As part of Toys ‘R’ Us’ bankruptcy process—in which it closed its more than 700 U.S. stores totaling millions of sq. ft.—the retailer is in the process of selling off its real estate to other big-box retailers, including Big Lots, Hobby Lobby and Ashley Furniture.

Toys ‘R’ Us is incrementally auctioning off stores that it owns across the country, as well as the leases it has for other stores. Most of the stores are freestanding or located in open-air shopping centers and average around 40,000 sq. ft.

The Wayne, N.J.-based company operated 735 U.S. Toys ‘R’ Us stores when it announced plans to liquidate its U.S. operations in March, after filing for bankruptcy protection last September. The company also owned Babies ‘R’ Us.

Who’s pursuing the space?

Early auctions are an indication of the types of retailers that will fill empty Toys ‘R’ Us storefronts.

“In the initial auction, there were bids on 53 of them from various people like Hobby Lobby, Burlington Stores and TJ Maxx. The usual suspects that you would think might want to pick up a location here or there,” says Jan Rogers Kniffen, a retail consultant and founder of New York City-based J. Rogers Kniffen Worldwide Enterprises. “But I don’t think 100 of those 700 locations have been spoken for between the time of the bankruptcy and now. There are a lot of them.”

According to bankruptcy filings, retailers bidding on Toys ‘R’ Us locations include Hobby Lobby, Aldi, Big Lots, Scandinavian Designs, Ollie’s Bargain Outlet, Ashley Furniture, Raymour & Flanigan, sports concepts like PGA Tour Superstore, Target, and off-price chains including Burlington Stores and TJX Cos., the parent company of TJ Maxx, Marshalls and HomeGoods.

In addition to retailers, developers and investors are also bidding on some locations.

“In the last round of auction sales, lots of developers and investment firms have bid on a group of assets,” says Bill Read, executive vice president with Birmingham, Ala.-based consulting group Retail Specialists. “The way these auctions are run is they require bidders to close very quickly and not have financial or lender contingencies, and this leads to only players that can afford to invest in the spaces.”

In some cases, retail landlords are bidding to win back control of the properties and lease them up themselves.

“Landlords looking to control the space in their shopping centers have also been some of the more active players,” Read says. “Since they already own the rest of the shopping center, it only makes sense for them to be able to control—and hopefully profit—by owning these assets. They already lease and manage them and know if there’s demand for the spaces.”

Next round of stores hits auction block

New York-based A&G Realty Partners held auctions for 123 Toys ‘R’ Us and Babies ‘R’ Us locations on Aug. 13-14 on behalf of the bankrupt retailer’s creditors. The stores total nearly 5 million sq. ft. of space and include 112 owned properties and 11 ground leases. A&G Realty Co-President Emilio Amendola said the firm can’t comment on the demand for the spaces until the auction is completed.

The properties range in size from 20,000 to 65,000 sq. ft. and include 10 locations in California, 18 in Ohio and multiple stores in Illinois, Massachusetts and Pennsylvania. The properties include stand-alone Toys ‘R’ Us and Babies ‘R’ Us locations, as well as side-by-side or combined stores featuring both brands. Some are freestanding, while others are in shopping centers.

“Overall, the assets coming available in this round are high quality and should generate significant activity,” Read says. “The only issue with this round of sales is that there’s an abundance of space in some smaller markets.” For example, he says only 10 properties are for sale in California, four in New York and three in Florida.

But “good space always leases,” Read adds. “Any retailer looking to open in quality real estate will be interested in the remaining assets for sale. While the malls have suffered some big losses with department store retailers, quality space around good malls has fared rather well.”

The last round of auctions will include 311 assets (both Toys ‘R’ Us and Babies ‘R’ Us locations), according to Read, and there’s a much higher concentration of assets in desirable coastal markets, including 37 in California, 20 in Florida and 20 in New York. No date has been set for the auction as of yet.

A lot of stores still up for grabs

Overall, the vacant Toys ‘R’ Us stores translate into a massive amount of space dumped on an already challenging bricks-and-mortar retail market, according to Kniffen.

Fueled by Toys ‘R’ Us’ closings, the U.S. retail vacancy rate rose to 10.2 percent in the second quarter of 2018, according to real estate research firm Reis Inc. The amount of occupied retail real estate in 77 major U.S. metropolitan markets decreased by 3.8 million sq. ft. in the second quarter— the biggest drop since 2009.

Kniffen says while some Toys ‘R’ Us locations are being purchased, it’s mostly on a one-off basis. No big user is pursuing a massive block of stores.

“It appears nobody is walking up and saying ‘Gee, I want 213 of these.’ It’s not happening,” he notes. “It’s one-offs in specific locations where somebody is trying to fill in a hole, which that store matches, and then it’s easier than building a store. It’s not like Primark is coming in and saying we need 700 40,000-sq.-ft. boxes.’”

“Everyone’s looking to see if there are some new players stepping up on these locations,” Read says.

However, Party City announced plans to lease 50 former Toys ‘R’ Us locations for temporary pop-up stores for the upcoming Halloween and Christmas seasons, with a view to boost its assortment of toys. There are no plans at the moment to make the stores permanent.

How many 40,000-sq.-ft. users are growing?

The number of big retailers available to fill Toys ‘R’ Us boxes is shrinking, which may leave some landlords with sizeable vacancies. Other retailers around the same size as Toys ‘R’ Us are expanding their online businesses and renovating existing stores, not necessarily adding a bunch of new physical locations, Kniffen says. Target, for example, is expanding, but it is focusing on opening smaller stores in urban markets and near college campuses.

“But everybody’s trying to place those Toys ’R’ Us stores and they’re big stores,” he says. “It’s not like just anybody can go in there… Lots of people have looked at them, and maybe you need a small Target there or a TJ Maxx, but most of those companies have store opening programs. They know where they’re going. If it just happens to be that one of those Toys ‘R’ Us locations is at the right intersection and fits the bill, they would take it because it’s easier than building a store.”

The empty boxes can be a “huge opportunity,” Kniffen points out, if a retailer needs space and can land a great deal. “The bad news is if you don’t need the space, you don’t need the space. It doesn’t matter how good of deal it is,” he says. “Most of retailers’ growth is moving online. It’s going to be harder and harder to fill space.”

And while off-price retailers with large space needs, like TJ Maxx, might be expanding, Kniffen questions how many more off-price stores the market can support.

“I don’t think that’s going to be the answer,” he says. “They will take some of the Toys ‘R’ Us locations, but I think it’s going to be a long time before some of these locations get picked up. If ever.”

He notes the stores can also be repositioned to house doctor’s offices, medical centers and other non-traditional uses, “but that doesn’t bring in the rent revenue stream that a Toys ‘R’ Us did.”

(Bloomberg)—Airbnb Inc. is set to debut another almost-hotel—and, according to its development partner, it has many more to come. The latest project for the Silicon Valley home-rental behemoth is a branded apartment complex in Nashville, Tennessee. The property will be the company’s second announced Airbnb-branded building, and will lease apartments to a hybrid of long-term renters and short-term visitors.

The new project is a takeover of an existing 328-unit building, called the Olmsted, in the SoBro neighborhood of downtown Nashville, a popular tourist destination for music lovers and bachelor parties. Airbnb’s partner Niido purchased the building last week. Under Niido’s new ownership, current residents of The Olmsted will be encouraged to sublet their units to Airbnb travelers for a maximum of 180 days per year. Airbnb and Niido will take 25 percent of the income the residents generate from home-sharing. The two companies will jointly rent a portion of the remaining vacant units through Airbnb’s platform for short-term stays.

The concept, called “Niido Powered by Airbnb,” is part of a larger push by Airbnb to team up with real estate developers and facility managers, a group that has frequently argued that the home-sharing company enables renters to illegally sublet their apartments. In December, Brookfield Property Partners LP agreed to invest as much as $200 million into Niido’s efforts to turn residential apartment buildings into Airbnb-branded complexes.

By the end of 2019, Airbnb and Niido will open as many as 14 Airbnb-branded complexes across the country, said Cindy Diffenderfer, co-founder and chief marketing officer for Niido Powered by Airbnb. “We have a pretty aggressive growth strategy,” Differnderfer said. A representative for Niido said the plans could change. Airbnb declined to comment.

As part of a push to broaden its appeal to more up-scale clientele, Airbnb has added more hotels and hotel-like listings under the label Airbnb Plus. Those sites get regular visits from an inspector to confirm towels are fresh, sheets are matching and that appliances commonly found in hotels, including hair dryers and irons, are stocked. Working in partnership with real estate developers like Niido will help Airbnb offer a more hotel-like experience while operating out of homes and apartments.

Not all residents are thrilled about their new neighbors, however. Earlier this year, Niido and Aibnb revealed a conversion of a 324-unit complex in Kissimmee, Florida. That prompted some residents to claim that they “didn’t agree to live in a hotel.” In Nashville, there was similar surprise after Niido

Powered by Airbnb informed Olmsted residents that their building would become a home-sharing complex late last week. “We’re excited to announce the recent acquisition of your beautiful community,” said a letter sent to residents on behalf of Diffenderfer and her partners at Niido. Residents already living in the building say they had no idea that Niido was taking over their leases or that their building would be turned into a permanent Airbnb complex. A representative for Niido said the real estate company is aware of the pushback and that they’re focused on, “building robust and satisfied communities in Nashville and Kissimmee.”

To contact the author of this story: Olivia Zaleski in San Francisco at [email protected]

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(Bloomberg)—Activist investor Jonathan Litt has significantly increased his position in Mack-Cali Realty Corp. and is likely to push for changes at the real estate investment trust, including a possible sale of all or parts of the company, according to people with knowledge of the matter.

Litt’s Land & Buildings Investment Management disclosed in a regulatory filing Monday that it had acquired 1.26 million additional shares in the New Jersey company, quadrupling its stake to about 1.85 percent. It isn’t clear whether Litt and Mack-Cali’s management have met to discuss the changes he might seek at the company, the people said, asking not to be identified because the matter is private.

A representative for Litt declined to comment. A representative for Mack-Cali, based in Jersey City, didn’t immediately respond to requests for comment.

Mack-Cali owns, manages and develops office and apartment properties in the Northeastern U.S. In a presentation on its second-quarter results, the company estimated the net asset value of its real estate at $35.93 a share.

The shares rose on the news, climbing as much as 6.5 percent. They were trading at $19.84 at 12:27 p.m. in New York.

Litt’s increased position also comes as Chairman Bill Mack, 78, is nearing the mandatory retirement age of 80 set by the company’s bylaws.

Mack-Cali is well known to Litt, who sat on the board for more than two years. In November 2014, eight months after Litt joined the board, Mack-Cali said its chief executive officer at the time, Mitchell Hersh, was stepping down and wouldn’t seek re-election as a director.

Litt himself resigned from the board in August 2016 after the shares rose more than 32 percent. The company said at the time that his resignation wasn’t the result of any disagreement with the company or its strategy.

To contact the reporter on this story: Scott Deveau in New York at [email protected] To contact the editors responsible for this story: Elizabeth Fournier at [email protected] Christine Maurus, Michael Hytha

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© 2018 Bloomberg L.P

(Bloomberg)—It’s too early to call it, but the U.S. buying binge by sovereign wealth funds may end soon, according to Bank of America Corp.

Government-run funds have piled into the U.S. this decade, snapping up prime properties and stakes in hot tech companies — most notably of late, the Tesla Inc. stake acquired by Saudi Arabia’s Public Investment Fund. Their trades were probably rewarding: U.S. economic growth hit a four-year high last quarter, unemployment is below 4 percent, and the S&P 500 Index is near a record, up more than 60 percent over the past five years.

“Investors such as SWFs and public pensions have been focused and enjoying the ride in the U.S. for the last couple of years, and certain indicators seem to still be constructive,” Woody Boueiz, global head of sovereign wealth funds at Bank of America, said in an interview. “It’s unclear what the trigger will be, but at some point I’d expect the weighting towards the U.S., and specifically certain sectors, to witness a rotation.”

Some signs of a peak are emerging in the U.S., where housing is headed for its broadest slowdown in years. The S&P 500’s price-earnings ratio is on track to surpass 20 for the third year running, the longest stretch since the turn of the century.

“Valuations feel fairly high, which makes it more challenging to put money to work,” said Boueiz, who is also co-head of corporate and investment banking for the Middle East and North Africa. “I wouldn’t be surprised to see a tactical rotation towards places such as emerging markets and Asia. SWFs and public pensions continue to be attracted by income-yielding assets such as infrastructure, real estate, power and data centers, but that space is getting crowded, especially in the developed markets.”

Sovereign wealth fund assets more than doubled in the last decade, to $7.45 trillion from $3.1 trillion in 2008, according to industry tracker Preqin. The pool is global, with almost a third based in the oil-rich Persian Gulf. Their investments span all asset classes, from stocks and bonds, to real estate, private equity, and increasingly in direct acquisitions.

Such state investors have occasionally acquired companies in the past, usually with co-investors. This is changing as the funds develop capacity to execute deals on their own, Boueiz said, and it’s also forcing the banks that service them to pitch transactions they would have historically reserved for private equity firms.

One example is when France’s Schneider Electric SE agreed in May to lead a $2.1 billion buyout of the electrical and automation division of Larsen & Toubro Ltd., India’s largest engineering and construction company. Singaporean investment company Temasek Holdings Pte was also involved, acquiring a 35 percent stake in the unit.

As SWFs and public pensions get “more confident and build up their teams internationally, we are seeing them do more direct deals,” Boueiz said. “Increasingly, they are acting as a source of liquidity in large corporate transactions, being it on the debt or equity front. They are long-term investors with less constraints than general partners and that plays to their advantage.”

To contact the reporter on this story: Mohammed Aly Sergie in Dubai at [email protected] To contact the editors responsible for this story: Stefania Bianchi at [email protected] Keith Campbell

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Single-family office Casoro Capital Partners LLC has given birth to a non-traded REIT called Upside Avenue.

The new REIT will invest in income-producing multifamily, seniors housing and student housing assets across the country, says Yuen Yung, CEO of Austin, Texas-based Casoro Capital. With a minimum buy-in of $2,000, accredited and non-accredited investors around the globe can participate in deals alongside Casoro, family offices, high-net-worth investors and institutional investors.

“The world of real estate opportunities is changing because the laws have changed, which is now allowing—finally—non-accredited investors to get into institutional-type deals,” Yung says.

In welcoming both accredited and non-accredited investors, Yung says Upside Avenue is embracing a “Main Street versus Wall Street” approach to real estate investing. Upside Avenue is projecting IRRs of 12 percent to 16 percent, with half of that in the form of annualized yields, according to Yung.

The REIT has a $3 million threshold before it can start allocating capital for real estate deals, Yung says. As of mid-August, it was close to one-third of the way toward that benchmark.

Casoro Capital’s parent company is commercial real estate investment firm The PPA Group, also based in Austin. In partnership with PPA, Casoro Capital has closed more than $1 billion in real estate transactions.

In a Q&A with NREI, Yung discusses how Upside Avenue differs from similar investment platforms, why the REIT is concentrating on the multifamily, seniors housing and student housing sectors and what his advice is for real estate investors in the current cycle.

This Q&A has been edited for length, style and clarity.

NREI: Why is now a good time to launch a non-traded REIT?

Yuen Yung: With the market at an all-time high, a good deal of investors and their financial advisers are looking to move a portion of their portfolios into private real estate that does not have the peaks and troughs of the stock market. These market factors—combined with increased awareness of new low-fee, low-minimum, non-traded REITs—are making them an emerging alternative for investors looking for diversification across multiple properties out of the stock market.

NREI: How does your online platform differ from all of the other online investment platforms out there?

Yuen Yang: One difference is the fee structure. A lot of the platforms you see out there with the other REITs are very cost-heavy—there are commissions paid, there are heavy fees—so the investor ends up getting a very small return. The reason we’re going to be able to hit our targets is that we’re designed to be very low-fee.

NREI: Why is Upside Avenue concentrating on multifamily, seniors and student housing?

Yuen Yang: Early on, when we go to college, we all need a place to live. So, the enrollment numbers are growing, and we felt like student housing was a very good sector to go into. The multifamily space has grown and continues to grow, especially in areas where there’s a lot of job growth and population growth. And in senior living, a lot of baby boomers are giving up their single-family homes because of the amount of work it takes for upkeep, and if they want to travel, it’s hard for them to leave their house behind, so they’re opting for more community-oriented spaces.

NREI: What’s your take on market concerns about overbuilding in the multifamily sector?

Yuen Yang: You have to look at it market by market. There are a number of markets, such as Oklahoma City and Houston, where the population growth is trending up while new starts are on the decline.

You also have to look at what’s happening across all asset types. The class-A market, which new builds generally fall under, may not be the best asset strategy for the market and overall demographic trends in an area. In many areas, we look to acquire class-B and class-C assets, which often still experience positive rent growth even when there’s an abundance of class-A units added to the market.

NREI: Is Upside Avenue looking at new construction or existing properties?

Yuen Yang: Because we’re an income-focused REIT, we are very focused on existing properties where there is some cash flow already and, with some slight to moderate modifications, we have the ability to enhance that cash flow. We’re really not going to focus much on new development; we might do a little bit, but that’s really not the focus.

NREI: How much does Upside Avenue plan to invest in each asset?

Yuen Yang: It could be anywhere from $1 million in equity up to $10 million to $15 million. We’re not as worried about the size of the deal; we’re more interested in the fundamentals and financials of the deal.

NREI: What will the hold periods be for Upside Avenue’s investments?

Yuen Yang: Typically, it’s a long-term hold, but investors will have liquidity after three years. There’s a 2 percent penalty in year one and a 1 percent penalty in year two, and then if they hold it till year three, there’s no penalty. For investors to get the most advantage out of the REIT, they really should think of this as a three- to five-year investment, at minimum.

NREI: Based on where the market is now, what advice do you have for real estate investors?

Yuen Yang: My biggest piece of advice is to work only with sponsors and operators who have been through both up and down market cycles. We are very late in the cycle right now. Experienced teams are changing their assumptions on underwriting and being way less aggressive. This is even more true with value-add assets, which often require very extensive repositions. Established firms are also often capitalized enough to make it through lean times when fewer deals are getting done.

You can still make a lot of money at this phase of the cycle, but you have to be less aggressive and be with a team positioned to play the long game.

There’s a storm of new development coming to the Miami apartment market—and it’s likely to hurt the prices investors are willing to pay for apartment properties there. So far, however, cap rates in the city have remained stable as storm clouds gather.

“CoStar expects cap rates to increase in the face of these conditions,” says Pamela Stergios, market analyst for research firm CoStar Group. “But we aren’t yet seeing cap rates move any higher in Miami than they are in the rest of the country.”

More new apartment units are now under construction in Miami as a percentage of the existing inventory than in any other city in the United States. Many of those are expected to open by the end of 2018.

Property sales strong so far

So far, despite the new construction everyone knows is coming, investors are still busy buying and selling apartment properties in Miami.

Investment sales volume for apartment assets in the city totaled $5.4 billion in the first half of 2018, according to Real Capital Analytics (RCA), a New York City-based research firm. That’s roughly equivalent to sales volumes recorded in 2015 and 2017, though below the figure reached in the first half of 2016, a record year for apartment sales.

The prices investors pay for these assets are still rising relative to the value of the properties. The median cap rate for apartment properties in Miami was 5.7 percent for the 12 months that ended in early August, according to RCA. CoStar, puts the average cap rate in Miami a little higher, but roughly in the same range.

But investors do demand higher cap rates when the buy apartment properties in Miami than they accept in other cities. “The average cap rate in Miami is 6.0 percent, which is much higher than other gateway metros, like Boston, Washington D.C., Seattle and L.A., which all have average caps well below 6 percent,” says Stergios. “This divergence has been lingering since the housing bust.”

However, the overall movement of cap rates in Miami has followed a similar trend to the rest of the United States. From 2010 through 2017, cap rates fell in both Miami and the broader U.S. market and have generally remained flat for the last 18 months, as property prices and income from properties have risen slowly, keeping pace with each other, according to CoStar.

International investors help Miami

International investors are helping to push prices higher in Miami, just as they are in other gateway cities.

“It is no secret that there is a lot of foreign capital in Miami, which certainly has the potential to drive pricing for multifamily assets higher,” says Stergios. “Regardless, it does not appear that foreign capital has had an outsized impact, at least compared to other gateway metros.”

The average price that investors pay per unit for apartment properties in the city has increased at nearly the same rate as in other “gateway” metropolitan areas. The top international investors in apartment properties tend to be from Canada. “Latin Americans tend to put more dollars into office and retail space,” says Stergios.

New construction clouds outlook

Developers are planning to open a record number of new apartments in the city by the end of 2018. That’s likely to push up apartment vacancies and sap the eagerness of investors to buy properties in Miami. “Vacancy is projected to finally jump above the national average and continue to remain elevated through at least 2020,” says Stergios.

Developers now have more than 18,000 new apartment units planned or under construction in Miami. That works out to 10.8 percent of the existing inventory—more than any other major metropolitan area, according to RCA.

Industrial developers in coastal U.S. markets are cashing in on the extraordinarily high demand by small businesses for for-sale modern warehouse facilities of between 25,000 and 40,000 sq. ft.

For example, Los Angeles-based Dedeaux Properties and a joint venture partner recently sold seven stand-alone industrial buildings ranging in size from 27,438 sq. ft. to 43,166 sq. ft. at Echelon Business Park in City of Industry, Calif. before a certificate of occupancy had been secured, according to Matte Evans, Dedeaux chief investment officer.

While investment-grade industrial properties in this region are trading at $120 per sq. ft., according to second quarter Greater Los Angeles Inland Empire Industrial Knowledge Report from real estate services firm Colliers International, the seven San Gabriel Valley buildings, which totaled 246,543 sq. ft., brought in about $50 million, or nearly $203 per sq. ft.

The buildings include two-story office space, ample dock-height loading and configurations for loading shipping containers. Evans says the bidders included a mix of small businesses and entrepreneurs, including: import/export and light assembly companies involved in the automobile, textile, electronic components and apparel industries, as well as suppliers desiring “last mile” space nearby large retail distributors like Amazon.

The high values commanded by buildings under 40,000 sq. ft. underscore the huge demand and low vacancy rates for small industrial buildings, says Dennis Sandoval, executive vice president with DAUM Commercial Real Estate Services, who represented Dedeaux in the sale. The vacancy rate for buildings of that size has hovered at 1.0 percent for the past four quarters, while overall industrial vacancy rate in the area has ranged between 2.3 percent and 2.8 percent in the first quarter of 2018.

Evans also notes that the San Gabriel Valley is an infill market, so it costs more to build industrial facilities due to the higher cost of land. In addition, larger buildings are more cost-efficient to build from the ground-up on a per-sq.-ft. basis due to economy-of-scale discounts for infrastructure, utilities and other construction requirements, he adds.

“Due to Echelon’s success, a couple [of] other local developers revamped their single-building development plans and brought to market similar free-standing, multi-building developments in the North San Gabriel Valley,” says Sandoval.

Southern California-based Mike Kendall, executive managing director of investment services, Western region, with Colliers International, who is responsible for investment sales from Denver westward, says that his counterparts nationally report an upswing in both sales and leasing demand for smaller industrial buildings everywhere small businesses are doing well. But he notes that the greatest demand for small, for-sale assets is in the four-corner coastal markets—Southern California, the Pacific Northwest, New York/New Jersey and Miami, which have similar cap rates, rental growth and entitlement challenges due to the infill phenomenon.

Inland markets like Atlanta, Chicago and Dallas have lower values because land is more readily available and thus less expensive than in coastal markets and labor costs are significantly lower, particularly in “right-to-work” markets in the South and Midwest, Kendall adds.

Not long ago, he notes, “There was an inversion in values, with larger buildings bringing higher pricing per square foot than smaller buildings, but now we’re seeing equilibrium in values, due to strong demand for smaller, for-sale buildings by small businesses, high-net-worth individuals and other private investors.

Kendall cites the following reasons for the extraordinary demand for small industrial buildings in coastal markets:

• Interest rates are still historically low, and owning your own building is the best hedge against inflation for the next 10 years and helps to build value while the company grows.
• Most existing small buildings were built between 20 and 40 years ago and are now obsolete for modern uses.
• Certain cultures have a strong bias for owning their own real estate to house their businesses, including Chinese and Korean business owners, which operate a significant number of import/export operations in coastal markets, particularly on the West Coast.
• Small businesses that want to remain in place as they grow, but may get priced out if they rent, are also opting to buy their own real estate.
• Some small business owners also using their company’s real estate as a retirement fund, purchasing it and leasing it back to their company, which pays the mortgage. Then, when they retire and sell the business, the real estate will continue to generate income for their retirement.

Meanwhile, Evans also says that many small businesses are buying their own real estate simply because they are growing in a specific market where there is little space available and/or are investing significant capital in customizing workspaces to fit their unique operational needs.