Hartman Simons Commercial Real Estate Blog

The Wednesday Wrap: May 8, 2013

Each Wednesday, The Wrap presents a compilation of recent noteworthy commercial real estate stories from a variety of publications. Below are five stories that caught our eyes in recent days.

• “Health-Care Owners Shun Nursing Homes” by A.D. Pruitt of The Wall Street Journal.

Some of the largest owners of healthcare facilities are scaling back their investments in nursing homes because of their growing concerns that the homes will be less profitable in the face of steep Medicare and Medicaid cuts, Pruitt reports.

Ventas Inc. has said it will won’t make any major new acquisitions until the effects of the cuts become clear, while others, like Health Care REIT Inc., say they might exit the sector altogether, Pruitt reports. 

A number of states are reducing Medicaid reimbursement payments to nursing homes, and the federal government cut Medicare rates by 2 percent on April 1 as part of the sequestration, Pruitt notes.

Other firms say they aren’t concerned about possible sequester-induced cuts and that the market risk is overstated, Pruitt reports.

• “Office Demand Still Catching Up With Job, Business Growth” by Randyl Drummer of CoStar.

Modest job growth has prevented a dramatic increase in demand for U.S. office space, and therefore rents have remained at relatively low levels, Drummer reports.

Average office employment is growing at a rate of just more than 2 percent, while demand for space is growing at just half that rate, according to CoStar Group’s First-Quarter 2013 Office Review and Outlook.

In the first quarter, the national office vacancy rate declined 10 basis points to 12.2 percent. The post-recession high was 13.5 percent, according to Drummer.

• “Samsung Opening 1,400 Mini-Shops inside Best Buy Stores across U.S.” by Salvador Rodriquez of The Los Angeles Times. 

Samsung is planning to open hundreds of mini-shops across the country inside Best Buy big-box locations, Rodriquez reports.

The electronics giant already has opened a couple of the shops and hopes to have 900 of them up and running by the end of May and 500 more shortly after, according to Rodriquez. 

Samsung considered opening its own retail locations, but found that partnering with Best Buy would allow it to open the stores more quickly, Ketrina Dunagan, Samsung’s vice president of retail and channel marketing, told Rodriquez. 

• “Miami’s Condo Market Rebounds, Stoking a Building Boom” by Terry Pristin of The New York Times.

Because of the demand of Latin American investors, only about 600 of the 22,000 condos created in downtown Miami during the pre-recession era are still on the market, Pristin reports. Now, developers are building more units, he adds. 

In February, home values rose by 10.4 percent in Miami versus a year ago, while national home prices jumped 9.3 percent, Pristin notes. 

Miami officials are encouraging condo developers to provide easy access to public transportation, street-level retail and underground parking, Pristin reports.

• VIDEO: “Quick Study: REITs Beat Market in April” by Allen Kenney of REIT.com.

In this clip, NAREIT Editorial Director Allen Kenney and Senior Vice President of Research and Industry Information Brad Case discuss the REIT market’s performance in April.

The two discuss how the REIT market performed in relation to the rest of the stock market and which sectors stood out for their performances.

The Wednesday Wrap: Dec. 19, 2012

Each Wednesday, The Wrap presents a compilation of recent noteworthy commercial real estate stories from a variety of publications. Below are five stories that caught our eyes in recent days.

• “The Rising Cost of Prescription Real Estate” by Mark Heschmeyer of CoStar.

Drugstores continue to be sold at record-high prices, Heschmeyer reports. 

Walgreens stores are particularly popular with investors right now, showing a significant increase in per-square-foot sale prices since late last year, according to CoStar data. Walgreens were going for an average of $374 per square foot in the fourth quarter of 2011, and now are selling for $419 per square foot, Heschmeyer reports. That’s a 12 percent increase.

CVS is also seeing a 12 percent increase in per-square-foot sales prices over the same timeframe. Rite Aid stores are experiencing a 7 percent increase. 

• “Skyscraper? Value of New York Tower is High” by Craig Karmin of The Wall Street Journal.

TIAA-CREF, one of the largest pension fund managers in the United States, has agreed to pay about $250 million to developer Forest City Ratner Cos. for a stake in a Manhattan apartment building currently valued at a record $1 billion. 

The 850-foot-tall tower at 8 Spruce St. in lower Manhattan features penthouse apartments with asking rents of up to $60,000 a month. TIAA-CRE’s stake will cover 49 percent of the building’s equity, according to Karmin.

Even though momentum in the apartment sector is slowing, investor demand remains strong for high-end apartment buildings, Karmin notes.

• “Will Shipping Containers Catch On as Building Products?” by Anna Spiewak of Commercial Property Executive.

As the construction industry is becoming “greener,” shipping containers are now being looked at in a new way: as building material for residential and commercial properties, according to Spiewak.

Shipping containers are strong structurally, said engineer Patrick Beville, who has built six homes out of the containers. Containers also tend to produce small homes that are faster to build, more sustainable and cheaper, Spiewak notes.

Worldwide, shipping containers are being used more frequently in construction, such as in the case of an entire block of apartments in Johannesburg, South Africa. A 36-room hotel made of containers is planned in Detroit, Spiewak notes.

Public acceptance is slow as people wait to see more contemporary designs that don’t have a “trailer-home” feel, Spiewak reports. 

• “French Software Maker Arkadin Puts North American HQ in Atlanta” by Urvaksh Karkaria of the Atlanta Business Chronicle.

Paris-based Arkadin, a communications software maker, has moved its North America headquarters from New York to Atlanta, Karkaria reports.

Arkadin President Mark Alexander told Karkaria that being in the fast-growing Southeast will provide the company significant advantages for long-term growth. Atlanta provides Arkadin better coverage of the United States and better access to skilled talent, according to a company spokeswoman.

Arkadin has leased more than 10,000 square feet in the “Queen Building” located at 5 Concourse Parkway in the Central Perimeter submarket, according to Karkaria.

• “Bank CRE Lending Slows to a Crawl” by Mark Heschmeyer of CoStar.

The third quarter had banks retreating from commercial real estate lending, Heschmeyer reports.

Lending for multifamily properties was up just 1 percent, and investment property lending was up about one-quarter of a percent. Construction and development loans were down 3.3 percent in the third quarter.

Bank lending for refinancing or buying owner-occupied commercial real estate properties dropped two-tenths of a percent in the third quarter, making it the second quarter in a row that the statistic has declined, according to Heschmeyer.

Residential mortgage demand was mostly flat, whereas small-business-loan demand experienced modest growth, Heschmeyer reports.

The Wednesday Wrap: Oct. 24, 2012

Each Wednesday, The Wrap presents a compilation of recent noteworthy commercial real estate stories from a variety of publications. Below are five stories that caught our eyes in recent days.

• “U.S. Retail Sales Increase for Third Straight Month” by Tim Trainor of CoStar.

Recent economic reports are showing more signs of a gradual economic expansion in the United States, according to Trainor. A new Census Bureau report says the country’s retail sales totaled $412.9 billion in September, the third straight month of increasing sales.

Retail sales from July through September were higher than economists had expected, Trainor adds. 

Other encouraging news includes the drop in the unemployment rate to 7.8 percent after the addition of 114,000 jobs, although many of the jobs added were part-time positions, Trainor reports.

Good signs in the real estate sector include positive numbers in home starts, building permits and construction activity (not including the Northeast), and home sales.

• “More Robust Commercial Real Estate Recovery Projected for 2013” by Carisa Chappell of REIT.com.

Those in the commercial real estate industry are optimistic about its recovery next year as the job market seems to be improving and new construction has been limited, according to the new “Emerging Trends in Real Estate 2013” survey from PricewaterhouseCoopers (PwC) and the Urban Land Institute.

Survey respondents said there should be gains in leasing, rental rates and pricing for all real estate sectors, and also noted that newly added jobs should increase absorption and push down vacancy rates in the industrial, office and retail sectors.

Optimism about commercial real estate could increase investment in the industry as other types of investments struggle, Mitch Roschelle of PwC told Chappell. Investors are also expected to take on more risk in their real estate portfolios, including in secondary and tertiary markets, according to the survey.

• “Are Rising Rents Too Much of a Good Thing?” by Bendix Anderson for National Real Estate Investor.

Apartment rents are rising faster than inflation, meaning more profits for real estate investors, but the trend also comes with risk, Anderson reports.

“Landlords need to be careful,” Brad Doremus of Reis told Anderson. “They can’t raise rents forever if they come up against that budget constraint.”

Competition exists from new rental housing, cheaper rental housing and for-sale housing, making sky-high rents unattractive, Anderson notes.

According to a new report from the Center for Housing Policy and the Center for Neighborhood Technology, the cost of housing rose 52 percent between 2001 and 2010, while household incomes only rose 25 percent in that time.

Transportation costs also rose dramatically in that time, but that could make an apartment community in a place with less expensive transportation more attractive, Scott Bernstein of CNT told Anderson.

• “Traditional MOB Is Becoming Obsolete” by Carrie Rossenfeld of Globe St.

Healthcare reform is coming, and that means a dramatic change for the medical-office sector, according to Gary McKitterick of law firm Allen Matkins.

Specifically, McKitterick believes the traditional medical-office building will soon become outdated. “Providers are reducing cost by pushing services out of the hospital — the highest cost point for delivery — into an outpatient setting,” he told Rossenfeld. “From a real estate perspective, you need to understand what your local hospital is doing to push services out.”

Sanford Smith of Hoag Memorial Hospital Presbyterian says the industry needs to deconstruct the hospital and take out services that would be better located in the heart of a community.

Other innovative ideas in the medical industry that could greatly affect real estate include the idea of time-sharing spaces between multiple physicians and “medical pods,” locations to which doctors travel to see outpatients instead of patients coming to them.

• “Why Pier 1 Is Choosing Bricks over Clicks — and Winning” by Lydia Dishman of Forbes.

The CEO of retailer Pier 1 Imports, Alex Smith, isn’t completely sold on the idea that e-commerce is better, telling Dishman his company offers the experience of seeing a product in person with great service.

Smith is using funds to improve Pier 1’s physical stores through remodels, relocations and merchandising fixtures set up to better display products and keep customers lingering in the store, according to Dishman.

Pier 1 is not totally turning its back on e-commerce, also choosing to focus funds on its website, which was re-launched in July after being shut down five years ago.

“We are trying as much as we are able online to replicate the in-store experience,” he told Dishman.

The Wednesday Wrap: May 2, 2012

Each Wednesday, The Wrap presents a compilation of recent noteworthy commercial real estate stories from a variety of publications. Here are five stories that caught our eyes in recent days:

• “Office Market Nears Rent Growth Tipping Point” – by Randyl Drummer of CoStar.com. After years of sluggish performances, U.S. office markets could finally be on the verge of real rent growth over the next few years. This according to CoStar’s “First-Quarter 2012 Office Review and Outlook.”

A lack of new supply in recent years and an improving job market are two of the primary reasons for CoStar’s forecast. While recent job numbers have left some unimpressed, there have been increases in both the number of temporary jobs converted to permanent full-time positions and the number of hours employees work, both of which bode well for future office demand and rent growth, Drummer writes.

"We’ve seen steep increases [in leasing activity] from the bottom of the market in 2009," says Jay Spivey, CoStar senior director of research and analytics, in the article. "These leasing levels rival what we saw in the 2000 dot-com period."

• “Continued Signs of Progress at the Start of 2012” – Cassidy Turley report on Atlanta office market. On the local front, the Atlanta office market is continuing to improve, a new Cassidy Turley report shows. The market experienced 305,000 square feet in net absorption during the first quarter, driving down its vacancy rate to 21 percent, its lowest level since 2009.

Atlanta’s unemployment rate has continued to drop since the first quarter of last year; in fact, the area experienced job growth of 3.1 percent in 2011, the second-highest rate in the nation during that time. Office jobs made up half of the growth. Given these strengths, Atlanta will see increased sales activity throughout 2012, concentrated in Class A properties as well as distressed assets, Cassidy Turley forecasts.

• “A Coming Deluge of Apartment Construction” – by Victor Calanog of Reis for National Real Estate Investor.

Apartment vacancy rates are the lowest they’ve been over the past decade, and that’s fueling developers’ desire to build more units. The national vacancy rate dropped to 4.9 percent in first-quarter 2012, and effective rents grew by 0.9 percent, the biggest three-month increase in almost five years, according to Calanog.

While an increase in supply could reverse the positive trends of recent years, that may not necessarily happen, Calanog says. “Increased supply growth is a necessary but not sufficient condition for a severe pullback in apartment fundamentals,” he writes. “If demand for rentals remains high or rises even further, improvements in occupancies and rent growth can be sustained.”

• “Fed: Demand Up for Business, Commercial Real Estate Loans” – by Kent Hoover of BizJournals.com. New banking surveys bring additional good news for the commercial real estate industry. According to a quarterly Federal Reserve survey, banks are seeing increased demand for business and commercial real estate loans. In relation, they’re seeing “more aggressive competition” from other lenders, and some are even easing terms for business and commercial real estate loans, Hoover reports.

Another survey by Gallup for Wells Fargo found that only 30 percent of small business owners found it difficult to get credit in the past 12 months, down three percentage points from January.

• VIDEO: “Senior Housing Markets Solid” from GlobeSt.com. In the clip below, Sharon Yester, chief asset management officer for CNL Financial Group, discusses the healthy seniors housing market. Topics include the impact of demographics – 10,000 people per day are turning 65, Yester notes – and the likely future activity of healthcare REITs.

The Wednesday Wrap: April 11, 2012 (with video)

Each Wednesday, The Wrap presents a compilation of recent noteworthy commercial real estate stories from a variety of publications. Here are five stories that caught our eyes in recent days:

• “U.S. Apartment Vacancy Rate Falls to Decade Low” – by Ilaina Jonas of Reuters. For the nation’s apartment sector, the good times just continue to roll. The U.S. apartment vacancy rate reached its lowest level since 2011 in the first quarter, dropping 0.30 percentage points to 4.9 percent, according to a REIS report summarized by Jonas.

In another good trend, effective rents rose by 0.9 percent to $1,018 per month. That’s the largest increase in four years.

All is not perfect, however. Up to 200,000 new units are scheduled to be delivered next year, which could put the kibosh on rent growth. “Once that supply hits the market next year, we may find that this is the year rent growth peaked,” Victor Canalog of REIS told Jonas. “It's still going to be a great year for apartment landlords.”

• “CMBS Delinquencies Spike Again in March” – by Paul Bubny of GlobeSt.com. After showing steady improvement since last summer, the delinquency rate for commercial mortgage-backed securities (CMBS) is once again on the rise. According to Fitch Ratings, the rate rose by 13 basis points to 8.43 percent in March. Meanwhile, Trepp pegged the March increase at 31 basis points, which placed its rate at 9.68 percent.

“The special servicers are going to remain busy for the foreseeable future,” Manus Cancy, senior managing director at Trepp, told Bubny. “There’s a lot of wood to cut, and we will continue to see a combination of bifurcations, extensions, rate relief and in some cases, foreclosures and seizing of properties. I think it’ll be a very mixed bag across that spectrum.”

• “Retail REITs Continue to Prune Portfolios” – by Jennifer Popovec for National Real Estate Investor. Call it their version of spring cleaning: in the wake of the Great Recession, retail REITs are looking to toss non-core assets out of their portfolios.

The trend “is not the run-of-the-mill recycling of assets common among REITs and, instead, is a direct outcome of the credit crisis, according to REIT analysts,” Popovec writes.

“Post-Great Recession, retail REITs - and REITs overall - have been a lot more focused on selling assets,” Alexander Goldfarb, managing director of Sandler O'Neill + Partners LP, told Popovec. “One of the takeaway lessons from the credit crisis was that if you can sell assets that do not fit your purpose, you should do so. REITs realized that they tended to hold onto too many assets.”

• “Reform May Impact the Medical Office Sector, but Nontraditional Spaces Promise Continued Growth” – by Mike Jansen for National Real Estate Investor. The uncertain future of President Obama’s healthcare reform law and the possibility of future cuts to Medicaid and Medicare are not dampening investor appetites for the medical office sector. On the contrary, the sector appears to be more popular than ever among investors.

“We’re just seeing more and more investors being attracted to the space because of the stability of the product type,” Chris Bodnar, who leads CB Richard Ellis’ healthcare capital markets group, told Jansen. “Physicians usually invest a lot of money into their spaces, and patients are location-sensitive.”

In the years immediately preceding the Great Recession, the sector got overbuilt, Jansen notes, but it’s now faced with the opposite problem. “There is probably as much or more capital chasing medical office transactions than there ever has been,” says Shawn Janus, head of Jones Lang LaSalle’s the national healthcare practice. “The issue has been a lack of product.”

The vacancy rate for medical office properties grew to more than 12 percent in 2009, but that figure has dropped to a shade under 11 percent, Jansen reports.

• VIDEO: Bill Hoffman, president and CEO of Trigild Inc., says the commercial real estate recovery has begun but will proceed slowly for a couple of years (from GlobeSt.com).

Four on Friday: Dr. Lee Resnick of WellStreet Urgent Care

Dr. Lee Resnick is the chief medical officer and chief operating officer of WellStreet Urgent Care, a client of Hartman Simons that opened its first facility two weeks ago in Peachtree Square in south Buckhead. We recently got a chance to chat with Resnick about the company’s growth plans, its operating philosophy and his medical career.

You just opened the first WellStreet Urgent Care site. When will you be opening others and where will they be?

By the end of 2012, we will have opened 12 of our urgent care centers. They will be all across the metro Atlanta area. In 2013, we will begin to explore other markets. We will look at secondary markets in Georgia, and we’re also open to looking at other metropolitan areas across the nation.

What is the operating philosophy and strategy of WellStreet?

Urgent care is an impulse decision: someone gets sick or gets injured – maybe Johnny breaks his leg sliding into second base – and all of a sudden you’re faced with, “Where do we go? What do we do?”

We want to be the brand that is people’s first thought in those situations. By locating in Class A real estate – properties that have high visibility and high traffic counts – we create a high profile in our communities and will be top of mind when those times come. We want to create an easy option and provide patients with the path of least resistance.

Once they are there, we will provide clinical care that is second to none. Our facilities foster an environment of care. They feature wide hallways, warm colors, spacious waiting rooms, coffee and tea. In an environment like this, patients feel more comfortable, and it becomes easier for them to talk with our doctors and to tell them more information, which in turns helps our physicians.

To ensure the best quality of care, we hire the best talent and put them through a 66-hour urgent-care training program.

You have long been at the forefront of improving the quality of urgent care throughout the country. Fill our readers in on your medical career and your background on the issue of urgent care.

I am board-certified in family medicine and an assistant clinical professor in the Department of Family Medicine at the University Hospitals Case Medical Center in Cleveland. I have spent the past decade in various urgent-care leadership roles.

I’m the founder and president of the Institute of Urgent Care Medicine, which specializes in the development of continuing education programs for urgent-care medicine. I’m also a founding board member and the past president of the Urgent Care Association of America.

Additionally, I’m a founding board member of both the Urgent Care College of Physicians and the Urgent Care Foundation, and I serve as the editor of The Journal of Urgent Care Medicine.

How do you enjoy spending your time when you’re not working?

When am I not working? (laughs) I really enjoy traveling with my family. My wife Stephanie and I have two children: a 13-year-old daughter named Paige and an 11-year-old son named Ian.

I’ve had speaking engagements all over the world, and I’ve usually been able to take my family with me, which has provided us with some wonderful opportunities to be together and experience places like New Zealand and Ireland. It’s been a lot of fun. 

MOBs: A Prescription for Commercial Real Estate Investors

By Andy Litvak, Hartmans Simons partner

 

Note: This post originally appeared on the Atlanta Business Chronicle's Real Talk blog.

The last several years have proven to be an extremely volatile period for investors and owners of commercial real estate properties.

While real estate investment has never been for the faint of heart, thoroughly vetted and calculated investment strategies have typically proven to produce strong yields (irrespective of asset class). Given the nature of these tumultuous times, I have observed many of my clients gravitate toward far ends of the investment spectrum.

By way of example, many have employed a "carpe diem" attitude and have attempted to seize the day by capturing perceived home run opportunities and returns in the distressed property arena. These distressed asset strategies have been the topic of much discussion of late, and there are certainly no shortage of hungry investors seeking to acquire REO or so-called "value" add properties, purchase notes at significant discounts or otherwise eager to recapitalize underfunded partnerships by injecting fresh equity.

On the other side of the spectrum, however, there are legions of investors seeking stable properties which produce consistent, low risk dividends. Many of these buyers are institutional players (REITS, life companies and pension funds), and their individual investors and annuitants are craving "coupon-clipper" deals producing reliable and consistent income streams. Along these lines, net-leased properties with corporate or other high credit tenants and grocery anchored retail centers have proven to be very attractive.

The strong demand for these stable properties has resulted in bidding wars and cap rate compression. Although, perhaps the new leading contenders in this category are "MOB's" - medical office buildings.

Long before the current real estate downturn, MOB's were viewed as recession resistant properties. The strength and credit of the physician practice group tenants, historically low turnover and consistent patient base requiring medical services lends to an inherently strong degree of stability. Now, fast forward and infuse equal doses of the ever-evolving world of health care legislation reform, new trends in practice group and hospital consolidation and other anticipated changes in health care delivery models — and you have all the ingredients to attract major interest in MOB investment by sophisticated investors.

Four on Friday: Christine Gorham, CCIM

Meet Christine Gorham, CCIM with Eastwood Real Estate Services. In 2010, she partnered with Lee Eastwood (last week’s Four on Friday) after 24 years of medical experience in both the operations and real estate sectors (including 10 years at Northside Hospital and Director of Asset Management and Leasing nationwide for SRS Investments).  The dynamic partnership has continued to grow Eastwood Real Estate Services, a commercial real estate firm specializing in medical and dental transactions.  Christine currently serves as a director on the board of CREW Atlanta. In 2009 to 2010 she served as co-chair for Leadership CREW and has been active in CREW Atlanta since 2005. Christine and Lee were recently nominated by CREW for the Entrepreneurial Spirit award in Washington, D.C.  Check out Christine’s insight into what’s happening in medical office and why CREW is important to her!

HS: What are some trends you are seeing in medical office real estate?

CG: There are some common misconceptions that the healthcare industry is doing well. We are still doing deals, but the industry has been largely affected by the economy and job layoffs. People are rolling the dice and not carrying insurance, which has reduced the volume of patients in doctor offices. This, combined with healthcare reform and pending Medicare cuts, has the healthcare industry in caution mode. Doctors are being more thoughtful about leasing space for their practices. It used to be that five and ten-year medical office leases were standard. Now we are seeing more three and five-year deals.

HS: How is Atlanta doing compared to the rest of the country?

CG: In terms of medical office, we are doing better than a lot of the other markets in the South. It basically comes down to density. People seem to be migrating toward larger cities and growth is still expected in Atlanta over the next decade. The city is currently experiencing mild growth while other markets are falling apart.

HS: Why has CREW been important to you?

CG: The quality and breadth of resources my partner Lee and I can utilize is immeasurable. In addition, I personally feel strong about supporting women in the industry. Last March I spoke at a conference in New York City, and out of a room of 300 commercial real estate professionals, there were only 13 women. Women are outnumbered in the commercial real estate industry and it is nice to have such an excellent network of women you can turn to and count on.

HS: What keeps you busy when you are not in the office?

CG: I am the wife of a busy husband and mom of three awesome boys; I really make an effort to attend all of their activities.  I also help with the PTSA, usher at my church, participate in my sorority alumnae chapter, play volleyball & tennis and of course cheer on those Clemson Tigers…did I say ranked 8^th out loud?  Lee and I have been working very hard and are looking forward to celebrating our successes with some great Fall-weather golf! The last time we played together in a tournament I won the long drive contest so we are planning to use my winnings at Chateau Élan very soon!