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By Richard Westlund
Commercial real estate has benefitted from the sustained global economic recovery, which has driven demand for office, industrial and retail properties. But is there still room for growth in the multifamily and regional mall sectors? Leading investment and advisory professionals say the answer is yes.
“We invest deeply in all major commercial real estate sectors on a global basis,” says Chris McGibbon, managing director, head of Americas, Global Real Estate, TIAA Global Real Estate. “In general, we look beyond cycles to long-term demographic trends.”
One of the drivers of multifamily demand in the U.S. and Canada is the size of the Millennial generation as well as the inflow of immigrants from around the world, says Doug Poutasse, EVP and head of strategy at Bentall Kennedy, a Sun Life Investment Management Company. “Unlike the baby bust that followed the Baby Boom generation, there is no drop off in births this time. Therefore, we expect a continuous wave of potential renters going forward.”
Retail is also in high demand, adds Poutasse. “Millennials don’t want to live somewhere without take-out food in walking distance. So you need a mix of uses and public spaces, including regional malls.”
Noting that the multifamily market remains strong, Calvin Schnure, SVP, Research & Economic Analysis, National Association of Real Estate Investment Trusts (NAREIT), says, “The retail sector is still recovering, but moving in the right direction.” In addition, the growth of ecommerce has increased the need for warehouse and distribution facilities, he adds.
Looking at the overall U.S. commercial real estate market, the FTSE NAREIT U.S. Real Estate Index rose 2.29 percent last year following a 27.15 percent rise in 2014. Last year’s performance surpassed the S&P 500, Dow Jones Industrials and Russell 2000 Total Return Index, according to NAREIT research.
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| Chris McGibbon TIAA Global Real Estate | Chris Spain Cushman & Wakefield |
While some investors are concerned about overbuilding in the multifamily market, the pace of new construction is well below demand, says Chris Spain, EVP, capital markets investment sales and acquisitions, Cushman & Wakefield in Atlanta.
“We are used to multifamily boom and bust cycles, but I believe we have a well-balanced market. Today, we have working families, Boomers and Millennials who choose to rent instead of own.”
In the Southeastern U.S., Spain has seen rental apartment values go up $50,000 to $60,000 a unit in the past three years, with a similar rise in rents. “Returns haven’t changed very much and the cap rate [the ratio of net operating income to asset value] for core product in the region remains around 4.5 percent.”
Nationwide, the value of U.S. apartment REITs has doubled in the past five years, reaching approximately $150 billion in 2015, according to NAREIT statistics.
“About 1.25 million new households form each year in the U.S.” says Schnure. “Since the financial crisis, new construction has been as low as 500,000 units a year. That means if you own an existing building, you can expect a high occupancy and charge a good rent.”
Leading investment companies are deploying various strategies to capitalize on the strong multifamily market. “We have focused on urban locations and infill areas,” says Ric Clark, senior managing partner and chairman. Brookfield Property Group. Brookfield is developing Manhattan West, a 5.4 million-square-foot mixed-use project with 840 rental apartments, as well as another 700 units in Brooklyn.
“We are also acquiring older suburban properties and renovating them as a turnaround play,” adds Clark, noting that Brookfield’s portfolio includes about 40,000 apartment units. “With little new development in the works, we think the next several years look good.”
In contrast, TIAA Global Real Estate has focused on workforce housing that caters to middle-class renters, such as nurses, teachers, police officers and construction workers. “This segment of the market has strong fundamentals and continues to be underserved in terms of supply,” says James G. Martha, managing director, Global Real Estate.
“Student housing and senior housing are two strategies that complement the workforce multifamily market, Martha adds. “They target different demographic segments of core-like demand, creating diversification opportunities within this sector. Bentall Kennedy is developing new rental apartments in the U.S. and Canadian innovation markets where high-paying jobs and lifestyle amenities are located within walking distance of multifamily communities. “San Francisco is one innovation market where we have invested in multifamily products,” says Amy Price, COO, Bentall Kennedy United States. “Because of tremendous demand and supply constraints, we are now looking at Oakland, which has very compelling dynamics, including a 12-minute BART ride to downtown San Francisco.”
Looking to the future, Price says, “With multifamily, you need a long-term view of investing. It’s hard to develop or acquire properties with a short-term perspective.”
Regional malls: A split market
In the past decade, the growth of ecommerce has had a major impact on brick-and-mortar retail outlets. “More than half the growth of total retail sales since 2011 has been ecommerce and that share continues to rise,” says Schnure. “Successful retailers are integrating their online platform with mall stores as showrooms and shopping places – it’s a big adjustment.”
As in multifamily, demand is growing faster than supply with about 2 million square feet of new retail construction annually compared with 3 million square feet net absorption of retail space. Retail rent growth is rising gradually with a 2 percent increase in 2015, according to NAREIT.
Across the U.S., the regional mall market is divided between the “haves” and the “have-nots,” says McGibbon. “The A and AA credit malls that dominate their trade areas appear to be stronger than ever, while the B and C credit malls continue to struggle. An intelligent deployment of capital into an A or AA mall can deliver twice the return of an investment made in upgrading or renovating older retail centers.”
Mark Gilbert, EVP, capital markets retail investment advisors, Cushman & Wakefield in Miami, agrees. “Retailers pay close attention to sales per square foot,” he says. “When they have an opportunity to be in a better mall, they move there quickly.”
In dense urban markets like South Florida, developers are planning new massive projects catering to tourists as well as local residents. Gilbert points to Brickell City Centre, a $1 billion mixed-use project near downtown Miami, as an example of this trend. “With office, multifamily, hotel and condominium components, plus a transit stop, you couldn’t create a better environment for retail shopping,” he says.
Other investment opportunities include acquiring existing malls in smaller markets with additional development rights, such as adding apartments or offices,” Gilbert says. “That makes the U.S. gateway and coastal markets more attractive to retailers.
Looking beyond the U.S. retail market, McGibbon says, “We believe there is still good value in emerging global markets, although there are far more uncertainties than in the U.S. I believe the market often undervalues the premium needed for emerging market volatility, but if you can stand the ups and downs, there is good value there in the long run.”
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| Ric Clark Brookfield Property Group | Calvin Schnure National Association of Real Estate Investment Trusts (NAREIT) | Doug Poutasse Bentall Kennedy |
