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The Future of CRE... Parking Lots?

March 14, 2017 by Mark Staples

While there are many naysayers regarding the future of driverless cars, past experience tells us that they will become ubiquitous in the decades to come. Just look at these 3 examples of naysayer predictions and their ultimate outcome.

In 1995, Bill Gates famously said “The internet is just a passing fad”. This was in response to a question put to him regarding his lack of concern over Netscape dominating the browser market at the time.

In 1994 the Financial Post (Canada) described e-commerce as a “tele-shopping magical experience,” and the story that followed was a bit dismissive of “the latest fad.”
In 1995 Amazon was launched.

In 1993, in response to rumors, used car dealers across America said that consumer electronics retailer Circuit City “knew nothing about the automobile business and wouldn’t be successful if it ventured into the business”. That year, Carmax opened its first store in Richmond, Virginia.

On the flip side, forward-thinking people like Travis Kalanick (CEO of Uber) and Elon Musk (CEO of Tesla) predict that in the decades to come car ownership will become a thing of the past. That people will prefer to use their smartphones to hail a driverless cab whenever they need transportation. This prediction is supported by insurance industry estimates of fleet insurance costs for driverless cars being a fraction of what they are currently. And also supported by the obvious fact that car ownership is a “money pit” sucking up a large portion of an average person’s disposable income.

So by now I am sure many of you reading this article are asking “OK, so what does any of this have to do with Commercial Real Estate?” Well, I will now make a prediction of my own. I predict that driverless cars will cause major disruption in the CRE industry. Huge parking lots and decks located in retail and urban centers will become obsolete. They will no longer be “highest and best use” of the property.

The storage lots for driverless cars will be better located in the periphery of urban centers. In addition to providing vehicle parking while waiting for the next fare, there will be a need for repair and restoration services located at each lot. After all, fleet vehicles need frequent maintenance and cleaning. These revolutionary developments will be the genesis of an entirely new service industry devoted exclusively to driverless cars. We might call this new business model "Vehicle HoverPorts".

And for CRE Brokers…? Simply put. Opportunity! Commercial Real Estate Professionals will be the folks that will be handling transactions to sell the obsolete urban parking facilities and to find the properties appropriate for the new driverless terminals.

Vehicle Hoverports… What say you?

Article originally appeared in my "Insider Blog" in March 2017

We Sell or Else!

March 2, 2017 by Mark Staples

The phrase “We Sell Or Else” was the promise of David Ogilvey, the man who is widely considered the father of the advertising business. Being great admirers of Ogilvey, my team and I have adopted “We Sell or Else” as our daily mantra. Without sales, a real estate broker is reduced to the role of a tour guide, which in itself is an honorable profession, but in our line or work it doesn’t put food on the table or pay our mortgage. We must create opportunities and close transactions…. or move on… 

The commercial real estate business is populated by many smart, talented, and motivated entrepreneurs. These entrepreneurial people recognize that commercial property brokerage is a business that rewards knowledge and effort, and at the same time they realize that the business is intense, stressful, and competitive. The best of the bunch wake up every morning, shake our fist at the world and say “Bring it on”! Among our core principles is the belief that we are problem-solvers… and we “must” be good at it…or else!

The best commercial brokers possess a comprehensive knowledge of the business and of best practices, knowledge of our market, a solid work ethic, integrity and ethics, plus creativity and the ability to think outside of the box. We think constantly about success… but not just “our” success. The best brokers are more focused on the success of their clients, realizing that if we help our clients achieve their goals, our personal success will follow.

Article originally appeared in my "Insider Blog" in October 2016

Need to Store That? Booming Self-Storage Industry Says No Problem

October 28, 2015 Posted by Mark Staples of KW Commercial Chapel Hill:

It could be a while before anyone loses the storage wars.

Business is booming for companies that lease out storage units to consumers. Rents are rising, most units are occupied, and competition is tame due to limited new construction in the wake of the financial crisis, storage executives and analysts say.

Investors are bidding up the shares of industry leaders such as Extra Space Storage Inc., whose stock is up 33% through Monday in a year when many other commercial real-estate firms have been hit hard and the broader S&P 500 is down 2%. Evercore ISI last week boosted its price targets for Extra Space Storage stock and the shares of two rivals.

Large investment firms also are trying to cash in, with Carlyle Group LP spending about $80 million to help build new facilities in Southern California, the Pacific Northwest and elsewhere, and Harrison Street Capital LLC considering selling storage properties it snapped up in recent years.

“It’s a good industry to be in,” said Charles Byerly, chief executive of Westport Properties Inc., which is based in Irvine, Calif., and operates more than 80 facilities in 13 states under the US Storage Centers brand.

Consumers seek storage space because of life changes that occur in good times and bad. Some in the industry refer to the 4Ds—death, divorce, downsizing and dislocation, which can include people finding new jobs, getting married or moving away or back home from college.

Because such events don’t necessarily track the economic cycle, the storage business “isn’t recession-proof, but it is recession-resistant,” said Ryan Burke, an analyst at Green Street Advisors, a real-estate research firm.

Juli Ann Polise, a University of Michigan sophomore, said she used a storage company in Ann Arbor, Mich., to store her possessions when she went home for the summer. “It would have just taken up unnecessary space in our house,” she said. “We are definitely doing it again next summer.”

Demand for storage space appears steady, even amid tepid job growth, and supply remains tight. Extra Space, based in Salt Lake City, said 94.5% of its space was occupied at the end of the second quarter, up from 92.1% a year earlier. Public Storage, the largest publicly traded firm in the industry, reported a 7% increase in rental income year-over-year.

Part of the reason for the tight supply is that building new units can take years. In one extreme example, it took Extra Space more than a decade to build one facility in Southern California, said Spencer Kirk, the firm’s CEO. Some communities are unenthusiastic about hosting storage facilities.

The protracted timeline can make it challenging for smaller firms to get financing, said Mr. Burke. New units are coming online, but at a middling pace that is likely to limit the impact for at least a year or so, he said.

Still, supply is likely to grow at a faster pace in coming years, said Mr. Burke. In addition to the facilities that Carlyle is building, Public Storage has plans to build 3.9 million square feet of storage space, according to a company spokesman.

Some of the new facilities may simply meet pent-up demand in neighborhoods where construction has been slow. Carlyle is targeting places where the amount of storage space per capita is below the national average, said Rob Stuckey, the firm’s head of U.S. real estate.

But acquiring new facilities has gotten more expensive, which could make future growth more costly. Extra Space announced on Oct. 1 that it had closed on the $1.3 billion acquisition of SmartStop Self Storage Inc. “We obviously would have paid less” for the SmartStop portfolio three or four years ago, said Mr. Kirk of Extra Space.

In addition, the share prices of the largest storage companies may already reflect much of the upside for the industry as a whole.

“There’s a lot of positive expectations already priced into the stocks,” said Paul Adornato, an analyst at BMO Capital Markets.

Still, analysts said storage can be a good long-term business because the space tends to be “sticky.” Once people rent storage units, they are unlikely to move to a different facility even if the rent is slightly lower, and they tend to keep the units longer than they anticipated, according to Mr. Burke.

Consumers also often have a sentimental attachment to their possessions that keeps them around.

“Your competition is the dumpster,” said Christopher Merrill, co-founder of Harrison Street, which manages $7.9 billion in assets. Harrison Street sold a group of storage facilities to CubeSmart, another storage firm, for about $223 million last year.

Mr. Merrill said the firm still owns about 40 facilities around the country, some of which it expects to keep because of the steady income they provide to Harrison Street’s investors and some of which it expects to sell in the next two years. 

Article written by Liam Pleven of the Wall Street Journal

 

 

Chris Marr, CEO of CubeSmart, said he sees no risk to the business from new construction until at least the end of next year. He has been in the industry for about two decades and says conditions now are “as good as I’ve seen.”

Triangle Retail

October 1, 2015 Gary Becker

The Triangle area of North Carolina remains a strong retail marketplace. From 2008 to 2012, 1.6 million square feet of community neighborhood retail space was added. At present, the retail vacancy rate is approximately 6%, which is well below the vacancy rates in the office and industrial sectors.

In 2014, 131,000 square feet of retail space was added with the completion of the 2nd and 3rd phases of Park West Village in Morrisville. In addition, Phase 1 of the Parkside Towne Commons Power Center also opened in Cary. That leaves 360,000 square feet under construction in three neighborhood centers.

On the horizon, Phase 2 of Parkside Towne Commons is already under construction. In addition, a 207,000 2nd phase of Holly Springs Towne Center is being planned as are additional phases of Broadstone Station in Apex and White Oak Crossing in Garner.

Many new retailers have entered, or have announced plans to enter the Triangle market. These include Publix Grocery, Bass Pro Shop, Gander Mountain, Field & Stream, Toby Keith’s Bar & Grill, The Egg & I, and many others. Separately, Costco has announced plans for a second warehouse store, located along the Cary/Apex border.

Cap Rates for Single Tenant Retail and Office Properties Experienced Moderate Increases

October 21, 2013 KW Commercial Excerpted Boulder Group

Cap rates for single tenant retail and office properties experienced moderate increases for the first time in nearly two years in the third quarter of 2013. Cap rates in the industrial sector remained unchanged. The modest rise in cap rates, for retail and office sectors, is primarily due to the increase in interest rates correlated to the 10.4% increase in the 10 Year Treasury yield from July to August. Retail and office properties experienced a slight rise in cap rates; however cap rates for net leased properties valued below $8 million have not experienced the same cap rate impact. Properties priced below $8 million are in the highest demand amongst individual investors. Individual investors are more likely to pay lower cap rates than an institutional investor as they do not have to meet the same return hurdles and frequently utilize 1031 Exchanges. Additionally, institutional investors are typically more sensitive to interest rates and make real time adjustments to changes in the capital markets.

While the 10 Year Treasury yield continued to increase in the third quarter, the supply of net leased retail and office properties decreased by over 9%.

Net lease participants were expecting cap rates to be impacted more than the moderate increase in the third quarter due to the uptick in interest rates.

However, downward pressure applied on cap rates by limited supply in the market kept cap rates from being impacted more significantly.

Retailers plan to focus on same store growth rather than expansion, causing the development pipeline for new construction single tenant assets continues to be limited. Additionally, the limited supply of core market assets has caused cap rates for these assets to remain at last quarter's level or even decline slightly in some cases. Retail properties remain in the highest demand as evidenced by the premium over office and industrial properties of

68 and 98 basis points respectively. The competition amongst investors for this asset type can best be illustrated by the spread between the asking and closed cap rates, which compressed further in the third quarter for retail properties.

It is expected that there will be a limited movement in valuation in the fourth quarter of 2013 as there is a substantial investor pool seeking a limited supply of net lease assets. Transaction volume in the fourth quarter is expected to remain at similar levels to 2011 and 2012, as institutions are anxious to allocate recently raised dollars from their significant fundraising year.

Excerpted Boulder Group

 

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