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Los Angeles Becomes a Mecca for Interactive Gaming and E-Sports

Interactive gaming is big business with an estimated 2.2 billion people who play video games worldwide. And Los Angeles reigns supreme, with many top game developers including Riot Games, Activision Blizzard, Electronic Arts and ESL Gaming headquartered here.

From the Westside to Burbank, Los Angeles currently leads the nation with 331 gaming companies operating in the metropolitan area and was second only to San Francisco when it came to being the largest employer in the industry segment (14,484 compared with the Bay area’s 16,466 employees across 307 companies, according to data from the Entertainment Software Association.)

JLL charted the locations of gaming companies—from Fortune 500 developers to related businesses—throughout town in a recent snapshot research report on the industry, dubbing the region a mecca for the sector.

Top dog Riot Games, owned by Tencent—which reported more than $12 billion in revenue in September 2017, according to Newzoo, a leading provider of market intelligence on global games and e-sports, or electronic sports—occupies 500,000 square feet of prime office space in West Los Angeles.

Furthermore, the interactive gaming industry’s impact on the office market in Los Angeles is poised to increase with the growing interest and investment in e-sports—multiplayer video game experiences and competitions in which players play against one another through a digital platform—which is driving additional demand for studio and creative office space, according to findings from a CBRE industry report released in December 2017.

Despite their sizable footprint, landlords have been skittish about entering into leases with gaming and e-sports businesses—which inspired the CBRE research report.

“Our clients and our brokers from several different offices around Los Angeles have seen some large tenants in the market looking for office space and a lot of these are new tenants to the market,” David Nusbaum, a senior research analyst at CBRE, told Commercial Observer. “They are venture-backed companies or privately funded e-sports companies that don’t have a long track record. The landlords’ concern was these tenants were new to the market. They didn’t have a credit history and a lot of these landlords were very hesitant to give high-end, Class A office space to [these] tenants.”

E-sports allow teams to compete in tournaments sanctioned by specific game developers. The field is evolving with the formation of leagues specific to popular games. Erase that outdated image of solitary players competing for bragging rights in their own domicile and enter major sports franchise owners and investors, broadcast rights and million-dollar arenas and studios being constructed to aid competitions.

Underscoring the trend, Blizzard Entertainment built out a 60,000-square-foot broadcast studio at 3000 West Alameda Avenue, at the site of the former Burbank Studios in Burbank last year for an undisclosed sum. Just this year, as the CBRE findings point out, two prominent North American leagues organized: Overwatch League and North American League of Legends Championship Series. Franchise fees range from $10 million to $20 million and owners and investors include Stan Kroenke, Robert Kraft, Peter Guber, Joe Lacob and other traditional sports team owners.

UC Irvine in Orange County opened the UCI Esports Arenaa 3,500-square-foot facility in 2016—the first of its kind at a public university—and actively recruited players with scholarships.  Major television and digital platforms have struck multi-million-dollar broadcasting deals. (For a sense of scale, West-L.A. based Riot Games, League of Legends’ developer, signed a seven-year, $300 million dollar deal last year with BAMTech, the streaming technology arm of Major League Baseball.) Heck, the 2024 Paris Olympic Committee is even considering adding e-sports to the Summer Games, according to ESPN.

Like other creative content providers that have expanded their business model and presence in the L.A. market—Amazon, Netflix and Hulu among them—gaming ventures are drawn to the area because of the talent base and concentration of entertainment studios and facilities, he said. “It goes along with everything else that you see in content creation and all sorts of digital media content that is being produced in Los Angeles,” Nusbaum said.

The gaming companies located in Los Angeles are not necessarily price sensitive, but are making business decisions in which they are prioritizing proximity to talent over real estate costs, Kevin Carroll, a research analyst at JLL, said.  This drive toward talent contributes to the high density of gaming companies in areas where tech and media employees are located on the Westside in Santa Monica, Culver City, Playa Vista and Venice, which consequently are some of the most expensive markets in Los Angeles. (Office rents in West L.A. averaged $4.61 per square foot at the end of 2017, according to research from Colliers International.)

Additionally, Downtown and Pasadena are also home to a cluster of gaming companies.  Gunslinger and WhiteMoon Dreams moved to Pasadena in 2016 and 2017 respectively, while Magnopus made the move Downtown in 2014, with Section Studios following a year later.

“This speaks to the demographic of those markets, and access to a young, educated work force. We continue to see a clustering of gaming companies around larger, more established tech firms as an effort to draft off of their success,” Carroll said.

And CBRE predicts the growth of e-sports will continue to fuel investments in the sector by game studios. Industry growth is also expected to spread into ancillary businesses including training facilities and broadcast studios and add to the demand for these hard-to-get commercial spaces in Los Angeles, especially in key markets, Nusbaum said. These include Burbank, which has become an epicenter of e-sports because of the Blizzard Arena, the suburban city of El Segundo and the West LA markets, including Culver City and Playa Vista.

“We are at the beginning of this industry. It’s an emerging trend and something our clients and brokers should be looking out for in 2018,” he said.

Source: commercial

Going Back to Cali

Los Angeles is a town that loves snapshots—heck, the entire paparazzi industry has risen from it. This is a snap shot, if you will, of what the L.A. real estate market is looking like in 2018.

Transit Expansion

Los Angeles, the land of sprawl and traffic jams, has made a serious commitment to expanding mass transit options. The Olympic Games, which the City of Angels will host in 2028, has been a major impetus, with Mayor Eric Garcetti pledging to complete 28 key road, transit and bicycle and pedestrian projects in time for the Summer Olympics. The “28 by 28” plan will be funded in part by Measure M, a sales tax increase passed by L.A. County voters last November that allocates $120 billion to transit projects over the next 40 years.

It can’t come too soon for a city that, once again, was named the worst in the United States for traffic, with commuters spending 102 hours stuck in traffic congestion in 2017 during peak hours, according to an annual scorecard by INRIX.

The continued expansion and creation of transit services will not only ease commuters’ pain, but will add to property values around transit options. As previously reported by Commercial Observer, the growing public demand to be close to transit hubs has given landlords the confidence to push rents higher.

In Hollywood, for instance, office rents have climbed 19.8 percent in the past two years because of access to talent, neighborhood amenities and transit, rising to $52.20 per square foot in 2017 from $43.56 in 2015, according to JLL research.

“Tenants are willing to pay a little bit more [because] if you’re thinking about how to keep your workforce happy or at least less stressed, one of the first ways you can do that is to eliminate some of the pain that comes with their commute,” Amber Schiada, a senior vice president and national director for JLL research in the Southwest, told CO.

Keeping workers happy—given negatives like a chronic lack of affordable housing in the Southland, is paramount for continued growth, she added.

To call the lack of affordable housing a crisis is not hyperbole. As the Los Angeles Times reported in an Op-Ed in January, when housing expenses are tallied with incomes, the U.S. Census officials estimate that one in five Californians live in poverty. Thus, California has earned the ignominious distinction of having the nation’s highest poverty rate despite having the sixth-largest economy in the world.

“We cannot sustain long-term growth if our workforce cannot afford housing,” Schiada said. “In Los Angeles, there is certainly a lot of housing development underway and density is no longer a dirty word, but it’s not enough. This will ultimately be what impedes long-term growth.”

If S.B. 827, introduced by San Francisco State Senator Scott Wiener on Jan. 3, is passed, it will address two important impediments—the statewide affordable housing crisis and residential zoning restrictions that can bog down commercial development in California’s urban centers. (See here for more on the bill.)

Multifamily

The recent federal tax overhaul is expected to benefit commercial real estate statewide in almost all sectors, according to The Winter/Spring 2018 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey. The biannual survey compiles the views of supply-side participants—commercial developers and financiers of such development—to create a three-year outlook for industry sectors in major Southern California and Bay area markets for office, industrial, retail and multifamily development.

The most recent poll, taken this past December, indicates that the federal tax overhaul will probably moderately increase the rate on return on commercial real estate and make investment more attractive in all sectors except retail (see retail and e-commerce section below). The Tax Cuts and Jobs legislation disincentivizes homeownership in California by imposing lower limits on home mortgage interest and reducing property tax deductions.

Starting in 2018, homeowners can deduct interest on mortgages only up to $750,000. The previous cap was $1 million, with an additional $100,000 allowed for home equity loans. Interest on home equity loans and lines of credit will no longer be deductible. For the first time, homeowners also will face a $10,000 cap on what they can deduct on their state and local taxes, according to NPR.

As a result, the law should push up the demand for multifamily rental housing and the desirability of such commercial projects for investors.

The new tax structure changes how “pass-through” income can be taxed, with owners of pass-through entities eligible to claim a 20 percent deduction for business-related income. As the National Real Estate Investor reported, the change would mainly apply to individuals and family trusts investing in real estate through partnership entities, such as limited liability partnerships and private equity funds, as well as individuals who receive income from real estate investment trust dividends.

Matt Levis and Jack Levis, both in CBRE’s property sales division, said the multifamily market in Greater Los Angeles remains strong with high-net individuals looking for long-term investments, viewing apartment rentals as low risk. The brokers (and brothers) based out of CBRE’s South Bay office cited rent-control ballot measures (there are no such controls in place today) being proposed by tenant advocates for several SoCal cities, including Long Beach and El Segundo, as potential impediments for growth.

“Introducing rent control in the South Bay and Long Beach markets will impede industry growth every way possible. Landlords will have no incentive to invest in their property and velocity will slow down; over time there will be more dilapidated buildings,” Jack Levis said.

Not Your Father’s Office

Content is still king in Los Angeles and, with the emergence of new content creators, where companies and individuals are developing content that can be distributed across a variety of media platforms, such as YouTube, the demand for creative office space is sky high and shows no sign of slowing down anytime soon.

Even companies whose main purpose is not content at all, are diving into producing or partnering for new content at a rapid rate,” said Jeff Vertun, a broker in CBRE’s downtown Los Angeles office. “Technology, media and entertainment-related tenants continue to attract impressive talent to fill those jobs,” Because of the enormous entertainment industry, Los Angeles is positioned as the ideal location for all content-related companies, which, in turn will lift the synergistic businesses with it.”

Last year alone saw streaming giant Netflix fully lease 415,226 square feet of office space between the ICON and CUE buildings on the Sunset Bronson Lot at 5800 Sunset Boulevard at an estimated rent of $4.75 to $5 a square foot per month. Entertainment Weekly is slated to relocate its headquarters from New York to 11766 Wilshire Boulevard in L.A. in March.  Meanwhile, Facebook opened its second L.A.-based location at 8500-8550 Balboa Boulevard in Northridge, in the once-uncool San Fernando Valley.

The recent expansion in interactive gaming—including live eSports tournaments—will also add to the race for suitable creative space around town.

According to Vertun, companies looking to attract and retain top talent have turned to properties that have souped-up amenities including wellness programs, and companies looking for flexibility have sought out coworking solutions.

“We’ve witnessed not-so-small companies take full floors of coworking space,” said Vertun, citing Heineken and Sketchers, which are utilizing WeWork, as examples of the trend.

The Los Angeles office market remains strong with moderate growth and Vertun’s outlook continues to be cautiously optimistic. He pointed to an 11 percent year-over-year increase in asking rates, though there is rising concern that an influx of new construction may lead to a glut in the market.

While the L.A. office market closed 2017 with rents and vacancy holding steady, downtown fared worse as vacancy rates there spiked, according to Colliers International’s fourth-quarter 2017 report.

The area’s 1.7 million square feet of office space under construction is far higher than the amount seen in the two other Greater Los Angeles submarkets the brokerage tracked with 80 percent of that space still available.

The strongest markets for rent values continue to be West Los Angeles, where average rents are currently over $5 per square foot, an 8 percent year-over-year increase, the Colliers data indicate. Downtown Los Angeles, meanwhile, has a high average rent of $3.51 a foot. Of note, the Arts District is commanding rents that rival the Westside.

Cushman & Wakefield also projects that this year non-central business districts downtown, including the Historic Core and Arts District, will account for 1.6 million square feet of new supply.

Justin Weiss, a vice president of brokerage at Kennedy Wilson, and an expert on the Downtown L.A. market, concurred, saying both the Arts District and the once-sleepy Bunker Hill, where Frank Gehry’s mixed-use Grand Avenue Park is set to break ground this fall, are areas to watch.

In one of the largest office lease transactions of 2017, anchor tenant Bank of America extended and expanded its lease at its namesake plaza at 333 South Hope Street in Bunker Hill, growing within Brookfield Property Partners’ 55-story, 1.4-million-square-foot property to 218,000 feet from 164,000, according to an official company statement. Though neither BoA nor Brookfield would disclose financial details of the lease, a spokeswoman for Brookfield said the lease was for more than 10 years.

The South Bay

Geographically, the continued influx of media, digital and high-tech players to the Westside of Los Angeles in Silicon Beach—which stretches from Santa Monica south to Venice and Playa Vista—has led to greater interest in the nearby South Bay market for office property. Vacancy rates have been dwindling and square footage has become costlier by the minute. (Google, Facebook and Snapchat are among the biggies who have set up shop in the area.)

According to CBRE’s fourth-quarter 2017 report, institutional investors have turned to suburban markets such as the Tri-Cities (Glendale, Pasadena and Burbank) and El Segundo in the South Bay as a more economical option for their offices.

CBRE’s Vertun said the average asking rates for office space in the South Bay was $2.59 a square foot. (In comparison, asking rates for West L.A. ARE $5.02 a square foot.)

Institutional investors including Brookfield, J.P. Morgan and Blackstone Group were new to the market in 2017.

One of the biggest deals last year was Blackstone’s acquisition of a group of Southern California warehouses in the South Baby and San Gabriel Valley and related properties from Principal Real Estate Investors for $448 million in October, according to Tina Arambulo, the industrial research director for the Los Angeles Basin at C&W. Another indication of the sector and area’s growing appeal was Starwood Capital’s acquisition of Pacific Corporate Towers in El Segundo for $611 million, or $385 per square foot, in late October.

Retail and e-commerce

Like elsewhere in the nation, brick-and-mortar retail in California has taken a hit, particularly as big-box and mall-anchor mass retailers including Macy’s and Toys “R” Us dramatically scale down operations.

Though the tax overhaul in D.C. was supposed to create higher returns of investment throughout the commercial real estate sectors, in retail that is not the case, the Matkins/UCLA Anderson Forecast found. Panelists in each of the six California regions surveyed were more pessimistic than before the tax bill passed.

In the Bay Area, none of the survey’s panel of retail developers started a new project last year, and very few are planning on doing so this year. In Southern California, just over half of the panel began new retail projects last year, while only a third plan to develop retail in the next year.

Despite the market apprehension and general sentiment that retail is overbuilt, CBRE found that, in Greater Los Angeles, the retail market concluded 2017 with stable and optimistic fundamentals. The brokerage’s fourth-quarter report analyzed all retail centers of 50,000 square feet and greater.

Vacancy rates remained unchanged throughout 2017, standing at 5.2 percent at the year’s end and anticipated to hold in the low 5-percent range through 2018, according to CBRE. Leasing momentum remained positive with 231,104 square feet of positive net absorption by the end of 2017. Average asking rents further increased by 9.3 percent year-over-year, ending the final quarter of 2017 at $2.71 per square feet.

Alex Kozakov, a senior vice president at CBRE, said that the ongoing growth in online shopping will ultimately reduce the brick-and-mortar footprint of retailers, while increasing the demand for warehouse and industrial space.

Greater Downtown ranked the highest in vacancy rates at 11.1 percent in the final quarter of 2017, according to CBRE, which the firm attributed to numerous smaller spaces becoming vacant versus major move outs. Fitness, grocery and discount tenants were among the notable retail categories in the region. Kozakov said the strongest markets and neighborhoods for retail include West Los Angeles, Hollywood, Silicon Beach, Santa Monica and Culver City, all of which are due to their good average household incomes and abundance of jobs, amenities and density, which together enable and encourage consumer spending.

Rents in some of the best retail markets in West Los Angeles ranged as high as $10 per square foot and cap rates of 4 percent in the fourth quarter of 2017, Kozakov said.

In response to rising rents, retail tenants with existing locations in Greater Los Angeles slowed expansions, hoping that a slowing cycle will lead to vacancy increases and eventually some rent relief, according to CBRE.

On the flip side, the ongoing growth of e-commerce has fueled an increase in industrial property values. As demand outpaces supply, rents for Class-A properties will continue to escalate and lead occupiers to consider functional Class-B warehouses, according to Ryan Foley, a senior associate at CBRE. (Current Class-A asking rates are in the upper $0.08s on a triple-net basis, pushing low $0.90s on a triple-net basis on brand new construction. Class B asking rents, meanwhile, are in the mid $0.70s. Both class rates are almost double what they were in the recession.)

Tina Arambulo at C&W agreed, saying that Class B properties which five years ago may have been considered obsolete will continue to be sought after in in-fill markets.

“Greater Los Angeles continues to have the lowest vacancy of any major industrial market in the U.S. with vacancy of just 1.3 percent,” she said.

The need for industrial property is also fueling the continued rise of the Inland Empire, which CBRE labeled its own “North Star” in its fourth-quarter 2017 report. A sizable portion of activity came from pre-leasing activity earlier in the year, while demand for industrial space smaller than 300,000 square feet did the rest.

Real estate investment trust Liberty Property Trust started 2018 with a move that confirms the overall trend: It purchased a 400,169-square-foot Class-A industrial building at 5959 Randolph Street in the city of Commerce for $92.7 million. The fully leased building is among three other major industrial properties Liberty purchased at the tail end of 2017.  These include the acquisition of a 702,668-square-foot Class A building at 1221 N. Alder Avenue in Rialto for $94.2 million, a 210,710-square-foot property at 16325 Avalon Blvd. in Carson for $46.3 million. In all, Liberty has nearly doubled its footprint across Southern California in the last year, investing a total of $176.3 million in 2017 in acquisitions and development in Southern California, and the portfolio now includes 3.7 million square feet, according to an official company release.  A Liberty Property Trust spokeswoman told CO that at the end of 2016 the company owned 2.1 million square feet in SoCal. Today, that stands at 3.8 million, including what is currently under development.

Foreign Capital

The Golden State is, well, golden in the eyes of foreign investors as L.A. moved ahead of New York for the first time in terms of the volume of foreign capital it attracted in 2017, according to research released by JLL last month. While London still topped the list—despite Brexit uncertainty—attracting $33 billion in foreign capital, L.A. shifted up to second place in the top 30 with $23 billion and New York dropped to third with $21 billion. The research from JLL references 300 global indices and benchmarks that assess the relative performance of cities. The most recent study found that while the global investment landscape continues to be dominated by the “Big Seven” cities, which include London and New York, “contender” cities like L.A. have attracted investors because of a lack of product and high pricing for prime assets in the core seven.

The 26th annual survey from the members of the Association of Foreign Investors in Real Estate (AFIRE) also back up L.A.’s growing draw as the City of Angels tied with New York for the first time as the top U.S. city for foreign real estate investment. (London took the top spot as the reigning global city for real estate investment.)

In last year’s survey, L.A. ranked second among U.S. cities and fourth globally. AFIRE members are among the largest international institutional real estate investors in the world and have an estimated $2 trillion or more in real estate assets under management globally.

“With the growth of on-line shopping, foreign investors continue to rank industrial/logistics properties as their No. 1 investment opportunity,” Jim Fetgatter, chief executive of AFIRE, said in an official release.  “The cargo coming into the Port of Los Angeles represents 43 percent of all cargo coming into the United States. Respondents also say online shopping is likely to have the biggest affect on real estate over the next five years. With these as benchmarks, it’s easy to see why investors would be bullish on Los Angeles.”

Source: commercial

Manhattan Is Tops for Coworking Space, LA Ranks Second: Report

Coworking represents a small yet growing segment of the office market, a new study demonstrates, with Manhattan dominating.

Manhattan has 245 coworking spaces equaling 7.7 million square feet, according to a new study by Yardi Matrix,  a commercial real estate research and data platform. Los Angeles came in second with 3.7 million square feet in 158 locations. Nine other metros studied have at least 1 million square feet of coworking office product, with Miami being home to the most coworking space as a percentage of total stock, at 2.7 percent of the metro’s 50.5 million square feet of space. Manhattan took second at 1.7 percent of total product dedicated to shared space. (Los Angeles ranked third along with West Palm Beach, with 1.6 percent of space dedicated to coworking.)

Yardi quantified coworking locations in 20 of the U.S.’ largest markets encompassing buildings of 50,000 square feet in major cities and large regions. The research found companies offering memberships at 1,166 coworking sites with 26.9 million square feet of space, which represented 1.2 percent of office space in the 20 markets studied. Furthermore, 11 of the 20 locations studied have more than 1 million square feet of coworking space for lease. There is no comparative data available, as Yardi said this is the first study to “quantify the amount of square footage of coworking space in relation to total office space within markets.”

Perhaps, unsurprisingly, coworking has proliferated more in cities—which have a critical mass of workers—with leases encompassing 1.4 percent of urban office versus 0.9 percent of suburban office space, according to Yardi.

Although there are numerous companies offering coworking space for lease, the field is dominated by Regus (9.4 million square feet)—which pioneered the “workspace as a service” concept in the 1990s, first in Europe and later in the Americas—and WeWork (6.5 million square feet). The two industry giants account for nearly 60 percent of all coworking space in the 20 markets studied.

“Demand is high in markets with concentrations of knowledge workers—especially IT but also new media or industries such as biotechnology and telecommunications—that are friendly to startups [and] in metros where space is at a premium,” the report says, and lower in cities such as Dallas and Houston that have modest barriers to construction and high vacancy rates. Markets with lower vacancy rates, where office space is at a premium, have a higher concentration of coworking space. Fewer blocks of space exist in large coastal markets studied, such as Manhattan, San Francisco and Los Angeles, which, subsequently, have led to a larger percentage of coworking space.

That’s certainly been the case in Los Angeles, where an increasing number of new media providers including Amazon and Netflix have set up shop around town.

According to stats from Cushman & Wakefield’s fourth-quarter 2017 Greater Los Angeles Office market report, coworking companies WeWork and Spaces currently span multiple submarkets and have signed leases totaling more than 220,000 square feet in Hollywood, the Financial District and Culver City.

Source: commercial

City Set for 33-Year High in New Office Supply Through 2019: C&W

Manhattan is set to see more new office supply come online over the next two years than at any point since the mid-1980s—a dynamic that will bolster the city’s aging office stock but could hold asking rents in check and keep landlord concessions at historic highs, according to Cushman & Wakefield.

Led by sprawling Far West Side megaprojects like Hudson Yards and Manhattan West, the 12.6 million square feet of new office construction due to hit the market over the course of 2018 and 2019 is the most of any two-year period since 1985 to 1986, the brokerage said in a press briefing today overviewing the state of the city’s office market.

While 7.3 million square feet of that space has already been preleased, it is part of an enormous 22.1-million-square-foot influx in new office supply set to arrive in Manhattan over the next five years—13.7 million square feet of which is still available for lease, C&W said. That influx is already placing downward pressure on asking rents for the city’s existing office stock and is expected to keep concessions at “historical high levels,” according to the brokerage.

Richard Persichetti, C&W’s vice president of research for the tri-state region, said that while the new construction is a positive considering the city’s “aging office stock,” it will exacerbate a dynamic that has seen “more tenant improvement allowances than ever before” and could cause a hike in vacancy rates as new space is delivered. Manhattan’s overall office vacancy rate dropped 0.4 percent to 8.9 percent at the end of 2017—”its lowest level in 18 months,” he noted.

New office construction is also commanding a 27.5 percent premium over existing Class A space, according to the C&W report, with the new development consequently driving down rents for the city’s existing office supply. Overall office asking rents in Manhattan fell 0.8 percent in 2017 to $72.25 per square foot—though Persichetti said rents should be “flat to increasing” in 2018 as the new, “higher-priced space” comes online.

In total, Manhattan saw 30.5 million square feet of new leasing activity last year, which was up 16 percent from 2016. Midtown office leasing was up 10.4 percent to 19.7 million square feet, while the Downtown market saw a 63.6 percent jump to 5.8 million square feet. The supply-constrained Midtown South saw a 2.1 percent increase in new leasing activity to 5 million square feet.

Leasing activity was characterized by a sizable uptick in the volume of major, 100,000-plus-square-foot deals; the 56 such leases signed last year were the most on record, according to C&W, and accounted for 40 percent of all Manhattan leasing activity—with 22 of those deals for 250,000 square feet or more.

The financial sector, which saw employment levels in the city rise to a 16-year high in 2017, drove much of the new leasing activity; financial industry tenants leased 5.5 million square feet of space last year, up 60 percent from 2016, the brokerage said. The technology, advertising, media and information (TAMI) sector, meanwhile, softened in terms of employment—losing more than 9,000 jobs through the first 11 months of the year—but still saw a 12 percent increase in leasing activity to 4.3 million square feet, according to C&W.


Source: commercial

NYC’s Retail Chains Feel Headwinds Despite Growing Presence: Report

Though national retail chains continued to strengthen their presence in New York City this year, most of that growth came from food and mobile phone stores like Dunkin’ Donuts and MetroPCS while apparel and electronics retailers continued to experience “significant contractions,” according to the Center for an Urban Future’s (CUF) annual “State of the Chains” report released today.

The 296 chain retailers tracked by the report grew their footprint to a total of 7,317 stores across the city in 2017, up nearly 2 percent from 7,223 stores last year. While that constitutes the ninth consecutive year of a net increase in the number of national chains in New York City, the CUF noted that the growth has been “limited to a relatively small number of retailers”—with more chains than ever feeling the market headwinds that have battered the brick-and-mortar retail sector this year.

Coffee-and-donut behemoth Dunkin’ Donuts continues to dominate the CUF’s ranking of national retailers with a presence in New York, topping the list for a ninth consecutive year and growing its footprint to 612 locations in the city from 596 stores last year. Prepaid wireless provider MetroPCS, fueled by its 2013 merger with T-Mobile, leaped Subway to become the city’s second-largest chain retailer with 445 stores across the five boroughs—an increase of 119 locations from 2016.

But while those companies joined the likes of Crumbs Bake Shop—which has reestablished itself at 22 locations after experiencing financial troubles that forced major closures in 2014—and Pret a Manger among chains that have expanded in New York in 2017, the CUF found more worrying trends across the industry at large. One-fifth of the city’s national retailers have closed stores in the past year (compared with one-seventh in 2016), while only one in seven chains tracked by the CUF actually grew their presence in 2017—the smallest share since the public policy think tank launched the “State of the Chains” report a decade ago

“Every single year we’ve done this [report], the number of chains stores in New York City has gone up, but I think this year we’re starting to see some new challenges,” Jonathan Bowles, the CUF’s executive director, told Commercial Observer.

Bowles noted that while Dunkin’ Donuts and MetroPCS together accounted for 135 new stores across the city in the past year, the other 294 national chains tracked by the report experienced a combined net loss of 41 retail locations across the five boroughs in 2017—statistics that depict “much more of a mixed picture for national retail in New York than has been in the past.”

Food-related chains have thrived over the last decade, alone responsible for more than 40 percent of the growth in national retailer locations in the city over the past 10 years, according to the CUF. The number of coffee chains like Dunkin’ Donuts and Starbucks have grown by 65 percent over the past decade, while fast-casual dining chains like Pret a Manger and Chipotle have more than doubled their presence in that time and fast-food restaurants like McDonald’s have grown 14 percent.

But the news has not been so good for retailers that “compete most directly with online outlets,” the report said, such as those in apparel, footwear, office supplies and electronics. Electronics retailers, in particular, have experienced the biggest drop of any national retailer category—with factors like RadioShack’s bankruptcy meaning there are now fewer than half as many electronics chain locations in New York than there were in 2008 (53 stores today, compared to 144 in 2008).

That dynamic hasn’t extended to mobile phone service chains like MetroPCS and T-Mobile, which in 2017 have surpassed clothing stores as the second-largest national retail chain category in the city, behind fast-food restaurants. Cell phone chains “have dominated the consumer electronics market in the decade since the iPhone was first released” in 2007, the CUF said, having grown to 854 stores across New York City from 233 locations in 2008.

Drugstore chains like CVS, Rite Aid, Walgreens and Duane Reade have struggled in comparison to recent years, losing a combined 53 locations across the city. Chain pharmacies now have a total of 558 locations across the city, up only 1 percent from their number in 2008, the CUF said—attributing the contraction in part to Duane Reade and Walgreens consolidating their locations since merging in 2010, as well as their closing of 600 stores nationwide ahead of a $4.38 billion acquisition of a portfolio of stores from Rite Aid.

Referring to the lukewarm environment for national chain retailers in New York City at large, Bowles cited “the combination of some of the highest rents in America and declining sales because of online competition.”

“A lot of retailers’ profit margins were already slim, and then you add in losses because of online shopping, and it’s not a surprise that a lot of these merchandise retailers are cutting back,” he said—adding that food establishments like Dunkin’ Donuts and Chipotle “aren’t facing that kind of online competition.”

While Manhattan continues to dominate the market among national retail chains with 2,734 locations, Brooklyn has seen the largest increase among New York City boroughs in the number of new chain locations in 2017—adding 47 new stores for a total of 1,587 locations, a 3.1 percent increase from last year.

After Dunkin’ Donuts (612 stores) MetroPCS (445) and Subway (433), the top 10 national retail chains with the most locations in the city are Starbucks (317), T-Mobile (236), Baskin-Robbins (221), McDonald’s (215), Duane Reade/Walgreens (260), Rite Aid (179) and CVS (149).


Source: commercial

Construction Starts in the Bronx Projected to Top $2B—Again

The Bronx is still burning.

Led by strong housing development, the value of construction starts in the Bronx is expected to be more than $2 billion for the third consecutive year, according to a just-released New York Building Congress Bronx study of Dodge Data & Analytics data covering the first nine months of 2017.

The Building Congress forecasts that about $2.3 billion worth in projects will have commenced construction this year in the Boogie Down, roughly the same amount as in 2016, and slightly outperforming 2015’s $2.2 billion.

Projects that started this year in the borough by September were collectively worth $1.7 billion, according to the analysis. (New York City overall saw around $31.2 billion of construction project starts through the first three quarters of 2017.)

The Bronx has seen increasing interest from developers over the last 10 years in response to the demand for more affordable housing citywide as well as the availability and affordability of the land in the borough.

“The Bronx is experiencing positive momentum and benefitting from continued strong investment from both the public and private sectors,” Building Congress President and Chief Executive Officer Carlo Scissura said in a prepared statement. “With the value of annual construction starts more than doubling since the beginning of this decade, it’s obvious that the development community now views the Bronx in a whole new light.  And I would be surprised if that percentage doesn’t continue to rise in the coming years.”

As of September, the top costliest developments in the Bronx this year are a $232 million project to replace Unionport Bridge and a $133 million 12-story, 305-unit apartment building at 443 East 162nd Street in Melrose, which is being developed by New York City’s Department of Housing Preservation and Development, the Women’s Housing and Economic Development Corp. and BFC Partners

Housing account for the largest asset class—53 percent—for which new projects began construction through the first three quarters of 2017 in the Bronx, according to the report. That was followed by public works at 20 percent, institutions (schools and health care facilities etc.) at 15 percent and commercial properties with 11 percent.

“The Bronx possesses the most opportunities for new residential development, and the ability to produce new housing for residents at all income levels,” Scissura said. “As the de Blasio administration further ramps up its affordable housing program and as private developers increasingly look to the north, the future looks bright for the Bronx.”

Excluding the final quarter, the Bronx saw 3,190 residential units begin construction in 2017. The report indicates that the total is on track to outperform last year’s 3,918 units and 2015’s 4,240 units, which was the most in the last decade.

“The Bronx has land, which the other boroughs don’t,” Louis Coletti, the president and CEO of the contractor association umbrella Building Trades Employers’ Association told Commercial Observer. “And the land is obviously less costly than in Manhattan or Brooklyn.”

Regarding the future of development projects in the Bronx, Coletti added: “The only thing that could impede the growth of the Bronx is the natural economics of real estate—if interest rates start to get too high and people decide they aren’t going to borrow money or if [the economy] starts to slow down. Then you will see things slow down in the Bronx.”


Source: commercial

After Tepid Growth, Brooklyn Hotel Room Rates Spike

The Manhattan hotel market—one of the priciest hospitality markets in the country—has been strong this year, with hoteliers selling almost nine out of 10 rooms nightly for the first 11 months of this year. But that demand has not amounted to an increase in average daily rates, or ADR, according to new research from STR, a hotel data and analytics specialist.

Manhattan hoteliers have cut nightly room rates this year by 1.6 percent from 2016, to $269.45 (although the room rate is still higher than in any of the 25 largest markets in the U.S. tracked by STR). That is a continuation of the decline in room rates since 2014’s high of $292.46.

In nearby Brooklyn, however, room rates shot up a considerable 4.1 percent to $182.13 year-over-year, as supply surged 21.1 percent, occupancy rose 4.2 percent to 81.5 percent and the number of hotels rose from 61 to 71 today.

Manhattan “is getting very expensive with ADR and development costs and I think a lot of people are looking outside, right across the river,” said Jan Freitag, a senior vice president of lodging insights for STR. “There is very, very strong supply growth and even stronger demand.”

Brooklyn’s 4.1 percent ADR uptick is double the U.S. average percent change to date, and the year-over-year increase is much greater than the borough has seen over the last couple of years. Between 2015 and 2016, the ADR grew by 1.4 percent, and the year prior, it increased 1.3 percent.

Today, Brooklyn hoteliers have more “conviction” to increase their pricing, Freitag said. Brooklyn is now a destination in its own right, and between its proximity to Manhattan and its new product—with sweet amenities—hoteliers have reasons to justify higher prices. To stay at the William Vale Hotel in Williamsburg for one night in mid-January, for example, costs $279 plus taxes, the hotel website indicates.

“Brooklyn is super hot,” Freitag said. “Developers like it. Travelers like it. It has a great reputation and it’s very close to Manhattan.”

As perceptions about Queens and the Bronx have shifted, their room rates have climbed. In Queens, the ADR rose by 5.1 percent to $157.59 and in the Bronx it went up 4.7 percent to $157.19, STR data covering the first 11 months of the year indicate. The borough’s hotel count increased from 113 last November to 122 today, supply increased 7 percent and occupancy crept up 1.3 percent to 85.5 percent. Hotel room supply in the Bronx jumped 9.2 percent, the number of hotels increased from 22 to 24 today and occupancy ticked up .3 percent to 72.6 percent. (In Staten Island, where the number of hotels remained the same at nine and supply and demand remained flat, the ADR dropped .5 percent to $126.67.)

If the number of rooms sold in Manhattan has increased 3.7 percent for the first 11 months of 2017 from the same period last year and the number of hotels rose from 416 last November to 428 today, why isn’t pricing following suit?

“That’s the billion-dollar question,” Freitag said.

He offered five potential reasons, but noted, “The truth is somewhere in the middle”: 1) With so much supply coming online (up 2.7 percent from 2016 at the same point), hoteliers don’t feel comfortable being aggressive in their pricing, 2) the ADR is already high, and the average guest doesn’t want to pay beyond that, 3) new entrants aren’t pricing as strong because they want to achieve occupancy, in turn dragging down the overall market prices, 4) more limited-service hotels are being built, which brings down the price point, and 5) hoteliers focus on hitting 95 percent occupancy, which allows them to get reimbursed by the brand at the ADR rather than a low fixed rate when guests pay for rooms with loyalty points.

As in Manhattan, citywide occupancy has risen this year, but pricing hasn’t follow suit. Through November, New York City hotels saw an 86.5 percent occupancy rate, up 1.1 percent from the same period last year, according to STR figures. ADR was $251, down 1.4 percent year-over-year. And the number of rooms under construction in New York City dipped by 2,000 rooms to 12,000 less than last year at the same time, but that is not anything to be worried about, Freitag said.

The Big Apple’s pipeline is “the highest of any market in the U.S,” he said. “The number we tracked a year ago was a high-water mark for rooms under construction in any market that we track since 1990.”


Source: commercial

Los Angeles and Orange County Among Top Markets for Office Market Growth

Los Angeles and Orange County were among the top three markets to get a boost in office market growth from the rise of the high-tech sector, according to CBRE’s annual Tech-30 report.

The report, which measures the tech industry’s impact on office rent in the 30 leading tech markets in the U.S. and Canada, found that Los Angeles County saw jobs in high-tech software/service sectors rise 20 percent during 2015-2016, nearly a three-fold increase from the prior two-year period’s 6.7 percent. Consequently, average office asking rents in Los Angeles climbed 11 percent to $37.08 per square foot annual from the second quarter of 2015 as compared to the same period in 2017. In the area’s top tech submarket in Santa Monica, average rents reached $71.28 during the period.

The rise in high-tech jobs and subsequent need for office space, has led companies either priced or locked out of high-demand areas on the Westside or near major entertainment studios, to the submarket of Downtown Los Angeles according to CBRE’s Senior Vice President John Zanetos. Vacancy rates in Downtown Los Angeles were 17 percent, for instance, compared to around 7 percent in Santa Monica, according to CBRE research.

“The space and the entertainment industries are merging in a very big way. That will continue to drive more of the big brand name technology companies into LA because of the need to be in the content creation and delivery business. I see this growing,” Zanetos told Commercial Observer.

He anticipates that lesser-known areas like Boyle Heights and Frog Town will be the next to benefit from the tech boom.

“You have these pockets of early 1900s industrial buildings that don’t really have an industrial use that can be converted in the same way that the Arts District was in Downtown LA and Culver City was,” he says. “They are close to public transit and the city of LA is going to be dumping a lot of money into those areas because of the LA River development plan and Sixth Street Viaduct redevelopment plan so they’re going to have a lot of benefit from public investment as well as having really cool buildings that can be converted into office space.”

Meanwhile, the OC led the country for rising office rents over the past two years.

Average office asking rents in Orange County climbed 23.3 percent to $33 per square foot annual from the second quarter of 2015 to the same period in 2017. The area’s top tech submarket — South Orange County — saw average rents reach $34.20 during the most recent period. Tech employment in Orange County increased 40.7 percent during 2005 and 2016, making it the top-growing industry in Orange County with approximately 300,000 sq. ft. of active requirements.

According to Allison Kelly, first vice president for CBRE, who has worked in the OC market for more than 13 years, office rents are primed for continued growth. For new to market properties, she expects the asking rents to increase to nearly $4 per square foot or $48 per square foot annual.

The drivers aside from lower rents than in high-demand markets in Los Angeles, she says, are the ability for companies to buy land and create buildings to suit them, proximity to mass transit and thousands of units of new housing being developed in the area, including residential units at the former El Toro Marine Corps base by FivePoint.

She also said the area attracts an educated, tech-savvy work force drawn to the region for lifestyle reasons.

“When people thought of tech companies, they were thinking of Mark Zuckerberg, bright kids in their early 20s in these startup companies with VC money, “said Kelly. “That might be a portion, but a lot of other people work in tech too, people in their 30s and 40s that have children, want to buy a home, are looking for that holistic quality of life and that is something that you can find in OC, where there are enough technology companies here, enough great talent for them to locate here, and a lot of options if you are an employee.”


Source: commercial

Los Angeles Is Tops for Foreign Investors in Industrial Real Estate

When it comes to foreign investment in industrial real estate, Los Angeles leads the nation, according to the latest research released last week by CBRE. In fact, the Greater Los Angeles area has attracted the most foreign capital—$1.4 billion in sales of buildings and properties — in the high-growth industrial sector since 2010. Other markets that saw significant foreign investment during this period include San Francisco/Oakland ($476 million), Seattle (with $449 million) and Phoenix (with $508 million). Each of these markets has benefitted from strong demographics and well-established logistics hubs, according to the CBRE findings.

Furthermore, the sector is taking an ever-larger piece of the foreign investment pie, driven in large part by the rise of e-commerce and the subsequent need for distribution and warehouse facilities to support it.

“Historically, the foreign investors had much more interest in hotels and hospitality and high-rise office buildings and more trophy assets,” CBRE’s Barbara Emmons-Perrier, a broker specializing in industrial, office and land sales, told Commercial Observer. “And in the last year or two years that’s shifted to logistics because of the rise of e-commerce. We were not a favored product class for a lot of this foreign investment until recently.”

Gateway locations to major metropolitan markets in the United States, like Los Angeles, (home to two of the nation’s biggest ports—Los Angeles and nearby Long Beach respectively)­ as well as its proximity to Asia-Pacific are particularly appealing. (Foreign investors have acquired nearly $61 billion in U.S. industrial real estate since 2010, 48 percent of which has come from Asia-Pacific-based investors—largely from Singapore and China, according to CBRE.)

“Foreign investors are very attracted to core gateway markets which would be obviously Los Angeles and New York,” Emmons-Perrier said. “They want something with a recognizable name. They’re not doing much in Ohio or Minneapolis or Iowa. They want all the top markets. There are tremendous amounts of those developments and opportunities in Southern California. From Asia, it’s an easy direct flight into [Los Angeles International Airport]. It’s the ports and a lot of good fundamental historical data that point to why it’s happening here.”


Source: commercial

Manhattan Office Leasing Activity Held Strong in Q3: CBRE

The Manhattan office leasing market continues to show signs of strength via positive net absorption figures and double-digit percent increases over last year, according to CBRE’s latest Manhattan office market report released today.

Total leasing activity of 7.4 million square feet in the third quarter outperformed the five-year quarterly average by 12 percent, and took total Manhattan office leasing activity for the first nine months of 2017 to 21.1 million square feet—a 24 percent increase, year-to-date, on 2016.

But perhaps the strongest indicator of the market’s strength so far this year was the 1.45 million square feet of positive net absorption registered last quarter. The Midtown market, in particular, posted more than 1 million square feet of positive absorption for the first time since the second quarter of 2015.

At a media briefing discussing the figures, Nicole LaRusso, CBRE’s director of research and analytics for the tri-state region, cited strong employment growth figures in New York City that she said “has really been fueling a lot of this [leasing] activity” in the Manhattan office market.

LaRusso was joined by CBRE Vice Chair Paul Amrich and Executive Vice President Neil King at the briefing, held at Rockpoint Group and Highgate Holdings’ office development at 412 West 15th Street in the Meatpacking District.

The property, which is still under construction as workers continue to build out the interiors, served as an ideal setting for a discussion on the state of the Meatpacking District and Hudson Square office market. According to the brokers, the area has changed “drastically” as larger, more mature companies view it as an increasingly viable office destination.

King said that the West Side neighborhood’s culinary and cultural amenities are among the reasons “why people want to be here”—citing Shake Shack’s recent 27,000-square-foot deal for its new headquarters and flagship restaurant at 225 Varick Street in Hudson Square, as well as institutions like the Whitney Museum of American Art, which moved to the Meatpacking District in 2015.

Amrich noted that more than ever, companies are using their real estate as a tool to recruit new, young talent—a trend that has extended from tech, media and creative firms into the realm of financial services and insurance companies. He cited insurer Argo Group, which inked a 48,000-square-foot lease at Rockpoint and Highgate’s Meatpacking project earlier this year, as well as Aetna’s recent agreement for 150,000 square feet at nearby 61 Ninth Avenue, developed by Vornado Realty Trust.

As far as Manhattan leasing activity on a submarket-by-submarket basis, CBRE said the Midtown market saw 4.84 million square feet of leasing activity in the third quarter, which constituted a 19 percent increase on the five-year average. Asking rents in Midtown stood at $80.54 per square foot, flat from the previous quarter but down 1 percent from the same period last year.

Midtown South registered 1.14 million square feet of activity—down 8.8 percent below the five-year average for the supply-constrained market and fueled mostly by small deals below 25,000 square feet, which constituted 59 percent of all transactions in the submarket last quarter. Midtown South asking rents of $71.90 per square foot—which LaRusso noted have run up dramatically over the past decade from their range in the low $40s per square foot in 2009—are flat from the previous quarter but up 4 percent year-over-year.

In the Downtown market, 1.43 million square feet of leasing activity in the third quarter was 9 percent over the five-year average, with government tenants—such as the city agencies that have flocked to the Verizon Building at 375 Pearl Street—accounting for 30 percent of all activity in the quarter. The submarket continues to see tenant migration trends work in its favor, with 1.5 million square feet of space in the year-to-date period comprising tenants who have moved Downtown from elsewhere in the city. Downtown asking rents were up 1 percent from the previous quarter, to $61.95 per square foot.


Source: commercial