by Steve Lubetkin, Globest.com
Sales
WHITEHALL, PA—PH Retail, an affiliate of leading-edge real estate company Post Brothers, sold 2610 MacArthur Road, a 4,815-square-foot retail property in Whitehall, PA. The freestanding building, situated on an outparcel of MacArthur Towne Center — home to national retailers Walmart, Sam’s Club, Dick’s Sporting Goods and Lowe’s – is now occupied by Chick-Fil-A in a triple-net lease. PH Retail originally acquired the property in February 2015 after it had fallen into disrepair following the departure of a prior restaurant. Recognizing the site’s prime location nearby major thoroughfares and retail centers, the company quickly secured Chick-Fil-A as its new tenant following the acquisition. PH Retail led the subsequent demolition of the existing structure, in addition to securing approvals for the development of the new freestanding Chick-Fil-A structure.
HARRISBURG, PA—Wild Tomato Group purchased the restaurant The Wild Tomato Pizzeria from SD Food Management. The 1,500 square-foot business is located at 4315 Jonestown Road in Harrisburg.
Leases
HARRISBURG, PA—Calderon Textile has relocated and leased a 57,600 square-foot distribution warehouse located at 7253 Grayson Road in Harrisburg from Liberty Property.
www.omegare.com
Tuesday, October 11, 2016
Monday, October 10, 2016
WuXi AppTec Opens Third Lab At Philadelphia’s Navy Yard
by Steve Lubetkin, Globest.com
WuXi AppTec, a global pharmaceuticals, biopharmaceuticals, and medical devices firm, has opened its third facility at the redeveloped Philadelphia Navy Yard, a 150,000 square foot facility that will house an additional 200 high-tech manufacturing and support jobs focused on cell and gene therapy manufacturing.
The new building adds to the rapidly growing life sciences community at the Navy Yard, which, with a total of 750,000 square feet, is now home to the highest concentration of privately leased life sciences space in the City of Philadelphia.
“Over the last decade, the Navy Yard has become the epicenter for life science companies in Philadelphia,” says Brian Cohen, vice president and city manager for Liberty Property Trust, which redeveloped the property. “WuXi AppTec has been at the forefront of this movement, leading this segment of the thriving business community which continues to attract top companies and talent from around the world.”
In 2004, Liberty developed a 75,626-square-foot office and lab facility for WuXi AppTec, one of the first life sciences companies to locate to the Navy Yard. In 2014, WuXi AppTec expanded into 55,000 square feet of flexible space at another Liberty property in the Navy Yard Commerce Center. With the new facility, WuXi AppTec expands its Navy Yard footprint to more than 280,000 square feet of space, which will employ more than 400 people by the end of 2016.
Designed by Environetics Design, now known as NORR, WuXi AppTec’s newest building incorporates similar materials to its adjacent building at 4751 League Island Boulevard, including the extensive use of cast stone with fields of warm brick and a 30’ tall curtainwall. In addition, the building features a minimum 37’ clear height and vast loading capabilities. The building is designed to achieve LEED Gold certification from the US Green Building Council.
“This facility is one of the largest facilities in the world for the GMP manufacturing of vectors and new cell- and gene-based medicines, such as CAR-T cell therapies for the treatment of cancer and other devastating diseases,” says Felix Hsu, senior vice president of WuXi AppTec’s US business unit. “We are very proud to build upon our relationship with Liberty and to continue to create an important center for the manufacturing of cell and gene therapies here in Philadelphia at the Navy Yard.”
Philadelphia’s life sciences industry has grown to one of the strongest in the country due to the strength of its academic and research institutions, a robust talent pipeline from recent college graduates to senior executives and scientists, the central location on the East Coast, and proximity to international customers via air, rail, and sea. At the Navy Yard, life sciences companies benefit from the flexibility to build a completely custom facility, and the campus-like atmosphere, with more than 20 acres of world-class parks and open spaces, fostering a creative and collaborative environment. The campus has the remaining land capacity to create the largest urban life sciences cluster in the United States.
“Philadelphia has one of the most dynamic life sciences and healthcare industry clusters in the nation. The Navy Yard offers a unique campus environment to attract top talent and support the growth of this important sector of our economy,” says John Grady, president of the Philadelphia Industrial Development Corporation, a quasi-public entity that, as master developer, oversees much of public-private development at the Navy Yard. “As one of the first tenants within the Navy Yard’s growing community of R&D enterprises, WuXi AppTec has long been at the forefront of innovation in Philadelphia and we are thrilled to celebrate their continued expansion and growth.”
The life sciences industry at the Navy Yard includes large corporate North American headquarters (Glaxo Smith Kline), established and emerging companies (Wuxi AppTec, Iroko Pharmaceuticals, Adaptimmune), educational institutions (University of Pennsylvania, Vincera Institute, Thomas Jefferson University Hospitals), and related capital ventures (Phoenix IP Ventures and Ben Franklin Technology Partners), among others.
www.omegare.com
WuXi AppTec, a global pharmaceuticals, biopharmaceuticals, and medical devices firm, has opened its third facility at the redeveloped Philadelphia Navy Yard, a 150,000 square foot facility that will house an additional 200 high-tech manufacturing and support jobs focused on cell and gene therapy manufacturing.
The new building adds to the rapidly growing life sciences community at the Navy Yard, which, with a total of 750,000 square feet, is now home to the highest concentration of privately leased life sciences space in the City of Philadelphia.
“Over the last decade, the Navy Yard has become the epicenter for life science companies in Philadelphia,” says Brian Cohen, vice president and city manager for Liberty Property Trust, which redeveloped the property. “WuXi AppTec has been at the forefront of this movement, leading this segment of the thriving business community which continues to attract top companies and talent from around the world.”
In 2004, Liberty developed a 75,626-square-foot office and lab facility for WuXi AppTec, one of the first life sciences companies to locate to the Navy Yard. In 2014, WuXi AppTec expanded into 55,000 square feet of flexible space at another Liberty property in the Navy Yard Commerce Center. With the new facility, WuXi AppTec expands its Navy Yard footprint to more than 280,000 square feet of space, which will employ more than 400 people by the end of 2016.
Designed by Environetics Design, now known as NORR, WuXi AppTec’s newest building incorporates similar materials to its adjacent building at 4751 League Island Boulevard, including the extensive use of cast stone with fields of warm brick and a 30’ tall curtainwall. In addition, the building features a minimum 37’ clear height and vast loading capabilities. The building is designed to achieve LEED Gold certification from the US Green Building Council.
“This facility is one of the largest facilities in the world for the GMP manufacturing of vectors and new cell- and gene-based medicines, such as CAR-T cell therapies for the treatment of cancer and other devastating diseases,” says Felix Hsu, senior vice president of WuXi AppTec’s US business unit. “We are very proud to build upon our relationship with Liberty and to continue to create an important center for the manufacturing of cell and gene therapies here in Philadelphia at the Navy Yard.”
Philadelphia’s life sciences industry has grown to one of the strongest in the country due to the strength of its academic and research institutions, a robust talent pipeline from recent college graduates to senior executives and scientists, the central location on the East Coast, and proximity to international customers via air, rail, and sea. At the Navy Yard, life sciences companies benefit from the flexibility to build a completely custom facility, and the campus-like atmosphere, with more than 20 acres of world-class parks and open spaces, fostering a creative and collaborative environment. The campus has the remaining land capacity to create the largest urban life sciences cluster in the United States.
“Philadelphia has one of the most dynamic life sciences and healthcare industry clusters in the nation. The Navy Yard offers a unique campus environment to attract top talent and support the growth of this important sector of our economy,” says John Grady, president of the Philadelphia Industrial Development Corporation, a quasi-public entity that, as master developer, oversees much of public-private development at the Navy Yard. “As one of the first tenants within the Navy Yard’s growing community of R&D enterprises, WuXi AppTec has long been at the forefront of innovation in Philadelphia and we are thrilled to celebrate their continued expansion and growth.”
The life sciences industry at the Navy Yard includes large corporate North American headquarters (Glaxo Smith Kline), established and emerging companies (Wuxi AppTec, Iroko Pharmaceuticals, Adaptimmune), educational institutions (University of Pennsylvania, Vincera Institute, Thomas Jefferson University Hospitals), and related capital ventures (Phoenix IP Ventures and Ben Franklin Technology Partners), among others.
www.omegare.com
Friday, October 7, 2016
Spaulding & Slye Invest in King of Prussia Office Bldg
Hayden Real Estate Investments and Miller Investment Management have sold the office building at 150 S. Warner Rd. in King of Prussia, PA to Spaulding & Slye Investments for $28.15 million, or about $187 per square foot.
The four-story, 150,922-square-foot office building delivered in 1986 on 5.8 acres in the King of Prussia / Wayne submarket of Montgomery County.
The four-story, 150,922-square-foot office building delivered in 1986 on 5.8 acres in the King of Prussia / Wayne submarket of Montgomery County.
Sprint Renews Office Lease at Glenhardie II
Sprint, a leading international telecommunications company, has renewed its 15,424-square-foot lease at the Glenhardie II office building at 1285 Drummers Ln. in Wayne, PA.
The three-story, 62,862-square-foot office building was constructed in 1983 on five acres in the King of Prussia / Wayne submarket of Chester County.
www.omegare.com
The three-story, 62,862-square-foot office building was constructed in 1983 on five acres in the King of Prussia / Wayne submarket of Chester County.
www.omegare.com
Thursday, October 6, 2016
Open vs Private Office: Is the Pendulum Off Its Axis
by Julia Bunch, Bisnow Dallas/Fort Worth
This morning, 77 million Americans got up and went to work in an office. Increasingly, Americans log their 40-plus hours in spaces with an open concept design, unassigned seating, exposed ceilings and maybe a ping pong table. But are choices and creative office really solving a problem?
Too Much Of A Good Thing
During the rise of the creative office in the late 2000s, the New York Times reinvigorated discussion of an important concept: decision fatigue. The concept states that having too many choices can have an adverse effect on one's ability to make good decisions. Gensler principal Paul Manno says creating good workplaces has always been about offering choice, but this push for collaboration and flexibility hasn't necessarily being thoughtful and has gone too far. Architects and designers can't fill a space with some lounge chairs and sofas and call it choice; they must get smarter, Paul says.
HKS associate principal Kate Davis tells us it's easy to take these trends as drivers and miss the point. Kate thinks if designers keep offering choice in the workplace without first considering what solutions a client needs, a tipping point could be in the future...or may even have begun. Gensler's 2016 workplace study found that while creative workplaces are twice as likely to offer choice to employees in how and where they work compared to traditional offices, workers actually reported less choice overall than in 2013. But making a laundry list of choices often leads back to a discussion about flexibility.
M Moser Associates strategic planning associate Elfreda Chan (above, center) thinks flexibility for flexibility’s sake is a non-answer, and every choice offered needs an intuitive purpose. The Rise Of The Creative Office Dot-com companies in the early '90s struck gold when they put all their employees in a single room (or more often, garage). Since, the open concept plan has widely replaced office-lined perimeters for execs and a bullpen center for support staff, as furniture vendors continued to develop solutions that aligned with those times. And while some industries (tech, creative, communications) adapted more willingly than others (legal, financial), the design world embraced the idea that humans as social animals needed areas to congregate, collaborate and socialize.
And from the open office came the creative office. You know the one...it usually has a slide (like HCSS's Sugar Land office above), or a gourmet coffee bar with lounge area made from reclaimed wood. Elfreda says open office and creative office are similar, but the creative office is definitely an evolution of the former. The slides, tents, nap pods, hammocks and beanbag chairs now synonymous with Google's many offices have come at a price to the rest of the professional world. HKS director of interiors and VP Silva Zeitlian has worked on tons of creative offices, including Google, and she'll be the first to tell you that not everyone can or should work like the tech giant, but that hasn't stopped many from trying. Elfreda has learned that this pendulum swing from private to open (or now creative) office is influenced largely by the shift in how people work, especially with the introduction of better tools and more complex challenges. The adoption of new workplace ideas is driven by business needs to continue innovating, which sometimes means a shift in business culture. Those industries with serious corner office pressure have struggled to adapt all along, but businesses that need to grow in a certain way have embraced a new workplace, Elfreda tells us.
Millennials becoming a larger portion of the employment pool accelerated the trend, morphing creative office and open office. But Elfreda thinks the story goes deeper than a generational change. Gensler principal Christopher Goggin (above) thinks Millennials unfairly get a bad reputation for demanding something every generation wants: a place to do meaningful work. And when Baby Boomer decision-makers try to design for Millennials, the workplace and the purpose of the workplace become disconnected. Solving For The Future With SF per employee shrinking and cost of materials increasing, designers already feel pressure to make offices as efficient as possible with the least available money. But HKS associate principal Greg Verabian says he also feels a new pressure to incorporate wellness into every project. Greg, Silva and others find themselves making spaces shallower and pushing back or eliminating columns so nearly every desk has a view and access to daylight.
Designers’ point of contact clearly illustrates this shift toward wellness. Kate (above) says when she first started her career in the late ‘90s, her clients were usually facilities employees and those in charge of the budget. These days, her clients are directors of HR and employees more invested in human capital. The original idea of an open office does prioritize employee wellness, but doesn’t often account for pitfalls such as poor acoustics, distractions and lack of ownership over one desk or office. We went too far without thinking about the two things that exhaust us most during the workday: acoustics and synthetic light, Greg tells us. Wellness, on the other hand, takes these factors—plus connectivity, spaces for introverts and extroverts, air quality and health—into consideration. And if workplace experts agree that flexibility isn't necessarily an office solution, maybe it's time to re-evaluate office problems.
www.omegare.com
This morning, 77 million Americans got up and went to work in an office. Increasingly, Americans log their 40-plus hours in spaces with an open concept design, unassigned seating, exposed ceilings and maybe a ping pong table. But are choices and creative office really solving a problem?
Too Much Of A Good Thing
During the rise of the creative office in the late 2000s, the New York Times reinvigorated discussion of an important concept: decision fatigue. The concept states that having too many choices can have an adverse effect on one's ability to make good decisions. Gensler principal Paul Manno says creating good workplaces has always been about offering choice, but this push for collaboration and flexibility hasn't necessarily being thoughtful and has gone too far. Architects and designers can't fill a space with some lounge chairs and sofas and call it choice; they must get smarter, Paul says.
HKS associate principal Kate Davis tells us it's easy to take these trends as drivers and miss the point. Kate thinks if designers keep offering choice in the workplace without first considering what solutions a client needs, a tipping point could be in the future...or may even have begun. Gensler's 2016 workplace study found that while creative workplaces are twice as likely to offer choice to employees in how and where they work compared to traditional offices, workers actually reported less choice overall than in 2013. But making a laundry list of choices often leads back to a discussion about flexibility.
M Moser Associates strategic planning associate Elfreda Chan (above, center) thinks flexibility for flexibility’s sake is a non-answer, and every choice offered needs an intuitive purpose. The Rise Of The Creative Office Dot-com companies in the early '90s struck gold when they put all their employees in a single room (or more often, garage). Since, the open concept plan has widely replaced office-lined perimeters for execs and a bullpen center for support staff, as furniture vendors continued to develop solutions that aligned with those times. And while some industries (tech, creative, communications) adapted more willingly than others (legal, financial), the design world embraced the idea that humans as social animals needed areas to congregate, collaborate and socialize.
And from the open office came the creative office. You know the one...it usually has a slide (like HCSS's Sugar Land office above), or a gourmet coffee bar with lounge area made from reclaimed wood. Elfreda says open office and creative office are similar, but the creative office is definitely an evolution of the former. The slides, tents, nap pods, hammocks and beanbag chairs now synonymous with Google's many offices have come at a price to the rest of the professional world. HKS director of interiors and VP Silva Zeitlian has worked on tons of creative offices, including Google, and she'll be the first to tell you that not everyone can or should work like the tech giant, but that hasn't stopped many from trying. Elfreda has learned that this pendulum swing from private to open (or now creative) office is influenced largely by the shift in how people work, especially with the introduction of better tools and more complex challenges. The adoption of new workplace ideas is driven by business needs to continue innovating, which sometimes means a shift in business culture. Those industries with serious corner office pressure have struggled to adapt all along, but businesses that need to grow in a certain way have embraced a new workplace, Elfreda tells us.
Millennials becoming a larger portion of the employment pool accelerated the trend, morphing creative office and open office. But Elfreda thinks the story goes deeper than a generational change. Gensler principal Christopher Goggin (above) thinks Millennials unfairly get a bad reputation for demanding something every generation wants: a place to do meaningful work. And when Baby Boomer decision-makers try to design for Millennials, the workplace and the purpose of the workplace become disconnected. Solving For The Future With SF per employee shrinking and cost of materials increasing, designers already feel pressure to make offices as efficient as possible with the least available money. But HKS associate principal Greg Verabian says he also feels a new pressure to incorporate wellness into every project. Greg, Silva and others find themselves making spaces shallower and pushing back or eliminating columns so nearly every desk has a view and access to daylight.
Designers’ point of contact clearly illustrates this shift toward wellness. Kate (above) says when she first started her career in the late ‘90s, her clients were usually facilities employees and those in charge of the budget. These days, her clients are directors of HR and employees more invested in human capital. The original idea of an open office does prioritize employee wellness, but doesn’t often account for pitfalls such as poor acoustics, distractions and lack of ownership over one desk or office. We went too far without thinking about the two things that exhaust us most during the workday: acoustics and synthetic light, Greg tells us. Wellness, on the other hand, takes these factors—plus connectivity, spaces for introverts and extroverts, air quality and health—into consideration. And if workplace experts agree that flexibility isn't necessarily an office solution, maybe it's time to re-evaluate office problems.
www.omegare.com
Five Trends Affecting Commercial Real Estate: Looking Ahead to 2017
by David J. Lynn, Ph.D. and Peter Burley
The U.S. property market landscape in 2017 will be characterized by continued strong fundamentals, increased investor flows and high transaction volume. As for the economic landscape, the U.S. continues to grow moderately and add jobs. The U.S. employment gains continue to be strong, with unemployment dropping below 5.0 percent earlier this year, and adding to demand for housing in a variety of forms, for office space, for the retail sector and for industrial/distribution facilities. While many fear the end of the current economic cycle, the fact that the recovery was so protracted leads me to believe that we may have another two years left in the current growth cycle.
The U.S. Federal Reserve made it clear last December that the central bank sees U.S. growth as relatively stable, notching the federal funds rate higher by a quarter point. Nevertheless, underlying inflation is extremely tame in the U.S. and in major emerging markets (with worries of deflation in some sectors and countries), providing no impetus for significantly higher rates. Lending rates and fixed-income rates of return will still be very low by historical standards, inducing continued levered purchases of real estate assets.
The following five trends will play a significant role in commercial real estate in 2017.
Global economic and political uncertainties. The Brexit vote in the U.K. has added new uncertainties that will not be fully understood, much less resolved, in the near term. The IMF has downgraded global growth twice since January as uncertainties blur the outlook. For U.S. markets—real estate in particular—the impact is likely to be largely positive as U.S. assets become more attractive and valuable to global investors. We can probably expect enhanced inbound foreign investment in U.S. real estate as the U.S. becomes even more of a safe haven. The IMF predicts higher economic growth in the world as emerging markets find their footing and commodities continue their recovery. Stronger global growth is likely to provide more real estate inflows into the U.S. market as the U.S. remains one of the most attractive commercial real estate markets.
2. Low interest and cap rate environment. While it seems fairly certain that the Fed will seek another rate hike before the year is out, it should be minor. The funds rate could be boosted by perhaps 0.25 percent to 0.50 percent in 2016 and the same in 2017, but both inflation and employment appear to be coming in under the Fed’s expectations. With global economic growth lower than expected earlier in the year, the Fed will more likely maintain a ‘wait-and-see’ position in the short term. We still believe that the Fed is more than likely to weigh the effects of each move it makes before adding any additional friction to current (if unspectacular) economic growth trends. Ten-year Treasury yields have been in flux as early concerns about the effects of Brexit have begun to smooth out. Yields, which had fallen to as low as 1.24 percent in the immediate aftermath of the Brexit vote, have risen back to more than 1.5 percent in recent weeks. As concerns about global economic developments ease, we should expect those yields to push back toward a more normalized 1.75 percent to 2.0 percent range by early 2017. The squeeze on cap-rate spreads remains of some concern for real estate investments should rates rise more rapidly than expected, especially with the “frothiness” we have seen in certain gateway, class-A markets. At present, little indication exists that a rate increase will push cap rates dramatically higher. Nonetheless, there are indications that yields may begin to drift upward. And, as pricing in first tier markets stalls and yields hover in the sub–4 percent range in some of the major gateway markets—which are, in some cases, already in peak pricing territory—we should probably expect investors to move more aggressively into secondary and tertiary markets—and to opportunities beyond core assets to core-plus and value-add properties, as well as some of the higher-yielding niche property sectors, such as medical real estate.
3. Foreign investment in the United States. Global economic and political uncertainty continues to drive capital to the United States. International capital flows into U.S. real estate assets will continue—and increase. The U.S. property market is the most stable and transparent in the world, with higher relative yields and price appreciation potential, making it an easy investment choice. And, while slowing growth in China and much of Europe may dampen currencies and incomes over there, there is still abundant non-U.S. capital looking for placement and very strong demand for U.S. assets, as 2015 proved with record inflows. In 2015, foreign purchases of U.S. real estate assets rose to more than $87 billion over the 12 months ending in December, according to the Association of Foreign Investors in Real Estate (AFIRE), with China, Canada, Norway and Singapore all riding the wave. That volume is up from just $4.7 billion in 2009, according to research firm Real Capital Analytics. Among members of AFIRE, a substantial percentage expect to increase investment in the U.S. in 2017. Changes in the 1980 Foreign Investment in Real Property Tax Act (FIRPTA), which now allow foreign investors to be treated in a fashion similar to their U.S counterparts, will likely lead to an increase in foreign investment in the U.S. real estate market as well.
4. Slowing new supply. Additions to supply will remain limited across the board, with only modest supply growth in a few sectors—multifamily (now slowing for the remainder of 2016), student and seniors housing (creeping up) and single-tenant industrial (regional distribution centers)—and repurposing in others (suburban malls). Lending sources were extremely skeptical about funding new construction (particularly hotel and hospitality) coming out of the last recession, and the current lending environment is showing signs of reticence as bank reserve requirements from Basel III and CMBS risk retention requirements from Dodd-Frank are due to kick in by late 2016. Market volatility has sharply reduced CMBS offerings as well. Insurance companies are stepping in to fill some of the gaps, and private debt funds are emerging as an alternative space. Of all the property sectors, only multifamily can be said to be near long-term new supply highs, although office is seeing some marginal supply additions in a few markets for the first time in years. Medical office supply remains at a fraction of its long-term levels.
5. Volatile Energy Markets. Energy market volatility has already affected certain regional economies (Houston, North Dakota) and producer nations (Saudi Arabia, Venezuela). Last year saw a dramatic drop in oil prices, and the drop continued into early 2016, followed by substantial volatility through mid-year. Increased production and reduced demand due to slowing global growth led to the decline which saw oil prices fall from $110 per barrel to a 13-year low $27 per barrel in early 2016, with recovery to just $43/bbl in July. The world is oversupplied, and major oil-producing countries have barely reduced production. This has had a profound economic impact and carries with it implications for property market fundamentals and commercial real estate pricing.
The impacts vary considerably by region and sector. Negative effects are largely concentrated in a few metropolitan areas with high economic exposure to the energy industry (including Houston, Texas and the oil shale region in North Dakota). For most metro areas and property types, lower oil prices have been a net positive. Spending less on gasoline encourages consumers to spend more on other items, which helps retail and hotel market fundamentals. Lower oil and energy costs will also reduce certain construction, manufacturing and logistics costs. This aids business investment and expansion, which, in turn, increases demand for industrial and manufacturing space. Property markets will see a short-term lift due to a combination of improving tenant fundamentals and lower operating costs. However, for major energy-producing metro areas, the short-term benefits of low prices will be discounted by the negative impacts on energy-related firms. The long-term health of the property markets in these metro areas will greatly depend on the speed with which oil prices rebound to sustainable levels for U.S. producers. The national economy overall is better off in the near term. The U.S. is still a net importer of oil at about $190 billion per year, and the decline in prices positively influences the nation’s trade balance. Lower prices directly translate into an increase in household disposable income. Americans could see $50 billion to $75 billion ($400 to $650 per household) in gasoline savings this year alone. David Lynn, Ph.D., is the founder and CEO of Everest Medical Core Properties and Medical Core REIT I. He is the author of five books and more than 70 articles on commercial real estate and a frequent speaker in the industry. His recent book, The Investor’s Guide to Commercial Real Estate, offers expert advice for institutional real estate investors.
www.omegare.com
The U.S. property market landscape in 2017 will be characterized by continued strong fundamentals, increased investor flows and high transaction volume. As for the economic landscape, the U.S. continues to grow moderately and add jobs. The U.S. employment gains continue to be strong, with unemployment dropping below 5.0 percent earlier this year, and adding to demand for housing in a variety of forms, for office space, for the retail sector and for industrial/distribution facilities. While many fear the end of the current economic cycle, the fact that the recovery was so protracted leads me to believe that we may have another two years left in the current growth cycle.
The U.S. Federal Reserve made it clear last December that the central bank sees U.S. growth as relatively stable, notching the federal funds rate higher by a quarter point. Nevertheless, underlying inflation is extremely tame in the U.S. and in major emerging markets (with worries of deflation in some sectors and countries), providing no impetus for significantly higher rates. Lending rates and fixed-income rates of return will still be very low by historical standards, inducing continued levered purchases of real estate assets.
The following five trends will play a significant role in commercial real estate in 2017.
Global economic and political uncertainties. The Brexit vote in the U.K. has added new uncertainties that will not be fully understood, much less resolved, in the near term. The IMF has downgraded global growth twice since January as uncertainties blur the outlook. For U.S. markets—real estate in particular—the impact is likely to be largely positive as U.S. assets become more attractive and valuable to global investors. We can probably expect enhanced inbound foreign investment in U.S. real estate as the U.S. becomes even more of a safe haven. The IMF predicts higher economic growth in the world as emerging markets find their footing and commodities continue their recovery. Stronger global growth is likely to provide more real estate inflows into the U.S. market as the U.S. remains one of the most attractive commercial real estate markets.
2. Low interest and cap rate environment. While it seems fairly certain that the Fed will seek another rate hike before the year is out, it should be minor. The funds rate could be boosted by perhaps 0.25 percent to 0.50 percent in 2016 and the same in 2017, but both inflation and employment appear to be coming in under the Fed’s expectations. With global economic growth lower than expected earlier in the year, the Fed will more likely maintain a ‘wait-and-see’ position in the short term. We still believe that the Fed is more than likely to weigh the effects of each move it makes before adding any additional friction to current (if unspectacular) economic growth trends. Ten-year Treasury yields have been in flux as early concerns about the effects of Brexit have begun to smooth out. Yields, which had fallen to as low as 1.24 percent in the immediate aftermath of the Brexit vote, have risen back to more than 1.5 percent in recent weeks. As concerns about global economic developments ease, we should expect those yields to push back toward a more normalized 1.75 percent to 2.0 percent range by early 2017. The squeeze on cap-rate spreads remains of some concern for real estate investments should rates rise more rapidly than expected, especially with the “frothiness” we have seen in certain gateway, class-A markets. At present, little indication exists that a rate increase will push cap rates dramatically higher. Nonetheless, there are indications that yields may begin to drift upward. And, as pricing in first tier markets stalls and yields hover in the sub–4 percent range in some of the major gateway markets—which are, in some cases, already in peak pricing territory—we should probably expect investors to move more aggressively into secondary and tertiary markets—and to opportunities beyond core assets to core-plus and value-add properties, as well as some of the higher-yielding niche property sectors, such as medical real estate.
3. Foreign investment in the United States. Global economic and political uncertainty continues to drive capital to the United States. International capital flows into U.S. real estate assets will continue—and increase. The U.S. property market is the most stable and transparent in the world, with higher relative yields and price appreciation potential, making it an easy investment choice. And, while slowing growth in China and much of Europe may dampen currencies and incomes over there, there is still abundant non-U.S. capital looking for placement and very strong demand for U.S. assets, as 2015 proved with record inflows. In 2015, foreign purchases of U.S. real estate assets rose to more than $87 billion over the 12 months ending in December, according to the Association of Foreign Investors in Real Estate (AFIRE), with China, Canada, Norway and Singapore all riding the wave. That volume is up from just $4.7 billion in 2009, according to research firm Real Capital Analytics. Among members of AFIRE, a substantial percentage expect to increase investment in the U.S. in 2017. Changes in the 1980 Foreign Investment in Real Property Tax Act (FIRPTA), which now allow foreign investors to be treated in a fashion similar to their U.S counterparts, will likely lead to an increase in foreign investment in the U.S. real estate market as well.
4. Slowing new supply. Additions to supply will remain limited across the board, with only modest supply growth in a few sectors—multifamily (now slowing for the remainder of 2016), student and seniors housing (creeping up) and single-tenant industrial (regional distribution centers)—and repurposing in others (suburban malls). Lending sources were extremely skeptical about funding new construction (particularly hotel and hospitality) coming out of the last recession, and the current lending environment is showing signs of reticence as bank reserve requirements from Basel III and CMBS risk retention requirements from Dodd-Frank are due to kick in by late 2016. Market volatility has sharply reduced CMBS offerings as well. Insurance companies are stepping in to fill some of the gaps, and private debt funds are emerging as an alternative space. Of all the property sectors, only multifamily can be said to be near long-term new supply highs, although office is seeing some marginal supply additions in a few markets for the first time in years. Medical office supply remains at a fraction of its long-term levels.
5. Volatile Energy Markets. Energy market volatility has already affected certain regional economies (Houston, North Dakota) and producer nations (Saudi Arabia, Venezuela). Last year saw a dramatic drop in oil prices, and the drop continued into early 2016, followed by substantial volatility through mid-year. Increased production and reduced demand due to slowing global growth led to the decline which saw oil prices fall from $110 per barrel to a 13-year low $27 per barrel in early 2016, with recovery to just $43/bbl in July. The world is oversupplied, and major oil-producing countries have barely reduced production. This has had a profound economic impact and carries with it implications for property market fundamentals and commercial real estate pricing.
The impacts vary considerably by region and sector. Negative effects are largely concentrated in a few metropolitan areas with high economic exposure to the energy industry (including Houston, Texas and the oil shale region in North Dakota). For most metro areas and property types, lower oil prices have been a net positive. Spending less on gasoline encourages consumers to spend more on other items, which helps retail and hotel market fundamentals. Lower oil and energy costs will also reduce certain construction, manufacturing and logistics costs. This aids business investment and expansion, which, in turn, increases demand for industrial and manufacturing space. Property markets will see a short-term lift due to a combination of improving tenant fundamentals and lower operating costs. However, for major energy-producing metro areas, the short-term benefits of low prices will be discounted by the negative impacts on energy-related firms. The long-term health of the property markets in these metro areas will greatly depend on the speed with which oil prices rebound to sustainable levels for U.S. producers. The national economy overall is better off in the near term. The U.S. is still a net importer of oil at about $190 billion per year, and the decline in prices positively influences the nation’s trade balance. Lower prices directly translate into an increase in household disposable income. Americans could see $50 billion to $75 billion ($400 to $650 per household) in gasoline savings this year alone. David Lynn, Ph.D., is the founder and CEO of Everest Medical Core Properties and Medical Core REIT I. He is the author of five books and more than 70 articles on commercial real estate and a frequent speaker in the industry. His recent book, The Investor’s Guide to Commercial Real Estate, offers expert advice for institutional real estate investors.
www.omegare.com
Philadelphia Industrial CRE Markets are Catching Up to Other Sectors
by Matthew Rothstein, Bisnow
If there’s one thing that differentiates industrial from the other forms of commercial real estate, it’s the way it interacts with the land around it. Office, residential and retail increasingly want to share the same spaces and create live/work/play environments. Most industrial spaces are still better served by largely keeping to themselves so trucks can move with ease and freedom.
Transportation has always been crucial to industrial spaces, but now it might be the most crucial factor. That’s because e-commerce has begun to dominate the retail economy, placing a premium on shipping and requiring more distribution centers. E-retailers generally require more facilities with a smaller footprint, easy access to more employees, and closer proximity to consumers than manufacturing plants, the industrial sector's classic use. “For projects that are a complicated product mix—things like supplying major retailers—[distribution] isn’t easily automated and requires a lot of employees to work it,” says PIDC’s Tom Dalfo. For Philadelphia, that's good news. “It’s not an easy thing to recruit a thousand people to work in a warehouse, but we have a very deep labor pool for that,” Tom says. What’s more, Philadelphia already has clearly defined industrial zones, which has empowered PIDC to facilitate land sales, development and financing. Industrial uses for land can often cause a conflict with NIMBYs (what doesn't these days?), who don’t want to be anywhere near the truck traffic that comes with an industrial building. “If there’s pre-existing residential, office or mixed-use in place, you tend to get significant resistance from townships during the entitlement process."
“In Philadelphia, that’s not really a challenge,” Tom says. “The properties that would be interesting to developers have been zoned as industrial for quite some time, and I think the neighboring residential populations and the city support that.” Even though industrial zones are kept separate, their presence in a city means they aren’t exactly isolated—a crucial point when trying to recruit a workforce. “The pattern of development is so tight in Philadelphia that [retail] doesn’t necessarily need to be integrated into the industrial district,” Tom says. Philly also benefits from its position among the Northeast’s cities, positioned to be a distribution base to both Washington, DC, and New York, with a better situation for industrial development than either. With all those factors in its favor, it’s no surprise that the industrial market in Philadelphia is trending upward. "The drivers of demand for industrial activity are very different than the drivers for residential and retail and commercial," Tom says. "That said, I think a rising tide lifts all boats, and investors who are active in the city now, and were not active five or 10 years ago, operate in many different areas. The extent that they’re in this market means they can deploy their investments a little more broadly than before.”
There is another connection, beyond proximity, between Philadelphia’s strong residential and commercial markets—there are more people and jobs here than there have been in years, and, if nothing else, that means more consumers need products shipped to them here. That demand has to be met by someone. In the surrounding area, industrial developments have more space to work with, and often house the larger distribution centers that service wider regions. There, just as in Philly proper, indicators for the market are positive. “Regionally, we're in the fifth year of steady institutional investor demand, significant tenant activity and rising rental rates, an active speculative market that risks outpacing near-term demand in certain locations.” With all these good signs for demand in the industrial market, many developers are building industrial sites on spec, which always presents a danger of overbuilding. In urban Philadelphia, building costs are too high to do so, but the greater region doesn’t always possess the same natural barrier to entry. “Some [investors] have chosen to develop in secondary locations while underwriting core market rental rates in order to establish a presence in this region. They’re taking risks beyond what MRP Industrial is comfortable promoting to our capital partners.” Their enthusiasm is understandable, but also risks creating something Philadelphia rarely has to deal with—a bubble. Still, there is little cause for anything but enthusiasm, especially with respect to Philadelphia’s urban market. It’s simply too well-positioned for the changing climate of industrial real estate for any other sentiment.
www.omegare.com
If there’s one thing that differentiates industrial from the other forms of commercial real estate, it’s the way it interacts with the land around it. Office, residential and retail increasingly want to share the same spaces and create live/work/play environments. Most industrial spaces are still better served by largely keeping to themselves so trucks can move with ease and freedom.
Transportation has always been crucial to industrial spaces, but now it might be the most crucial factor. That’s because e-commerce has begun to dominate the retail economy, placing a premium on shipping and requiring more distribution centers. E-retailers generally require more facilities with a smaller footprint, easy access to more employees, and closer proximity to consumers than manufacturing plants, the industrial sector's classic use. “For projects that are a complicated product mix—things like supplying major retailers—[distribution] isn’t easily automated and requires a lot of employees to work it,” says PIDC’s Tom Dalfo. For Philadelphia, that's good news. “It’s not an easy thing to recruit a thousand people to work in a warehouse, but we have a very deep labor pool for that,” Tom says. What’s more, Philadelphia already has clearly defined industrial zones, which has empowered PIDC to facilitate land sales, development and financing. Industrial uses for land can often cause a conflict with NIMBYs (what doesn't these days?), who don’t want to be anywhere near the truck traffic that comes with an industrial building. “If there’s pre-existing residential, office or mixed-use in place, you tend to get significant resistance from townships during the entitlement process."
“In Philadelphia, that’s not really a challenge,” Tom says. “The properties that would be interesting to developers have been zoned as industrial for quite some time, and I think the neighboring residential populations and the city support that.” Even though industrial zones are kept separate, their presence in a city means they aren’t exactly isolated—a crucial point when trying to recruit a workforce. “The pattern of development is so tight in Philadelphia that [retail] doesn’t necessarily need to be integrated into the industrial district,” Tom says. Philly also benefits from its position among the Northeast’s cities, positioned to be a distribution base to both Washington, DC, and New York, with a better situation for industrial development than either. With all those factors in its favor, it’s no surprise that the industrial market in Philadelphia is trending upward. "The drivers of demand for industrial activity are very different than the drivers for residential and retail and commercial," Tom says. "That said, I think a rising tide lifts all boats, and investors who are active in the city now, and were not active five or 10 years ago, operate in many different areas. The extent that they’re in this market means they can deploy their investments a little more broadly than before.”
There is another connection, beyond proximity, between Philadelphia’s strong residential and commercial markets—there are more people and jobs here than there have been in years, and, if nothing else, that means more consumers need products shipped to them here. That demand has to be met by someone. In the surrounding area, industrial developments have more space to work with, and often house the larger distribution centers that service wider regions. There, just as in Philly proper, indicators for the market are positive. “Regionally, we're in the fifth year of steady institutional investor demand, significant tenant activity and rising rental rates, an active speculative market that risks outpacing near-term demand in certain locations.” With all these good signs for demand in the industrial market, many developers are building industrial sites on spec, which always presents a danger of overbuilding. In urban Philadelphia, building costs are too high to do so, but the greater region doesn’t always possess the same natural barrier to entry. “Some [investors] have chosen to develop in secondary locations while underwriting core market rental rates in order to establish a presence in this region. They’re taking risks beyond what MRP Industrial is comfortable promoting to our capital partners.” Their enthusiasm is understandable, but also risks creating something Philadelphia rarely has to deal with—a bubble. Still, there is little cause for anything but enthusiasm, especially with respect to Philadelphia’s urban market. It’s simply too well-positioned for the changing climate of industrial real estate for any other sentiment.
www.omegare.com
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