Monday, July 16, 2018

Industrial Real Estate Trends in 2018 (Video)

Philly & S NJ See Moderate Gains In Q2 2018

by Steve Lubetkin,
The Southern New Jersey market remains in good shape, making moderate gains and showing strong fundamentals. The firm believes the market may be poised for strong growth as benefits of the new tax law begin to materialize.
“Our market continues to show quiet strength and may take off as consumers and businesses feel the effects of lower tax rates. We expect the new law to be a net positive for overall economic growth in 2018 and be especially beneficial to the commercial real estate industry.”

There were approximately 303,656 square feet of new leases and renewals executed in the three counties surveyed (Burlington, Camden and Gloucester), a gain of about 10% over the previous quarter. Leasing picked up, and the sales market stayed active, with about 1.46 million square feet on the market or under agreement and an additional 317,961 square feet trading hands.
New leasing activity accounted for approximately 61.4% of all deals. Overall, net absorption for the quarter was in the range of approximately 253,000 square feet.

Other office market highlights from the report:

  • Overall vacancy in the market is now approximately 10.4%, which is nearly one point better than the previous quarter.
  • Average rents for class A and B product continue to show strong support in the range of $10.00-$15.00 per square foot triple net or $20.00-$25.00 per square foot gross for the deals completed during the quarter. These averages have stayed near this range for most of 2018, though they are trending a bit higher.
  • Vacancy in Camden County improved dramatically, to 11.6% for the quarter.
  • Burlington County vacancy was at 9.2%, which was also lower than the first quarter.

The Southeastern Pennsylvania reports on transactions, rates, and news from Philadelphia and the suburbs. Highlights from the second quarter in Pennsylvania include:

  • Philadelphia’s office market vacancy rate was unchanged during Q2 2018, though positive absorption was 547,339 square feet, a 20% improvement over the first quarter. Vacancy rates for class A properties stood at 10.5%, while class C properties had vacancy of 5.5%.
  • Average asking rent across all office property classes in the Philadelphia market was $22.72 per square foot in the second quarter. Within the CBD it was $29.64 per square foot.
  • There are about 3.8 million square feet of office space currently under construction in Philadelphia. During the second quarter 590,632 new square feet became available via completed new construction.
  • Philadelphia’s retail market is moving in the right direction. Average asking rents have jumped the past few quarters, net positive absorption was 909,884 square feet, and retail vacancy rates ticked down to 4.4%.
  • Industrial vacancy in Southeastern Pennsylvania was down to 5.6%. The market saw positive net absorption of more than 6.6 million square feet.

The Southern New Jersey and Philadelphia retail market highlights. The second quarter saw a drop in consumer confidence as well as a generally positive outlook for consumer spending, buoyed by a strong job market. Other highlights from the retail section of the report include:

  • Retail vacancy in Camden County stood at 7.7%, with average rents in the range of $13.75 per square foot triple net.
  • Retail vacancy in Burlington County stood at 9.8%, with average rents in the range of $14.59 per square foot triple net.
  • Retail vacancy in Gloucester County stood at 7.4%, with average rents in the range of $14.74 per square foot triple net.

Sunday, July 15, 2018

Repeat Institutional Borrowers Heating up Commercial Mortgage Bond Market

The commercial mortgage backed securities (CMBS) market has heated up since summer kicked off, with 39 new deals emerging since June 1. In a recent twist, the market is seeing institutional investors packaging property loans in a new CMBS to refinance portfolios that had been previously financed in the CMBS market.

Private-label, single-borrower deals backing portfolios from Workspace Property Trust and Millennium Partners are the two latest examples of the trend this week. They join deals backing Greenfield Partners and Brookfield Asset Managementproperties, which we reported on in the past two weeks.

In June, CMBS private-label pricing volume totaled $11.5 billion, the highest monthly volume the market has seen since February 2015, according to Kroll Bond Rating Agency (KBRA). June's robust volume brings the year-to-date total to $40.3 billion, up 18.4 percent year-over-year.

"Based on the forward pipeline, it doesn't look like the CMBS market will be on summer break for the next few weeks," KBRA analyst reported. "We are aware of as many as a dozen single-borrowers, including several single-asset deals and up to six conduits that are expected to announce through the first week of August."

There is not much visibility of deal flow through the remainder of August, KBRA reported, adding that perhaps that is when deal flow could cool off.

Morningstar CMBS analysts reported this week that borrowers seeking to lock in low rates are one source for the increased activity. In addition, a growing number of yield-hungry investors tied to large projects that may be viewed as too capital-intensive by bank lenders have turned to the CMBS market -- or in the case of Workspace Property Trust and Millenium Partners, turned to it again.

Last month, Morgan Stanley originated a $710 million fixed-rate debt package on eight retail and office properties owned by a joint venture led by Millennium Partners. The investment banker is securitizing a portion of the long-term debt, which will likely hit the market this month: Morgan Stanley Capital I Trust 2018-MP.

The financing was used to pay off debt on the similarly named Morgan Stanley Capital I Trust 2014-MP, a $463.9 million deal.

At the time of KBRA's last review of the offering in September 2017, the portfolio's value was estimated at $639.6 million and generated annual net cash flow of about $47 million.

J.P. Morgan Chase Commercial Mortgage Securities this week filed preliminary paperwork for a new CMBS offering backing a package of loans on 147 office, flex and retail properties in four states owned by Workspace Property Trust.

Late last month, Workspace Property Trust, a private real estate investment firm led by former Mack-Cali Realty executives Thomas Rizk and Roger Thomas, lined up $1.275 billion in portfolio financing from JP Morgan Chase Bank.

The proceeds from that financing were used to pay off a CMBS loan backed by 108 of Workspace's properties. As of September 2017, KBRA valued that portfolio at $689.9 million and calculated net cash flow at $66.9 million.

New Jersey's Empty Office Park Glut Eases With Merck Headquarters Sale

New Jersey will soon have one less giant, empty suburban office park.

Unicom Corp., a Beverly Hills, CA-based IT company that's part of Unicom Global, said it agreed to buy the former Merck headquarters complex in the Whitehouse Station section of Readington Township, NJ, from Merck Sharpe & Dohme Corp. for an undisclosed amount. It concludes a move started in 2012, when Merck said it was leaving the hexagon-shaped complex spanning 1.24 million square feet on a leafy 1,100-acre campus.

Merck's former headquarters site is one of a number of large suburban office parks, and corporate headquarters, to be left vacant in the past decade in New Jersey. Industry consolidation, rising state and local taxes, and the growing popularity of urban living have driven a number of corporations out of the state -- and helped make office vacancy rates rise. Some of these properties have new owners and tenants, while others sit empty.

"It’s exciting because there’s not a speculative purchaser but basically a corporate user, so it’s pretty good for New Jersey, a really big win.  My God, that’s going to give the economy in western New Jersey a big boost."

Drugmaker Hoffmann-La Roche left its 116-acre campus on the border of the New Jersey communities of Nutley and Clifton, and the site is now a redevelopment called ON3. That mixed-use project has the state’s first private medical school in more than half a century, and other tenants such as retailer Ralph Lauren Corp., medical services provider Quest Diagnostics Inc. and biofabricator Modern Meadow Inc.

And Bell Labs’ 2 million-square-foot former research facility in Holmdel, NJ, has also been transformed into a mixed-use complex called Bell Works.

In contrast, the former headquarters of chemical company BASF Corp. in Mount Olive, NJ, remains vacant. And retailer Toys R Us, which has gone out of business and is liquidating its assets, is putting its headquarters in Wayne, NJ, up for sale.

As for Unicom, the firm did not specify on Thursday how many employees it plans to move to Whitehouse Station. Unicom put the property under contract and initiated due diligence last December and the sale is expected to close in October. The property will be renamed Unicom Science Park I & II and will be used as the company's headquarters for its New York and New Jersey operations.

"We presently have offices in Parsippany and Princeton, so it will be nice to have everyone under one roof," Russ Guzzo, Unicom vice president of sales and marketing, said in an email. "It is unclear the number of employees that will be coming over to the new site at this time, but we have big goals as far as new hires."

Unicom Global consists of more than 40 corporate entities encompassing a range of businesses. It has acquired a number of products and business lines from technology company IBM, including System Architect, Focal Point, PurifyPlus, solidDB and the PowerHouse programming language. It is also the parent company of the former GTSI, now named Unicom Government, which it acquired in June 2012. Other major business units include Unicom Systems, offering IBM mainframe software products, and systems integrator Unicom Engineering, formerly NASDAQ: NEI.

The complex consists of 1 Merck Drive, a 992,476-square-foot hexagon-shaped building, and the smaller 2 Merck Drive, a 223,357-square-foot structure, according to CoStar.

James Hughes, professor and dean emeritus of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, said Bell Lab’s former facility in Holmdel and the Merck former headquarters are both "iconic structures" architecturally.

Merck’s former main headquarters is clad in Spanish granite and features natural light. The building also has a 1,900-vehicle underground garage, Hughes said.

Merck transplanted the site's trees during construction and they are now fully grown in an open area in the hexagon’s center, Hughes said.

"There’s a mature forest in the middle of it," he said.

While studies show millennials are attracted to workplaces located in urban settings near public transit, Hughes said a California-based company like Unicom may be accustomed to its employees commuting to work in cars, or to providing shuttle transportation to workers, making a location in rural Whitehouse Station seem like less of a drawback.

Thursday, July 12, 2018

Logistics Property Construction Surges on a Global Scale

Prologis Inc. said it completed 16 construction projects totaling almost 6.3 million square feet in the first six months of the year, including almost 1.4 million square feet of new logistics space for two tenants at the developer’s 1,800-acre master-planned industrial park in California’s Central Valley.

However, the bulk of the developer’s activity in the first half of the year was outside the United States. Prologis said it finished a new distribution center for Amazon in Mexico City totaling almost 1 million square feet, and a nearly 610,000-square-foot facility in Paris for Cultura, and wrapped up other large projects in Poland, Czech Republic, Italy, Spain and The Netherlands.

In the U.S., the San Francisco-based real estate investment trust, which is the world’s largest owner and developer of logistics buildings, wrapped up a 708,080-square-foot distribution center for Switzerland-based Lindt Chocolate and a 664,000-square-foot warehouse for San Leandro, CA-based mattress maker Zinus, both within its Prologis International Park of Commerce in Tracy, CA.

Prologis also finished construction on a 504,428-square-foot regional distribution building for Home Depot in Cranbury, NJ, and an 80,000-square-foot warehouse for JAS Forwarding in Chicago.

The company expects its development pipeline will flow steadily for the near future. Prologis this week reported started new projects totaling more than 6.2 million square feet with a total expected investment of $475 million in the first six months, including a 567,870-square-foot facility for an unidentified tenant in Tracy and three buildings totaling about 480,000 square feet for tenants in Dulles Commerce Center in Virginia.

Most of the new construction starts are for customers occupying multiple Prologis sites in the U.S. or around the world, the company said.

"Our multi-site customers, many of whom are focused on e-commerce, continue to drive strong results in our build-to-suit business," said Prologis Chief Investment Officer Michael Curless. "Our development activity is focused in major population centers because our customers need facilities close to their end consumers."

In addition to its development projects, Prologis was also active in the mergers and acquisitions during the first half as well, announcing an $8.4 billion merger with Denver-based DCT Industrial Trust Inc. in April. DCT shareholders will vote on the transaction, recommended by the company’s board, at a special meeting scheduled for Aug. 20.