6.9.17: Industrial Warehouse Buildings Are Hot!

Industrial warehouse real estate is one of the hottest sectors in commercial real estate this year, with e-commerce boosting demand. Many markets are reporting industrial building space is being gobbled up quickly, with Amazon leading the way.

In New Jersey, 9.4 million square feet of industrial space is under construction, according to Kyle Schmidt of Cushman and Wakefield, and 51% has been pre-leased. Based on strong interest in the remaining buildings, it is possible that the properties could be over 70% pre-leased by the time the buildings are ready for occupancy. In April, Amazon announced plans to open three additional fulfillment centers in Cranbury, Edison and Logan, New Jersey totaling nearly 3 million square feet. Amazon’s first major fulfillment center — which contains 1.2 million square feet of space — opened in 2014 in Robbinsville, New Jersey.

In South Florida, inventory of industrial space has grown by 9 million square feet in the past three years, according to a new construction update published by JLL Research. Another 4.6 million square feet of warehouse space is expected to come online in 2017, surpassing last year’s record of 3.9 million square feet. Amazon is reportedly negotiating a lease for an 850,000-square-foot warehouse. This is in addition to its existing footprint of over 500,000 square feet of space in Miami-Dade County, Florida.

Furthermore, Amazon just announced that it is spending $200 million on what will be one of its most expensive fulfillment centers ever. Amazon’s new regional fulfillment center in Utah will total 800,000 square feet, according to Utah Governor Gary Herbert. The state gave Amazon a $5.6-million tax credit to win the facility. Amazon was reportedly considering six other states for the center, according to the Tribune.

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6.5.17: Redevelopment Strategies for Former Department Stores

With reports of department store closings now routine, particularly in mall locations, mall owners are actively redeveloping these spaces for alternative uses in strong markets.

CBL & Associates recently redeveloped a vacant Sears store at Fayette Mall in Lexington, Kentucky, into a total of 20 new inline retail tenants totaling 115,000 square feet (sf) of former Sears space, including a two-level 23,000 sf H&M as well as a Michael Kors and Brighton Collectibles. In addition to redeveloped retail space, two new mall entrances — one flanked by restaurants with outdoor dining — were added, featuring restaurants including The Cheesecake Factory. In a similar fashion, CBL subdivided a former 182,000-square-foot Sears store at the CoolSprings Galleria in Franklin, Tennessee, into smaller spaces that are now leased to American Girl, H&M and The Cheesecake Factory.

Simon Property tore down a Nordstrom and Saks Fifth Avenue at the Florida Mall in Orlando and replaced the building with a newly constructed Dick’s Sporting Goods and a crayon-based family attraction called the Crayola Experience. The area formerly occupied by Saks Fifth Avenue was carved into space for American Girl, H&M, Forever 21 and Zara.

Retail real estate trust PREIT had three Sears stores close in malls that it owns. PREIT has leased all of the nearly 400,000 sf of vacated space. CEO Joe Coradino said the tenants that are moving in, such as the Dick’s Sporting Goods and Field & Stream in Capital City Mall in Pennsylvania, will pay more in rent and drive more interest than Sears.

 

 

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6.1.17: Hotels Seek Chain Restaurant Owners/Operators as Partners

Most franchised select service and full-service hotels require on-site restaurants to comply with franchise requirements. However, most hotel owner/operators consider running a hotel restaurant a necessary evil, and most hotel restaurants do not make money. In addition, hotel guests do not care to frequent a “no name” restaurant offering in the hotel and instead seek a familiar chain restaurant nearby.

To kill two birds with one stone, hotel owners are seeking partnerships with chain restaurants that are more efficient and skilled in operating restaurants and provide menu features that hotel guests are familiar with.

For example, Ruth’s Chris Steak House is featured in over 20 Embassy Suites hotels in major U.S. metropolitan cities. In fact, the Ruth’s Chris in the Embassy Suites in Chattanooga, Tennessee just tied for top honors among the brand’s 81 franchised restaurants. According to the hotel owner, “The Ruth’s Chris restaurant is an asset to the hotel. The restaurant staff also handles the food service in our banquet room space so we can focus on selling rooms.”

Another steak chain that partners with hotels is Outback Steakhouse, such as the one found at the Marriott Springhill Suites in Chicago, Illinois, just east of O’Hare International Airport. A recent guest comment indicates how chain restaurants can turn a minus into a plus: “My flight was cancelled (snow/below zero cold) so I spent the night at the hotel, so no luggage or car, and I’m very glad Outback was here.”

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ValueXpress Obtains $5.5-Million CMBS Conduit Loan for the Refinance of a 78-Room Hampton Inn & Suites in Richland, MS

ValueXpress has arranged a $5,500,000 CMBS conduit loan for the refinance of a four-story Hampton Inn hotel constructed in 2015. The loan provided an opportunity to pay off an existing SBA 504 loan and some additional high-cost construction debt. The new loan features a lower monthly payment based on its lower interest rate and longer amortization period (30 years).

Hampton - Richland

The property is located off I-20, south of Jackson, Mississippi. Area attractions include Trustmark Park, the Jackson Convention Complex, and the Mississippi Museum of Natural Science. The hotel was constructed to Hilton’s “Forever Young” program initiative, which includes the “Perfect Mix” lobby and “Jumpstart” Fitness Center. The hotel is a high performer, earning a number-one ranking on TripAdvisor and achieving a 109% RevPAR penetration rate.

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5.27.17: Furnished Apartment Deals Are Okay in CMBS

We recently received a request to finance a 100-unit multifamily property located 12 miles outside a major southeastern city on a heavily traveled interstate. The immediate area is heavily populated with large commercial and industrial facilities, and the area is well known to have a growing manufacturing presence. The property was built in 1995, is 92% occupied and in good condition.

The buyer and seller entered into an $8-million purchase contract and the buyer was all set to utilize agency financing through Fannie Mae or Freddie Mac for $6 million. The property was not located in an area of market concern for Fannie/Freddie (sometimes referred to as pre-review markets). A no-brainer, thought the buyer.

But the loan was turned down by the agencies for the requested loan amount. Why? Well the commercial and industrial nature of the market generated demand for medium-term furnished apartment rentals. In particular, the subject property had 42 furnished (sometimes referred to as “corporate”) units in which the units were leased fully furnished with all utilities and cable provided at the cost of the landlord. Because the units are furnished and utilities paid by the landlord, the monthly rent is much higher than an unfurnished apartment unit. Fannie Mae and Freddie Mac marked down the rental rates on the furnished units to the level charged for unfurnished units and the resulting cash flow did not meet the minimum required debt-service coverage for a $6-million loan.

The buyer then turned to the CMBS market. The key to the transaction is that the seller was able to show five years of occupancy greater than 90% despite the potential volatility from the move-in/move-outs of the shorter term furnished units. We were able to achieve the full $6 million in proceeds and utilize the actual in-place furnished unit rents and a 90% occupancy rate. Icing on the cake? The interest rate was a mere 10 basis points higher than the agency rates.

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5.23.17: Report from ICSC RECon Conference

Dennis Suh and Stan Siciliano represented ValueXpress at the International Council of Shopping Centers (ICSC) RECon convention at the Las Vegas Convention Center in Las Vegas, Nevada May 20-23. Much of the discussion at the convention centered on the fate of malls in America.

Class B and C malls in secondary locations cannot be financed and will have to be repositioned or, in the worst case, torn down and the land reused for another purpose. Class A malls will survive. Defaults on CMBS loans secured by class B and C malls are soaring. What is fascinating is that many of the CMBS loans on class B and C malls are reporting debt-service coverage well in excess of 1.25x for many years, yet are defaulting at maturity. This is a strong indicator that lenders are unwilling to finance these properties even though they are performing.

Another hotly discussed topic was the positive effect restaurants are having on retail properties. So far, Amazon cannot deliver chef-prepared hot meals to your door, and with more Americans eating out, restaurant tenants are one bright spot in retailing. Mall owners are looking to add as many diversified restaurant options as they can accommodate, and neighborhood and big-box centers are luring restaurant tenants to pad sites, end caps, or in-line spaces in an attempt to increase traffic to their centers.

Finally, Amazon chatter was everywhere. A primary takeaway was that retail owners are all looking to add “service” tenants that do not compete with Amazon, such as urgent care centers, dentist offices, hair salons and gyms. Grocery-anchored shopping center owners seemed the least stressed over the Amazon effect and were comfortable that home-delivery options will come from their tenants, not Amazon.

For additional color on the ICSC RECcon conference, contact Dennis at dsuh@valuexpress.com or call him at (347) 393-3208.

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5.19.17: CMBS Industry Working on Improving Loan Servicing

Borrower complaints regarding CMBS loan servicing are resulting in action by industry participants to improve the loan servicing experience. Industry leaders are recognizing that poor servicing experiences are driving borrowers to other loan products, depressing already relatively low CMBS loan origination volume.

Borrowers cite difficulty in communicating with their loan servicer (assuming they can even figure out who it is) as the number one complaint. Servicers simply do not get back to borrowers in a timely manner, if at all.

As a result, the industry’s trade group, the CRE Finance Council (CREFC), has set up a task force to propose customer service improvements. Meanwhile, some lenders and servicers are implementing initial changes on their own in an effort to streamline borrower servicing requests. CREFC set up its Servicing and Issuer Task Force in September to craft a set of uniform standards and practices for CMBS lenders and servicers. Immediate plans call for drafting a basic framework, possibly by year-end, that would address some of the long-time concerns raised by borrowers about conflicting provisions or lack of clarity in loan documents. The framework will also try to prevent excessively complicated review procedures for relatively minor issues.

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