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Equity Office Daily Brief: April 20, 2017

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Daily Brief

April 20, 2017

  EquilityOffice

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The Internet Isn't Killing Shopping Malls—Other Malls Are

The Wall Street Journal

 

Internet retailing is eating into mall revenue, but competition from newer shopping centers was the most common cause of death for malls over the past decade, according to a study of 72 such properties. While the situations were different, the dead malls...

 


Office Market Swings in Tenants' Favor

The Wall Street Journal

 

The U.S. office market became more tenant-friendly in the first quarter in many big cities as a seven-year expansion slowed. In San Francisco, vacancy rose for the fourth consecutive quarter amid a surge of new supply, according to real-estate services firm Cushman...

 



BLOG & ONLINE NEWS

 

L.A. Is Number Two for Asian Investment

GlobeSt.com

 

Asian investment in the office market more than quadrupled in the US last year with the majority of the funds concentrated in New York and Los Angeles, according to Commercial Cafe. In 2016, Los Angeles had $1.7 billion of office investment...

 


Greater LA office market still in growth mode: report

The Real Deal

 

Despite negative absorption in the first quarter, the office market in the Greater Los Angeles area is slated for continued growth in 2017, according to a new report from CBRE. Thanks to strong demand, and strong job growth, CBRE predicts rents will...

 

FULL TEXT


The Internet Isn't Killing Shopping Malls—Other Malls Are

The Wall Street Journal

 

Internet retailing is eating into mall revenue, but competition from newer shopping centers was the most common cause of death for malls over the past decade, according to a study of 72 such properties.

While the situations were different, the dead malls generally struggled to compete with newer malls that offered more modern features and a broader selection of stores, according to Wells Fargo Securities, whose database covers about 1,000 malls.

The dead malls were built in the mid-1970s and were overtaken by larger malls built from the late 1970s to the early 1990s that better capitalized on demographic and transportation shifts.

One common hallmark of a dead or dying mall is the closure of an anchor store. When that happened, fewer customers tended to visit, resulting in more store closures, which led to even fewer shoppers, and so on.

“Relocation of an anchor department store from the weaker property to the newer mall was a common tipping point for the downfall of the weaker mall,” said Jeffrey Donnelly, senior analyst at Wells Fargo Securities. He said weak malls are typically the fourth or fifth mall in a town with a population insufficient to support that much shopping.

Of the 72 malls that closed, 23 were redeveloped into other types of retail property, such as strip centers or open-air shopping centers, while 18 were reused as civic centers or converted into residential towers or industrial or office campuses.

Plans for the remaining 31 malls have yet to be determined, though most of them already have been demolished. The average dead mall was about 752,000 square feet, compared with the 1.2 million square feet for an average class-A mall and the average 910,000 square feet of a class-B mall.

Ohio suffered the most mall closings—six, in Akron, Canton, Columbus, North Randall, Northwood and Toledo—followed by Texas and Missouri, with five each.

Landlords have grappled with numerous threats over the years. Two decades ago, Blockbuster was eating into the revenue of movie chains, while big-box stores were battering smaller stand-alone retailers, noted Sandler O’Neill Partners analysts in a recent report.

This time, factors such as consumers being more thoughtful about their purchases after the recession, the overbuilding of retail centers and retailers’ focus on investing in more online shopping channels are pressuring mall landlords.

Property owners generally try to court trendier brands and avoid outdated retailers. In recent years, they have started shaking up their tenant mix more radically, moving away from full-price apparel brands and toward entertainment and food offerings.

That is resulting in a more dramatic separation of the strongest and weakest malls, with top-tier malls in cities with strong population and income growth receiving more investment and weaker malls suffering from neglect.

When developers build a mall, they generally expect it to serve the community for 40 years or longer, according to the International Council of Shopping Centers. The Southdale Mall in Edina, Minn., for instance, celebrated its 60th anniversary last October. NorthPark Center in Dallas and South Coast Plaza in Costa Mesa, Calif., recently turned 50.

“Malls view themselves as community hubs, and as market shifts occur, mall owners throughout the industry have effectively curated new customer offerings to meet changing consumer behaviors and expectations,” said Tom McGee, president and chief executive officer at the ICSC.

-Esther Fung

Office Market Swings in Tenants' Favor

The Wall Street Journal

 

The U.S. office market became more tenant-friendly in the first quarter in many big cities as a seven-year expansion slowed.

In San Francisco, vacancy rose for the fourth consecutive quarter amid a surge of new supply, according to real-estate services firm Cushman & Wakefield. A mixed-use development at 181 Fremont St. hasn’t announced any leases for its 432,000 square feet of office space, even though it is scheduled to open later this year.

Asking rents in the Midtown Manhattan neighborhood of New York City, meanwhile, averaged $80.45 a square foot annually in the first quarter, compared with $81.16 at the end of the first quarter in 2016, according to real estate services firm CBRE Group Inc. CBG 0.66%The vacancy rate crept up to 11.9% from 11.6%.

Overall, average asking office rents increased 1.8% between the first quarter of 2016 and 2017, the slowest annual rate of growth since 2011, according to data firm Reis Inc.

Meanwhile, tenants occupied 5 million square feet more at the end of the first quarter than at the beginning of the year, compared with an average of 9.4 million square feet per quarter in 2016.

The office market generally tracks growth in the job market. But in the current economic expansion it has lagged behind, in part because tenants have learned to use space more efficiently.

“The office market has yet to see a bounce or accelerating growth in this recovery and few signs suggest it will do so this deep into the expansion,” Reis said in a first-quarter report.

Lately, in some top markets, rents and occupancy rates have been pressured by new supply. More than 3 million square feet of new space is expected to be delivered in San Francisco this year, the most since 1987, according to Robert Sammons, Cushman & Wakefield’s head of research for that market.

In Boston, about 1.4 million square feet is under construction or renovation, according to real-estate-services firm JLL. A 1.5-million-square-foot mixed-use development at the site of the old Boston Garden being developed by Boston Properties Inc. includes 150,000 square feet of “speculative” office space, meaning it is being built without preleasing.

The rent and occupancy trends have disappointed investors who bet on a stronger recovery. Shares of public companies that are big New York office building owners—like SL Green Realty Corp. , Vornado Realty Trust and Paramount Group Inc. —have been trading at close to 20% discounts to the value that the private market puts on their properties, according to Jed Reagan, an analyst at real-estate research firm Green Street Advisors.

Private investors who have paid top prices for office property in recent years might not get the income growth they are seeking. Green Street earlier this year revised its projections for rent increases through 2020 to about 3% annually from 4% annually.

The market is still reasonably healthy. Brokers in many cities report that tenants are optimistic in their outlook and moving ahead with deals.

In San Francisco, for example, the soaring Salesforce Tower under construction in the South of Market district is about 70% preleased, according to Mr. Sammons.

The Bay Area market also is seeing strong demand from companies getting into the self-driving car business, as evidenced by General Motors Co.’s announcement this month that it would add more than 1,100 new jobs in a new research and development facility in the city for its Cruise Automation division.

In Boston, Related Cos. has leased about two thirds of Congress Square, the old Fidelity Investments headquarters building that it is overhauling, according to Benjamin Heller, a managing director in JLL’s Boston office. Tenants include Publicis Groupe, a French marketing and communications firm.

But numerous tenants are enjoying the softness in the market. In Houston, for example, the vacancy rate is more than 20%, one of the highest in the country, owing to the collapse in oil prices.

The cost to tenants today is about 30% less than it was three years ago, taking into account landlord concessions like free rent and interior construction, according to Neal Golden, head of the Texas market for Newmark Grubb Knight Frank.

New York landlords increased the value of interior work incentives by 4% in 2016 and the growth is continuing in 2017, according to CBRE. The reasons include rising construction costs, growing competition for “increasingly cash-conscious tenants” and the desire of many owners—particularly investment funds—to maintain rent levels, the report said.

In one first-quarter deal, Gannett Co. leased about 50,000 square feet at 1633 Broadway with rents starting in the low $70s a square foot, according to data firm CompStak Inc. The deal included about 12 months of free rent and interior improvements valued at about $115 a square foot, CompStak said.

- Grant

L.A. Is Number Two for Asian Investment

GlobeSt.com

 

Asian investment in the office market more than quadrupled in the US last year with the majority of the funds concentrated in New York and Los Angeles, according to Commercial Cafe. In 2016, Los Angeles had $1.7 billion of office investment from Asian investors, in a total of eight deals. Comparatively, Los Angeles had no office investment activity from Asia in 2015 or 2014.

“Chinese investing has grown in the US for years due in large part to the amount of wealth within China looking to minimize risk from the instability of the Renminbi and political regulation,” Doug Ressler, senior research officer at Yardi Matrix, tells GlobeSt.com. “The appreciation potential and confidence in the US fixed asset markets, and SOE’s are helping large investors do this. The advent of Fintech services is making things easier, and real estate is a good place to go since US real estate is one of the most stable real estate markets in the world, and contributes an ease of investment.”

The office investment activity in Los Angeles last year was the strongest in the last decade, and the activity from Asian investors helped move the bar. Both domestic and foreign investors see strong upside potential in office assets. “With fewer people are purchasing residences and choosing to rent, the value of office assets is on the rise. Plus rising interest rates and increased FDI are projected,” adds Ressler. “It should also be noted that condo and residential investment has typically been by individuals, whereas commercial investment has typically been on a more institutional level.”

Activity in New York was even stronger. The city saw $7.4 billion in Asian office investment last year. As a result of this activity, competition for office assets is increasing. “This appreciation potential has increased the competition for higher-end assets, which has no doubt contributed to the increase in prices, and these firms have deep pockets,” says Ressler.

-Kelsi Maree Borland

Greater LA office market still in growth mode: report

The Real Deal

 

Despite negative absorption in the first quarter, the office market in the Greater Los Angeles area is slated for continued growth in 2017, according to a new report from CBRE.

Thanks to strong demand, and strong job growth, CBRE predicts rents will rise 8.2 percent in 2017 and vacancies will fall 0.3 percent.

The office market saw a “double whammy” of factors that contributed to a negative absorption of 742,053 square feet in the first three months of 2017 — two major move-outs and new supply — but rent continued to grow from $2.94 per square foot per month in the final quarter of 2016 to $3.04 in Q1 2017, according to CBRE’s analysis.

“There’s a lot of talk about slow down, but when you look at our data, there’s no indication of that,” said Petra Durnin, head of research and analysis for CBRE Southern California. “We have room for vacancy to come down and for rent to appreciate.”

Rents have gone up across submarkets, with West L.A. growing nearly 5 percent year-over-year to $4.74 per square foot a month and DTLA up 6 percent to $3.39 a square foot. CBRE predicts rents will rise 8.2 percent in 2017 and vacancies will fall 0.3 percent. But as landlords pushed rents up, they’ve also increased concessions significantly, the report said.

Meanwhile, overall vacancy increased slightly during the first quarter of 2017 to 14.3 percent, but that number still reflects a dip since this time last year. The negative absorption can be attributed Sony moving to a building it purchased and IPG downsizing in West L.A., CBRE said.

Demand is anticipated to remain high, according to Durnin, despite diminishing land for new construction. There are 1.8 million square feet of office space currently under construction, according to the report — the lowest since the first quarter of 2014.

“As space tightens, it’ll be more difficult for tenants to find choices for available space,” Durnin said.

But thanks to strong job growth, it’ll still be sunny days ahead, she added.

Greater L.A. added more jobs in 2016 than San Francisco and San Jose combined, the report said. CBRE predicts that office-using employment will grow another 1.4 percent in L.A. County over the next four quarters.

-Cathleen Chen

Daily Brief April 20, 2017 unsubscribe

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