Insights and perspectives with the world's most experienced real estate valuation and consulting professionals.


A spotlight on the hospitality sector

Posted by:
Michael Welch
Michael Welch

This month, all eyes are on the hospitality sector. As part of our Viewpoint 2016, we’ve published a stand-alone hospitality report, which provides an in-depth look into the trends shaping the hospitality sector.

As a whole, the sector performed exceptionally well in 2015 and despite a couple of migrating factors, this trend is expected to continue until the cycle peaks sometime in 2017. The improving U.S. economy, combined with growing demand and still-scarce supply, has resulted in record levels of hotel occupancy—in fact, the highest rates in seven years. Still, the hospitality market faces the biggest risks in 2016. The industry is segmented, so generalizations about the impact of inbound international tourism might be hyperbole. But a strong U.S. dollar also favors American travel abroad, which would be even more threatening to average daily rates (ADRs) across almost every sector.

Download your copy of IRR’s 2016 Viewpoint Hospitality Report here.

In addition to the U.S. hospitality industry, we took a deeper dive into the Caribbean hospitality market with the help of senior managing director of IRR’s Caribbean offices, James Andrews. The Caribbean Market Update 2016 gives an overview of where the region’s hospitality sector stands, with insights into the economy, tourism, travel demand, hotel performance, and a detailed analysis of each of the local markets. Of note, IRR found that the tourism industry in the Caribbean has effectively reached its peak levels seen prior to the recession, providing some economic improvement to countries which rely heavily on tourism. Real estate markets are generally showing signs of modest improvement as well, with increases in sales volume recorded in Cayman, Jamaica, Turks and Caicos Islands, and the Bahamas.

That’s a wrap on hospitality, for now. Take a look at the reports and check back for more updates on each of the commercial property sectors all year long.

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Year in review: The 5 biggest commercial real estate trends of 2015

Posted by:
Michael Welch
Michael Welch

2015 has come and gone, and what a year it was for commercial real estate — rents soared, big buildings came with even bigger price tags, and the multitude of CRE segments bounced back to pre-recession levels.

Today, let’s look back at the biggest commercial real estate trends from 2015.

1) The year of different conversions: The trend of “warehouse to whatever” has been eclipsed by all other conversions. In 2015, an office building in San Jose became apartments, developers began slowly transforming former commercial spaces to apartments and retail in Wilmington, Delaware, to appeal to the millennial crowd, and there’s even talk of converting an entire city into a medical destination in Minnesota. Of course, warehouses throughout the country are still being redeveloped into offices and apartments, but in some cases they’re being carved up for niche manufacturing businesses.

Another trend we’re seeing is churches being converted into apartments and office space – more than 1,000 transactions like this were completed last year. In some cases, developers are working with congregations to preserve worship space while also adding retail, multifamily units, or office space.

2) Building up, not out: Is the era of sprawl over? We repeatedly saw developers build up, rather than out, over the last year. Developers in Florida went for tall, luxury buildings in Fort Lauderdale, for example. Los Angeles’ expanding tech scene has resulted in new apartment and office development happening in its downtown, and not in the city’s surrounding outskirts. Even in Brooklyn, which remains a major growth area, developers are repurposing the upper levels of commercial buildings to meet office and housing demands; they’re even buying air rights to expand up. Warehousing is no different – developers are building new industrial sites with ceilings 40 feet tall or higher, saving them money, minimizing the building footprint, and increasing square footage for product storage.

We also got a glimpse of the future. Chicago is certainly a city known for its tall buildings and architecture, and a number of supertalls (buildings taller than 300 meters) proposed in 2015 would add new heights to the skyline, as well as thousands of hotel rooms, square footage of office space, and residences.

3) A Southern cities revival: No question that Southern cities have gained a lot of popularity. Major cities in the South have seen population growth since the 2010 census, and the commercial market is reacting in positive ways. Nashville development exploded with new office space and millennials are landing in Charleston, causing apartment vacancy rates to fall. The Port of Savannah is driving a flurry of commercial real estate activity, and millions of square feet of industrial space has been built around the port as a result. The money is also flowing into Memphis for new multifamily development.

On top of this influx of investment money, we’re seeing very interesting building trends in these Southern cities. Take, for example, Winston-Salem, North Carolina, where a multifamily development added 65 apartments in just 47 days thanks to modular construction.

4) A healthy medical office building market: The medical office building market got a clean bill of health in 2015 – in fact, it’s healthier than it’s been in a decade. Demand for medical office buildings (MOBs) remained strong as cap rates dipped, interest rates stayed the course, and the spigot of unprecedented capital remained on this commercial segment. The stability of the medical real estate sector is causing investors to funnel money into MOBs, short-stay hospitals, and other clinics. And, because many Class B spaces are in need of upgrades, the sector is anticipated to remain strong for the next few years and rents are expected to grow.

5) The changing face of retail: Retailers have seen the writing on the wall, so 2015 was the year of adapting to consumers’ tastes and trends. E-commerce has forced retailers to marry their brick-and-mortar stores with warehouses and rethink their online sales strategy more generally. But malls certainly aren’t deadfar from it in fact, and some cities are adding more retail to meet demand.

At the same time, some retailers are shifting their approach and going small, focusing on specific store types to boost sales. And, like everything else in San Francisco and Miami, retail shopping centers, malls, and outdoor markets are seeing record low vacancy rates and tons of new investment money.

That’s what commercial real estate looked like in 2015. Check back soon to read IRR’s projections for 2016 in our annual Viewpoint trends report.

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3 ways Charlotte’s Blue Line extension could spark a commercial real estate boom

Posted by:
Fitzhugh Stout
Fitzhugh Stout

A simple rail line transformed Charlotte’s real estate landscape.  The LYNX light rail service, which commenced service in 2007, sparked nearly $2 billion in new construction in Charlotte’s South End and uptown neighborhoods.

The success of the rail, and real estate development around its stations, encouraged the city to continue its public transit push.  It recently announced a 9.3-mile, $1.1 billion dollar Blue Line extension project connecting Ninth Street and University City.  While the Blue Line expansion is destined to encourage some real estate development in the region, the new infrastructure will not have the same regional impact as the original LYNX light rail.

The Blue Line extension is slated to open in 2017, but the first wave of real estate development has already begun.  Developers and investors interested in the Charlotte market should consider several factors when selecting commercial development areas along the new extension: proximity to stations, location along the corridor, and rezoning of land to transit-oriented development (TOD).

1. Keep station proximity in mind. Station proximity will be a key market driver for real estate prices around the Blue Line extension, with multifamily, office, and retail space all seeing an increase in development around certain rail stops. We predict significant development around the first few stops on the extension, including the Ninth Street, Parkwood, 25th Street, and 36th Street stations, due to the revitalization of the North Davidson (NoDa) corridor.  Other areas might not be as lucky.  The Blue Line transitions from a free-standing rail line to a trolley line positioned in the median of the highway at Old Concord Road.  This shift will limit new development and negatively impact the value of real estate around this section of Blue Line extension stops due to the rail’s inconvenient positioning for pedestrians and riders.

2. Choose the right locations along the corridor. Areas around the LYNX experienced development highs and lows based on location — uptown saw 2 million square feet of residential development and another 4 million square feet of commercial development from 2005 to 2009, while other areas in the region remained stagnant. The same will happen for the Blue Line extension.  Fruitful land exists outside of the Interstate 277 loop and runs through Sugar Creek station.

Developers can acquire inexpensive land in the region that could yield a high return on investment.  Properties along West Craighead Road could also prove to be valuable, with the former NorthPark Mall site ripe for redevelopment, standing as one of the only major commercial properties near the Old Concord Road station.Other areas in the region will struggle to attract new development.  Due to a high concentration of existing retail and multifamily projects, the corridor from University City Boulevard station to University of North Carolina (UNC) Charlotte Main station will not see much real estate growth.  The office sector near UNC will continue to lag, as high office vacancy rates plague the region.

3. Seek TOD areas. The concept of TOD puts businesses, homes, and workplaces within a short distance of a transit station. Since the origination of the LYNX rail system, TODs have been popping up across Charlotte, with the Fountains Southend at the New Bern station — a complex that combines apartments and a rail stop — becoming one of the most successful in the city.  The NoDa area, which lies just southeast of the 36th Street station, is also a strong example of an up-and-coming TOD area, sharing characteristics with Charlotte’s South End right before the original LYNX light rail was constructed.  NoDa, like the South End, used to be an industrial center but now continues to see apartment recovery as more residents are driven to this trendy neighborhood.  The influx has significantly increased land prices, with a single acre going for more than $1 million.  Land prices will continue to increase once the Blue Line extension is completed and more commuters choose to make the NoDa region their home.

The ultimate challenge for developers

While some areas along the Blue Line extension show promise for significant commercial real estate success, investors looking to get in on the ground floor should take a hard look at Charlotte as a whole.  Though current demand for new apartments is high, with more than 3,000 units completed each year, the larger question is: What will demand look like in two or three years?   Vacancy rates in the South End are low, at 4.5%, and the neighborhood is expected to see $200 million of new construction in the next year alone.  With the potential for overbuilding and Charlotte’s ascent to the top of the real estate cycle, developers and investors should proceed with caution.

The Blue Line extension will change Charlotte’s CRE landscape.  While some areas will see little growth in the sector, other neighborhoods are on the verge of expansion.  The line will help spread development beyond Charlotte’s hot South End region, and trigger growth throughout the city. For more information on the proposed new line, check out the plans and proposed stations in the video below.

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Retailtainment: Pop-Ups and Concept Stores-A Guest Post from Llenrock Group

Posted by:
Ray Cirz
Ray Cirz

This post from Eric Hawthorn is part of our Llenrock Group guest post series and originally appeared on the Llenrock Group blog. 

Retail drives other retail, which means vacant store fronts are a significant liability for both landlords and their tenants. Outside of key retail hubs like Manhattan and certain regional shopping malls, retail vacancies are a major problem, even years after the financial crisis. The slew of retail closures and bankruptcies that afflicted the retail sector (i.e., Borders, et al) have left enormous open areas in once-vibrant shopping districts. And big-box retailers aren’t the only culprits; in many of the country’s most fashionable shopping districts, a small storefront may go unfilled for months and even years after its boutique tenant has gone out of business. Here in Philadelphia, some of the city’s most popular, vibrant shopping districts–Market East, Manayunk’s Main Street, and South Street–have unfortunate gaps in their retail offerings, despite large crowds of daily visitors. Even Philly’s Walnut Street west of Broad–the most valuable retail area in the city–has seen a vacant storefront or two. 

We’ve discussed the subject of retail vacancies and their short-term solutions, pop-up shops, a few times here on the Llenrock Blog. Sure, a landlord would prefer to have a strong credit tenant with a splendid long-term outlook, but in a pinch, a pop-up store can work as well and help to drive traffic to the area’s retail–all while boosting revenue when there would otherwise be an empty storefront. We’ve all seen unique retail concepts “pop up” in malls, shopping centers, and urban retail strips for short periods, whether a few weeks or a whole season. Examples of such pop-ups in recent years have included seasonal staples like Halloween and Christmas shops, brand-specific concept stores (to promote a new line of clothing, etc.), and even discount book stores. In major regional malls and big-city shopping districts one likely finds pop-ups built around a particular concept, like a “One Direction” store.

But unique concepts are not limited to pop-up shops, though the temporary format may sometimes be compatible with a specialized concept. Some stores, here in the States and throughout the world, feature unique layouts, operations, products, or other attributes to make them stand out from what–let’s face it–can be an often bland or mundane retail landscape. Particularly in response to the onslaught of online retail, which has cannibalized brick-and-mortar retail for some time now, many retailers have launched retail concepts that offer more than simply merchandise at a higher price than one would find online. Today, more and more retailers offer an experiential shopping opportunity to their customers.

Check out this article on The Independent, which looks at the growing trend in which retail concepts attempt to create an all-encompassing experience for the consumer, merging retail and entertainment: retailtainment:

First coined by American sociologist George Ritzer in his 1999 book, Enchanting a Disenchanted World, Revolutionising The Means of Consumption, “retailtainment” was defined as “the use of sound, ambience, emotion and activity to get customers interested in the merchandise and in the mood to buy”. He argued it was all about allure; the dilemma of attracting more customers “while remaining highly rationalised”.

Thus we have pricey, elaborate concept stores like The Disney Store, M&Ms World, FAO Schwarz, and the Apple Store, as well as boutique and name-brand retailers like Urban Outfitters and Hollister and Abercrombie. These stores, some oriented around a single product or product line, some more diverse, may offer the exact same products one might find on Amazon (and often at lower prices). But what they offer customers is a memorable, fun experience–something more than simple shopping.

Thus we have retailtainment, a segment of the lifestyle shopping movement that is revolutionizing traditional retail. This is a healthy change for the retail sector, whose customers have long ago tired of “traditional.”

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So Far, So Good?-A Guest Post from Llenrock Group

Posted by:
Ray Cirz
Ray Cirz

This post from Eric Hawthorn is part of our Llenrock Group guest post series and originally appeared on the Llenrock Group blog.

A couple years ago, in a post entitled “A Return to Luxury,” I reported that UBS was offering single-asset CMBS on the famous Fontainebleau Hotel in Miami Beach. This was a significant move for the bank, and for the commercial real estate world, because it was the first time in over 10 years that a hotel property had been securitized as a single asset (rather than being packaged in a conduit with a variety of other assets and asset types). I brought up the the Fontainebleau at the time because it offered a positive sign for CMBS demand, not to mention investor confidence in the expensive, often-risky niche of luxury hotel properties.

This offering took place over two years ago and the CMBS market has recovered significantly since then. But I bring it up because the fact that UBS was able to execute an offering for a single hospitality asset says a lot, both about the quality of the asset and the recovery of the CMBS/CRE sectors since the mortgage-backed securities market took a nosedive in 2008-2009.

Of course, CMBS activity has picked up significantly since 2012, as has the hospitality/lodging sector, so it’s clear that investor demand hasn’t subsided for CMBS backed by hotel assets.

Take a look at the graph to the right. Obviously, CMBS issuance includes a variety of asset types, not simply hotel properties, but we know from examples like the Fountainebleau that hotels are a big part of America’s overall CMBS story. While 2013′s $82.33 billion is impressive, it pales in comparison to the highs reached during what one commentator dubbed “the euphoria of 2005-2007.” Still, it shows steady, substantial improvement from the trough of 2008-2009. In fact, analysts predict that 2014 may be the year we top $100 billion in CMBS issuance nationally, and judging by the rate we’re going so far this year, these analysts might be right.

Chicago Business reports,

Amid rising occupancies, rents and property values, more bond investors are willing to buy CMBS debt, and the Wall Street banks that make the loans and put together CMBS offerings are more than happy to satisfy the increase in demand. Nationally, CMBS lending rose 85 percent last year, to $82.23 billion, according to Trepp.

Of course, some analysts are concerned that the U.S. CRE industry is returning to that magical thinking that led up to the real estate bubble and financial crisis in the first place. It wouldn’t be the first time the business world lapsed into a position of selective memory when it comes to certain financial practices.

Fitch Ratings has been outspoken about potential weaknesses in CMBS underwriting practices, the quality of the properties backing this debt, and quantities of outstanding debt. GlobeSt.’s Paul Bubny reports,

A little more than a year ago, Fitch Ratings expressed concern over the quality of the underwriting in many of the sizable securitizations that were being announced….

This year, …Fitch [has] a new worry. Although the quality of the properties has improved, the absolute level of debt on large loans issued this year pose the risk now.

Specifically, the ratings agency is concerned that ratings of ‘BBB−sf’ through ‘Bsf’ on a substantial number of 2014 large loan transactions are not warranted given the significant amount of debt at those ratings. In a new report, Fitch says that its wariness is “further reinforced by the amounts of additional debt, subordinate to the first mortgage, that raise leverage on the property and sponsor even further.”

As an example of this potential issue, Fitch points to the CMBS offering WFCM Trust 2014-TISH, which includes the hotel assets Westin Times Square and Sheraton Chicago. While both are extremely well-positioned lodging assets in core markets, their operating performance is threatened by a pipeline of new hotel supply in their markets, as well as tranches of non-securitized debt that may have received a lower grade by Fitch had they been rated.

Personally, I think that only severe mismanagement on the part of their operators would leave the aforementioned hotels in distress, so I’m not concerned about these assets in particular. However, the question of absolute debt is an important one, and one that CMBS borrowers, lenders, and investors would be wise to consider. Even if the market is steadily improving, strong fundamentals are no replacement for thorough due diligence. The quality of a property’s capital flows is only one consideration; if the property’s overall debt structure is flawed, the underwriter should know–and respond accordingly.

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Retiring at the Ritz-A Guest Post from Llenrock Group

Posted by:
Ray Cirz
Ray Cirz

This post from Eric Hawthorn is part of our Llenrock Group guest post series and originally appeared on the Llenrock Group blog. 

There is a great deal of overlap among CRE asset classes, which I think is what makes each so interesting. Medical office buildings, for instance, are office assets modified for use by (duh) the medical profession, which makes them something of a hybrid of office and healthcare properties. And when it comes to operations and design, hospitality concepts have found their way into asset classes well beyond hotels and restaurants, influencing retail and multifamily projects that have a “lifestyle” or luxury bent. Similarly, single-family rentals are now operated and invested in more like multifamily assets. Real estate specialties seem to evolve through the influence of other CRE sectors.

We particularly see this (buzzword alert!) “synergy” in effect when it comes to repurposed real estate, when one asset class is quite literally adapted to work in a different sector. In many major and older cities, one salient example of this process can be seen in the trend in which increasingly obsolete office assets are converted to luxury apartments, or industrial properties converted to “loft-style” apartments (aging industrial buildings are also serving as self-storage facilities in some cases, I’ve noticed). There are a lot of things one can do with a basic several-story structure.

Which brings us to today’s topic: the trend in which obsolete or superfluous hotel properties are being converted to senior housing. As Baby Boomers reach retirement age, investors and developers have shown greater interest in senior living projects of all kinds (independent living, assisted living, skilled nursing, memory care, etc.), and this interest has led to a number of interesting hotel-to-senior living conversions, including those below:

  • F&F Realty is repurposing the Palatine, Illinois Hotel Bollero into a 118-unit independent living community, Senior Housing News reports
  • In Austin, Texas, Senior Housing News also reports, Pi Architects has emerged as a firm that specializes in senior living properties, and one of its projects has been the conversion of a hotel and convention space in Dallas into a multi-specialty senior living community called Windsor Senior Living
  • Other examples include a former Sheraton Hotel being converted to senior living in Fort Myers, FL by The Pittman Group
  • In the Sacramento, California area, the Rocklin Park Hotel is being converted to Rocklin Park Senior Living, it was announced at the end of last year

Developers are sometimes attracted to hotel-to-senior-living conversions for the same reasons they are attracted to office-to-apartment conversions: the multistory assets are comparable in size, already divided into individual suites, often come with sufficient parking, and exist in established communities that can support such a conversion. And for senior living and multifamily alike, the demand is real; few communities offer as much demand for aging office or hotel assets.

Of course, despite all the market fundamentals justifying a conversion to senior living, an experienced developer may see reasons not to execute such a repurposing project, as Senior Housing News explains:

As senior housing development continues to take cues from the hospitality industry, conversion projects that transform defunct hotels into senior living communities might be more trouble than they’re worth, though it largely depends on the property type.

Resident acuity levels and complying with varying states’ building code requirements makes hotel conversions more feasible projects for independent living transformation, rather than assisted living…

And independent living is just one niche within the larger senior living real estate sector. Codes for senior housing vary by state, of course, so conversions may be viable in some states more than others. As is often the case, ground-up construction may make more sense than repurposing, but that all depends on where the project is taking place, what type of asset the developer is working with (and what condition it’s in), and the ultimate function of the senior housing asset once completed.

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Three guidelines for a fair, smooth eminent domain process

Posted by:
Nick Chop
Nick Chop

The high-profile eminent domain case in Breckenridge, Colorado recently came to a close, leaving the government with 10 new acres of backcountry land and homeowners with a $115,000 payout for their forced sale.  While a seemingly small monetary exchange, this case caused uproar among Breckenridge residents, and even made its way into the national spotlight.

The government has the right to acquire property, though there are limits of this power as addressed within the Fifth Amendment.  Still, eminent domain cases are a concern for the property owners who are affected and can cause substantial heartache for homeowners forced to sell for a public project.  Since the landmark Kelo versus City of New London case in 2005, eminent domain cases have increasingly been making the news.  The Kelo case had major repercussions as the ruling allowed the City of New London to condemn a residential neighborhood and resell it to a private developer for economic development (i.e., to increase the tax base).

As an appraiser specializing in eminent domain, I have seen first hand the impact of residential takings.  Homes have a sentimental value, and often mean far more to owners than just their brick and mortar foundations. Yet eminent domain remains a vital tool for the acquisition of property for developing road projects, expanding utilities, and creating new transportation improvements such as airports and ports. As a result, the government’s right to take private property via eminent domain will never be extinguished.

Condemnation refers to the legal process used to acquire private property, and although eminent domain is here to stay, the condemnation process has room to evolve and is already changing.  Although not perfect, I have seen the condemnation process become more accommodating to landowners in a way that helps ease frustration and diminish negative impacts.

Condemning authorities, appraisers and other sub-consultants, such as engineers, land planners, contractors, and acquisition agents, should follow three major guidelines to help streamline this process.

Open lines of communication

I suggest that government organizations acquiring property connect with the community early on when discussing eminent domain projects. Town hall-type informational meetings in local libraries or churches should be held early in the planning process.  This provides the community with access to real information on how the planned project may impact the area — real information instead of mere speculation.  Gathering feedback from the community also allows the condemning authority to gain insight from the people who will benefit the most from the project.  And, making early changes to the engineering plans can save a tremendous amount of money for the taxpayers in the long run.  In the end, good communication practices are a win-win for both parties.

Conduct a fair property valuation

Another step to making the condemnation process more palatable is to ensure that homeowners receive fair market value for their properties.  Although money can’t make up for the emotional burden that comes with losing a home, it can help a family build a new future at the current location or elsewhere.

From a valuation perspective, in cases where the condemning authority plans to acquire a complete property, the process is similar to any other appraisal.  The appraiser must utilize market data to establish what the true market value is for that property.

The valuation process becomes more difficult when the government plans to acquire only a portion of a property.  For example, in road expansion projects, it’s common for government organizations to seize backyard lots to extend the width of highways.  In this case, appraisers must assess the property damage that will result from losing the backyard area.  To do this, appraisers must compare similar properties in the market with normal backyards to those with reduced backyards, and use the difference in values to calculate property damages.  Understanding how the market responds to specific deficiencies will help to properly compensate an owner being impacted.

Employ eminent domain conservatively

Even with a fair market value being compensated for a property, eminent domain cases can cause turmoil for homeowners, communities, and even government organizations. While uprooting Americans from their homes will likely never be a simple or socially-accepted task, it is possible for government organizations to ease the condemnation process by limiting the number and type of eminent domain projects they pursue.

Homeowners may have an easier time with the condemnation process when they know their losses will help the greater public good.  Land seizures to alleviate roadway congestion, to provide space for a needed airport expansion, or to develop a public park tend to be accepted more easily with a community.  Land seizures used to increase municipal revenue, however, tend to cause tremendous dissent, as evidenced by Kelo versus City of New London and the recent Philadelphia home seizure used to build a high-end shopping center.  People are far less willing to give up their homes for government gains, and for that reason, government organizations should be cautious when employing eminent domain for these cases.  The process not only positions local governments in a negative light, but also tends to taint seized lands or create difficulties for planned development projects, a reality which can be seen with the property in the Kelo case, which remains vacant today.

Eminent domain is a hot-button topic for both government organizations and landowners. These cases will never be easy for the two sides involved, but through open communication between the government and the community, fair valuations, and conservative use of eminent domain, condemning authorities can diminish the negative repercussions of this necessary law.

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Against Entertainment Districts-A Guest Post from Llenrock Group

Posted by:
Ray Cirz
Ray Cirz

This post from Eric Hawthorn is part of our Llenrock Group guest post series and originally appeared on the Llenrock Group blog.

Let’s talk about downtown entertainment districts. You know the kind: a planned city development featuring at least one anchor establishment (a hotel, for instance, or a large cinema or sports stadium), with hundreds of thousands of square feet of bars, higher-class chain restaurants, and retail offerings. The entertainment district usually comes with a trendy, brand-able name like So-and-so Street or Such-and-such Village and has lots of modern, sleek architecture, evenly planted trees, and packs of drunk bros (drunk bros only come in packs). Entertainment districts usually look like a chain sports bar or Dave & Buster’s exploded across eight acres.

Why do these things exist? What benefits do they serve to their community? What are the costs?

I recently discovered an old article on, in which Nathaniel Hood explores the costs and benefits of what the article termed “overnight” entertainment districts (i.e., planned districts, as opposed to those that evolve into entertainment hotpots organically over many years). Here are a few highlights from this article. You may or may not agree with everything the author says, but you’ll probably find these thoughts intriguing:

…show me an existing or proposed entertainment district and I’ll show you a struggling city.

…Paris and Florence don’t have entertainment districts. Neither does San Francisco. Melbourne doesn’t either. What these cities have are spaces for people. They also have sports stadiums and bars – just not as the focal points of their city centers or of their new infrastructure investments. The problem boils down to something very simple: We are disconnecting our downtowns from all other aspects of life when we attempt to turn them into “entertainment districts”.

Throughout the article, which was written in 2012 but seems as current as ever, the author characterizes “entertainment districts” as a cash-strapped city’s attempt to fill its coffers (and well-connected developers’ pockets) by attracting out-of-towners and locals with a wide variety of entertainment offerings. Because entertainment districts may cost hundreds of millions of dollars to develop, they usually require a deal of city subsidization, which means the city’s fiscal stability (such as it is) is riding on the success of this venture. The author breaks down some of the challenges that come with entertainment districts, such as

  • They’re single-use developments, by and large, and come with all the risks of non-diversified investment strategies
  • They limit the city/submarket’s ability to grow organically, through diverse commercial enterprises (other than entertainment)
  • They limit flexibility: the interests of a few individual parties (i.e., the biggest tenants) limit how (really, if) the district can evolve
  • The disproportionate effect of failure: if the anchor tenant goes down (i.e., the movie theater, the hotel, the Dave & Buster’s), its neighbors follow suit

There are many examples of entertainment districts throughout the country. Recent developments include the Power & Light District in Kansas City and Ballpark Village(which just opened in St. Louis)–both of which were built by the Cornish Company of Baltimore. Both of these were built adjacent to major league sports stadiums, and both received a lot of public-sector backing. It’s too soon to tell how Ballpark Village will fare as an economic and real estate driver for the city, since it opened about a week ago, but the Power & Light District has already proven problematic for its hometown.

I wrote about this a couple years ago. This project, begun in the optimism of 2006, was financed in a way that created problems down the road. Kansas City issued almost $300 million in bonds to pay for its construction, but the district’s underperformance forced the city to pick up the rest of the tab (cutting spending for essentials, like roadwork and firefighters, as a result). The 8-block district enjoys a substantial nightlife, and its retail occupancy is better than in many neighborhoods, but this hasn’t been enough.

Timing is everything, and in the case of the optimistically envisioned Power & Light District, the timing was severely off. This might not be the case for St. Louis.

Still, the article I referenced above suggests there are long-term, urban-planning costs to entertainment districts as well. Though they may be intended to boost economic growth, they may in fact curb long-term growth, as residential and office developers are forced to look elsewhere (taking families, workers, and companies with them).

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Why we should expect more billion-dollar REIT mergers and acquisitions in 2014

Posted by:
Joseph Pasquarella
Joseph Pasquarella

Real estate investment trust (REIT) mergers and acquisitions (M&A) exploded in 2013 with multiple billion-dollar deals.  American Realty Capital Properties acquired American Realty Capital Trust IV for $3.1 billion.  Essex Property Trust acquired BRE Properties for $4.34 billion.  And the trend is already pushing into 2014, with Kite Realty Group Trust acquiring Inland Diversified Real Estate Trust Inc. for $1.2 billion in stock in February.

Why such a flurry of activity? REITs were rocked on share prices last year, and M&A might be the salve.  While the S&P 500 grew 32.4% in 2013, the average REIT return was just 2.7%.  The jump in interest rates last May triggered the cold snap and since then REITs have had to pursue alternative strategies to demonstrate their worth to investors.  And the actions they’re taking to rein investors back in are driven by three opportunities:

1.  Economy of scale operations.  Bigger is better, and REITs held to high standards for growth can get a boost through M&A.  Through roll-ups and acquisitions, REITs are growing their silhouettes in bursts rather than property by property.  And by acquiring more properties, REITs can reduce operating expenses and better pool human resources.

2.  Location, location, location.  Through mergers and acquisitions, REITs aim not only to pad their property portfolios, but also to expand the geographical diversity of their holdings.  Many REITs typically focus on a single area, and by diversifying by location, REITs stand a better chance of maintaining value despite regional issues, such as Detroit’s bankruptcy last summer.

3.  The price is right.  Because REITs have tumbled on the market, acquisition opportunities have arisen as stock prices fail to reflect REITs’ true net asset value.  With agency REIT values 20% below their book value, those with deeper pockets are snatching up what they can.  For example, when Kite bought Inland Diversified Real Estate, it doubled its shopping center holdings to about 20 million square feet, taking advantage of favorable cap rates and lucrative locations.

Retail and apartment REITs stand to gain the most from this phenomenon.  Last year apartments hit a 12-year high for occupancy, with rents riding high.  Yet Bloomberg’s Apartment REIT index slipped 7% in 2013.  The result is acquisitions like Essex Property Trust’s recent purchase of BRE Properties, which was trading at 13% below net asset value, amounting to a hefty discount on high-quality assets.

As 2014 continues, we expect to see more M&A as REITs take advantage of discounts in net asset value to add heft to their footprints.  It’s nearly impossible to meet many shareholders’ expectations by acquiring properties one by one.  Wall Street is looking for strong growth with a healthy trajectory.  Not to mention that larger acquisitions are more efficient in terms of transaction and human resources costs.  So watch for more billion-dollar deals as REITs show the bulls who’s boss.

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Caribbean economic update: Not all sunshine just yet

Posted by:
Jim Andrews
Jim Andrews

Recently I was called upon by The Wall Street Journal to discuss the changing dynamics and real estate investment trends in the Caribbean market. For the special issue that ran in print on February 28, I shared insights on everything from real estate tax abatement to the value-add of certain amenities for local residential properties. As the reporter noted in the story, IRR’s Fourth Quarter 2013 Caribbean Market Update finds that the second-home market in the region was affected by the recession, and still has some work to do for prices to return to their highs of seven to 10 years ago. But today, I wanted to take a deeper dive for our clients and partners to explain the areas of growth in this region and provide a more comprehensive outlook on what’s ahead in the commercial sector.

After years of a slowdown, the Caribbean real estate market’s finally heating up. In my last post, I explained the economic standings of the Caribbean nations after the second quarter of 2013, and highlighted modest improvement in the sectors of tourism, construction, and housing prices.

Those improvements added up to 2.6% growth in GDP per capita for the Caribbean in 2013, with larger countries, such as Haiti and Jamaica, leading the charge.  While improvements today are still modest, increases in American tourism, commercial real estate sales and development, and medical tourism point to continued growth throughout the region.

Here are three areas of positive growth in the Caribbean:

Reignited American tourism

While Caribbean visitor arrivals were basically flat in the second quarter of 2013, so far 2014 tells a different story.  According to Smith Travel Research (STR), occupancy was up 2.8% to 72.6% throughout the region in January, with average daily rate (ADR) up 5.6% to $245.46.  Stay overs were also up by 3.6%, a trend the Caribbean Tourism Association expects to continue in 2014.

The rise in tourism comes as no surprise.  As the United States economy continues to bounce back after the Great Recession, the Caribbean is expected to follow suit at a 12- to 24-month delay.  With more Americans regaining disposable income, many are returning to the Caribbean and spending that money on tropical vacations.

Many Caribbean developers have also slowed their number of current construction projects, since the region continues to feel the aftershocks of the American recession.  This slowing in construction has limited the number of available rooms throughout the region, and has boosted ADR.

Commercial real estate pickup

Real estate sales are rebounding, especially in the larger commercial property markets of Trinidad, Jamaica and the Cayman Islands.  Offshore jurisdictions such as the Cayman Islands’ which have significant financial sectors were able to keep their economies afloat during the recession, allowing the commercial real estate market to continue to thrive.  The office and commercial property market in Puerto Rico is also sizable, but stagnant in terms of improvement relative to rents and occupancies.  Trinidad’s economy remains strong largely due to the nation’s rich oil and gas reserves.

Some of the Caribbean countries renowned for luxury resort-residential developments, such as the British Virgin Islands, Anguilla, Barbados, St. Vincent and the Grenadines, and St. Barth, are seeing slow recovery in regard to real estate sales, which more significantly affect these smaller economies that are heavily dependent upon new developments to spur job growth.  Real estate sales in Turks and Caicos, another destination known for luxury vacation homes, are rebounding following a major slump in the years 2008-2011.

While hotel and resort developers are struggling to acquire financing through traditional U.S.  institutions, lending from regional banks have kept construction ongoing, albeit slowly.  Developers have moved away from mid-price chain scale hotels in favor of luxury brands which are perceived to have higher profit margins and are more recession proof.

The all-inclusive sector also appears to be shifting toward a more luxury element based on recent acquisitions and expansions in this genre.  For example, Sandals recently purchased and rebranded the upscale La Source Hotel in Grenada to a Sandals and purchased the Veranda Resorts and Residences in Turks and Caicos which has been rebranded to Key West Village – the fifth village within their Beaches Hotel on Providenciales.  Sandals is on an expansion trend, having also recently purchased both the Couples Resort and the Almond Village hotel in Barbados, which is considered a more upscale destination than Jamaica where many of the Sandals properties are located.

Healthy medical tourism

Medical tourism is a $100 billion global industry forecasted to grow 35% each year.  As Americans continue to go abroad for medical care, an increasing number are choosing the Caribbean as their optimal treatment location.  Medical tourism is a new source of income for many Caribbean countries, and is spurring the development of high-end medical facilities throughout the region.  For example, the Cayman Islands recently completed construction of Health City, a “center of excellence” for cardiac surgery, cardiology, and orthopedics.  This center houses 105 beds, all reserved for tourists seeking luxury medical care; but with future expansion plans up to 2,000 beds within 10 years.

The Caribbean’s marked economic improvement and recovery is expected to continue at a slow but steady pace.  An influx of American tourism, through traditional and medical means, will lead the growth, with slight boosts stemming from the offshore financial services sector.  Panama, Costa Rica, and the Dominican Republic are expected to see significant GDP growth in the coming year.

Check out more updates on the Caribbean economy, and what these trends might mean for developers and investors

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