• 1-800-123-789
  • info@webriti.com

Category ArchiveColumnists

Is High Street Retail (Finally) on the Upswing?

It’s been a bumpy few years for high street retail, and at the risk of taking us off high alert too early, it looks like we’re finally entering a period of stabilized rents, increased deal activity, and a détente between e-commerce and bricks-and-mortar sites.

At the height of the market in 2015, everyone lost sight of the fact that retail stores needed to perform and that sales had to support rents. On prime Madison Avenue, for example, rents jumped seemingly overnight from $1,100 to $1,500 per square foot to an all-time high of $1,800 to $2,200 per square foot.

Putting aside the jolt e-commerce delivered to the rest of retail, this was never sustainable. Landlords increased rents to unrealistic levels and tenants grabbed spaces at any cost. There were painful repercussions for both, ultimately prompting stores to exit the market. Landlords who continued to demand top dollar found themselves saddled with vacant spaces.

Today retail rents have declined by 30 to 50 percent from the peak and leveled off, delivering a much-needed correction. Now those prime Madison Avenue rents have returned to their previous $1,100- to $1,500-per-square-foot level.

Not surprising, the rent adjustment is bringing about a renewed demand for retail spaces.

Tenants initially tiptoed back into the market with pop-ups—short-term scenarios to occupy a space, move some product, build a brand and make a statement. Brands like Amazon and Google did experiential pop-ups, while other brands did exciting collaborations like Supreme X Louis Vuitton. And then there were multiple pop-ups that provided great brand exposure for everything from Casper Bedding to Yankee Candle to Unilever’s multiple pop-ups for St. Ives skincare, Magnum Ice Cream Bars and Pure Leaf Tea. On top of that, it is now becoming the norm for many fashion apparel and shoe brands to do pop-ups in retail spaces for fashion week—i.e., Bogner and Sophia Webster. Lastly, some brands take pop-up space to conduct sample sales to clear out merchandise. Christian Siriano occupied a space on Madison Avenue for a week, and featured fabulous merchandise at much-reduced prices.

Now we’ve gone from very short-term pop-ups to seeing tenants sign one- to three-year leases with options for long-term extensions, a scenario that is limiting risk for both landlords and tenants. If sales are strong and the stores perform well, the tenants plan to stay long term.

Brands are reengaging, perhaps taking fewer stores or spaces with a smaller footprint, but making a real commitment, spending money, and opening retail locations with substantial product.

Retailers that aren’t yet ready to commit to five- or 10- or 15-year leases are nervous about the changing retail climate and future of the industry. Their anxiety is heightened by the constant drumbeat that e-commerce will continue to take market share away from bricks-and-mortar stores.

But I believe that retailers should relax because retail is all about driving sales and there is now less concern whether those sales originate online or in a store. If customers visit a store and it helps them make a decision to go home and buy merchandise online, then that store is serving a purpose.

A classic example is a luxury online brand we represented that wanted to test the New York City market. The tenant opened in a pop-up space in Soho, which was so successful we found the store a permanent space in Soho where sales have been phenomenal.

This retailer understood after opening the pop-up how important it was to have a physical presence. The managers learned that there were expensive products customers weren’t comfortable buying online. Instead, customers wanted to go to the store and see and touch these high-ticket items before making such a significant purchase.

For bricks-and-mortar shops, the lesson is that the internet isn’t something they should fear but embrace and integrate into their brand identity. For e-commerce sites, the lesson is that to increase sales, online retailers should open a physical store, which today is more doable than ever in this climate of reasonable rents.

Robin Abrams is a principal and vice chairman of retail at Eastern Consolidated.

Source: commercial

Where Can You Achieve the Highest Yields in the World?

“Once in a while you get shown the light, in the strangest of places if you look at it right.”—Jerry Garcia

If you are a lender, where can you have your pick of multiple deals returning around 10 percent on a 50 percent loan-to-value? If you are an investor, where you can you find dozens of deals projecting a three- or four-times multiple over a three- to five-year timeframe? The answer is the Caribbean. I know that the immediate reaction might be to cringe and turn the page—but hear me out on this. First, 90 percent of the domestic lenders and funds can’t even lend or invest in the Caribbean because of their charter. But that is the crux of the opportunity—less competition. Of the ones that can lend or invest there, many have legacy issues or are otherwise fully invested. So when a high-quality project does come up, there are a surprisingly small number of candidates and for those that are interested, they have incredible leverage to name their price without fear of getting outbid.

Mitigating risk is step one for any lender-investor in the Caribbean and it is an important hurdle. Part of the fear for somebody who hasn’t previously invested in the Caribbean is the fact that you are often not dealing with U.S. law (though there are plenty of opportunities in Puerto Rico and the U.S. Virgin Islands). In most other cases, it is British, Dutch or French law that is followed. Often, a new lender-investor doesn’t want to spend the legal fees necessary to get up to speed. As a generalization though, note that most Caribbean countries are lender-friendly. There is then the issue of the foreign withholding tax. Without a government waiver, many countries require a 20 percent withholding tax, reducing yields considerably. If it is a development project, the cost to monitor or to have to deal with local construction crews can be a frustrating process. Real estate people joke about people being on “Caribbean time” and I can tell you from firsthand experience that it’s a real thing. And then there is the worry about hurricanes, which is overblown. So long as the construction is built to a high enough standard, the hurricane risk is greatly diminished.

Avison Young has three assets in the market right now including an Aruba retail property, a Barbados hospitality asset and a Bermuda conversion from housing to hospitality. We have been able to get up to speed on the most aggressive lenders and investors but, frankly, I’ve been surprised at how difficult our clients found the investing climate prior to hiring us. We’ve been pleased with the response since we got into the market except for the fact that many can’t invest due to their charter even though they wished that they could. Therein lies the opportunity.  

Most of the Caribbean deals that make the news are megaprojects. Most recently, CCRE financed $195 million for the development of a new Marriott hotel and Stellaris Casino in Aruba. BML Properties recently built the $3.9 billion Baha Mar; however, that is more in the news due to its recent lawsuit claiming fraud by the general contractor, China Construction Corp.  There are countless other deals though that fly below the radar. So how do you decide which deal to invest in? Well, the first step is the sponsor. While that is true in any real estate deal, that is especially true in the Caribbean as you want to invest with somebody with a proven track record of successfully traversing the myriad of government obstacles and regulations. The sponsor should also be committed to the area either through additional deals, residence or other financial commitments. They need to be vested in the country.

Having a clear exit strategy is key also. One can’t simply assume an institutional buyer as an exit like you could in, say, Miami. If it is a condo deal, you have to be aware of the rules for letting a buyer back out of a deal and the remedies. In many Caribbean countries, it is very different from the U.S. Another nuance is that land leases are very popular in the Caribbean so local legal counsel should be engaged to look into the terms of extension and other details. A savvy lawyer with previous experience with the local government is something that is paramount to any deal in the Caribbean as it is also critical to know the intricacies of the zoning regulations.

The bottom line is that if you aren’t precluded from investing in the Caribbean, you are short-changing yourself by not considering deals there. The Caribbean promises extraordinary returns with very little competition.

Dan Gorczycki is a Senior Director at Avison Young New York LLC where he places debt and raises joint venture equity capital globally including the Caribbean.

Source: commercial

Millennials, Techies and the Brooklyn Multifamily Boom

At the end of 2017, I took over as the head of the Northeast for Commercial Term Lending, replacing Chad Tredway who is now the co-head of J.P. Morgan’s Real Estate Banking group. Since then, I’ve been educating myself on the city’s unique boroughs and submarkets. One of my favorite ways of doing so in slightly warmer months was by putting on my sneakers and taking long runs through them. But another way we remain on top of neighborhood changes is through periodic van tours of the markets we lend in. With Brooklyn constantly evolving, Chad and I recently went on a  tour of the borough to see what’s new.

It’s the New Economy

New York’s real estate market has always benefited from the city’s status as the capital of global finance. But in recent years, there has been a boom in commercial real estate that extends beyond Manhattan. Brooklyn’s revived waterfront neighborhoods have become home to many of the leading TAMI firms and have seen an increase in redevelopment.

Set along the East River, the iconic Domino Sugar Refinery has become an emblem of the borough’s new economy. Once the largest sugar refinery in the world, the Williamsburg site is now home to a redevelopment project that will offer 600,000 square feet of office space, 2,000-plus apartment units and six acres of new parkland.

To the south, the Brooklyn Tech Triangle hosts 11 universities and more than 500 tech startups. Today, there are at least 36 co-working sites in Brooklyn catering to this growing part of the local economy. Google and Facebook now have Brooklyn offices while new media giants like Vice have offices in converted warehouses nearby.

Brooklyn’s private sector employment grew by 29.3 percent between 2004 and 2014, far faster than any other borough. Over the same 10-year period, the number of residents with a bachelor’s degree grew by 77 percent. Adding to the borough’s dynamic makeup, economic diversity is a clear strength of the market with nearly 40 percent of jobs coming from small businesses.

Demographic Trends

The rise of Brooklyn’s TAMI sector is drawing a diverse crowd of young professionals to the borough, which has been a boon for the multifamily market. Unlike previous generations, who fled to the suburbs as their careers took off, millennials have shown a desire to continue living in the urban center, even as their paychecks and families begin to grow.

The influx of millennials has shifted the entire city’s demographics. Prime renting-age citizens (ages 20 to 34) now comprise 21.5 percent of New York’s population, a full percentage points higher than the nation’s average. With the prospect of owning a home in the city’s most desirable neighborhoods a far-reaching goal for most salaried workers, the tide of young professionals is driving demand for rental units.

Immigration has long been a source of demographic growth for the city and a strong force driving demand for rental units. From 2004 to 2014, Brooklyn’s population grew by 5 percent compared to 3.7 percent for New York City as a whole. Today, Brooklyn stands as the most populous borough with 2.6 million people.

Near-Term Headwinds

The city’s unique demographic and economic landscape has created a booming multifamily sector. Within Class-A product, rents in Brooklyn peaked in 2015, trended downward in 2016 and declined in 2017. Rent growth has slowed in Class-B and C assets. Approximately 16,000 residential units are under construction in Brooklyn with another 20,000 in the planning stages—which should continue to put downward pressure on rents and occupancies. In addition, population and job growth have both slowed. Finally, interest rates, and by association, mortgage rates, have begun their march upward—which negatively impacts values. And while the new supply will take time to absorb, fundamentals will eventually revert and values should stabilize.

Brooklyn’s Staying Power

There are many reasons for multifamily investors to remain optimistic about the long-term prospects of Brooklyn. It has transformed from an industrial hub to the heart of the city’s most vibrant industry cluster, which should continue to draw in young professionals. People want to live in Brooklyn and meaningful jobs are locating there. There are other reasons to be optimistic if you are a multifamily investor: Median home prices remain at all-time highs at approximately $750,000 and there are nearly 14,000 rent-stabilized buildings in Brooklyn. Both of those factors add to the stability of the tenant base and the underlying cash flows of the existing multifamily stock. As a lender, we see these factors as positives for NYC’s multifamily investors and believe in Brooklyn’s staying power.

Kurt Stuart is head of Northeast commercial term lending at J.P. Morgan Chase. 

Source: commercial

Why All the Interest in Interest Rates?

For the past few weeks, one of the major topics of conversation has been interest rates and the impact they could have on the capital markets if they rise. Ironically, good economic news delivered weeks ago about gross domestic product growth, job creation and corporate earnings sent the equities markets on a rollercoaster ride, mainly based on the expectation that all of this healthy economic news would cause interest rates to rise faster, and to a greater extent, than expected.

For more than two years now, the Fed has been telegraphing that rates would be increasing with two to three one-quarter point increases per year. The positive economic news has left market participants feeling as if rate increases might outpace the Fed’s projected slow, steady climb.

The general feeling among commercial real estate players is that interest rate hikes are bad for the market. While it is true that low interest rates are rocket fuel for real estate capital markets, increases in rates are not necessarily bad.

If you are a frequent reader of Concrete Thoughts, you know that I always say that it is not “if” rates increase but “why” they increase. If rates increase because of stagnation in the economy, a decrease in the amount of available credit, an increase in the demand for credit or because we are having trouble selling bonds, those increases are negative for commercial real estate. However, if rates increase because the economy has tangible positive traction, rate increases can ultimately be positive. 

Yes, it is true that interest rates and capitalization rates are highly correlated over the long term, so if interest rates rise, cap rates will also rise. Rising cap rates exert downward pressure on property values and this is why the general perception of interest rate increases is viewed negatively by real estate market participants. However, if the rate increases were precipitated by positive economic news, net operating incomes will rise and even with rising cap rates, values can climb.

The short-term problem for the market is that if rates increase today, by this afternoon, the mortgage rate quote from your lender is likely to be higher. The increases in net operating income don’t kick in until leases roll, which is short term for residential apartments but longer term for offices and retail spaces. 

We have been in an extraordinarily low interest rate environment for about nine years now. Long periods of low interest rates, while great for real estate capital markets, are indicative of monetary and fiscal policies that are not working. Rates have been so low for so long because the recovery since the Great Recession has been mediocre at best. Now that the economy is picking up, rates will rise and that is not necessarily a bad thing. 

The increases in property values in New York City have also been below what would have been expected with rates being so low for so long. Since the low point (either 2009 or 2010 depending on borough), values have approximately doubled. But take into consideration that values dropped, on average, 38 percent from peak to trough in the last cycle, values today, while near all-time highs, are only about 20 percent above 2007 peaks. This reality flies in the face of the thesis that long periods of low interest rates create asset bubbles (it is important to note that many market observers blame former Federal Reserve Chairman Alan Greenspan’s keeping rates too low for too long as the catalyst for the housing market crash which led to the Great Recession). 

The investment sales market correction, now in its 30th month, appears to be winding down with sales volumes expected to rise this year while property values bottom out in an apparent replay of 1993 and 2010. Both of those years had similar dynamics at the end of market corrections. So the question today is if the interest rate increases will thwart the positive momentum we are seeing in sales volume and how property values might be impacted. 

Source: commercial

REITs and Their Shareholders Stand to Gain Under New Tax Law

Conventional wisdom might suggest that the combination of recently enacted corporate tax rate cuts and the likelihood of continued upward pressure on interest rates would create less than favorable market conditions for REITs. Implicit is the assumption that REITs would lose some of their tax advantage over other types of corporations and that their high-yield nature generally makes them more sensitive to anticipated interest rate changes.

Despite these potential detriments to REIT value, REITs stand to gain overall as a result of tax reform, which will create new advantages for REITs and their shareholders, on top of what is an already advantageous tax structure. REITs will also benefit from the boon for the real estate industry as a whole that is expected to result from tax reform.

REITs have traditionally offered benefits when compared with other corporate structures. Chiefly, REITs do not pay taxes at the corporate level on taxable income that is distributed to shareholders (REITs are required to distribute at least 90 percent of such income). Ownership limits in REIT charters designed to preserve REIT status also provide some protection against hostile takeovers. Like other taxpayers, REITs and their shareholders benefit from tax deferrals on 1031 like-kind property exchanges.

The pre-tax reform regime that benefited REITs and their shareholders was left relatively untouched by tax reform and is now accompanied by several newly enacted advantages, including reduced rates on dividends, that should be welcome news for REIT shareholders. (The end of this article includes a summary of significant tax reform changes that affect REITs.) Non–capital-gain distributions to domestic noncorporate REIT shareholders (previously taxed at the top income tax rate of 39.6 percent, plus a 3.8 percent surtax) will now be taxed at the new pass-through rates, which carry a maximum rate of 29.6 percent (plus the 3.8 percent surtax). Meanwhile, the withholding rate for non-U.S. shareholders on capital gain dividends (which, for publicly traded REITs, applies only to non-U.S. shareholders owning in excess of 10 percent of the REIT shares) has been reduced from 35 percent to 21 percent.

REITs also should not be negatively impacted by the changes to business interest deductions. REITs and other real estate businesses may elect to opt out of the new limitation on interest expense deductions (which caps the deduction at 30 percent of adjusted taxable income), in exchange for agreeing to relatively modest extensions of the cost recovery period of nonresidential real property from 39 to 40 years and on residential property from 27-and-a-half to 30 years. The recovery periods for qualified improvement property may also be extended.

REITs that do not distribute 100 percent of their taxable income to shareholders will benefit from the reduced corporate tax rate of 21 percent on undistributed income, as will taxable REIT subsidiaries. Additionally, the new mandatory inclusions by U.S. persons of previously untaxed earnings and profits of 10-percent-owned foreign subsidiaries will not be counted when applying the REIT’s income tests.

Section 1031 like-kind exchanges, a technique commonly employed by the REIT and the broader commercial real estate industry—which investors feared was in peril before the tax bill was finalized—remains relatively untouched. REITs, as well as other taxpayers, can continue to defer tax through like-kind exchanges of real property, though Congress has repealed tax-deferred like-kind exchanges for other types of property. That said, REITs may be required to recognize some gain on exchanges of real property that have a significant personal property component that is owned by the REIT, such as hospitality properties.

Ultimately, REITs look to be winners under the new tax law. While certain aspects of the tax advantages of operating as a REIT may be diminished, including by virtue of the lower corporate tax rate, the new advantages—including the reduced rate on distributions—leave the REIT in a strong tax position relative to other forms of investment.

Set forth below are significant tax reforms that affect REITs:

Non-capital gain distributions to domestic noncorporate REIT shareholders generally are taxed at the pass-through rates (maximum rate of 29.6 percent), plus the 3.8 percent Medicare surtax.

REITs may elect out of the new limitations on the deductibility of interest (i.e., 30 percent of adjusted taxable income); electing REITs must depreciate 1.) nonresidential real property over 40 years, as opposed to 39 years for nonelecting REITs and 2.) residential rental property over 30 years, as opposed to 27.5 years for nonelecting REITs.

REITs can continue to engage in like-kind exchanges of real property (tax-deferred like kind exchanges of property other than real property has been repealed).

The withholding rate to non-U.S. shareholders on capital gain dividends (which, for publicly traded REITs, are limited to non-U.S. shareholders owning in excess of 10 percent of the REIT shares) has been reduced from 35 percent to 21 percent.

Mandatory inclusions of previously untaxed earnings and profits of 10-percent-owned foreign subsidiaries are not counted in applying the REIT income tests.

Taxable REIT subsidiaries will be taxed at the reduced 21 percent corporate rate, as will REITs on their undistributed income.

Barry Herzog is a partner and Rita Celebrezze is an associate in the tax department at Kramer Levin Naftalis & Frankel.

Source: commercial

How’s the Brooklyn Market? A Little Choppy

“How is the market today?”

It’s a question I often get as a real estate broker. And even after more than 40 years in commercial real estate, the former U.S. Merchant Mariner in me can’t help but turn to a nautical analogy to provide orientation in a market that has defied explanation.

The seas are choppy. Heavy fog is rolling in. Radar and radio aren’t working. As captain of the ship, what course do you take? Stop engines and drop anchor? Proceed at a crawl? Abandon ship?

These are the predicaments an uncertain market presents to today’s captains of real estate—landlords, tenants, buyers, and sellers.

Landlords are keeping their storefronts vacant to secure top-dollar rents. In CPEX’s 2017 Brooklyn Retail Report, we noticed the number of retail corridors averaging $100 per square foot has quadrupled over the last decade—including 10 that have at least doubled in pricing. In some cases, these corridors have fallen victim to their own success—in a flurry of articles investigating New York’s empty stores, even Manhattan’s Upper West Side had a vacancy rate of 12 percent.

Meanwhile, tenants, especially in the retail sector, are reluctant to sign a lease at such a high price point. In an environment where online shopping continues to undercut brick-and-mortar retail, and many nationals are letting their leases expire, small businesses in particular are having a harder time finding the right space at the right terms.

On the sales side, buyers don’t want to pay a premium at this point in the extended cycle. The turnover rate for elevator buildings in Brooklyn, for example, dipped from a 10-year peak of 3.9 percent in 2015 to less than 2 percent last year. And sellers can’t help comparing their properties to the peak values they might have achieved in 2015. For one of our clients, they were faced with offers 15 percent lower than the same property received two years ago. Wouldn’t you be a little salty?

In essence, we’ve gone from the Brooklyn Tech Triangle to the Bermuda Triangle.

Take Smith Street, for example: Rising retail tides brought average rents on Brooklyn’s “Restaurant Row” from $80 to $99 per square foot up to $150 per square foot in less than two years. Suddenly, market-force gales closed the hatches on a dozen stores. Only recently has it begun to regain its foothold, with one of Esquire magazine’s top bars in 2016 (Leyenda) and Stumptown Coffee opening on nearby Pacific Street.

We’ve lost our bearings, and we can’t see our way to safe harbor.

Luckily, there is a maritime precedent to help navigate out of uncharted waters.

After sailing their ships thousands of miles across the high seas, captains approaching New York out of Asia, Africa, Europe, or the west coast will welcome aboard what is known as a harbor pilot to determine the course and speed for the last leg of their voyage. Waiting outside the harbor to greet incoming vessels, the harbor pilot uses his experience and intricate knowledge of every reef, rock and other hazards to steer each ship safely into port.

This is the role of the real estate broker. We know the constant shifts in the current of the local market, the sandbars and shipwrecks to steer around, and other ships passing in the night.

Perhaps it is an owner or tenant’s first lease, or first lease in a long time. In other instances, the property may have never been to market before. With so many headlines touting the “Brooklyn” market, we as brokers can provide more nuanced advice and education of the different submarkets that could range from as much as over $1,000 a foot for a multi-family walk-up in Downtown Brooklyn to less than $200 per square foot in East New York.

No, it is not our ship. But we have guided countless ships just like it to that very same destination. Whether it’s a sunfish, a sailboat, a steamer or a yacht, we have brought it through low tide, high tide, busy afternoons, and pitch-black nights.

It may not be clear where we are or where we’re heading. But with the right tools—a compass, the north star, and a trusty navigator—we can always find an answer to “how.”

Where there’s a tiller, there’s a way, and a captain need not feel rudderless, even out at sea.

Whatever you do, there’s no sense in going down with the ship.

Tim King is the co-founder and managing partner of CPEX Real Estate.

Source: commercial

A Kumbaya Moment for Pre-Planning Landlords With Tenants

It’s something to see two entities with seemingly opposite endgames come together for their mutual benefit. But that’s what’s happening with many of today’s landlords and tenants. Increasingly, landlords and commercial leasers are contracting together to secure future offices that suit companies’ workday needs and landlords’ desires for quality tenants.

While six months ago landlords scrambled to obtain all-too-resistant tenants, now they and their would-be tenants are taking the initiative in negotiating favorable deals for future joint ventures. By working together today, landlords are securing tenants for spaces that would have been unoccupied one, two or five years down the road, and tenants are locking in future office spaces before their current leases are up. The arrangement takes considerable pressure off both parties—landlords, in what would be an immediate push to find tenants after their current occupants’ leases expire, and tenants’ rushed need to find an available office space when their existing lease ends.

By being proactive, landlords can vet the best possible tenants to fill their spaces instead of contracting with whoever is readily agreeable when the location opens. In addition, tenants can select from a range of available options to find the one that best meets their requirements, rather than having to settle for what’s readily available when the time is up on their current lease. Moreover, because pre-planning for future occupancy gives landlords and tenants time to fill their wants, extended lease negotiations offer a wider spectrum of possibilities, including monetary bonuses and desirable design features, like turnkey spaces that ease the tenant’s transition into the new space, striking lobbies, creative common areas and flexible, multi-use conference spaces.

A recent December of 2017 real estate survey conducted by one of the more prolific owner representatives and project managers in the northeast shows that general contractors and construction managers in New York City are optimistic about their prospects for 2018. In all, the survey indicates, the anticipated increases were beyond earnings for 2016 and 2017 by 9 percent, thanks to the coming year’s project schedules.

In fact, one brokerage firm advises tenants to investigate relocation options two to three years before their lease expires, or earlier, depending on the size of the space, to take advantage of incentives, raw space options and other pluses.

In our work with larger firms, client interest in sublets and moves to spaces that either need renovations or are turnkey stems from the opportunity to refresh or up-the-game of their office when their leases expire. Often, the firms revisit the idea of in-office culture and ways to attract and retain younger workers, a demographic with a reputation for their tendency to comparison shop for workplaces outfitted with desirable features. Many larger firms are following tech firms’ and startups’ leads in bypassing traditional office layouts for more mobile, modern designs and amenities. After all, it’s become hard to deny the benefits of up-to-date, company-specific layouts, including attracting talent plus enhanced worker engagement and productivity. And, while many businesses are interested in elements that work for other firms, they don’t want to duplicate anyone else’s space. The process has companies more closely studying how their business functions to heighten efficiency.

In another scenario, a not-for-profit client of ours has been involved in the pre-design and design of its ultimate space for two years, including a workplace strategy study, visioning and (detailed) programming to help the organization determine its best option, whether it’s to stay in its current location or move into a new one. Whether it takes two years, two months or two weeks to gather data and benchmarking, having a cushion of time to avoid rushing into a lease agreement goes a long way in helping tenants find their perfect space. That’s important, because in some cases rents are going through the roof and in others landlords are looking for lengthy leases, like 825 Third Avenue, where The New York Post recently reported the building’s owner is looking for long-term tenants to take over where the previous, 25-year leasee will leave off when the building empties in mid-2019.

With positive market-based data fueling tenants’ study of their future options and landlords’ focus on filling upcoming spaces before leases are up, a proactive approach to commercial leasing and renting is on the rise. Modern office design isn’t just a trend. It’s a path to productivity. All parties involved would do well to analyze relevant data, be aware of market trends and make smart decisions. Cultural shifts, like mobile and remote working options for individuals and teams, abound and can translate into workday cost savings.

Starting sooner and with the strategic input of an architect can off-set the urgency of having to quickly secure a tenant or space, helping landlords and renters capture their needs and get the agreement right.

Scott E. Spector, AIA, is a principal at Spector Group, one of New York’s premier architecture and interior design firms and a leader in corporate tenant and building owner-based design. The award-winning company has affiliate offices nationally and internationally. To date, it has completed more than 2,000 projects. sespector@spectorgroup.com

Source: commercial

Eight Retail Trends to Watch in 2018

The year 2017 was one of the newsiest and noisiest retail years on record. It will be remembered as the year retail evolved and changed forever. We will remember it as the year that experiential retail moved to the forefront and brick-and-mortar brands finally embraced omnichannel strategies in a meaningful way. While media reports of a “retail-pocalypse” grabbed the headlines, online stores—Everlane, M.Gemi and Rent the Runway to name a few—were busy opening more physical locations than ever before.

It was the year retailers shifted strategies and realized that consumer engagement must come from multiple touch points. Megamergers and strategic mergers changed the landscape with Walmart’s $310 million acquisition of Bonobos and Amazon’s purchase of Whole Foods Market for $13.7 billion—the latter representing a watershed moment for the retail industry. It is barely 2018 and already there are rumors of new brick-and-mortar targets for Amazon. In general, the “Amazon effect” finally forced the industry to adapt to the needs of the modern consumer and brick-and-mortar to embrace omnichannel.

So, what will take hold in 2018? Here are eight major themes and trends that will continue to transform the retail landscape:

International brands will continue to touch down in the U.S.: We expect exciting international brands to continue growing their presence stateside. In New York City last year we witnessed several new overseas retailers like Sneakersnstuff (Sweden), Innisfree and Line Friends (both from Korea) stake a claim in the market. The U.S. remains a highly prestigious key market and international brands will continue to flock to our largest urban markets to grow and attract new consumers. Asian brands, especially those from South Korea and Japan, are poised for another year of strong retail expansion and brand building. K-Beauty (referring to skin care products from Korea) continues to flourish overseas, buoying a still-strong beauty and cosmetics retail segment in the U.S. I also expect to see more fashion from Down Under as brands from both Australia and New Zealand have recently touched down in Manhattan. Aussie retailer Ksubi opened shop in Soho in 2017, while fellow Australian outfitter Scalan Theodore found a home on Prince Street. Expect more to follow. And of course, European brands will continue to be popular in the U.S.

Market correction: We finally saw much-needed flexibility from property owners who moved to establish new rent thresholds that both landlords and tenants could accept. New opportunities were created in 2017 for emerging, entrepreneurial retailers who entered the market at a lower cost of entry, and I expect price adjustments and more creative deals to continue well into 2018.

The “theme-park-ification” of retail will continue: Global brands like National Geographic, Disney, Mattel, Lionsgate and DreamWorks will continue to take advantage of vacant retail space, leverage their intellectual property and attract visitors with new engaging technologies and social media-friendly landscapes. “Retail-tainment” won’t be limited to big-box spaces in 2018; companies are harnessing the power of Instagram to create small-scale museums and “Instagamable” theme parks in boutique spaces.

Seasonal sales are so 2017: Retailers won’t be relying as much on one-time sales events as they did in the past. As evidenced by this last holiday selling season, the seasonal and event-shopping mentality is flattening out. In 2018, we will see more event-driven and experiential retailing year round as events like Black Friday become less important.

Food, fitness and fun: Clusters of health and wellness-oriented retail (athleisure, juice shops and fast casual with menus showcasing traceable ingredients) will continue to draw shoppers to street retail corridors, lifestyle centers, malls and live-work-play developments in 2018. In fact, fitness centers are one of the key categories and have become attractive, sustainable anchor tenants for repositioned malls.

The still-great American mall: In 2018, developers and mall owners will be working overtime to unveil updated mall footprints. Expect to see fewer department stores and big-box anchors, and more food purveyors, fitness studios, medical uses and converted residential and office units. Malls will be reimagining their food options into attractive quick dining options, making way for more food halls that are an experience in and of themselves. Mall food courts will be getting a facelift for the new year and changing their name in the process. Food halls are here to stay. Keep an eye out for more celebrity chef-driven concepts, as they look to leverage their name brand and star power to start new ventures.

Retail gets snackable: It is no secret that we Americans like to snack. This year will see an increase in small artisanal-style purveyors of snacks and treats like handmade ice cream, gourmet doughnuts and housemade pickles, just to name a few. In 2018, the more detail and care taken in creating food, the more popular these smaller locations will become.

There is little doubt that it is an exciting time to be in the retail real estate industry, and it’s clear that we have already witnessed one of the biggest retail transformations of our time. I am excited to see retail’s next act continue as 2018 unfolds.

Retail real estate pioneer and investor Robert K. Futterman is chairman and chief executive officer of RKF, a leading retail real estate brokerage firm in the U.S.

Source: commercial

Achieve Your Dream with a Vision and Plan. (There’s a Difference.)

Successful people think big, set challenging goals and develop clear plans to achieve them. With 2018 less than a month old, now is an opportune time to plan for the future.

Thinking, setting goals and planning for the future necessarily requires change, and as we all know from experience, change is not easy.

A great way to approach change is through a “Force Field Analysis” developed by Kurt Lewin, the father of social psychology. In Force Field Analysis you assess your current state (where you are) with your future state (where you want to be). For example, your current state can be having one client meeting a week, and your future state can be having three client meetings a week.

The next step is to identify the forces that are driving change (e.g., you want to make more money and increase client retention) and the forces that are restraining change (e.g., I am too busy to leave the office). During this phase you need to think intentionally and with immense focus about how to reduce the restraining forces.

In the example above, you can delegate to a peer any issues that come up while you are out of the office or choose to do work during your commute. Additionally, it is critical to drill down into the driving forces to increase their motivation. You can specifically define why you want to make more money and how achieving that goal positively impacts the people on your team. The more they buy into your plan, the more activated they will be as well.

Next, lay out all of the specific steps necessary to ensure you meet your dream. Why did I call it a dream? Because any concept that takes longer than a month to achieve is not a goal. Goals are tactical. To be achieved, goals need to be short term and backed up by action steps. (Dreams are the desired vision we have of our future.)

This is the area where most people fail. They are well intentioned but don’t have the necessary action steps. The lack of persistence is often rooted in the reality that the plan was impulsive, rather than inspired by a long-term vision. But when the vision is there, the little steps along the way help bring us closer to achieving our dreams.

So let’s go back to the example of wanting three client meetings a week. What are the specific actions required?

First, identify and list the clients you want to meet. Next, prepare for the call by choosing two to three dates and times within a two-week window to actualize the meeting, a restaurant or other appropriate location for the meeting, and crafting the conversation. Keep the call short and direct. Create a simple script. For example: “Jane, it has been a while since we spoke and would love to catch up and see how your business is going. Can you do lunch on Tuesday or is the following Monday better?” 

Action is the driver of achievement, so give yourself a short-range, achievable deadline to begin reaching out to schedule the meetings. When you schedule a lunch meeting, immediately send either an email or calendar invite confirmation and place it on your calendar, along with a reminder to confirm the day before. Finally, make a reservation at the restaurant under your name.

Since the action steps are the most important part of the plan, it is important to lay them out with the granularity you see above. Dreams and goals rarely fail for reasons other than lack of following through on an action plan.

By turning your dreams and goals into action, you can make 2018 your most successful year ever!

Source: commercial

The Middle Dominates in Down Markets

From almost every perspective, the 2017 investment sales market left a lot to be desired. While the final numbers for the year are still a couple of weeks away, the year-to-date numbers through the middle of the fourth quarter remained consistent with the trends we saw unfolding over the past two to three years.

The cyclical peak of the investment sales market in New York City was clearly in 2014 and 2015. In 2014 there were 5,534 properties sold in the city, an all-time record by more than 10 percent. This banner year was followed up by a dollar volume of sales in 2015, which hit $80.4 billion, another all-time record. Since these record years, activity in both of these key volume metrics has been sliding backward. The year-end numbers for the number of properties sold will likely show a third year of reduced activity and the dollar volume will likely show a second year of retreat. Values have also been sliding, particularly in the Manhattan submarket where all product types are down slightly. In the outer boroughs, values were mixed with some property types up slightly while others followed Manhattan’s lead.

While the metrics of volume and value are the most talked about in the market—and they should be because they are so indicative of how the market is performing—other metrics that are indicative of the health of the investment sales market are the average price of a property sold and the percentage of transactions occurring above $100 million. Both of these metrics are highly correlated with the health of the sales market.

On a citywide basis, midway through the fourth quarter of last year, the dollar volume of sales was on pace for about 41 percent of it attributed to transactions at $100 million or above. This will be the lowest percentage the market has seen since 2009 when the percentage was 33 percent. Over the last nine years, the average percentage has been 54 percent and was at a high of 67 percent in the market’s peak year of 2015. If we look at just Manhattan, the percentages are, not surprisingly, much higher. In 2017, the percentage of the dollar volume of sales occurring in the over-$100 million market is likely to end up around 60 percent. If this is the final number, it will also be the lowest percentage since 2009. The average percentage over the last nine years has been about 67 percent and hit a cyclical peak in 2015 at 81 percent. These numbers substantiate the fact that the “middle market” becomes much more dominant in tougher times.

Given the impact of extraordinarily large transactions at these dollar volume metrics, it is important, and in many ways more telling, to look at the number of properties sold.

On a citywide basis, midway through the fourth quarter of 2017, just 6 percent of all sales exceeded $100 million. Therefore, 94 percent of all sales in the city were below $100 million and 83 percent were below $25 million. In Manhattan, again 6 percent of the sale transactions were above $100 million. The biggest difference between the entire marketplace and Manhattan is the activity in the $25 million to $100 million bracket. Looking at the broader market, 11 percent of sales transactions occurred in this range while the percentage grew to 19 percent in Manhattan. Comparing these metrics over time would have to be inflation (appreciation) adjusted to have credibility, and we are working on that analysis.

These additional metrics support the position I put forth back in the fourth quarter of 2015 that the investment sales market in New York City was entering correction mode. We are now in the 28th month of this correction, which has been slow and drawn out. The reason for this is because there hasn’t been any particular event to catalyze this correction. It has simply been the natural cyclicality of the market taking hold. So the more important question is, How long will this correction last and what will the impact on value be when things start to improve? During the recent Great Recession in 2008 through 2010, values in New York City dropped on average by 38 percent on a price-per-square-foot basis. Even worse, during the Savings and Loan Crisis in the early 1990s, values dropped on a price-per-square-foot basis by a whopping 58 percent on average. If the worst we see in this correction is a single-digit drop, we should consider this a win, at least on a relative basis. I should also note that during, and subsequent to, the recession in the early 2000s, volumes dropped for four consecutive years but average values never fell.
When we have the 2017 year-end numbers in hand, we will provide insight into the market’s direction. Meanwhile, there are many externalities that could affect the market this year.

Robert Knakal is the chairman of New York investment sales for Cushman & Wakefield.

Source: commercial