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Equity Office Daily Brief: May 18, 2016

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Daily Brief

May 18, 2016

  EquilityOffice

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Hines Said to Offer $5.5 Billion Real Estate Portfolio Sale

Bloomberg

 

The Houston-based company, which manages $89.1 billion, has hired Lazard Ltd. to advise on the sale of the properties in the Hines Global REIT, the person said, asking not to be identified because the details are private. The real estate investment...

 


Is the CRE Lending Environment Improving?

National Real Estate Investor

 

Off to a wobbly start in 2016, the lending landscape for commercial real estate is expected to bolster as the year progresses. Yet investors and lenders remain uncertain about the extent of improvement, as the industry faces looming loan maturities and...

 


Medical Main Street in Lancaster?

San Fernando Valley Business Journal

 

From the top of a building on the campus of Antelope Valley Hospital, Lancaster City Councilman Raj Malhi can look out over medical office buildings, apartments, a scattering of retail malls – and 107 acres of empty land. That vacant land –...

 


Low-Vacancy Market Awaits Valencia Project

San Fernando Valley Business Journal

 

The industrial market in the Santa Clarita Valley is about to get a little bit wider. Developers AEW Capital Management LP, a Boston, Mass.-based real estate investment advisor, and Sheridan Ebbert Development in Sylmar just broke ground on three Class A industrial...

 



BLOG & ONLINE NEWS

 

Does CRE Need More Technology?

GlobeSt.com

 

There is no doubt that the commercial real estate industry has yet to be affected by technology, at least not in a major or meaningful way. But, does the industry nee more technology, or is it an industry that is never...

 


Beachbody Expands in Santa Monica

RENTV.com

 

Beachbody has inked a 69k sf expansion lease in Santa Monica’s Lantana Center, bringing their corporate HQ space to 200k sf. With this deal, the company, one of the world’s leading providers of fitness, nutrition and weight-loss programs, has taken over...

 


The digital apocalypse: how the games industry is rising again

HITC Tech

 

For 30 years the games industry worked in a certain way. People rented offices and set up studios to create games; they employed staff to work in-house, then got those projects funded and distributed by publishers. If you wanted to opt out...

 


Could slowdown in VC funding for LA tech companies dent the office market?

The Real Deal

 

Could a slowdown in the growth of venture capital funding pouring into Los Angeles tech companies have a negative impact on the region’s office market? Close to $260 million in high-tech VC funding was invested in L.A. in the first quarter, including...

 

FULL TEXT


Hines Said to Offer $5.5 Billion Real Estate Portfolio Sale

Bloomberg

 

The Houston-based company, which manages $89.1 billion, has hired Lazard Ltd. to advise on the sale of the properties in the Hines Global REIT, the person said, asking not to be identified because the details are private. The real estate investment trust, which isn’t publicly traded, owns all or part of 43 properties.

Hines Global REIT said it’s evaluating a sale of assets, a sale or merger, a listing of shares on a national securities exchange or similar transaction in a March 28 filing to the SEC. There’s no set timetable, a spokesman for the firm said. Lazard and Morgan Stanley declined to comment.

U.S. commercial real estate values fell in February, the second consecutive month of declines following a six-year streak of uninterrupted increases, according to an index by Moody’s Investor Services and Real Capital Analytics Inc. Total return from London investment properties, which combines changes in real estate values and rental income, was 1.54 percent in the three months through March, the lowest since 2009, according to data compiled by MSCI Inc.

About 62 percent of the Global REIT properties by value are in the U.S., 15 percent is in the U.K. and the remainder is split between Australia, Germany, Poland, France and Russia, according to Hines’ website. The Global REIT’s stake in the properties for sale is valued at about $5.3 billion, the company said in March, with the remainder held by venture partners in some of the properties.

Morgan Stanley’s office at 25 Cabot Square in London and the headquarters of Gap Inc.’s Old Navy brand in San Francisco are among the buildings owned by the REIT. Other properties held by the investment trust include New City in Warsaw, where tenants include Novartis AG, and Brindleyplace in Birmingham, England where Deutsche Bank AG leases space, according to the the REIT’s website.

-Jack SIdders

Is the CRE Lending Environment Improving?

National Real Estate Investor

 

Off to a wobbly start in 2016, the lending landscape for commercial real estate is expected to bolster as the year progresses. Yet investors and lenders remain uncertain about the extent of improvement, as the industry faces looming loan maturities and regulatory measures.

The CMBS market has been on shaky ground recently, as concerns about the stock market, China and the global economy dampened lender and investor confidence. “In the first two and a half months of this year, CMBS was virtually broken,” says Michael Riccio, senior managing director in the capital markets group of real estate services firm CBRE.

In May, CMBS delinquencies rose for the first time in 10 months, to 2.92 percent, from 2.90 percent in April, according to Fitch Ratings. (The firm expects delinquencies to remain below 3.0 percent this year.)

According to a recently released report by New York City-based research firm Real Capital Analytics (RCA), “Into the second half of 2015, the price of commercial real estate debt increased in line with turmoil in the corporate bond markets. RCA calculates that the average interest rate on commercial property loans (office, industrial, retail and hotel) came in at 4.4 percent in June 2015. By January 2016, this figure had increased to 5.0 percent.”

Late March brought some stabilization, with spreads recovering, at least partially.

“Sixty to ninety days ago CMBS was all but dead, spreads widened out and borrowers were being re-traded on most deals,” says Gerard T. Sansosti, executive managing director at financial intermediary firm HFF. “AAA-rated CMBS bonds widened out to 173 basis points, with BBBs widening to over 850 basis points. This was the bottom of the market. Since that time (in the last 30-45 days), pricing has come in significantly. The latest securitization priced at 117 for AAAs and BBBs were in the 625-725-basis-point range.”

In the interim, alternative sources of funding have risen to the occasion to fill the demand gap—and they don’t plan on going away any time soon.

One example of this is EB-5 funding. "For new construction and/or rehab projects in the Midwest and other locations, many borrowers are utilizing alternative sources of debt and equity, such as historic tax credits, new market tax credits and EB-5 funding," says Jim Doyle, senior vice president at Bellweather Enterprise, a commercial and multifamily mortgage banking company. Bank and life insurance companies have also positioned themselves to gain market share should CMBS issuance not return in a significant way.

“During the market volatility , a number of our borrowers avoided the CMBS market and went with debt funds or bank financing, even if it required some level of recourse. They were willing to put in more equity or take on recourse to avoid a CMBS execution,” Sansosti says.

For their part, banks are becoming increasingly more comfortable with longer loan terms, now going up to 10 years, and funding higher leverage deals if recourse is on the table. They are also increasingly funding new construction loans.

In its April 2016 Lender Forum report, CBRE notes that life insurance companies are competing with CMBS lenders by structuring loans at 75 percent loan to value ratios (LTV) for higher mortgage rates.“Life companies want to be at 60-65 percent LTV or below and are pricing deals below 200 basis points,” says Sansosti. “CMBS lenders are really only competing with life companies on higher leverage transactions (65 percent-plus LTV) and larger single asset deals ($200 million-plus loan size). With the recent tightening in the market, we have begun to see CMBS lenders competing with life companies on some of the lower LTV opportunities (i.e. 50-60 percent LTV).”

“Life companies continue to be aggressive this year after a record year in 2015,” he adds.

Insurance lenders accounted for 13.0 percent of all lending across commercial property types in 2015, according to data from the Mortgage Bankers Association (MBA), an industry trade group. Banks held the most market share last year, accounting for 41 percent of all lending, while CMBS lenders accounted for 16 percent of the market, down from 27 percent in 2014.

That downward trend continues in 2016. Owners and developers who can avoid using the CMBS market right now are doing so, with Simon Property Group being a prime example. Should CMBS not perform up to par, the REITs are quite comfortable going to life insurance companies, according to Steven Marks, managing director for corporate finance and REITs with Fitch Ratings.

“REITs generally endeavor to have as many different sources of capital as possible, such as unsecured debt, bank capital, preferred stock, joint ventures, asset sales, and even through the secured market if they really need it,” Marks says. This year brought an increase in assets sales, for example, to raise equity across several REITs, he adds.

Looking ahead through 2017, industry insiders are generally optimistic, pointing to solid property fundamentals, a stable market and good discipline from lenders. “Lenders are comfortable, but thinking about where we are in the cycle,” Riccio says.

With the wave of loan maturities coming due this year, it will take about 18 months to clear loans made in 2006 and 2007, industry sources say. The market will also have to adjust to Basel III bank reserve requirements and the Dodd Frank risk retention framework that are scheduled to take effect later this year.

“When they figure out what they will do about risk retention, then CMBS spreads should stabilize, and that engine will pick up again,” Doyle says.

-Diana Bell

Medical Main Street in Lancaster?

San Fernando Valley Business Journal

 

From the top of a building on the campus of Antelope Valley Hospital, Lancaster City Councilman Raj Malhi can look out over medical office buildings, apartments, a scattering of retail malls – and 107 acres of empty land.

That vacant land – owned by the hospital, city and private hands – is one of the biggest assets the city has in fulfilling its vision for a massive development project called Medical Main Street.

“We have all this land and can do so much more with it,” said Malhi, a restaurant owner. “Medical Main Street will make this dream come true.”

Lancaster officials are looking to replicate around the hospital what it did to the city’s downtown, which was to take an underutilized area and inject new life into it. Just as downtown has become a gathering place for residents with its collection of shops and restaurants, Medical Main Street would become a walkable area catering to the staff and patients at the hospital and associated medical buildings. Malhi would like to see a hotel where relatives of patients and visiting physicians could stay.

Deputy City Manager Jason Caudle looks at all the asphalt-covered parking lots around the hospital campus and sees the opportunity for a hotel and more.

“With the right planning, this can be a more vibrant place,” Caudle said.

Underserved market

City officials recognize that medical-related development is already coming to the Antelope Valley.

In Lancaster, City of Hope opened a $20 million cancer treatment center in 2013 and the following year Kaiser Permanente opened a 136,000-square-foot special doctor office.

Next door in Palmdale is the Palmdale Regional Medical Center, which when it opened in early 2011 was the first new medical facility in the Antelope Valley in some 20 years. Los Angeles developer Thomas Partners Properties has plans for a project called the Oasis of L.A. County, a $200 million wellness village built around the medical center.

Rob Martin, of Martin Properties Inc., a real estate investment consultancy in Westlake Village, said this activity is the result of the Antelope Valley being underserved when it comes to medical services.

“There is too much of a population now to not adequately serve them,” said Martin, who has developed medical office properties in Palmdale.

Palmdale may have gotten the jump on its northern neighbor by developing the area around the medical center with offices for physicians and other medical uses. However, Lancaster’s Medical Main Street project is bigger and more coordinated.

To get it off the ground, the city hired Sargent Town Planning, a Los Angeles urban planning consulting firm. The Lancaster City Council approved on April 26 an agreement valued at $675,940 with Sargent. Half of the money will come from the city, $200,000 from the Antelope Valley Healthcare District and $175,940 from a Los Angeles County Metropolitan Transportation Authority, or Metro, grant.

Sargent will conduct a study of the proposed Medical Main Street area that will take about 18 months. The project area is roughly bordered by Avenue J to the north; 13th Street West to the east; Avenue J-8 to the south; and 20th Street West to the west.

Chenin Dow, a management analyst in the city’s economic development department, said that any developer interested in the area does not need to wait until the study is complete.

“We are more than happy to see that certain aspects get done to get development moving faster,” Dow said.

The city has also earmarked $13.5 million toward infrastructure improvements of new streets, traffic circles and traffic signal modification through a Metro grant and its own matching funds.

Health impact

Antelope Valley Hospital is owned by the Antelope Valley Healthcare District, a public entity similar to a school district and governed by an elected board. The hospital opened in October 1955 with 86 beds and today has 420 beds and serves more than 200,000 patients annually.

Out of the 107 acres of vacant land in the Medical Main Street project, about 42 acres is owned by the hospital.

Dr. Doddanna Krishna, chairman of the district board and an internal medicine and pulmonary specialist, envisions the vacant property filled with additional medical services such as for a rehab center, orthopedic surgery facility and cardiovascular care clinic.

“This is a project that can build on the work the city has already done and is very exciting and will develop this area into something that will help the community,” Krishna said.

The hospital and city now wait for Sargent to complete its analysis of the Antelope Valley health care market with an inventory of available services and what is needed, plus an analysis of the real estate, parking, traffic and utility studies and environmental impact report for the project area.

Caudle, the deputy city manager, predicted the market analysis would say the area is underserved.

“That insight is going to allow us to reach out to investors and the medical community and say, ‘We’ve got a market here, we’ve got a location for you,’” Caudle said.

Within the project area, the middle section is the most developed with the main hospital building, outpatient center, Women and Infants Pavilion and the City of Hope facility. To the immediate south are two apartment complexes. Empty land is on each side and it is here the city plans to extend new roads, such as the north-south 17th Street West and the east-west Avenue J-3.

Falling into the projects boundaries is a retail center with an empty Kmart store and a furniture store. With the nature of retail changing and the closure of national chains, those empty storefronts give an opportunity to reimagine the space, perhaps into more medical use, Caudle said.

“With the plan and design it may not be a Kmart again but it is going to be something else,” he added.

Once the market analysis, environmental impact report and other studies are complete, the city can have shovel-ready land for developers to build on. After all, said Vern Lawson, the economic development director, speed is of the essence for developers.

“If we can take all that and open the gates for them, we can have the same kind of success we’ve had in the (Lancaster) business park or downtown Lancaster,” Lawson said.

Competing community

In Palmdale the area around the medical center has blossomed into something similar to Medical Main Street.

Martin’s development company along with Toneman Development Corp., Meridian Property Co. and Thomas Partners all have completed projects or those in the planning stages.

“The property I have abuts the hospital and it is a parcel for medical,” Martin said.

Toneman projects include the three-story building for Palmdale Health & Wellness Center and the 24,000-square-foot medical office Project 029 on Trade Center Drive, both down the hill from the hospital.

Thomas Partners has the most ambitious plans for that area. The 420,000-square-foot Oasis project will include health-oriented retail and restaurants, covered public parking, a gym and a hotel for visiting physicians and families of patients. In the second phase, there are plans to include senior housing and luxury condominiums to create a wellness village.

Chuck Hoey, a broker with Chuck Hoey & Associates, in Lancaster, said that between the two cities medical office space is at a premium.

In Palmdale, there was a rush by doctors to buy medical condo space after the new medical center opened and that has made the market tight.

One doctor contacted Hoey who wanted office space to buy in Palmdale but space for sale is hard to come by.

“The medical condos are filling up in Palmdale and we are not finding many that are available,” he added.

-Mark Madler

Low-Vacancy Market Awaits Valencia Project

San Fernando Valley Business Journal

 

The industrial market in the Santa Clarita Valley is about to get a little bit wider.

Developers AEW Capital Management LP, a Boston, Mass.-based real estate investment advisor, and Sheridan Ebbert Development in Sylmar just broke ground on three Class A industrial buildings on a 13-acre industrial site in Valencia known as the Valencia Gateway V. When the buildings are finished in the first quarter of 2017, they will bring almost 255,000 square feet of manufacturing, assembly, distribution and warehouse space into a desperately tight market.

The buildings sit along Hancock Parkway within the 1,200-acre Valencia Commerce Center, the largest master-planned industrial project in L.A. County.

Craig s and Doug Sonderegger, both executive vice presidents at L.A.-based CBRE Group Inc. are handling both leasing and sales for the properties. Construction started last week.

One of the buildings, the 60,923-square-foot Building 9 at 27909 Hancock Parkway, will be a state-of-the-art industrial building with 28-foot minimum clear height for stacking product vertically, an Early Suppression Fast Response Fire Sprinkler Systems for high-piled warehouse goods and truck-high and ground-level loading for the largest trucks allowed on state highways, s said.

“We’re in desperate need for additional supply,” s said. “We already have lots of demand – from both local companies and those from the San Fernando Valley looking for space at a time when there’s less than 1 percent vacancy. These buildings will fill part of the need, but the demand will far exceed the supply when these buildings come on line.”

The Santa Clarita Valley is starting to come into its own as a market for institutional investors, s said.

“Five years ago, the area was considered a core-plus market – core meaning it’s an area where everybody wants to invest in, and plus meaning it’s up and coming,” s said. “Now, it’s a core market.”

Buildings the type to be built are selling for $140 to $150 a square foot, s said, up about 6 to 10 percent from the same time last year and fed by a supply-and-demand imbalance and very low interest rates.

The even tighter San Fernando Valley market is driving businesses north to the Santa Clarita Valley, he added, and lease rates at the new site will probably be between 5 cents to 10 cents a square foot less than in the San Fernando Valley.

During the first quarter, industrial leases averaged 90 cents a square foot in the central San Fernando Valley and 73 cents in the west Valley, according to Colliers International. The average for Santa Clarita was 64 cents.

Institutional Advisors

Coldwell Banker Commercial Advisors, a Salt Lake City-based national network of 17 Coldwell Banker franchises, is expanding into Northwest Los Angeles and has opened a full-service brokerage in Woodland Hills, hiring Lee Black, former executive managing director of Cushman Wakefield’s L.A. area business, as managing principal.

Black’s goal is to grow the office as part of a national corporate services network because of his background representing national institutional and corporate clients, said Lew Cramer, the company’s chief executive.

“We draft the player and not the position; and Lee is such a talent,” Cramer said.

The Valley and L.A.’s northwest region are growing in the three segments where CBC Advisors handle sales and leases – industrial, retail and land, Cramer said.

Black’s office will handle brokerage services and property and asset management but the focus is on corporate services for large companies that want national support, Cramer said.

“In today’s commercial real estate world, you need scale and scope in order to compete for institutional investors,” he said. “If you’re dealing with large clients, they want to make sure you can handle their requirements.”

Family Brokerage

Chicago-based commercial real estate brokerage Jones Lang LaSalle Inc. has hired a father and son team at its Burbank office to handle office leasing for the Los Angeles North region, which includes the San Fernando Valley, Santa Clarita and Ventura County.

Twenty-year industry veteran Richard Bright has joined as executive vice president. His son, Ryan Bright, has been named vice president.

They’ll negotiate office leases for tenants looking to expand into the region as well as building owners locally, regionally and nationally, according to Jones. Both worked previously for CBRE.

The office has seven brokers but needed the additional help, said Tony Morales, Jones’ executive managing director, particularly from industry veterans.

Belisle, market director for Jones’ southwest region, said the firm is looking to grow in strategic submarkets, such as those covered by the local office.

“It increases JLL’s presence by adding two brokers with great reputations and who allow us to broaden our expertise further north in the Valley,” Belisle said.

-Staff Reporter Carol Lawrence can be reached at (818) 316-3123 or clawrence@sfvbj.com.

Does CRE Need More Technology?

GlobeSt.com

 

There is no doubt that the commercial real estate industry has yet to be affected by technology, at least not in a major or meaningful way. But, does the industry nee more technology, or is it an industry that is never going to be changed by technology? Michael DeGiorgio, the CEO of CREXi, a new technology company that is streamlining deal flow and the transaction process, says that CRE is definitely an industry that needs more technology, suggesting that the impact would increase transaction volume.

“There was a time 10 years ago when brokers said that our industry is never going to be changed by technology, and that was a common thought,” DeGiorgio tells GlobeSt.com. “People today understand that technology has to impact the industry, but that it just hasn’t happened yet. Some of the poor technologies and some of the “world’s shrinking” ideology has really helped to pull people away from that idea of brokers selling deals because they are connected to five buyers to the idea that there are hundreds of buyers out there for one property. There are better ways of selling real estate and speeding up the process. Everyone understands that and at least is open to it. Now, it is just finding the right technology to do it and to get everyone on board. We are definitely off to a really good start.”

Integrating technology into commercial real estate would mean a fundamental cultural shift, and getting every broker on board isn’t an easy task; however, DeGiorgio says that, while the younger brokers understand and even wants more technology, veteran brokers are also coming around to the concept. “This is especially true for the younger generation, but you are starting to see some of the most seasoned vets in the industry that have been part of the old boy’s club that are seeing there is no avoiding this and if you want to be the top broker in your industry, then you have to adapt to technology,” he says.

Deal volume is biggest driver to encourage—or push—brokers to use more technology. If an owner could hit a button, and a bunch of brokers would come, and then he picks his broker and the deal goes to market and the broker is getting offers immediately, and all of this is done in real time with real data and analytics, you are going to see owners have a much easier time,” says DeGiorgio, whose company CREXi is working to streamline the process so that brokers can do more deals and find more deals, and so that owners can find and market a property more efficiently. If their success is any indication—in their first five months, they have signed up thousands of brokers with 75 more new users a day—there is definitely a cultural shift toward technology.

-Kelsi Maree Borland

Beachbody Expands in Santa Monica

RENTV.com

 

Beachbody has inked a 69k sf expansion lease in Santa Monica’s Lantana Center, bringing their corporate HQ space to 200k sf. With this deal, the company, one of the world’s leading providers of fitness, nutrition and weight-loss programs, has taken over the former IMAX building at 3003 Exposition Blvd, just west of Centinela Ave, between Olympic Blvd and the 10 Fwy.

The firm’s new offices will primarily house Beachbody’s rapidly expanding technology team, who have been critical in supporting the company’s 24 percent compound annual revenue growth since moving to the Santa Monica campus eight years ago. The role of the technology team has grown with the launch of the Beachbody On Demand digital streaming platform, the evolution of e-commerce and mobile platforms, and the ever-expanding use of big data analytics to help drive the domestic and international business.

“We will create a state-of-the-art facility for the team to not only support the critical work that our tech team does, but also to attract the world-class talent we need to further support Beachbody’s amazing growth,” said Jon Congdon, Beachbody co-founder, President and Chief Marketing Officer. “This is going to be a really fun space that sparks creativity and helps our team have a great time at work, while helping Beachbody continue its evolution into a tech powerhouse.”

Beachbody has been in Santa Monica since 2008 and currently has over 600 employees in its Santa Monica headquarters and over 950 across the U.S. As this additional space becomes fully occupied, Beachbody will be one of the top five private employers in Santa Monica. Beachbody also actively supports the community, most recently through its partnership with Upward Bound House, which helped more than100 Santa Monica families get access to housing and essential support services.

Tom Turley, Jordan Kissel and Blake Searles of JLL represented Beachbody in the lease. The landlord, Jamestown, L.P., was repped by Jeff Pion, Blake Mirkin, Michelle Esquivel and Richard Ratner at CBRE. Terms of the deal were not disclosed.

-Staff

The digital apocalypse: how the games industry is rising again

HITC Tech

 

For 30 years the games industry worked in a certain way.

People rented offices and set up studios to create games; they employed staff to work in-house, then got those projects funded and distributed by publishers. If you wanted to opt out of that setup, you worked alone, or in a small team, as an indie developer – you operated in a totally separate stratosphere; the system neatly self-segregated. Meanwhile, in the background, the business worked to the seven-year cycles dictated by the lifespan of the major consoles. It was a machine of discreet components.

But that machine is rusting and falling apart. Something new is coming.

It started 10 years ago. The dawn of the broadband internet era gradually allowed developers to distribute their games digitally, rather than as boxed copies, immediately cutting manufacturing and distribution costs out of their budgets. The arrival of the Apple iPhone created a stable marketplace for the previously chaotic mobile gaming sector, the release of new development applications like Unity, GameMaker and Twine meant that people didn’t need to know how to code to make games, or spend months – even years – developing their own graphics engines. Big companies started to take notice; the console manufacturers opened online stores and courted indie devs to produce weird titles like World of Goo and Braid, both out in 2008. Then Steam arrived and blew open the PC games market.

The result is an industry that works in a radically different way than it did a decade ago. And we’re seeing this at every level. Take console manufacturing for a start. Until this generation, console makers stuck with one architecture for the lifespan of their current machine, maybe altering the form-factor or HDD size, or adding new peripherals, but rarely tinkering with the processing capacity. Now, both Sony and Microsoft are likely to announce mid-lifecycle upgrades to their machines. The rumoured PlayStation 4 Neo should add CPU and GPU power to cope with virtual reality and 4K screens; Xbox One is likely to evolve closer to the PC so that it can run the Universal Windows applications that may unite computer and console gamers. The seven-year lifecycle may be over.

“I think this is a symptom of Kurzweil’s law of accelerating returns which we’ve seen having an impact in just about every part of society and every aspect of technology the world over,” says indie developer Shahid Ahmad, who was until recently director of strategic content at Sony Computer Entertainment Europe. “Look at the pace of change in mobile phones over the past five or six years, it’s been crazy. There’s a fear that there will never be another console cycle that lasts as long as the previous generations.”

What he sees in the Xbox One and PlayStation 4 are two machines that have converged on the same type of architecture: they are both effectively compact PCs, built around essentially off-the-shelf processors and graphics cards. This has happened so that the platforms can be upgraded more quickly, responding to technological advances, without immediately making earlier versions of the architecture obsolete. “It’s what Apple calls a tick-tock cycle,” he says. “You launch a product, then you came out with a .5 version.”

Piers Harding-Rolls, head of games at IHS Digital agrees. “It reveals that consoles are becoming more aligned to other consumer electronics categories,” he says. “The standardised components that are now being used to go into consoles means that upgrades are more numerous and easier to implement. The challenge for console manufacturers is adopting a more iterative lifecycle without fragmenting the addressable audience.” Consoles then, are now glorified smartphones, built to be adaptable on a two- rather than seven-year cycle, while keeping legacy users in mind.

The structure of the games themselves is also radically changing. For the last five years we’ve seen the rise of downloadable content and in-game microtransactions, designed to extend the lifespan of major new console releases. When players buy a new title like Call of Duty or Fallout, they can also pay out for a “season pass” that will buy them all subsequent map packs and content additions, keeping them engaged in the product. But that model still relies on consumers paying out £50 in advance for the original game, and not enough people are willing to do that. So the industry is toying with new models.

One involves releasing a limited version of the game at a cheaper price point and allowing purchasers to pay extra for the features they want, or to simply download new levels. The latest Hitman and Street Fighter V both employ variations on this method, and we’ve even seen Microsoft experimenting with a free-to-play variation of its console hit Forza Motorsports, designed specifically for the PC market.

“Triple A games continue to get more expensive to produce, but the audience for those experiences is not growing, so they’re becoming riskier,” says industry analyst Nicholas Lovell. “One powerful way of reducing that risk is having an audience that you know will buy your game. When Hitman goes episodic, it is attempting to say ‘once we have found a customer, which is expensive, let’s keep them, and keep offering them, directly, the thing we hope they want to buy’.”

Right now, says Lovell, publishers like Capcom and Square Enix are looking to take the power back from retailers; to insert the store into the games themselves. “The trick for publishers is to build direct relationships with gamers that reduce the risk for development, that make it easy to grab new customers and that allow the gamers who love the game the most to spend lots of money on things they really value. It will be some combination of free-to-play, plus DLC, plus microtransactions. But physical retail is definitely on the way out.”

Disruption is also taking place in the smartphone sector. For several years, free-to-play supported by microtransactions or intrusive ads was the accepted model, but we’re seeing new variations. In 2014, the hit Frogger clone Crossy Road popularised a new opt-in ad model, where players could chose to watch video adverts in order to access new content. At the GDC event in 2015, developer Hipster Whale announced it had made £3m through this model. Rovio is using exactly the same system with Angry Birds Go.

“It seems to be changing players perceptions of ads,” says Oscar Clark, a mobile industry veteran, now at Unity. “They’re no longer barriers but instead a way to get playing rewards for the game I’m currently playing. The focus is not grind ... its on the expectation of future value. According to Seriously, their use of this ad format has not only increased revenues but actually increased session length by 250%! Players stay playing longer. Much longer.”

Clark also points to Amazon Underground as an interesting indicator. This app provides usually premium priced mobile games to users for free, and then pays royalties to developers based on how long people stay on their titles. “This signposts an alternative for ‘paid’ content or ad-funded services,” he says.

In the new super fluid games industry, developers are also radically changing the way they operate. Over the past three years we’ve seen the closure of big expensive studios like Lionhead, Evolution, Maxis and Irrational Games, and it’s partly because the whole idea of cramming lots of staff into the same building and employing them all to work on two-year projects is becoming untenable for all but the biggest, safest franchises.

Instead, we’re seeing a new era of virtual studios, with small teams working from home, augmented by part-time contract staff at key moments in the development cycle. “Rocket Lolly Games currently has a team of around 15 people, most of whom are involved in production,” says industry veteran Ella Romanos who had to close her more traditional studio Remode, two years ago. “Everyone on the team is contracted and works remotely. Most are freelancers but some are small companies too, coming in as needed to deliver the work required. We communicate primarily using Slack and Skype – with weekly calls and daily conversations, and meet up occasionally in person. It doesn’t make sense to build up the overheads, significant burn rate and management time required to run ”.

Helen Carmichael and her husband Jake Birkett run Grey Alien Games from their home in Bridport, Dorset, but they work with an international team. “For our current game, Shadowhand, our art team is based in Ukraine, our musician is in The Netherlands, and we are also working with Power Up Audio based in Vancouver, Canada. We communicate primarily by email, which is easier due to different time zones, and we rely heavily on the internet and on cloud storage such as Dropbox and Google Drive to share files.”

This way of working isn’t just about keeping costs low, it’s about allowing a more diverse range of people into game development. The traditional model, where hundreds of staff are employed in-house on huge projects, is massively skewed towards young (mostly male) staff who are willing and able to spend up to seven days a week in an office. Jake and Helen couldn’t work like that. “We have enormous flexibility with our working hours and arr
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