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Thursday, December 14, 2017

State of Atlanta market discussed at Bisnow event

By Nadine Melo (Atlanta) 

The room was teeming with excitement on December 5th, an odd sight given the time of day –7:30 am to be exact. 

Atlanta real estate professionals gathered by the entrance of Bisnow’s state-of-the-market event, grabbing their badges and greeting fellow peers as they made their way to the coffee station to continue their conversations. Some even provided their own projections on what can be expected of the market in the upcoming year. 

After an hour of networking, The Ardent Companies CEO and event host Mark Shulman kicked off a three-panel discussion.

“Today, Bisnow is all about projects and predicting the future,” he said. 

Here are some of the topics discussed on where the Atlanta market is today and where it will be in 2018: 

While the first panel made it a point to discuss all commercial real estate asset classes, panelists did so through the use of mixed-used developments. Mixed-used projects, and in particular retail, served as the framework for most of the discussion, and it was not surprising why. 

In fact, retail, more than any other asset class, serves as the foundation for most mixed-use developments that we see today in Atlanta and elsewhere. Look at Avalon, the Battery and Colony Square and retail is, indeed, the common denominator. However, panelists stressed that, to be successful, mixed-use properties must provide consumers with an experience. 

“For retail, it's the overall experience that developers have to create to get people in there,” said BBG Director Grant Griffin. 

A fact which was furthered addressed by Franklin Street Director Reid Mason, who attributed the success of Avalon, a mixed-use development located in Alpharetta, GA, to the marketing and programming of the project.

“It goes back to the consumers and the consumers these days want an experience,” said Mason. “They want something unique. These developers are looking for that (uniqueness) to put in their center.”

HFF Senior Director Chip Sykes opened the capital markets discussion with the following statement: “You are going to hear as a general theme that capital is abundant and that it’s being put thoughtfully and with discipline, and very unlike what we saw in the previous cycle.” 

“Office has been restrained and is good, because markets like Atlanta can get in trouble for overbuilding,” said PCCP Director John Randall. 

In addition to the change in real estate fundamentals, there has been an increase in insurance companies lending money to developers and landlords seeking debt financing outside of the typical CMBS loan.

“Insurance companies are lending more money now on an annual basis than they ever had previously – about $80 billion annually over the past three years, which is a high-water mark for the industry,” said Sykes.

Later, the developing southside of Atlanta’s downtown area, along with the issue of affordability and transportation, dominated much of the third panel discussion. While most panelists agreed that the burgeoning renaissance of south downtown is a huge boost for the overall marketability of the city as Amazon considers Atlanta for its HQ2 site, the fact remains that the city’s growth can be stymied if the issues of affordability and transportation are not dealt with now. 

“I think we do have an affordability issue, both on the development and the production side of our business,” said Shelton McNally, Principal of Conor McNally, “It’s just harder to make yields work on the more expensive, in-fill, higher-cost deals right now.” 

McNally went on to say: “If you do have a good transportation infrastructure you can move people around the city effectively, and you can deal with the affordability issue.” 

Despite the growing concerns over affordability, transportation and overbuilding, panelists projected a positive outlook for commercial real estate in 2018.

(Nadine Melo is the marketing co-ordinator in Avison Young’s Atlanta office. She works closely with her office’s capital markets group.)

Tuesday, December 12, 2017

Senior Housing Reaches New Heights

By Dan Baker (Washington, DC)

The senior housing industry has reached new heights in its relatively youthful existence as a real estate asset class as it continues to distinguish itself from multi-family, health care and hospitality as a viable institutional investment.

A multitude of factors have combined to create one of the largest bull runs in the history of the senior housing market, making it a great time for owners and/or operators to sell, refinance, or otherwise recapitalize their properties: 

  • Low interest rates for construction, bridge and permanent financing;
  • New entrants and capital to the space;
  • Increasingly favorable long-term demographics;
  • Turmoil, high pricing, and decreasing yields in other real estate assets; and
  • A dramatic increase in operator sophistication and transparency.

 Much of the new product being developed today is different from most of the existing inventory in the market. Amenities, such as bistros, game rooms, theaters and outdoor space, are becoming standard. Key-card access, advances in lighting, Wi-Fi, telemedicine, and the use of electronic health records are also commonplace. Larger units and fewer studios (except in memory-care facilities) are what one would expect in a recently constructed senior housing community.

However, the sky is not all blue for the industry, which is beset with challenges from numerous angles. Increasing regulations and media coverage in the wake of recent natural disasters in Florida, Texas, and California have required operators to invest resources into emergency preparedness. Incorporating quickly evolving technologies into communities to be a more appealing partner to other operators in the healthcare space also requires investment in resources and personnel. Additional headwinds are:

  • Labor, in terms of both availability and quality, is the dominant challenge for large and small operators alike;
  • Affordability remains a pressing issue that the industry has yet to resolve, as middle- class prospective residents, who account for the majority of the baby boomer generation, have enough assets to not qualify for government assistance, but not quite enough to afford the high-end product that is mostly being developed today. As one industry observer said: “They’re too rich to be poor – and too poor to be rich.”
  • When entering a senior housing community, the typical resident is increasingly older and more frail, with more complex medical requirements and in need of assistance with daily living activities, further encumbering an already thin labor force.
  • A tremendous inventory of first-generation senior housing, built in the 1980s and 1990s, is on the market seeking a buyer, and there is concern about the competitive abilities of that real estate in the future due to physical-plant limitations.

These factors are often much more burdensome on smaller, individual owner-operators than larger, regional or national operators due to a lack of efficiencies and economies of scale. As a result, a typical seller in today’s senior housing market has only one property, or a small number of them, and is faced with the decision to grow to remain competitive or sell to capture a market where valuations are historically high.

In all, the senior housing market is alive and well, with unprecedented levels of capital chasing returns in the space, but investors and operators must not believe that simple demographics will lead to success. Proactive operations, thoughtful design and development, and properly structured deals will succeed over the long run as new competition intensifies in the space.

(Dan Baker is a Vice-President in Avison Young’s Washington, DC office. He specializes in senior housing dispositions on behalf of REITs, private-equity firms, and individual owner-operators. His career in senior housing began in 2007 working for an operator in facilities.) 

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