Capital Earmarked for CRE Increasing

The volume of capital earmarked for commercial real estate is higher than it has ever been before, according to leading real estate experts. Despite successful fundraising efforts and an influx of capital, some investment managers are feeling pressure to put that capital to work in a highly competitive marketplace.

Having plenty of capital is a good problem to have,” said Jayme Nabors, co-founder of NBI Properties. “But placing capital can be a challenge, so we typically advise our clients to be patient and wait for the right opportunities.”

Experts agree the challenge of placing capital is likely to persist in the near term. The flow of capital into U.S. real estate continues to increase, with total acquisition volume for the 12 months ending June 30, 2015 at $497.4 billion, up 24.6 percent year-over-year, according to a recent Emerging Trends in Real Estate report. The report also predicts that the majority of investors will have capital available for commercial real estate investment in 2016 that is equal to or greater than 2015 levels.

One solution to satisfy that voracious demand is to simply make the pie bigger. To that point, investors are broadening their targets to include more options. The Emerging Trends report anticipates increased capital flows in 2016 to three key areas: 18-hour cities, alternative property types and older assets that could be good fits for renovation, redevelopment or conversion projects.

“Investors realize there is good economic and demographic growth occurring in numerous market, including here on the Emerald Coast,” Nabors said. “Overall there is a healthy supply of high quality real estate assets.”

Investors willing to consider alternative assets on the fringes of commercial real estate, such as cell phone towers, car dealerships or ski resorts, is something that’s occurring more on a case-by-case basis. Generally, investors are sticking with the four main groups of office, industrial, retail and multifamily, where they are more comfortable. However, more investors are willing to take on greater risk within these sectors, such as investing in new development or redevelopment opportunities.

Fed Hikes Not Expected to Hurt CRE

While commercial real estate investments continue to benefit from a range of positive economic trends, the prospect of an increase in the federal funds rate has raised concerns about asset values and sales activity. However, positive economic trends inching the Federal Reserve toward action are the same trends lifting commercial real estate performance, according to a real estate capital markets report recently released by Marcus & Millichap.

“While there’s global concern about various economies, the U.S. economy continues to do fairly well, although there is ongoing concern about how some of those large global economies may impact the domestic economy,” Marcus & Millichap Capital Corp. Senior Vice President Bill Hughes said. “As the markets prepare to digest a rate increase by the Federal Reserve, it is important to stress that long-term rates such as the 10-year Treasury are not directly tied to short-term rates, or the short end of the yield curve.”

According to figures, the 10-year U.S. Treasury ended the third quarter in the low-2 percent range, held down by rising demand for low-risk fixed-income assets. Craig Barrett, co-founder of NBI Properties in Fort Walton Beach, said he believes readily available capital and an abundance of active lenders will keep interest rates competitive in the coming months.

“The timing of the Federal Reserve isn’t expected to have a negative effect on commercial real estate lending as far as we can tell,” he said. “The Fed traditionally does not overreact to markets and so we think they will wait awhile longer before raising short-term lending rates.”

Barrett added that positive trends on the Emerald Coast include occupancy and rent growth I areas such as Fort Walton Beach, Destin, and Crestview along with the fact that none of the cities are over-developed.

“We have every reason to be optimistic moving into 2016,” he added. “Lenders and investors are finally seeing eye to eye on commercial real estate opportunities here.”

Shaky Global Economy Helps U.S. CRE

Falling unemployment and low interest rates meant good news for the owners of commercial real estate properties in the third quarter of 2015. However, in a recent report, CoStar revealed that uncertainty across the globe and shaky global economic conditions continue to send investment dollars into U.S. commercial real estate. Investors have taken note of how strong the U.S. commercial real estate market is and are limiting their investments in foreign markets.

“Investors are always looking for safe places to invest capital,” said Craig Barrett, co-founder of NBI Properties in Fort Walton Beach. “And right now the real estate market in the United States is considered one of the safest investment opportunities.”

CoStar reported a composite commercial sales volume of nearly $91 billion in the first three quarters of 2015. That number grew 32.8 percent when compared to the first three quarters of 2014. It also put 2015 on a record-setting pace for transaction volume in the CoStar Commercial Repeat Sale Indices. in addition, CoStar’s equal-weight U.S Composite Index — one of the broadest measures of pricing within the company’s recently released CoStar Commercial Repeat Sale Indices — jumped by 2.6 percent in the third quarter. This means that the value of U.S. commercial properties continued to increase during the quarter.

To no one’s surprise, CoStar pointed to multifamily as a top performer in the commercial sector. The Multifamily Index increased 3 percent in the third quarter and 12.4 percent for the 12 months that ended in September. This index is now 15 percent higher than its prior peak, a rather impressive accomplishment. On the Emerald Coast, Barrett added that the hospitality sector remained strong and enjoyed an uptick in the third quarter.

“Although hospitality suffered during the recession, there are signs everywhere that it’s booming again here,” he said. “Vacancy rates remain low at hotels and restaurants and retail are reporting healthy gains as well.”

Panel Predicts Commercial Lending Trends

What’s the latest buzz on commercial lending and financing? At a recent Realtors® Conference & Expo in San Diego, lenders and government officials on a panel called “Commercial Lending and Financing: The Ever-Changing Landscape” talked about trends in policy and technology that could change the way deals are funded in the future. Three of their top predictions included more online data, more lending options, and growth in the small business environment.

Elizabeth Braman, CCIM, chief production officer at real estate crowdfunding platform, predicted that within the next five years, the increase in the amount of available data will make capital acquisition processes more responsive to the needs of borrowers and lenders alike. She said it will be easier for borrowers to provide data to lenders, because much of it will come directly from sources such as the IRS or commercial transaction databases such as CoStar. Jayme Nabors, co-founder of NBI Properties in Fort Walton Beach, said his firm relies on big data to help determine property values rather than depending on strictly appraisals.

“Appraisers are limited to a specific data set,” he explained. “Big data can be forward-looking and help lenders and investors predict future valuations.”

The panel also predicted more lending options due to crowdfunding platforms and other opportunities. Realtors at the conference agreed that projects in first-tier markets building or redeveloping Class A commercial space don’t have the funding issues that Class B and C properties in less popular cities might face. However, both of the crowdfunding companies present on the panel said they are happy to be involved in such deals.

“We definitely play in the B and C space,” Braman said, noting that such investments often offer a higher yield for her company. She added that they’re more concerned with whether or not the people behind the deal are market experts who can accurately predict how a development will shake out in the long run. “We look for the guy or the gal who has a deep market knowledge and who knows how to execute on a business plan.”

All of the panelists agreed that the next five years would likely spell exciting growth for the small business environment. The consensus was that there may be more opportunities in the office sector coming soon due to a growing interest in entrepreneurship across the country.

“As the economy continues to improve, we’re working with more and more people who are interested in owning their own business,” said Nabors. “Luckily, there are plenty of opportunities available here on the Emerald Coast!”

Source: Realtor® Magazine

Real Estate Gifts That Last a Lifetime

While stores are crowded with holiday shoppers, investors are gifting themselves with real estate deals that will pay off for a lifetime. With numerous investment opportunities, the best gift of all is one that can create a passive income stream, guarantee a comfortable retirement, and allow you to take control of your financial future.

“It’s the perfect time to be in the real estate business ” said Craig Barrett, co-founder of NBI Properties in Fort Walton Beach. “Whether you’re interested in flipping houses or buying commercial properties, it’s an excellent time to be in the real estate investment business.”

After working with hundreds of investors throughout the years, Barrett said the key to investing success is having a strategic business plan. He helps clients plan for long-term success by taking advantage of what the real estate market is offering today and encourages investors to think big. For example, he said a common strategy for first-time investors is owning several single-family houses. While Barrett said this is a worthwhile goal for beginners, a much larger passive income is possible from owning duplexes, triplexes, and other multifamily properties, including small to medium apartment buildings.

“Some investors want to pursue opportunities that will make them independently wealthy while others are looking for a steady stream of income every month from multiple properties they own outright,” he said. “After assessing the capital they have available and personal preferences such as risk tolerance, we’re able to recommend the best properties for each investor’s needs.”

Barrett added that the marketplace is primed for landlords. Recent U.S. Census Bureau statistics revealed that homeownership is at its lowest level since 1996. Adding to the landlord advantage is that experts predict next year’s rents are expected to increase between four and six percent.

“Smart investors will let renters make the monthly mortgage payments while gaining the appreciated value and pocketing a monthly rent profit,” said Barrett. “These investors know that a secure financial future is the best gift of all!”

Retailers Responding to New Shopping Trends

A new holiday shopping survey reveals major disruptions in holiday shopping traditions, largely due to E-commerce and the convenience of shopping online. Deloitte’s 30th annual holiday survey of consumer spending intentions and trends found that some shopping traditions are losing their luster. Key findings from the survey of more than 4,000 U.S. consumers include:

Shoppers are planning to spend $1,440 across categories including gifts, socializing away from home, entertaining at home, non-gift clothing for family or self, home/holiday furnishings, and other spending. Forty-three percent of shoppers said they expect to buy a product online and pick up the item from the store instead of having the item shipped to them – primarily to save on shipping charges (67%), to get the item faster (49%) and pick up other items on the same trip (35%).

“We’re noticing more retailers in our area who are offering store pick ups,” said Craig Barrett, co-founder of NBI Properties in Fort Walton Beach. “Just like drive through windows at fast food restaurants, time- pressed consumers like the option of placing orders and having them ready to pick up at the store when they arrive. And, on the national level, retailers such as Wal Mart are testing home deliveries with drones.”

More than half (52%) of surveyed consumers say they do not rely on Black Friday as much as they did in the past; 41% say the same of Cyber Monday, up 5 percentage points from last year.
Nearly 7 in 10 (69%) plan to do “webrooming” – look at items online first, then go to a store to see the item before completing a purchase – jumping from 58 percent last year.
Roughly half (52%) expect to engage in “showrooming” – going first to a store to look at an item, then search online for the best price before completing a purchase. Free shipping is the most preferred retail offering this year with 72% of shoppers planning to take advantage of free shipping, followed by easy returns (55%) and price matching among 51%, up 6 percentage points from 2014.

Mixed-Use Centers Are the Wave of the Future

Mixed-use centers are evolving into the contemporary version of malls. With hundreds of malls throughout the county nearing the end of their 30-year cycles, mixed-use developments are gaining in popularity with investors who want to take advantage of the shift in consumer shopping habits.

“E-commerce has changed the dynamic of going to a mall to shop at department stores for apparel and household items,” said Craig Barrett, co- founder of NBI Properties in Fort Walton Beach. “Now consumers are buying more personal items online and are flocking to mixed-use centers for entertainment, restaurants, and specialty retail shops.”

In many cities, mixed use is clearly the wave of the future. Whether it’s multifamily with retail, or a host of various uses, mixed use offers the convenience and density many retailers, residents and city planners desire. Outlet or off-price retail centers have performed well in recent years. Until recently locating outlet shopping in town where it might compete with flagship stores was unthinkable. Now, as population heads back to the cities, those barriers have shifted. Customers are not driving out to the burbs for shopping. Retailers are seeking new places – in location and concept. An outlet store can expand a retailer’s coverage into additional market segments.

Barrett noted that mixed-use centers are especially popular on the Emerald Coast because the area is a vacation destination for thousands of tourists each year. He said that tourists plus steady traffic from local residents has drawn many new retailers to the area in recent years.

“We are seeing more specialty retail, or shopping designed for pleasure and entertainment instead of commodity retailing where the customer expects convenience and competitive pricing,” he said. “The most successful mixed-use development are destinations, and the retail mix should create a specific theme or atmosphere.”

Barrett added that building for single-use retail has been rare since the recession. But the future appears bright for this next generation of development. Multifamily, creative office space, senior living – cities across the country are adopting the mixed-use concept to solve local challenges.

“The market is demanding the incorporation of non-retail uses into areas formerly designated as retail property,” he added. “The repurposing traditional malls is a great example of this.”

Small Business Job Growth Alters CRE

The commercial real estate industry is increasingly focused on the needs of small firms employing fewer than 50 people where job growth is outpacing larger firms by nearly five to one, according to Emerging Trends in Real Estate® 2016, co-published by PwC US and the Urban Land Institute (ULI). Jayme Nabors, co-founder of NBI Properties in Fort Walton Beach, said that the commercial real estate industry’s focus on big cities and large employers is currently undergoing a huge shift.

“Small businesses are taking over and fueling a growth spurt or the U.S. economy,” Nabors said. “It is resulting a challenges for the office sector as it look for ways to create new space models to accommodate small business employers.”

Advancements in technology are affecting how people live, work, and socialize, reflecting the rising popularity of cities other than the largest coastal markets. More smaller cities are gaining a competitive edge by positioning themselves as vibrant, more affordable places to live and work, with amenities that appeal to different generations.”

“Smaller cities are proving they are magnets for investors,” said Nabors. “We are working with numerous investors who are excited about the many opportunities to invest here on the Emerald Coast.”

As the cost of living and housing prices have risen in the core gateway markets, it’s apparent that a fresh look at secondary markets and suburban opportunities is gaining investor favor. In the top 40 metro areas, 84 percent of all jobs are outside the center-city core – the basis for optimism for the suburban future. Furthermore, evolutionary trends in development, equity investment, and lending are showing that “small” can be powerful. Developers may find it difficult to access sufficient capital unless they have scale, but this means fitting the quality demands of conservative lenders. That requires finding niche lenders and investors willing to fund the smaller projects; and small developers with their lenders may be accessing the most innovative parts of the business. Firms may find themselves in the middle and will need to choose which side – smaller or larger – they wish to be on.

Demand for Office Space Exceeds Supply

Thanks to the Federal Reserve’s recent decision to delay its interest rate hike, commercial real estate investments are booming with the office sector leading the way. With demand for office space expected to continue to outpace new supply, vacancy rates are tightening and keeping rent growth above inflation in most areas throughout the United States. According to Craig Barrett, co-founder of NBI Properties, a lack of available space has resulted in the creation of a landlord’s market in many areas.

“Tenants are often facing higher rental rates or having to search for alternative locations,” Barrett said. The office tenant base is simply growing faster than new development can keep up with and investors are reaping the benefits.”

“Positive economic indicators are pointing to a sustained U.S. office expansion for the remainder of the year,” Barrett said. “It’s a reversal of what we saw immediately following the recession when job growth was lead primarily by the technology and energy sectors, but has now spread into all professional services areas. In our region, there is a huge demand in particular for office space for medical, dental, and other healthcare-related services.”

Office rents grew by 1.6 percent in the third quarter, marking a cumulative 4.3 percent increase since the beginning of the year, according to a third quarter report from JLL. Some of the strongest Central Business Districts (CBDs) saw rates jump as much as 9.1 percent in 2015 year-to-date. New York City, Portland, Ore., Salt Lake City and San Francisco are the tightest markets, all posting vacancy rates of less than 10 percent. Only 1.8 million sq. ft. of new development was delivered in the four cities this year.

Barrett added that the competitive employment market is making companies rely heavily on their office space as both a recruitment tool and a mark of identity.

“For the next year, we believe we’ll continue to see groundbreakings increase for new and existing properties,” he said. “And when some tenants migrate to the new, pricier office buildings, there will be opportunities that open up in second generation space at lower rates.”

Investors Find Value in Secondary Markets

Secondary markets will have a more compelling investment story next year than gateway markets, and that spells good news for the Emerald Coast. According to PwC’s Emerging Trends in Real Estate 2016 report, secondary markets, are emerging as great relative value propositions and are showing strong growth potential.

“Investors are realizing that smaller cities are more attractive in the long run because there’s a lower cost of living,” said Jayme Nabors, co-founder of NBI Properties in Fort Walton Beach. “Affordable cities such as Destin or Fort Walton Beach are creating more jobs than larger cities, and jobs are the key indicator of growth in the commercial real estate sector.”

PwC explored the idea of secondary markets in its 2015 Emerging Trends report. This year’s report found an increased desire to place a rising share of investment capital in attractive markets outside the major gateway cities. Retail properties are doing extremely well in secondary markets and Nabors added the Emerald Coast is riding the trend.

“While demand for office and industrial is not always as strong in secondary markets, retailers can make a good profit in smaller cities,” Nabors commented. “Investors can get very good returns in non-gateway cities, and investing in these markets offers some diversification, too.”

The potential investment universe for retail properties in secondary markets is nearly double that of the big six gateway markets which include New York, Boston; Washington, D.C., Seattle, the Bay Area and southern California, according to research firm CoStar and PwC. Based on data from credit ratings firm Moody’s and real estate research firm Real Capital Analytics, PwC analyzed the change in retail property values in major and non-major markets. From June 2014 to June 2015, property values increased 13.5 percent in non-major markets, more than double the 6.5 percent growth in major markets.

“Our area continues to attract investors because there are many opportunities here,” Nabors added. “There are a lot of places on the Emerald Coast where people love to live and work, and on top of that, investors know it’s a better value proposition.”