily within real estate), then you are describing a place for buying and selling stock, bonds, and debt instruments. A stock exchange, like the NASDAQ, is a type of capital market.
Zoom back into CRE
Within CRE then, you can see how capital markets are places for brokering financial deals specifically in property. When a brokerage, like ourselves, offers capital markets as a service this means we are providers of capital solutions relating to property. This can mean solutions for investors and for occupiers and may include advising on investments, recapitalizing, or debt placement – what’s on offer really depends on the brokerage and its own expertise in-house.
A capital markets service provider needs two overarching things for success: A depth of knowledge (expertise in the financial specifics and deal types), and a breadth of network (access to the right people and right primary and secondary markets).
From crowdfunding to app-based finance, capital market professionals are also facing a wave of innovation and change, largely driven by factors like digitization and the fourth industrial revolution.
“Evolving technology means the barriers to entry are coming down, but expertise and experience continue to be what sets capital market service providers and consultants apart,” explains Jay Olshonsky, President & CEO of NAI Global. “That’s what you want on your side when you’re looking for the capital solution you need.”
By Alec J. Pacella forProperties Magazine, March 2021
This month marks an anniversary of sorts. I’m sure you can remember exactly what even made you realize that COVID-19 was going to be a much bigger deal than originally thought. Most likely, this event happened sometime in the first two weeks of March 2020.