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Spring’s in the Air: How Palm Springs Went From Desert Getaway to Hipster Playground

Los Angeles is the second-least affordable city in the U.S., for both home renters and buyers, according to the 14th Annual Demographia International Housing Affordability Survey: 2018, a fact that has many heading east—more specifically to Palm Springs.

A desert town located at the base of the San Jacinto Mountains, synonymous with midcentury modern architecture, Palm Springs may have been the playground of the Hollywood elite and retirees, but of late it has become a hotspot for hipsters, telecommuters and members of the LGBTQI community, all looking to reside full-time in a more reasonably priced and slower-paced locale.

Moreover, serious real estate investors see the area’s potential: earlier this year The Desert Sun reported that BlackRock had picked up 167 acres of land with a potential to build some 1,100 homes in the Palm Desert. The price wasn’t immediately available and attempts to reach BlackRock were unsuccessful.

The city of Palm Springs, 106 miles from L.A., was first developed in the 1930s as a weekend getaway L.A. dwellers, but it wasn’t until the 1950s that it gained a broad appeal when Alexander Construction built more than 2,000 contemporary, stylish and affordable tract homes. Today the Alexander homes go for around $500,000, and are a cherished investment.

gettyimages 514975170 Springs in the Air: How Palm Springs Went From Desert Getaway to Hipster Playground
In 1908, Palm Springs was practically empty but became a popular winter resort. Getty Images.

Flinn Fagg, the director of planning services for the City of Palm Springs, said in the three years since he’s lived in Palm Springs, his office has seen a marked increase in entitlement requests, primarily for building small-lot single-family homes—one of the greatest indicators in assessing the need for to the city.

“People are looking for detached homes with yards and pools,” Fagg said. “We’ve been busy in terms of applications. If you compare between 2010 until now, we’ve easily increased the applications from 1,200 to 1,700 per year.”

As of January 2018, the average price for a single-family home in Palm Springs was about $495,000, and a condominium unit about $220,000, according to Zillow.

The median sale price for a single-family home in Los Angeles is $704,500 with a 2.9 percent projected increase by 2019 and the median monthly rent is $3,500, Zillow indicates.

Palm Springs is building largely to keep up with those who’re flooding to the desert for an easier and more reasonably priced lifestyle with all the amenities of a vacation destination.

Brad Shuckhart, the division president for the California region of Freehold Communities—a group of developers focusing on lots in Texas, Tennessee, North Carolina, Florida and California—and the project director for Miralon, a Palm Springs-based master-planned community in the works, explained that communities such as Miralon are anomalous in Palm Springs primarily because it is an older community. But developers are confident they must build it, because people are already coming.

“We expect to have a fairly broad draw from millennials to retirees,” Shuckhart said. “The desert does skew older, but it’s unique in the Coachella Valley, which contains the resort cities of Palm Springs and Palm Desert, as well as Indio, La Quinta, Indian Wells and Cathedral City, as there’s a vibrancy that you don’t find in similar communities—meaning there’s more activity across the age spectrum and the lifestyle spectrum.”

gettyimages 503213652 Springs in the Air: How Palm Springs Went From Desert Getaway to Hipster Playground
Cate Blanchett at the 27th Annual Palm Springs International Film Festival Awards Gala. Photo by Jason Merritt/Getty Images for PSIFF

He added: “We’ve seen interest in this community from people up and down the West Coast, as well as the Midwest and even parts of Canada. If you are a telecommuter or are retired or going to retire, and you’re looking at cost of living, the desert offers a more affordable way to continue with a lifestyle you’ve become accustomed to, but no longer want to pay for—at least to the extent you’d pay for it in L.A.”

With its year-round population of almost 48,000, historically Palm Springs’ youngest residents tend to leave after finishing high school, but today the city is finding its millennials returning to start their own businesses; three of the desert’s hippest bars and restaurants are owned by four members of Palm Springs High School’s class of 2002.

Between the annual Palm Springs International Film Festival,and the 77,500 people who descended on the town for Modernism Week 2016, it’s clear this little desert resort town has become a cool 21st-century destination.

Taking a unique approach to target a new buyer, Miralon has spent the last several months working with the city to convert the greens (the property was originally built as a golf resort), to what its executives believe is a more diverse and inclusive use of space.

“We’ve changed it to a system of plantings, which are largely olive trees, the fruit of which will be harvested by the [home owners association] through a contract, and pressed into olive oil and made available to future residents and members of the community,” Shuckhart said. “We believe that there is a better way to use the open space that’s more inclusive that would appeal to a broader range of people. Whereas golf may appeal to a subset of those, we believe everyone will enjoy this active open recreational space.”

Miralon will also leverage the existing golf space into hiking trials, offering what it calls “social spaces,” seating areas, Wi-Fi hotspots, community gardens, fireplaces and a club house—an 11,000-square-foot facility with seven or eight buildings all connected by a large shade structure—offering pools, spa, exercise rooms, and even a bar that will operate to the benefit of the HOA, according to Shuckhart.

When Miralon is finished this fall, it will offer 1,150 units, 400 of which will be affordable townhouses priced between $300,000 and $400,000. The balance will be traditional and larger single-family homes with prices in the mid-$700,000s, all built in a modern aesthetic.

In addition to planned communities and new homes, the activity in downtown Palm Springs isn’t just hot hotels like the luxe Arrive hotel, which opened in 2016, or a new Kimpton, which bowed at the end of 2017, but a number of new restaurants, and the tony Uptown Design District (Ezra Callahan, Facebook’s sixth employee, is one investor)—a two-mile stretch chock-filled with over 50 unique interior design boutiques, galleries, shops and galleries located inside stunningly-restored midcentury modern buildings.

“What created the resurgence of Palm Springs is it became accessible,” Tara Lazar told The New York Times in March of 2017. She is a lifelong resident who bought and renovated the Alcazar Palm Springs hotel in 2009 and now owns and operates three local restaurants and a bar called Seymour’s. “It was always for the elite and the wealthy,” Lazar said, “and then all of a sudden, other people could afford to come and stay. There is now a middle market. We have young people in Palm Springs, and that hasn’t happened in more than 20 years.”

The annual Coachella Valley Music and Arts Festival have also raised the profile of the area. Palm Springs has always had the marquis name, but now the city of Coachella has been put onto the map.

Thriving with diversity, all one needs do is take a stroll down the rainbow-flag strewn Palm Canyon Drive, to see that Palm Springs has one of the largest LGBTQI communities in SoCal. Once a conservative outpost, it has become an internationally known place of residence for gays and lesbians.

The city is ranked first in California and third in the U.S. among cities with the most same-sex couples (per 1,000 households), according to analysis of U.S. census data by the Williams Institute at the UCLA School of Law.

The community has a thriving year-round LGBTQI culture for residents and the Palm Springs Pride Festival is hugely popular, honoring the history of the gay rights movement. In November 2017, the city elected an all-LGBTQI city council.

“Palm Springs has become a very inclusive community to LGBTQ folks,” said Gretchen Gutierrez, the CEO of the Desert Valleys Builders Association. “It’s more affordable and it’s a community that has wholly embraced LGBT people.”

She said that although building in the desert isn’t easy, she can’t deny that there is absolutely a demand for housing. And although things can take a couple of years to build after filing for entitlements and permits, it does appear that the building market is growing.

Fagg said he hopes the city doesn’t become too crowded with L.A. folks, as what people like about Palm Springs is that it isn’t L.A. or Orange County.

“It’s a low-rise city,” Fagg added. “It prides itself on having open space and a relaxed style of life. The roads aren’t crowded. It’s walkable and bikeable. If you want to get coffee, you just jump on your bike and go. You don’t have to sit in traffic for 20 minutes, and additionally it’s more affordable than L.A.”

It should be said that Palm Springs is still California, so on-average the cost of living is higher than it would be in the Midwest or a small town, but definitely less than cities such as New York or Boston, and about 8 percent less than the California average.

With additional reporting provided by Max Gross and Lauren Elkies Schram.

Source: commercial

Facebook Grows Again at Vornado’s 770 Broadway

Facebook has again increased its presence at 770 Broadway after taking an additional 78,000 square feet of space at the Noho office building, landlord Vornado Realty Trust announced on its fourth quarter earnings call today.

The social media giant signed a lease last week for the entire third floor at the 15-story, 1.16-million-square-foot property between East Eighth and East Ninth Streets. The deal grows Facebook’s total footprint at the building to 513,000 square feet, Vornado Chairman and Chief Executive Officer Steven Roth said on the earnings call.

The space was made available for Facebook after Vornado bought Kmart out of its lease on the floor, which Roth said had 18 years remaining at rents of $33.50 per square foot. Kmart still has 82,000 square feet at 770 Broadway, including most of the property’s ground-floor retail space.

Asking rent and length of lease in the Facebook deal were not disclosed. Vornado’s Josh Glick and Edward Riguardi handle leasing at 770 Broadway in-house, while Facebook’s broker representation was not immediately clear. Representatives for Facebook did not immediately return a request for comment.

More to follow.

Source: commercial

What’s Happening With Chinese Investment in New York City Commercial Real Estate?

There was a lot of nail-biting from the New York real estate community heading into this year after hearing that the biggest whale in terms of investment might not be allowed to swim in our waters. We’re talking, of course, about China.

With China’s capital controls in place, the country was expected to tamp down outbound investment in 2017. While the number of New York City investment sales deals involving the country has dwindled significantly this year, China still represents the biggest cross-border player, according to Cushman & Wakefield.

Chinese investments dropped to 16 percent, or six, of the 38 foreign capital deals (excluding debt deals) in New York City in the first three quarters of the year, versus 28 percent, or 16, of 58 acquisitions at the same time last year, C&W data indicates.

Francis Greenburger, the chairman and chief executive officer of Time Equities, explained the issue in Commercial Observer’s survey for this year’s Owners Magazine: “Although there are exceptions, Chinese investors are subject to government restraints in arranging to transfer funds out of China. This has caused a reduction in transactions by one of the most active group of New York City buyers.”

But in terms of dollar volume the dip in Chinese investment in New York City hasn’t been dramatic, and the country still has spent more than its competitors. Chinese investments made up 11 percent of the $24.51 billion spent on commercial real estate in New York City this year through September compared with last year’s 13 percent of $45.87 billion.

Despite a slowdown in deal flow and a reduction in investment sums, the Chinese have been going for big deals in New York City.

“Starting in 2016 through the first half of 2017, China surpassed Canada as the largest foreign investor in New York City,” said investment sales broker Douglas Harmon of C&W. “Capital controls caused Chinese buyers to participate in less transactions, but the capital was consolidated into the larger deals.”

Harmon and colleague Adam Spies are representing SL Green Realty Corp. in the sale of a 49 percent stake in a 54-story office tower at 1515 Broadway between West 44th and West 45th Streets to China Investment Corporation (CIC), a Chinese sovereign wealth fund. It is a property valued at $2 billion. A spokesman for SL Green said the deal has not closed.

In the priciest foreign property acquisition of the 12 months ending in October, Chinese conglomerate HNA Group paid $2.21 billion for 245 Park Avenue between East 46th and East 47th Streets. The sellers were Canada-based Brookfield Property Partners and the New York State Teachers’ Retirement System. The deal represents one of the highest prices ever paid for a Manhattan office property. (HNA also bought a mansion at 19-21 East 64th Street for $79.5 million this year.)

At the end of last year, CIC bought a 45 percent interest in the former McGraw-Hill Building at 1221 Avenue of the Americas between West 48th and West 49th Streets from Canada Pension Plan Investment Board. The property was valued at $2.29 billion.

Two other large Chinese acquisitions in the last year include WanXin Media’s $68 million buy of an office building and vacant lot at 7-15 West 44th Street and office developer Soho China picking up the landmarked John Pierce Residence at 11 East 51st Street for $30 million.

Alex Foshay, a senior managing director in Newmark Knight Frank’s capital markets division, said the Chinese government’s restrictions have “really strangled all major investment out of mainland China.”

Foshay cited as an example, China’s Anbang Insurance Group’s pulling out of an investment in 666 Fifth Avenue. Kushner Companies was planning to redevelop its flagship New York office tower with Anbang but talks terminated in March.

Terrence Oved, the head of the real estate department and a partner in the law firm Oved & Oved, said he has seen the drop off in acquisitions generally, and those that are closing are taking longer to complete.

“That rapid-fire tennis-match-like quality that we saw in 2016 [between players] is glaringly absent in the foreign transactions in 2017,” Oved said. “The perception of foreign money is that New York is in the later stage of the cycle.”

Also, Oved said, New York City is facing global competition from other world cities that weren’t as competitive the last few years. He pointed to Silicon Valley’s appeal to the tech company likes of Amazon, Facebook and Microsoft.

HFF’s Andrew Scandalios said that deal flow is down this year because properties are overpriced.

“Buyers are less enthusiastic to pay 2015 prices, and the sellers aren’t going to move [them],” he said. “We haven’t seen the offshore capital abate. It’s just they’re waiting for better pricing opportunities.”

Scandalios worked on the deal in which Singaporean sovereign wealth fund GIC picked up a 95 percent stake in the 50-story office tower at 60 Wall Street from Paramount Group and Morgan Stanley with a $1.1 billion valuation. (He also helped secure GIC’s $550 million acquisition loan from German bank Aareal Capital.)

In the summer, Germany-headquartered Allianz SE contributed the 18-story, 352,000-square-foot office building at 114 Fifth Avenue (which it acquired in 2015 with L&L Holding Company) into a then-new joint venture with Columbia Property Trust to buy and manage U.S. trophy properties. Columbia contributed a Palo Alto and San Francisco property to the venture. The three properties were valued at $1.3 billion and HFF negotiated the deal.

Commercial real estate deal volume is down this year for all foreign buyers in New York City as of the third quarter to 28 percent of all investment sales, C&W found, from 34 percent a year prior. (A look at foreign investment in New York City is limited to investment sales deals because debt and equity transactions are harder to track.) The findings parallel the nationwide trend. As of mid-2017, foreign investors represented 13 percent of all U.S. transactions by volume versus 16 at the same point in 2016, Real Capital Analytics data indicate.

Foshay said that a number of overseas buyers are “skeptical” about plunking down large sums of money (over $150 million) in the U.S., out of concern about “where we are in the cycle.”

This doesn’t mean, of course, that foreign investors aren’t seeking out deals nationwide. And Canada heads the procession.

Canada has sealed 255 U.S. commercial real estate acquisitions in the last year, followed relatively closely by China with 215 before dropping off significantly with Singapore and its 36 deals, RCA data show.

In the last year, Canadian entities have closed some notable purchases in New York City. Oxford contributed $65 million in a $130 million deal for 427 10th Avenue and Brookfield Property Partners input $185 million of $370 million for 1100 Avenue of the Americas. In addition, Canadian pension fund Ivanhoé Cambridge and Chicago-based Callahan Capital Properties paid $652 million for Goldman Sachs’ former headquarters at 85 Broad Street (Ivanhoé Cambridge invested $326 million in the deal).

Finally, Canada-based Oxford Properties Group is in the process of purchasing the St. John’s Terminal site at 550 Washington Street from Westbrook Partners and Atlas Capital for $700 million.

In New York City specifically, foreign investment has been dropping because of a dearth of trophy property on the market, according to a couple of brokers.

“There just wasn’t as much property available this year as there was last year,” said CBRE’s William Shanahan, who along with CBRE’s Darcy Stacom brokered the 245 Park Avenue deal.

The duo also sold the 31-story office building at 685 Third Avenue for TH Real Estate and Australian sovereign wealth fund the Future Fund, to Japanese real estate firm Unizo Holdings for $467.5 million.

Foshay concurred about the lack of inventory.

“I would say there has been a lack of trophy product to be purchased,” he said, but “there’s been quite a lot of availability in investment sales of non-trophy assets, meaning Class B product, and it is that trophy investment product that particularly appeals to overseas investors.”

Going forward, Shanahan expects to see “more participation” from Japanese investors.

Harmon said, “We think Chinese investment should pick back up in the first quarter of 2018. Additionally, South Korea, Japan, Norway, Saudi Arabia and Canada make for plenty of competition for domestic investors in 2018.”

Source: commercial

Vornado Talks Up Moynihan Train Hall for Amazon HQ2

Vornado Realty Trust’s redevelopment of the James A. Farley Post Office Building into the new Moynihan Train Hall is “front and center” in New York City’s bid to house Amazon’s new HQ2 headquarters, Vornado said on its third-quarter earnings call today.

Vornado, which is redeveloping the former post office building with partners Related Companies and Skanska, cited the project’s 730,000 square feet of office space and 120,000 square feet of retail offerings as key facets of its pitch to host Amazon—which has sent municipalities across the country into a sweepstakes to host the Seattle-based e-commerce giant’s second headquarters complex.

Steven Roth, Vornado’s chairman and chief executive officer, said the company was “pleased” to see Manhattan’s West Side included in the New York City Economic Development Corporation’s proposal to Amazon as one of four city neighborhoods that could accommodate HQ2 (the other three being Lower Manhattan, Downtown Brooklyn and Long Island City), with the city touting the area’s robust transit offerings and ample office space in the Hudson Yards, Penn Plaza and Midtown West areas.

Roth noted that Moynihan Train Hall would be able to meet Amazon’s “near-term needs” for roughly 500,000 square feet of office space—though whether it would be able to provide that space by next year, as indicated by Amazon, is uncertain given the Moynihan project’s 2020 targeted completion date. (Amazon will eventually require up to 8 million square feet of office space for HQ2.)

But Roth and other Vornado executives noted that the project’s large, 250,000-square-foot office floor plates would be “extraordinarily attractive” to a company used to the sprawling, campus-like headquarters occupied by many major West Coast-based tech conglomerates.

They noted how Vornado’s senior management team visited Silicon Valley this past summer “to understand the nature of what these campuses are”—citing Facebook’s Frank Gehry-designed, roughly 10-acre headquarters as a “one-story building [with a] 450,000-square-foot footprint,” as well as the 820,000-square-foot floor plates at Apple’s headquarters. Both facilities also feature sizable outdoor, park-like amenities.

Moynihan Train Hall, they said on the call, is “truly unique” in its “ability to deliver a horizontal campus in New York, with great roof deck space in the heart of the city with views all around.”

But Roth added that regardless of “whether New York wins the HQ2 race or not, Amazon will have a long-term significant presence” in the West Side “for years to come,” with the company having committed to large blocks of space at Vornado’s 7 West 34th Street as well as Brookfield Property Partners’ Manhattan West development.

On a broader scale, Vornado reported a bullish outlook for its core New York City office and retail assets. It cited more than 450,000 square feet of office leases across 33 separate transactions signed at “record-breaking” average starting rents of $83 per square foot, as well as 97 percent occupancy across its city office portfolio.

Roth described demand for New York City office space as “robust” and coming from a diverse cross-section of industries. David Greenbaum, the real estate investment trust’s New York division president, noted that office-using employment in the city remains strong and will be able to “absorb the new supply coming online in the next five years,” with the financial services sector having “finally reached its pre-financial crisis level” of employment in the third quarter.

Greenbaum said Vornado has a “negligible amount” of office lease expirations planned over the remainder of the year, with the REIT’s 1 Penn Plaza comprising “over a third of our lease expirations over the next two years.” The company is currently “finalizing our plans” for an ambitious repositioning of the office tower, which Greenbaum said is expected to commence next summer.

Roth also discussed 666 Fifth Avenue in Midtown, which Vornado co-owns with Kushner Companies and which has drawn much attention this year due to the property’s uncertain financial future (as well as its ties to former Kushner Companies head and now-Trump administration senior adviser Jared Kushner).

The building, while located on a “very attractive piece of real estate,” is “over-leveraged,” Roth said, acknowledging rumors “about tearing the building down and doing all manner of fairly grand development schemes.” But he labeled such ambitious plans as likely “not feasible,” adding that the property will probably remain in its current state as an office building via capital improvement plans that he described as “a work in process.”

Vornado also leased around 38,000 square feet of retail space across its Manhattan portfolio in the third quarter, with the most notable deal being Sephora’s 16,000-square-foot relocation to 1535 Broadway in Times Square. Greenbaum said the company is also in talks “for another flagship lease, with a major national retailer, for the remaining 12,000 square feet” of retail space at the property’s base.

“Our upper Fifth Avenue and Times Square [retail] assets are buttoned up for term with great credit tenants,” Roth said, noting that the company has only one lease expiry in its Manhattan high street retail portfolio coming in the next five years—fashion retailer Massimo Dutti’s location at 689 Fifth Avenue, which is due to expire in 2019 “at below market rent.”

Vornado has also identified roughly $1 billion in assets that it plans to sell in the coming years, excluding residential condominium sales at its 220 Central Park South tower in Midtown, Roth said.

The 75-year-old Roth also acknowledged that he had heart bypass surgery in August—a procedure that raised questions about the publicly traded company’s future leadership and succession plan.

But the Vornado head attempted to dispel concerns about his health and the company’s leadership, saying that he is “now better than new, and back to work.”

Source: commercial

Winklevoss Twins’ Digital Currency Exchange Company Relocating Within Midtown South

Gemini Trust Company, a digital currency exchange founded by Cameron and Tyler Winklevoss three years ago, has signed a 34,000-square-foot deal to relocate its offices to 315 Park Avenue South, Commercial Observer has learned.

The company will occupy two entire floors of the 20-story building between East 23rd and East 24th Streets, according to a source with intimate knowledge of the transaction who declined to disclose which floors. Gemini is a platform for investors to buy, sell and store digital assets, such as Bitcoin and Ether. Its founders are best known for suing Facebook Chief Executive Officer Mark Zuckerberg over the the social media platform’s genesis.

The asking rent in the more than 11-year deal was in the low $90s per square foot, the source told CO. Gemini is moving from 30 West 24th Street between Fifth Avenue and Avenue of the Americas in spring 2018.

Columbia Property Trust, the owner of 315 Park Avenue South, has spent approximately $10 million to renovate the building with the addition of a new lobby and new elevator cabs. The landlord pointed to this transformation as the reason why Gemini signed a lease there.

“When we acquired 315 Park Avenue South in 2015, we recognized its potential to attract the city’s top creative, media and technology companies and made significant investments to transform the building into a premier Midtown South destination,” Nelson Mills, the president and chief executive officer of Columbia, said in a prepared statement.

Ross Zimbalist and Michael Blum of CBRE represented Gemini, while David Berkey and Andrew Wiener of L&L Holding Company, the exclusive leasing and managing arm of the building, handled the deal for Columbia.

A spokeswoman for CBRE said the brokers declined to comment, and a representative for Gemini did not immediately return requests for comment.

Source: commercial

Facebook Bets on Valley With Second Los Angeles Office

So much for the San Fernando Valley being the uncool cousin to hipper Los Angeles zip codes. Social media behemoth Facebook has chosen Northridge, deep in the heart of the Valley in Los Angeles, to put down its second set of SoCal roots—signing a roughly 80,000-square-foot lease at The Mix at Harman Campus, according to The Real Deal.

Facebook is building out a portion of the newly developed campus, formerly Harman International Industries‘ world headquarters, to fit a fledgling, specialized division of the company that could be related to creating original content, sources told TRD.

The 800,000-square-foot campus already includes creative office space, walking trails, private patios and a food truck dining area. In addition, the campus will be home to an LA Fitness and restaurants Five Guys and Chipolte.

Bill Shubin, a principal of Newport Beach-based developer Shubin-Nadal Realty Investors, declined to comment on the Facebook lease, but spoke in general terms about his company’s centrally located four-building campus at 8500-8550 Balboa Boulevard bordering Napa Street, with easy access to the 405 and 101 freeways.

“If you draw a target around the San Fernando Valley, we are where the bulls-eye would be, so it’s really smack in the center of the Valley,” Shubin told Commercial Observer. “There is also attractive executive housing nearby, attractive employment demographics.”

Shubin-Nadal and New York-based DRA Advisors acquired the property from NewTower Trust Co. in 2014 for $130 million, Shubin SAID.

Given the lease rates at the four-building campus, the estimated value of Facebook’s new digs is roughly $1.7 million a year, according to TRD, making it a relative bargain for the space. Last year Facebook plunked down around $1.5 million a year for a 35,000-square-foot lease at the Playa Jefferson campus in Playa Vista, on the in-demand Westside, according to published reports.

Other tenants at Harmon include technology company Samsung’s Harman International, the parent company of speaker manufacturers JBL and Harman Kardon.

Ron Wade and Bennett Robinson of CBRE represented the landlord. He declined to comment. The tenant’s broker could not be confirmed. And Facebook did not respond to requests for comment.

Source: commercial

Related Purchases Pacific Center in the South Bay of Los Angeles for $107 Million

Related Fund Management, a subsidiary of Related Companiespurchased the Pacific Center in Torrance, Calif. earlier this month, Commercial Observer has learned. The 306,765-square-foot office building located in the South Bay—part of the Los Angeles metropolitan area—was nabbed from Stream Realty for $106.8 million, according to a source familiar with the deal.

“This is the undisputed nicest property of this kind in the area,” Ryan Gallagher of HFF, who represented Stream Realty, told CO, pointing to its location as well as property upgrades. Stream, headquartered in Dallas, with offices in Sansunk, spent over $6 million for a full exterior landscape, lobby, bathroom and corridor upgrades after purchasing the property in 2015 for $68.5 million.

Proximity to the far costlier and in-demand coastal communities of Santa Monica, Venice and Playa Vista—dubbed “Silicon Beach” for the confluence of major tech companies like Google and Facebook and startups setting up shop there—also adds to its marketability according to Gallagher, who said vacancy rates in Silicon Beach are a miniscule 6 percent.

The Center at 21250 Hawthorne Boulevard sits at the heavily trafficked intersection of Hawthorne and Torrance Boulevards across from the Del Amo Fashion Center, the 2.3-million-square-foot super-regional shopping center which recently underwent a $500 million renovation.

The eight-story building is currently 91 percent leased and counts Bank of America, Morgan Stanley, Wells Fargo and Barrister Executive Suites among its tenants.

“We viewed the Pacific Center as a great asset with a diverse roster of marquee tenants and an excellent location,” a spokeswoman for Related Fund Management told CO, which plans on upgrading amenities including the addition of a fitness center and on-site café.

The Real Deal first reported news of the sale.

Source: commercial

No One at the Wheel: What Will Driverless Cars Do To Real Estate?

To say that the introduction of driverless vehicles will have both macro and micro effects is a macro understatement.

Automation has and will continue to change the way Americans travel, commute and consume, distribute and own things—everyone from economists to Facebook’s Mark Zuckerberg agrees. And driverless cars are on their way. With Intel’s August acquisition of sensor and navigation software firm Mobileye, another major company formally entered the cutthroat race to develop mass-market driverless cars. Both Ford and GM have already acquired software and artificial intelligence companies; Tesla offers an “autopilot” feature, and Elon Musk contends his Tesla cars ship with adequate hardware to go driverless already. The House of Representatives, in early September, approved legislation that paves the way for driverless cars to, well, get on the road. Comparable legislation has been introduced in the Senate.

What will the inevitable shift toward cars that drive (and park) themselves do to the real estate market? That’s one thing no one agrees on, yet.

“I think the future rarely plays out the way people anticipate that it will,” said Seth Pinsky, an executive vice president at RXR Realty and former president of the New York City Economic Development Corporation. “I think it’s very difficult in the real world to know that what you’re doing will avoid obsolescence many years down the line.”

It’s perhaps a fool’s errand to attempt to anticipate what something as profound as self-driving cars might do to any industry, but Commercial Observer learned that many of the largest real estate companies feel that—at this point—they have no recourse but to try.

The general sense is the industry got caught flat-footed with the housing crisis. It doesn’t want to repeat that with self-driving cars.

Tech experts and real estate pros say the possible effects range from different underwriting to societal upheaval. One industry leader believes that a significant percentage of the American workforce could be rendered moot—and how many office buildings will we need when no one has a job? To say nothing of what that does to the housing market.

At the other end of the spectrum are more immediate, practical changes. For instance, it seems likely real estate developers will build less parking in the future, as the personal vehicle fades from view (not that this is as big an issue in New York City as it is in the rest of the country, but it’s certainly something to consider).

Real estate executives find themselves pondering the smaller, pragmatic choices they face as they brace for the pending larger, more fundamental challenges to their business. Changes in demand and valuation for certain kinds of real estate are already being felt, partly in anticipation of driverless cars’ ubiquity and partly because ridesharing is already a preview of the changes we’re likely to feel.

“For every disruption there is opportunity,” said Spencer Levy, the head of research for the Americas at CBRE. “[But] there are going to be unexpected impacts on certain areas of commercial real estate [no matter what].”

Nico Larco, an architecture professor and co-founder of the Sustainable Cities Initiative at the University of Oregon, was less circumspect. “Land valuation should, in theory, go completely crazy,” he said.

If the cost of transport plummets, it won’t matter nearly so much what’s nearby (unless it’s so nearby it’s walkable).

“The things that will retain value will be based on things that are next to it that create buzz,” Larco argued. “It’s not that distance won’t matter, but it will matter less.”

As a result, real estate is atwitter about driverless cars, with both doomsaying and unbridled optimism—at least on the surface—on show in equal measure.

“It’s like, this weird time where it’s obvious this is going to be a transformative moment in real estate,” said Brandon Huffman of real estate investment manager Rubenstein Co. “There are all types of theoretical social impacts, including job loss across the board.”

The real estate industry might not need to panic yet, because technologists are taking a longer view. Robert Seidl, a managing partner at Motus Ventures, a fund that focuses on transportation and related industries, is surprisingly sanguine about the issue.

“I think we’re a good 10 or 15 years out on a scale where typical pedestrians would see it,” Seidl said. “Just like electric vehicles take up a tiny, tiny part of the electric space, though they have been poised to take off for a long time.”

John Krafcik, the chief executive officer of Waymo, Google’s robocar company, said much the same thing at Bloomberg’s recent “Sooner Than You Think” conference at the Cornell-Technion campus.

“It’s going to be a transformative technology,” Krafcik said, “but it’s going to unfold over quite a long period of time.”

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Google’s Lexus RX 450H Self Driving Car. Photo: Mark Wilson/Getty Images

The Death of the Parking Lot

While Huffman believes we’re 10 years away from a full shift away from personal automobiles, he said the way owners value office buildings is already changing.

“For urban office [product], one-third of the value is in the parking,” Huffman said.

As parking becomes less important, the underwriting to buy and finance such buildings will have to change. Already, those revenue streams have been impacted by Uber, Lyft, Via and the like, he added. “That cash flow is dropping off a cliff,” he said. “We are very wary of investing in a property where value is predicated on parking.”

Levy said developers are more often “opting for horizontal parking decks instead of ramped decks,” because they will be easier to convert to another use when parking is no longer needed.

Georgia Tech City and Regional Planning Professor Subhro Guhathakurta recently supervised research modeling self-driving cars’ impact in the Greater Atlanta area. “We found almost 90 percent of parking would not be necessary,” he told Commercial Observer.

Michael Comras, a Miami-based developer and the owner of an eponymous retail brokerage, said civic leaders are ahead of the curve on the parking issue, like the Miami Beach Planning Board director who told Comras he wishes the city would no longer require parking for new developments.

“Over time, I think this will become more prevalent,” Comras said. In San Francisco, the city has relaxed parking requirements for new buildings, where “a half dozen” residential projects have been built without parking included in recent years, according to the San Francisco Examiner.

Still, what will happen to the existing oceans of parking surrounding suburban apartment buildings, malls and big-box stores? Build on it or raze everything? It could go either way.

Those spaces are already seeing less use thanks to ridesharing.

Ridesharing with drivers will probably never be profitable, so Seidl predicts strange days ahead as the ridesharing startups run out of venture capital money before the software can drive cars.

“We might actually see—before we go forward—a few steps back,” Seidl said.

If Lyft and Uber can’t make money with drivers, they could run out of investor cash before the technology that will save their businesses is ready. If that happens, lawmakers might lose the will to write rules for this new industry. That’s where we might see steps backward.

On the other hand, were the ridesharing companies to wither on the vine, the carmakers might be ready to take their place. That means Detroit still has a shot at dominating the future of the automobile.

Of course, driverless cars will still have to be stored somewhere even if there should likely be many fewer cars in aggregate. Huffman imagines that most people won’t own their own cars. Krafcik described a future where each car costs more and a rider has to pay some kind of subscription to the cloud intelligence that drives it.

On multiple levels, every mile in a self-driving car will cost more, but transportation will probably still make up less of the average American’s budget because people will pay per ride. Levy said many businesses and offices will develop a drop-off and pick-up format, like airports have currently.

There is a consolation prize for the consumer to counter the unpleasantness of continually being dropped off at the airport: the concomitant death of traffic. As smarter cars, which communicate with one another, rule the road, hesitation and error will be nearly eliminated. A surprising side effect of this, in Huffman’s view, will be how viable suburban living could become.

“The biggest problem with living in the suburbs, which is dealing with the commute, is eliminated,” Huffman said, because not only will traffic be largely mitigated but also the car becomes another space where many people can get work done (if you don’t get motion sickness, of course). As the millennial generation—already about a quarter of all Americans—forms households and has children, their renewed interest in the suburbs, which is already evident, is likely to grow, he added. Indeed, almost 50 percent of millennial U.S. homeowners lived in a suburban market in 2016, according to Zillow’s Group Report on Consumer Housing Trends. Meanwhile, 33 percent lived in urban markets—figures contrary to the received wisdom that millennials largely reside in cities (the rest live in rural communities).

But foretelling the death of traffic could be premature. Robin Chase, the founder of Zipcar and an investor in self-driving car companies, said last year that traffic could be just as bad or worse with all the deliveries self-driving cars will make. Policymakers need to think now about rationing those trips.

Policymakers also need to think twice about closing down mass transit options. Even in the robot car future, the dedicated lanes of a rail system could remain the fastest route for many commuters.

Public transport dollars are very long-term dollars, Seidl cautioned. “If they shut down, they are not coming back,” he said.

But there are significant hurdles to a suburban renaissance, as author Richard Florida pointed out in his book The New Urban Crisis. “With their enormous physical footprints, shoddy construction, and hastily put-up infrastructure, many of our suburbs are visibly crumbling,” Florida wrote. The cost of reinvigorating them will not be minor.

Seniors are also likely to be more mobile and self-sufficient with driverless cars providing goods seamlessly and easily escorting the elderly to their doctor appointments and bridge games. The result? Senior housing might not be as important, Levy said.

The sectors that attract the most capital now could be uprooted by this technological change, from senior housing (which provided an average 13.64 percent return on investment over the seven full years prior to second-quarter 2017, per CBRE) to urban housing (about $158 billion in trades in the multifamily sector closed in the U.S. last year, according to data from Real Capital Analytics). Suburban housing and office buildings may recoup those sectors’ losses. “Demographically, [senior housing] looks like a great place to go,” Levy said. “But this is the type of disruptive technology that could change demand.”

The return of the suburbs could in turn reinvigorate the suburban office market, which is practically a dirty word in real estate these days.

“The pendulum may swing back” for the maligned asset class, said Daniel Parker, a senior vice president with Hodges Ward Elliott, an investment sales and real estate financing brokerage. “More and more places could be viable office districts.” One day, inking a lease in Midtown South might not be payday for brokers as it has been of late.

Larco agreed that the suburbs could win. “We point toward more and more sprawl,” he said. “The rest of the city should see a drop in value.”

Guhathakurta isn’t so sure. “Our conclusion was that there will be some amount of dispersion, but it’s not going to be so dramatic as other people have been afraid of,” he argued.

This can be explained in part by price. People behave very differently when a cost is fixed versus when a cost is marginal. Because they pay money each time they get in a car, people who rely on ridesharing take fewer trips than people who own cars. Even if the overall cost is lower, consumers will be aware that they are paying something every time they ride.

Suburbanites without cars will also face a new cost of transport: waiting. If the out-of-pocket cost drops with ridesharing, waiting for your car will be a new cost. Denser areas should have shorter waiting times, though.

Both of these factors could constrain the pressure to live farther away.

Or Musk will invent something no one anticipates that makes owning robot cars super cheap, too. Then, all bets are off.

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Local Motors’ Olli automated trolley car. Photo: Local Motors

Pilot Cities

These days, the U.S. is usually left in other countries’ dust when it comes to rolling out infrastructure—just ask anyone who has used Wi-Fi in South Korea. It’s likely that driverless cars, though developed at least in part by American companies, will be no exception, sources said.

Israel, Singapore and other Asian countries are much more likely to become a lab for driverless cars’ implementation than the U.S. for regulatory and logistical reasons, they said.

In the U.S., metropolises could also easily become “have and have-not” cities, Levy said.

In Ann Arbor, Mich., for instance, you can already navigate the University of Michigan’s engineering campus via driverless shuttle buses developed by a French company, NAVYA, as The New York Times reported in July. NAVYA recently opened its North American headquarters in Saline, Mich. It’s one of several companies betting that small commuter buses will be the West’s gateway drug to life without steering wheels. A similar company, EasyMile, also just opened offices in Colorado.

America also has its homegrown trolley companies, such as Local Motors in Chandler, Ariz., which makes a trolley called Olli that can only be described as adorable (like a shoe box with all its edges rounded off and little wheels on the bottom). Seidl’s partial to one of his portfolio companies, which retrofits existing shuttles and cars, Auro Robotics.

All of these companies agree that university and corporate campuses, resorts and amusement parks will see the driverless renaissance first. “Where you have a private, large-ish area and private roads,” Seidl said, “you can go to implementation much faster.”

Meanwhile, in Pittsburgh, Uber’s attempt to roll out driverless cars for ridesharing with the mayor’s blessing seems to be falling apart after nine months, as the Times also reported. The startup allegedly began charging for rides despite its initial promise that they would be free while part of the pilot program, causing Mayor Bill Peduto to lose political capital. City officials and citizens are frustrated that Uber has not created any of the jobs it promised or even shared the traffic data generated by its cars.

But the experimentation in trucking has begun. Uber-owned Otto has already made one autonomous delivery in Colorado. The vehicle automation firm Peloton Technology is winning new laws across the country that lets diesel trucks talk to each other so they can drive very close together, reducing air resistance and fuel costs for trucks. And Starsky Robotics is testing a platform in Florida where humans are still needed, sometimes, but they can drive via remote control from a cubicle in an office.

Distribution Revolution

Driverless cars and improved drone technology, which economists and futurists are even more sure is on its way, will only further cement Amazon’s role as America’s distributor of choice.

“The highest cost in the supply chain for shipping is labor,” Levy said. Eliminating that cost is an obvious call, and driverless cars are going to help. Amazon, needless to say, is likely to be at the forefront of this effort.

Seidl echoed this sentiment. “For Amazon, the end of the supply chain is the house,” he said.

But there’s good news for brokers. While everyone we spoke to generally agreed that warehousing will largely get bigger and more spread out, Larco added that there will also be a need for lots of small warehouses in the most dense urban areas. In fact, we already see Amazon doing just that in New York City with a 50,000-square-foot facility in Midtown and the forthcoming massive fulfillment center on Staten Island. Maybe that’s what we can do with the parking garages?

Various accommodations to facilitate drop-off in urban areas will be needed. Think of how, when Fresh Direct launched its business, New Yorkers complained bitterly about the trucks pausing in the street for deliveries. A whole infrastructure to handle driverless cars’ arrival will be necessary.

Apartment buildings will likely be redesigned to accommodate new modes of distribution, Parker said. Already, the industrial sector is bracing for the changes. “In talking to investors, they are thinking about ways industrial properties can accommodate Amazon’s model where [goods are] delivered in a few hours,” he said. He imagines shopping taking the form of scanning the items you want, leaving the store and finding the items at your door, delivered via driverless car or drone, a few hours later.

And there is likely to be further consolidation among distributors, Parker said, with the gargantuan and expensive task of erecting an infrastructure being possible only for, well, Amazon.

“I saw a tweet recently,” Parker said. “It said, ‘If Amazon wants to be in your business, sell now. If Amazon doesn’t want to be in your business, sell now because your business sucks.’ ”

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An Uber self-driving car drives down 5th Street in San Francisco. Photo: Justin Sullivan/Getty Images

Diseases of Despair

While there’s always the chance that building that whole new infrastructure can help the job market, this budding technology augurs massive shifts in employment, at best, and a huge uptick in unemployment, at worst.

“We cannot think about autonomous vehicles as a transportation issue. We need to think about autonomous vehicles as an everything issue,” Larco said.

Automation has already been eating into the market for lawyers (with computers doing the lion’s share of tasks that consumed hundreds of hours like document review), and law school admissions have plummeted in response. For the first time in decades, an accredited American law school, California’s Whittier Law School, shut down.

What happens to the massive chunk of the American workforce that drives for a living, when driverless cars dominate the highways? A speaker at the CREFC conference earlier this year pegged the number of Americans who drive for at least part of their job as 30 percent of the workforce; the Los Angeles Times recently said 5 million Americans will lose their jobs when driverless cars are fully implemented. Either number would be devastating to the economy and to real estate.

“The most complicated and controversial of questions [centers on] drivers and jobs and the housing market,” Levy said. With a healthy portion of America automated out of professional relevance, prospects for housing—where the majority of Americans have a financial stake of some kind, either through their own equity or a retirement fund that is tied in some way to real estate—darken. With the lessons of the Great Recession still fresh, real estate executives are scrambling to think of ways to ease this potential shock.

The proposition floating in real estate circles may surprise you: universal basic income.

“The solution that has been suggested is basic income,” Levy said. “But it is the wrong answer.”

Universal basic income (UBI), which has been implemented in pilot programs in Canada and the Netherlands recently, is often explained as “paying people for being alive.” Citizens are given a monthly, unconditional stipend that is sufficient to meet their needs, making income from employment all icing on the financial cake (although it would likely be taxed more heavily). The idea has been around in various forms for centuries but has gained more traction recently. Switzerland held a referendum to offer all citizens a 2,000-francs-per-month UBI last year, but 77 percent of voters said no.

Arguments for UBI range from the philosophical—Thomas Paine thought true individual freedom meant freedom from your employer—to the practical: When disruptions to the economy create shocks like 2008, money, talent and resources go to waste. Putting an easily administered universal safety net in place could cushion people from shocks. Think of providing liquidity to an individual’s personal financial system to incentivize longer-term planning.

A study in Ireland in 2012 showed UBI could be funded there by implementing a 45 percent flat tax with no exemptions—they wouldn’t be needed, after all—on all personal income. In their simulation, they improved financial prospects for more than half of the country’s citizens.

Of course, the idea is usually suggested by thinkers on the political left. But even economists and political scientists on the right, like Charles Murray and Milton Friedman, have argued for versions of UBI, partly because it would streamline the welfare-administrative state.

In America, UBI sounds impossible, but it might be the best mechanism to administer benefits to the growing segments of Americans who are no longer looking for work. In September 2015, the total proportion of Americans participating in the workforce hit 62.4 percent—the lowest percentage since 1977—according to FiveThirtyEight. While employment proportional to the total population has been ticking up slowly since early 2016, the larger trend remains profound, given that unemployment is predicted to grow quickly as automation improves.

Levy thinks UBI won’t help. He cites statistics on the growing number of “deaths of despair” in the U.S., usually defined as those from opioid abuse, alcoholism or suicide. Such deaths have risen steadily since the turn of the last century, according to numerous academic studies.

Clusters of deaths of despair are apparent in areas where industries have died and people, especially men, who want to be gainfully employed sit home, possibly collecting a social benefit. White Americans without a college degree between the ages of 45 and 54—a dominant rust belt demographic—have seen a half percentage increase in mortality rates every year from 1999 to 2013, according to Princeton University economists Anne Case and Angus Deaton.

Levy said that vast swaths of the unemployed, subsisting on UBI, will be even more prone to such deaths. And education is not a fix for this demographic quagmire, he said, because it “takes too long.”

But there aren’t any other apparent answers.

Source: commercial

HALL Structured Finance Provides $26M Construction Loan for Silicon Valley Hotel

HALL Structured Finance is lending Pollock Realty Corporation $26 million to construct a 61-room hotel in Menlo Park, Calif., HSF announced today.

The Park James Hotel will be constructed at 1400 El Camino Real, on the main thoroughfare that connects cities up and down the San Francisco peninsula. HSF expects the hotel to open for business in May, 2018, according to the announcement.

The project “presented us with the opportunity to finance a high-quality, luxury boutique hotel product that is in high demand in Menlo Park, minutes from Stanford University and the headquarters of some of the world’s most influential companies in neighboring Palo Alto,” Mike Jaynes, president of HSF, said in a statement. “The hotel market in Menlo Park is currently very strong and we are confident that the Park James will be a great success.”

Once a placid hamlet that was home to Joan Baez and Jerry Garcia, Menlo Park has developed along with the tech industry that has sprung up in every direction around the city’s central Silicon Valley location. Facebook moved to town in 2011 to set down roots on the former Sun Microsystems campus. And Stanford attracts 150,000 visitors per year, according a visitor-services representative.

“There’s so much commercial demand that’s that’s driving business for hotels throughout the peninsula,” John Berean, a Silicon Valley lodging analyst with HVS Global Hospitality Services, told CO.

That brisk market is augmented by a phenomenon Berean described as “compression.” When hotels in San Francisco, 25 miles north, fill to capacity during conventions or sporting events, other guests are forced to seek rooms farther afield, boosting demand as far away as San Jose—nearly 20 miles south of Menlo Park.

Lodging competitors in the city include a string of chain and independent motels, as well as the Stanford Park Hotel, a four-star, 162-room inn. Rosewood Sand Hill, a five-star resort, occupies seven acres in the city’s far southwest, about three miles from the business district. The Park James, on the other hand, will be just a five-minute walk from downtown.

That location will make it something of a swanky pioneer among a broad population of budget accommodations, Berean said. But the trend towards pricier rooms doesn’t surprise him.

“We’ve started to see some of these economy, budget hotels go to boutique branding. They’re getting good rates, they’re getting good occupancy. They’re betting they can still thrive while they drop franchise fees.”

Facebook’s headquarters occupy a 200-acre campus in the city’s extreme north along San Francisco Bay, and venture-capital offices dot the sunny, tree-lined stretch of Sand Hill Road that abuts Stanford University to the southeast. But residents of Menlo Park have been split on the question of future development.

A vocal citizens’ group championed a ballot measure in 2014 that would have set a strict cap on commercial zoning, but the law was voted down 61-39 after a lively campaign.

Source: commercial

Law Firm Cooley Moving to 130K SF at 55 Hudson Yards

Source: commercial