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Saturday, June 27, 2015

NCREIF Summer Conference - Perceptions and Prognostications

by Erik Foster (Chicago)

I was asked to speak last week at the National Council of Real Estate Investment Fiduciaries (NCREIF) Summer Conference and discuss the current state of the US Capital Markets.  NCREIF is an association of real estate professionals who are involved with institutional real estate investments; the audience members were pension funds, fund managers, various fiduciaries, consultants, insurance companies and appraisers.  

The tone of the conference was optimistic, yet there was an air of frustration as many have a difficult time investing funds in today’s market given the peak pricing and dearth of offerings which appears to be the norm across the country.  I focused my comments on office, industrial and medical office property segments, below are the main trends that I spoke to:

·       Office-oriented employment is accelerating and is expected to rise through 2015
·       Office vacancy has decreased year over year over the past three years in many of the major markets such as Chicago, Atlanta, Dallas and San Francisco.  Washington DC’s vacancy is moving the other way, since 2012 its vacancy has increased and now stands at 16.3%, and New York appears to be moving in a positive direction with vacancy at 8.7%, an improvement from last year, but still not down to the 2012 levels.
·       Office construction is moderate with many major markets such as Chicago, New York, Washington DC and Boston keeping their development in-check.  Yet some markets are building at a quick pace as compared to overall stock, Houston 4.5%, San Jose 3.4% and San Francisco 3.3%.
·       Medical office will continue to be a solid investment in the coming years.  The overall vacancy will continue to trend below 10% which was the peak in 2008 as the US population ages and hospital visits increase.

·       Demand for industrial assets remains steady and sales volume should reach close to the 2007 peak of $62 billion by the end of 2015.
·       Several markets still remain below the peak pricing seen in 2007, including several in California – San Jose, San Francisco, San Diego, Sacramento, and Orange County. Among the markets that are performing above peak pricing are Los Angeles, Austin, Houston, Northern New Jersey, and Indianapolis.
·       Buyers of core buildings are bidding these assets into record levels as institutional buyers push into record pricing in the major distribution markets.

NCREIF asked to make some predictions of what we’re expecting as we move into the second half of the year.  I noted that sale-leasebacks will continue to grow in popularity as many companies take advantage of the aggressive market pricing.  Also, as companies are constrained by their internal lines of credit given the new regulatory environment that we live in post-recession, many are choosing to liquidate assets in order to fund growth of their businesses.  I also believe that overall deal volume will be similar to 2014, yet major platform, and company, deals will be prevalent.

Friday, June 12, 2015

A Tour of the Port of Long Beach - It Is Massive!

by Erik Foster (Chicago)

The organizers of this week’s NAIOP’s I.Con ’15 Industrial Conference guided approximately 200 participants on a two hour boat tour of the enormous expanse of waterway known as the Port of Long Beach. This is one of the world’s busiest seaports, a leading gateway between the U.S. and Asia, and a vital part of our national distribution chain.

Despite setbacks from the recent labor issues, the port is holding its own and can expect positive momentum in the next few years.  Combined with the Port of Los Angeles, it is the busiest cargo port in the United States, and combined they rank 9th in the world in total container volume.

Key points of interest from our tour include:

  • The Port handles more than 6.8 million 20-foot container units (TEUs) each year, with cargo valued at $180 billion
  • The Port supports more than 30,000 jobs in Long Beach, 316,000 throughout Southern California and 1.4 million throughout the U.S.
  • 82.3 million metric tons of cargo passes through the Port each year, with 2,000 vessel calls
  • The Port comprises 3,000 acres of land and 4,600 acres of water, with 10 piers and 80 berths
  • The Port has 22 shipping terminals and 66 post-Panamax gantry cranes
  • It is massive!
The Port of Long Beach is implementing a multi-faceted energy efficiency and sustainability plan to help enhance the ecology, preserve natural resources, and reduce negative impact on the environment. This plan is being rolled out throughout the design and construction of the facility, as well as with operations and administrative practices. There is plenty of good news in this approach, as it carries through to clean trucks, green shipping initiatives, and shore power. The Port also is outfitting its container terminals with shore power to allow docked ships to plug into the land-based electricity instead of burning diesel fuel.

Given the dominance of the Asian import market, the California ports will continue to provide important access points for cargo. The boat tour provided a fascinating view of the overall scale and impact of the Port of Long Beach and of the Port of Los Angeles. We expect to see continued positive movement in this distribution sector over the next several years, which will positively impact the rest of the country’s logistics networks in the very near future.

Wednesday, June 10, 2015

When will Commuting be Obsolete?

By: Rand Stephens (Houston)

Research shows that Millennials (ages 17-34) do not want to commute, nor do they want cars.  Cars are expensive and commuting is a time waster! Millennials want mobility to enhance lifestyle, not drag it down.  This mindset is not owned only by the Millennials, it is also becoming more prevalent among the Baby Boomers. As a result, some real estate trends are being established that will not be going away.

Mobility means free movement without restrictions: to be able to live, work, and play in an environment where all three functions are interconnected and seamless. This allows families and friends to spend more time together, and for people to have “me time”, while getting the job done and having a fulfilling career. Technology allows this to happen and has opened everyone’s eyes to the possibilities of an enhanced lifestyle through improved mobility. 

Here are some of the major trends around mobility:

Mixed-Use Developments
These projects incorporate buildings that have multiple uses designed around a central public space that enhances the public’s experience (see my February 2014 blog posting “Live, Work and Play Lifestyles”). This set up provides functionality for people to live, work and play in the same place with less time in the car.  These types of projects have been around for a while in cities with dense populations, like New York.  However, mixed-use developments are springing up in other cities around the US, particularly in the south.  These types of developments were once thought to only work in the inner core of an urban area, although they are proving to be very successful in suburban communities as well.

Customized Transportation vs. Public Transportation
Who really likes public transportation?  It is inefficient and does not enhance quality of life; both are major problems for Millennials.  However, public transportation is inexpensive and not bad for moving a large number of people from point A to B. It serves a purpose for commuting to and from work where there’s a central pick-up and drop-off point, but fails in most cities in getting people around town. 

Companies like Uber, in conjunction with ZipCar and Cars2Go, are providing on-demand transportation options that are being fully embraced by people of all ages and are the way of the future. 

Once Google perfects its driverless car, which is not far from happening, customized transportation will explode.  Imagine being able to order a driverless car, with virtually no wait, that picks you up wherever you are and drops you off wherever you want. This concept gives a person the flexibility to ride alone, or to customize carpooling with friends and co-workers. 

Municipal investment in public transportation traditionally has been very beneficial for increasing real estate values. Although for US cities that do not have one central business core, they need to examine how to best allocate public funding for transportation infrastructure.

Less is More
Less living space is the way of the future.  The Boomers are selling their homes and renting an apartment or buying a condo in a cool urban environment in order to embrace the live, work, and play lifestyle that Millennials are demanding.  In addition, as Boomers retire, they want to do fun things like travel, and don’t want to be burdened with everything that homeownership entails.  There is a separate, rapidly growing trend of Boomers selling their homes to reinvest their equity in smaller residences in different locations to facilitate travel.

The Millennials want to be on the move like their parents but for new jobs and for careers that call for global travel.  They want functionality in an awesome location and have no problem with minimal accommodations as long as it’s affordable and supports their mobile lifestyle. 

And, the need for office space and parking will continue to decline, too.  As the Millennials move into executive positions and drive their lifestyle views through their organizations, the workplace will be less about individuals having an office| workstation| parking space, but about doing business from anywhere as people team and collaborate across geographies in a wireless and paperless environment.

The postings on this site are those of the bloggers and do not necessarily represent the views or opinions of Avison Young.