Why Grocery Anchored Tenants are Replacing Big Box Tenants

Like every other segment of the commercial real estate market, retail took a major hit in the downturn. Vacancies soared as established franchises left the scene, and the industry was forced to step back and reassess strategies.

Added to the tough economy was the advent of e-commerce, which has had a profound effect on the brick and mortar properties in retail. Big box stores in particular began to reassess space requirements as more purchases were made through online services. That’s where opportunity arose for grocery anchored tenants.

This has caused a shift in the makeup of shopping centers across the country. Moving forward, the trend is away from the big box stores as anchor tenants. These are the key retailers and service providers that regularly draw customers to a shopping center.

Investment interest in retail remains strong. Real Capital Analytics reported that the retail sector’s sales volume increased by more than 30% in 2014, and that is after a 10% increase the prior year. Total volume was nearly $83 billion, and interestingly $12.8 billion of that went to shopping centers anchored by grocery stores.

Following the downturn, it became more difficult to fill anchor spaces in shopping centers as the big box stores struggled to recover. Meanwhile grocery stores recovered to pre-2007 levels in less than 2 years, making them the new anchor of choice in many cases. Other retail segments such as department stores, electronics, and sporting goods have still not fully regained their pre-2008 strength.

Grocery stores were also less affected by another factor: e-commerce. As many retailers added an online component and mobile apps to their range of services, their need for physical space changed. Many stores that would traditionally be considered anchor properties – Staples and Sports Authority, for example- have moved to reduce their footprint.

Grocery stores, on the other hand, have been expanding their offerings. Following the lead of chains like Whole Foods, many now include café space and incorporate on-site dining. The fresh foods movement encourages more frequent visits to the grocery as well, often drawing consumers to the center every few days. This is helping to make grocery stores an obvious choice for the anchor location.

And these centers are proving popular and successful. When offered for sale, these properties can command low cap rates of around 5 percent to 6 percent or less. The presence of an anchoring grocery store helps to keep the shopping center vibrant and though it changes the paradigm a bit, the decline of the big box store does not signal doom for retail.

As the former favorite anchors restructure to accommodate online sales, those big box stores require less physical space and even parking. This creates an opportunity to reconfigure outdated shopping centers, anchored by grocery stores and offering a more pedestrian-friendly layout in many cases.

The popularity of grocery-anchored shopping centers is a reaction to their resilience in the downturn. The need to fill vacancies made these businesses a good choice, and their appeal to consumers boosts surrounding businesses as well.  The configuration of shopping centers is ever-evolving, but there is no doubt that the current industry darling is the grocery-anchored center.

3 Big NYC CRE Deals Made by Foreign Investors

2015 was a massive year for CRE deals in New York. Sales of commercial properties in the city set a new record, totaling $70 billion. This is a 12.5% increase from the previous, record, set in pre-recession 2007.

One of the factors that are driving this market is the rate of foreign investment. Foreign investment has been strong all over the U.S. in recent years. Overall, foreign buyers spent more than $87 billion on U.S. properties last year, from less than $5 billion in 2009, according to Real Capital Analytics. Interest in U.S. properties is high among foreign investors, who see our economy as a stable place to stash wealth. In fact, some of the city’s most significant CRE transactions over the past year have involved international investors.

Norges

Norway’s sovereign wealth fund entered into a partnership with church-run Trinity Real Estate to buy a 44% share of the company’s 11-building downtown office portfolio at the end of the year, the Real Deal reports. The price- $1.6 billion.  Totaling nearly 5 million square feet in Hudson Square, the buildings are about 94% leased.

The property occupies 215 acres, and the largest of the buildings is One Hudson Square, with 1.2 million square feet.

Norges is a division of the Norway Central Bank, and also purchased interest in properties at 11 Times Square and Citigroup Center at 601 Lexington Avenue earlier in the year.

AXA

French insurers AXA Financial, in partnership with JP Morgan, made over $3.5 billion in the sale of two midtown office towers in the past year. The properties, at 1285 6th Avenue and 787 7th Avenue, were placed on the market in August.

Both properties comprise about 1.7 million square feet of space, and were sold to RXR Realty and CalPERS, the California public employees pension fund, respectively.

RXR reportedly beat out competition from Chinese and Canadian pension and sovereign wealth funds to secure the 6th Avenue property.

Anbang

Chinese insurance group Anbang purchased the iconic Waldorf Astoria in the most expensive hotel deal ever.  The deal was completed this past year, and Hilton Worldwide received $2 billion for the property, which it has agreed to continue running for the next 100 years.

Five Star hotels are popular with international investors. The Plaza is currently owned by the Sahara Group of India, and the Carlyle is owned by New World Development of Hong Kong. Anbang Insurance Group has announced plans for significant renovations to restore the historic structure, first opened in 1931.

In a year with several billion-dollar deals, New York’s commercial market attracted a record level of foreign investment. Looking at the pipeline, even more major deals are in the works, many involving sovereign wealth funds, pensions, and high net worth individuals from China, the Middle East, and other parts of the globe.  With 40% of commercial investment coming from outside the U.S., it’s likely that international players will be involved in some high-profile deals in the year to come.

Brevitas Announces Collaboration With Embassy Group

SAN FRANCISCO, April 6, 2016 – Commercial real estate marketplace, Brevitas, announced its collaboration with one of India’s largest development companies, Embassy Group. The collaboration serves to further expand Brevitas’ presence in one of commercial real estate’s emerging markets. Brevitas is the leading online platform dedicated to off-market commercial properties. Membership is limited to qualified investors and brokers of commercial real estate assets from around the globe.

The agreement cements the relationship between one of the world’s preeminent asset management and development firms with the most powerful resource for buying and selling commercial real estate privately. With an influx of activity throughout the primary American markets and Western Europe, Brevitas has seen rapid growth since launching this past September, now boasting over ten billion dollars in assets for sale. The collaboration with Embassy Group seeks to build on this growth to create new opportunities for Brevitas members.

“Working with Embassy Group gives us unheard of access to arguably the world’s most important real estate market. We see it as a win-win for both sides of our marketplace,” said Brevitas CEO, Ardian Zagari. “This allows us to connect our members with investment opportunities they would not otherwise have access to.”

The commercial real estate industry has been slow to embrace technology, therefore a vast majority of commercial assets are never sold online. This collaboration is representative of real estate’s biggest players arming up and preparing to adopt new, disruptive technologies in order to gain a competitive advantage.

“The Embassy team is led by forward-thinking individuals who are always pushing the envelope – it was part of why we felt this was such a natural fit. We are giving buyers and sellers of flagship real estate assets unprecedented opportunities to connect and build relationships; our agreement with Embassy Group serves to further these relationships,” explained Zagari. Details of the collaboration between the two companies are expected to be released in the coming weeks.

Foreign Investment in U.S. Commercial Real Estate Market: An Update

The American commercial real estate market has received a sizable shot in the arm from foreign investors in recent years, and indications point to continued growth there. With foreign capital representing about a quarter of all investment sales in the U.S., this activity has been important in enabling commercial developments here. As we settle into 2016, here’s a rundown of where things stand and where they’re likely headed.

Heavy Investors

Interest in the U.S. market is high across regions, with the highest levels of investment coming from Canada, China, and Australia. This hierarchy is shifting, though, as Chinese investment has surged over the past year with strong continued momentum. Regionally, the Asia-Pacific investors lead the field.

A factor driving increased activity is the lack of attractive options in the home country as well as some relaxation of restrictions on outbound investment. The U.S. commercial market continues to represent the most stable and secure investment option for many foreign buyers, although the European market is also likely to attract international attention. The Eurozone has stabilized over the last year and there are some distressed asset opportunities that will be attractive to investors.

Institutional investors with massive pools of capital to invest have helped to boost prices in primary U.S. markets, and foreign investors are looking beyond those to secondary cities like Seattle, Philadelphia, Miami, and Dallas.

Decreasing Friction

The time seems right for international investment, with governments easing restrictions on both ends. Thanks to the Real Estate Investment and Jobs Act of 2015, the tax burden imposed on foreign investors by FIRPTA (Foreign Investment in Real Properties Act-1980) may be considerably lighter. FIRPTA’s original purpose was to discourage cross-border transactions, and it imposed heavy taxes on foreign investors. The JOBS Act goes a long way toward eliminating that barrier.

This legislation increases the percentage of publicly traded stock that a foreign shareholder may hold without incurring FIRPTA withholding and tax upon sale of the stock from 5 percent to 10 percent. It also exempts from tax certain gains on the sale of REIT stocks and capital gain distributions from REITs.

In addition, The Protecting Americans from Tax Hikes Act of 2015 (PATH) heads off the potential for tax increases down the road, and also makes it easier for foreign buyers to invest in development projects in the U.S. Price-Waterhouse recently outlined the changes that impact international investments in U.S. CRE.

These changes are expected to facilitate the flow of capital into the U.S. commercial market from global investors.

Pulling it Together

Overall, international investors are drawn to the U.S. market for safety rather than yield, attracted to the reliable, low-risk options to be found in our primary cities. Those who venture into the secondary markets are looking for better pricing and higher potential yields.

Meanwhile, foreign investment is driving up prices in major markets and competition for properties is high. Supply is not meeting demand. This opens the door for increased investment in commercial development projects.  

On our end, facilitating foreign investment in the U.S. market requires establishing partnerships that are mutually beneficial and assist international buyers in navigating regulations and tax law. It’s critical to understand the objectives of these buyers, and offer expertise in local markets and regulations that help them to achieve those goals.

4 Successful Vetting Strategies for Off-Market Deals

Off-market deals can be a terrific investment opportunity, often providing access to high-dollar properties that are not listed on any publicly accessible source. This private real estate marketplace is beginning to open up, with opportunities for a wider range of investors to participate.

Once an off-market property has been identified, the work that must be done upfront to evaluate or “vet” the deal is essentially the same. It is important to cover your bases and gather the information you need to make the best decision. This data is available to you, whether the property is officially “for sale” or not.

#1: Do your own property valuation

When considering an off-market investment, it’s important to come to your own conclusions on the value of a property. The timeframe for these deals can be different than with listed properties; it may be the case that a quick sale is important to the owner, or that a more conventional timeframe can be used. Either way, don’t skimp on diligence in valuation, or take the seller’s word on the value of the property.

You’ll want to establish a reasonable price for the property, and know what you’re willing to offer, based on hard facts. Whether you complete this work yourself or have a service gather the information, determine the Net Operating Income for any commercial property you’re considering (income minus operating expenses), and make sure that you can expect a fair rate of return on your investment.

It is often the case that a property is nearly suitable, but will require some modification or renovation after purchase. Evaluate the potential improvements needed on the property, and ask a trusted contractor to price those for you. Include those figures in your financial analysis as an important consideration for developing your offer.

#2: Review important documents

Looking into any real estate deal should include a thorough review of relevant documents. Due diligence should include collecting and evaluating these items:

  •         The deed
  •         Information on current tenants/lease terms, etc.
  •         Zoning documents indicating allowable uses of the property
  •         Land and improvement surveys
  •         Copies of any property bills
  •         Service contracts
  •         Any notice of pending legal and/or government action
  •         Environmental assessments
  •         Any special assessments or taxes
  •         Any seller inspections
  •         All construction plans and warranties in the seller’s possession
  •         Current title insurance and other insurance

       

#3: Get independent data

For some property information, it’s necessary to generate new data for yourself. A current land survey and a professional property inspection must be done to ensure that what is being sold accurately reflects the reality on the ground.

Gather information on the market and local trends that may influence the future value of the property.

#4: Know the players

The people involved in a deal are good indicators of its overall quality. Look into the record of the seller or developer of the property. Consider the success of previous projects as well as their reputation. Reach out to colleagues and partners who’ve had dealings with the seller and find out about their qualifications.  If these don’t match your expectations, move on to a property that does.