Archive for March, 2012

New Column: Institutional Insider

Saturday, March 31st, 2012
When the California State Teachers’ Retirement System lowered its assumed annual rate of return in January for the second time in a little over a year, something was obviously afoot. The $144.8-billion fund’s board of directors agreed to cut its target expected return from 7.75% to 7.5%. The move comes more than a year after the board was asked to make an even more drastic rate cut, from 8% to 7.5%, in December 2010, but the action was deemed too severe at the time.
Once upon a time, institutional investors like pension funds and insurance companies had been notoriously slow to adapt to real-time, changing market environments. That attitude is becoming a luxury that few can now afford.
Check out the rest of my new column in Real Estate Forum magazine and on

In the News (March 26-30)

Saturday, March 31st, 2012
Check out these links to some of the noteworthy stories that are trending in the world of commercial real estate.

Investor Interest Revives Industrial Sector

Sunday, March 25th, 2012
While the apartment sector continues to attract a great deal of investor attention these days, a growing number of buyers are revisiting the rebounding industrial sector as it continues to demonstrate positive signs of recovery, according to the Q1 Real Estate Investor Survey by PricewaterhouseCoopers. “Warehouse demand is rapidly picking up, especially in coastal markets with international port access,” notes one survey respondent.
In 2011, leasing demand for industrial real estate grew significantly, allowing this sector to reabsorb all of the space vacated during the recent recession. In fact, nearly all U.S. industrial markets reported positive absorption trends in 2011 with big-box warehouse activity outperforming the sector as a whole. Many surveyed investors feel that leasing demand for distribution space will remain strong in the coming months despite short-term concerns about the pending recession in Europe and the languid U.S. economic recovery.
Investors’ upbeat outlook for warehouse space is tied to the healing U.S. labor market, which will lead to greater consumer spending and the consumption of more goods. “For us, the underlying positive trends, while sluggish, outweigh the negative ones for this sector going forward,” says one participant. When combined with the limited amount of new supply added to this sector over the past few years, a main reason for acquiring industrial assets now is the potential for rent growth.
“Limited construction and steady demand should help propel rent growth in most markets in 2012,” notes an investor. Overall, rent growth assumptions for the survey’s national warehouse market have increased nearly 235 basis points over the past two years. In addition, the number of surveyed investors using rent spikes has jumped from 25% in the first quarter of 2010 to 60% this quarter.
Of particular interest to buyers are industrial properties located in hot-bed energy and high-tech markets, like Austin and San Jose-Silicon Valley, where job gains, leasing demand, and rent growth are expected to lead the country. According to the PwC Real Estate Barometer, these two industrial markets are in the recovery stage of the real estate cycle and are expected to progress into the expansion phase by year-end 2014. As a whole, the U.S. industrial stock will stand 50% in recession, 37% in recovery, and 13% in expansion by year-end 2012. By yearend 2015, expansion and recovery dominate this sector.
While the desire to acquire warehouse assets at this point in the cycle is not unusual for many investors, the current investing environment is far from “normal,” says PwC. While investors are intently monitoring an array of factors, including the U.S. economy and its impact on this sector’s fundamentals, they are also closely watching developers. Even though additions to supply have been constrained, a shortage of quality bulk warehouse space is spurring speculative construction and build-to-suit activity in various markets. As owners of industrial assets know, too much new supply could easily undermine the recovery of the entire sector, as well as many of its top-performing markets, squashing investment expectations and ownership interest over the near term.
National Secondary Office Market
To reflect the growing interest by investors in secondary office markets, PwC also created a new National Secondary Office Market section of the survey. Since there is no universal definition for “secondary,” the report includes 20 markets based on GDP, office jobs and total office stock.
In terms of cap rates, the two markets at the low end of the range are Austin and San Jose. For Q1, the overall cap rates for the CBD segment of the national secondary office market range from 5.50% to 9.00% and average 7.73%. For the suburbs, they range from 5.00% to 11.00% and average 8.39%.
According to the PwC survey, the offering of free rent is common in the national secondary office market, with just over 90% of surveyed investors using free rent in their cash flow forecasts. Free rent ranges from one to 12 months on a 10-year lease and averages 7.9 months.

In the News (March 19-23)

Sunday, March 25th, 2012
Check out these links to some of the noteworthy (and sometimes offbeat) stories that are trending in the world of commercial real estate.

U.S. Hotels Continue Recovery Mode

Sunday, March 18th, 2012
Book ’em, Danno. Hotel rooms that is.
U.S. hotels are continuing to recover from the recent recession, both in terms of fundamentals and in increased investment sales.
2012 sees the national hospitality sector heading into its third year of recovery, with occupancy expected to reach nearly 61% and Average Daily Rates (ADRs) climbing 4% this year on a year-over-year basis, according to a new study by Marcus & Millichap. North Dakota, Nevada and Texas are outperforming the nation’s hospitality sector in M&M’s Statewide Hospitality Index.
In terms of investment sales, M&M notes that properties in Texas and California, in particular, are in high demand. This comes on the back of a stronger 2011, which saw a 78% spike in sales of branded select-service, limited service and economy hotels.
A recent report from Jones Lang LaSalle Hotels confirmed that hotel sales in the Americas reached a 4-year high in 2011, surging 24% to $25.2 billion.
The largest U.S. hotel market, Manhattan, will show continued strength in operating metrics and investment sales in 2012, says CBRE.
“Manhattan hotel investment sales rebounded significantly in 2011, and 2012 is expected to be a strong year as well,” said Bradley Burwell, senior associate with CBRE Hotels. “Fundamental lodging performance remains strong, and despite the addition of more than 4,100 units in Manhattan in 2011, occupancy remained constant at 84%, clearly showing that the city can continue to absorb new supply.”

In the News (March 12-16)

Saturday, March 17th, 2012
Check out these links to some of the biggest, more interesting and sometimes offbeat stories that are trending in the world of commercial real estate.

Sprouts, Sunflower Farmers Markets Merging

Sunday, March 11th, 2012
Two of the country’s largest natural food grocery store chains have decided to grow together.
Phoenix-based Sprouts Farmers Market and San Diego-based Sunflower Farmers Market  have announced a potential merger that would expand the chains outside their traditional Southwestern U.S. roots.
The combined company will be a prominent player in the Western United States retail food industry, with projected 2012 annual revenues approaching $2 billion. It will operate 139 stores under the Sprouts Farmers Market name and will have approximately 10,000 employees. The transaction is expected to close in the second quarter of 2012.
The addition of Sunflower’s 35 stores expands Sprouts’ geographic footprint to Nevada, Utah, New Mexico and Oklahoma, and also extends its presence in California, Arizona, Colorado and Texas.
Overall, the combined company plans to open up to 13 new stores in 2012. All of the Sunflower stores are expected to be re-branded under the Sprouts banner by the end of 2012.
Sprouts is majority-owned by investment funds affiliated with Apollo Global Management, LLC (NYSE: APO).
Here is the new official website created by Sprouts and Sunflower.
And check out this story on the deal from the Phoenix Business Journal.

In the News (March 5-10)

Sunday, March 11th, 2012
Check out these links to some of the biggest, more interesting and sometimes offbeat stories that are trending in the world of commercial real estate:

Office Space Per Worker Falling to 100 SF

Sunday, March 4th, 2012
When it comes to your workspace, get ready to do more in less.
According to a new study by Atlanta-based CoreNet Global, for the first time for many companies, the average allocation of office space per person in North America will fall to 100 sq. ft. or less within the next five years.
At least 40% of the companies responding to the CoreNet study indicated that by 2017 they will reach this all-time low benchmark of individual space utilization, which has been the case in Europe for the past several years but is now heading for the Americas.
The average for all companies for square feet per worker in 2017 will be 151 sq. ft., compared to 176 sq. ft. today, and 225 sq. ft. in 2010.
“The main reason for the declines is the huge increase in collaborative and team-oriented space inside a growing number of companies that are stressing ‘smaller but smarter’ workplaces against the backdrop of continuing economic uncertainty and cost containment,” says Richard Kadzis, CoreNet Global’s Vice President of Strategic Communications.
CoreNet Global is the worldwide association for corporate real estate and workplace professionals, with mover 7,000 members, including 70% of the top 100 U.S. companies and nearly half of the Global 2000. The CoreNet Global benchmark survey was conducted in February 2012. More than 465 global managers of corporate real estate responded. CoreNet Global will continue to track this downward pressure on designated office space per worker over time.
CoreNet Global itself reduced its total office space and space per person by nearly 20% last year in a transformation of its downtown Atlanta headquarters.
Today, just 24% of the respondents reported that the average space per office worker is 100 sq. ft. or less; however, 40% reported that within five years, the average space per office worker would be 100 square feet or less.
It is clear that the amount of space dedicated solely to specific employees is steadily shrinking. A majority of the respondents, 55%, reported that square feet per worker has already decreased between 5% and 25% over the last five years.
“There are number of additional factors contributing to the decline in the amount of space per worker,” says Kadzis. “More companies are adopting open floor plans in which employees do not have any permanently designated space at all; rather they use unassigned space when they are in the office, settings that often change daily. This trend is enabled by technology and by cost measures, as they require smaller foot prints.”

In the News (Feb. 27-March 2)

Sunday, March 4th, 2012
Our new feature gives you links to some of the biggest, more interesting and sometimes offbeat stories that are trending in the world of commercial real estate over the past week: