Northwood Tower (courtesy of Yardi Matrix)
Houston-based real estate management, leasing and investment company LandPark Advisors has set up an office in San Antonio, Texas.
Located at 1777 NE Loop 410, in the Northwood Tower, the firm’s expansion is intended to bring over 30 years of commercial real estate experience to service the Central and South Texas commercial markets.
The new LandPark office will be headed by Senior Vice President for LandPark Commercial, Ric Holland, who has been with the company since its 2013 formation. Northwood Tower is a 12-story, 266,560-square-foot, Class A office property located within 5 miles of the San Antonio Airport.
LandPark’s main office, located at 2550 Gray Falls Drive in Houston, is a four-story, 86,916-square-foot, Class B West Houston office property, located near Interstate 10.
Bill McGrath, president of LandPark Advisors, stated: “After several years of steady growth in the greater Houston area, we are extremely excited to be opening a new office and expanding our services in the Central and South Texas markets. Just as we’ve done in Houston, our focus in these markets will be to provide greater value for our clients and to create new partnerships and opportunities in office, retail, industrial and self-storage (Right Move Storage, LLC). The new office will have the full support of LandPark’s corporate office in meeting all the needs of our current and future clients.”
2550 Gray Falls Drive, Houston (courtesy of Yardi Matrix)
A growing number of 1031 exchange buyers are paying a premium to buy newly constructed triple net lease retail and restaurant locations. But some of those investors may be in for a rude awakening when it comes time to calculate returns on an exit strategy.
The sweet spot for 1031 investors has typically been assets priced below $6 million, and demand is pushing prices higher and cap rates lower in that segment of the market. Buyers have an especially big appetite for newly constructed assets with long-term leases and high credit tenants. For example, a newly constructed Walgreen’s in Valley Stream, N.Y. with 24 years left on its lease term sold in May for $14 million or $1,055 per sq. ft. and a cap rate of 5.3 percent.
“Cap rates are the lowest that I have ever seen, especially the demand for newly developed product,” says Jason Maier, a senior director at the Stan Johnson Co., a brokerage that focuses on net least transactions, in New York City. During 2016 and early 2017, transaction volume in the sector slowed due to uncertainty surrounding the presidential election. Sales activity came roaring back in the second quarter, and cap rates have since compressed by 25 to 50 basis points for newly constructed properties, he adds.
Given the current pricing, the question is what will those returns be for investors when it comes time to sell or refinance properties? “That is really a big problem and an ongoing conversation that we have all the time,” says Maier. Most investors are buying a steady income stream. However, if a deal is structured with flat or minimal rent increases and there is a 100 or 150-basis-point increase in the cap rate at the time of the sale, it will result in a loss to the seller.
Newly constructed properties are selling for a premium in part because they “check a lot of boxes” for 1031 investors, notes John Feeney, a vice president at The Boulder Group, a brokerage firm that specializes in the net lease sector. For example, net lease quick service restaurant (QSR)-occupied buildings sold for an average cap rate of 5.56 percent during the second quarter. However, restaurants constructed in 2016 and 2017 sold for about 30 basis points lower at an average cap rates of 5.25 percent, according to The Boulder Group.
Will rents hold up?
Some developers are getting nervous that their exit cap rate is going to be higher, meaning that the property sale price will be lower. So in order to justify the project, they are trying to push rents. Rents on newly constructed single tenant QSR properties rose 8 percent year-over-year as of second quarter, according to the Boulder Group.
One issue is whether the rents are sustainable for the tenant’s business. Another question is how those lease terms will stand up to future market cycles. A downturn could put the tenant in the driver’s seat to negotiate a rent reduction.
Investors do need to do their due diligence in that regard, such as making sure rents are in line with what a tenant is paying across the board and how the unit compares to average unit volume of other restaurants, notes Feeney. Investors should make sure that their tenant is in a good position to be a healthy business and that they are not set up to fail from the beginning, he says. Owners can mitigate risk by structuring the lease so that they can keep tabs on the tenant’s sales and financials. If an owner doesn’t have financials or sales data on their tenant, then they are going into a negotiation blind and the tenant has the advantage, he adds.
Some investors may have a big wake-up call in seven, 10 or 15 years down the road when it comes time to sell the building and the exit price turns out to be lower than the purchase price, or an owner has to drop the rent to entice a tenant to exercise renewal options. “That is one of the real beauties for these tenants is that they really do understand that they are going to be in the driver’s seat in the future and they are not going to be looking to increase rents in the future,” says Maier.
The bigger issue is flat rate leases. “We have really steered our clients away from any flat leases whatsoever, simply because we believe that the loss of value, depending on what the holding period is going to be, could potentially be at a loss,” says Maier. Those flat leases generate income, but oftentimes there is a real loss of value projected into the future, he says. Flat leases are still common amount drug stores, such as Walgreen’s.
Tax savings drive deals
There is a compelling reason for 1031 investors to pay a premium, and even overpay on buying a new asset, if it means avoiding a hefty tax bill. “That really is the mentality, and because there are so many of those investors out in the market it creates that enormous competition for the new 15-year or 20-year leases that have the best debt options available to them—without the fear of what happens on the refinance of the property beyond the first generation,” says Maier.
For the majority of 1031 buyers, the financial benefits are still worthwhile even at aggressive prices. For instance, even when projecting an exit cap rate that is 150 basis points higher, and accounting for the income generated during the hold period, only about 10 percent of the time does underwriting show a loss that is greater than what the investor would have paid in capital gains taxes without the 1031 exchange, notes Maier. So there are still a lot of benefits to this form of investment, not to mention other factors such as deductions on mortgage interest and estate planning, he adds.
The market is not too frothy, because there is real value in the real estate, real rent growth and value in the credit of the tenants, notes Maier. “What’s really important to understand is that no one has a crystal ball to know where the market is going to be. So you have to insulate yourself the best you can and make good decisions,” he says. Maier advises clients to buy quality real estate and avoid leases with flat rate structures. And for those that do buy a property with a flat rate lease, it is important to make sure it is financed properly with an eye on debt and lease maturities.
Many 1031 buyers pay all cash, which takes refinancing risk off the table. Another thing that is different from years past is that a lot of the loans coming in from 1031 buyers are more conservative. People aren’t putting on 85 percent leverage with interest only debt for 10 years, notes Feeney.
The 1031 investors are willing to pay premiums over the REITs or other institutional investors. That doesn’t necessarily mean those buyers are going to be upside down in 10 years. “It’s more a factor of making sure that you understand the debt that you are putting on a property, if you decide to put on debt, and you have some idea of what things might look like in 10 years,” says Feeney.
In the latest episode of The REIT Report: NAREIT’s Weekly Podcast, Dirk Aulabaugh, managing director with Green Street’s Advisory Group, gave his thoughts on the current environment for REIT initial public offerings.
Through the middle of August, four REIT IPOs have taken place, starting with the Invitation Homes (NYSE: INVH) offering in January that raised nearly $2 billion. Currently, however, Aulabaugh noted that the stocks of most REITs in the more “traditional” property sectors, such as office and multifamily, are trading at discounts to net asset value. On the other hand, newer sectors, such as data centers, are trading at premiums.
“In other words, if you own assets that fall into the non-traditional bucket, an IPO isn’t off the table right now,” Aulabaugh said.
The growth of e-commerce likely means the financial markets would be receptive to an industrial REIT IPO, according to Aulabaugh. IPOs of data center REITs also would be viewed favorably.
On the other hand, some mall REITs could turn into privatization targets, Aulabaugh said. “The malls are going to require capital and time to execute a creative strategy to reinvigorate the malls or convert them to a higher, better use,” he said, “and the public markets might not be the best place for that to happen.”
The U.S. apartment completion volume across the country’s 100 largest metros has accelerated to more than 80,000 units per quarter in 2017, up from around 60,000 units a quarter in the previous couple years. That aggressive new supply tally is creating a more competitive leasing environment for top-of-the-market product, especially in urban core settings where so many communities are coming on the market within blocks of each other.
Digging deeper into the story, urban core results obviously vary quite a bit from one spot to another due to factors that range from how many new apartments are being built to how many jobs are being added. Measuring health in terms of annual rent growth for new resident leases, results range all the way from spectacular—a 7 percent rent escalation in downtown Seattle—to dismal—a 5 percent rent loss in downtown Houston.
The Stars
Among the country’s especially active building centers, Seattle now ranks as the leader for urban core apartment performance by a huge margin. Annual rent growth is running at 7.2 percent in the heart of downtown, and similar pricing momentum exists in adjacent urbanized zones like South Lake Union, Queen Anne and Capitol Hill.
So far in this economic cycle, urban Seattle has managed to digest some 19,600 units of new supply, and the downtown job base continues to expand very rapidly. Ongoing construction in the urban core tallies about 10,400 units, further putting absorption capacity to the test. Even with this new supply likely to slow urban Seattle’s rent growth pace from the sky-high level recorded now, the Emerald City still appears positioned to remain the nation’s healthiest urban apartment market for at least a couple more years.
Other downtown apartment markets currently recording strong performances include Philadelphia, Orlando, Fla. and Tampa, Fla. Downtown rents across the trio of cities are moving up about 5 percent to 6 percent annually. However, time on the rent growth leaderboard could prove short for these metros. Building activity is kicking into higher gear, after comparatively few urban core deliveries came to market over the past few years.
The Solid Performers
Downtown apartment markets that fall into the broad solid performer category include the urban cores of Atlanta, Austin, Texas, Boston, Chicago, Dallas, Kansas City, Mo., Minneapolis, Phoenix and Raleigh, N.C. Within this group, annual rent growth is running around 2 percent to 3 percent—healthy results, but only about half the pricing power recorded in the handful of metros in the best-performing segment. Unit availability is mostly limited to the just finished properties moving through initial lease-up.
However, performances in these markets are inconsistent from quarter to quarter, or even month to month. Rent growth can suddenly come to a halt when a big block of new product enters the initial leasing stage, although strong demand will bring a quick return of pricing power.
Within this group of markets, Boston and Minneapolis probably have the strongest near term outlooks. While meaningful construction is occurring in the urban core of each city, deliveries over the next couple of years will at most simply match the volumes that were absorbed without much difficulty over the previous few years.
If performance vulnerability exists in Minneapolis, conservative pricing behavior often exhibited by the metro’s regional operators could end up being what dampens results. With today’s annual rent growth around 3 percent in the downtown/University submarket and around 5 percent in the adjacent uptown/St. Louis Park neighborhood, operators are already pushing rents at some of the highest levels achieved historically.
Atlanta and Dallas are markets that could drop out of the “solid performer” category for urban core properties relatively quickly. The cities boast rapidly expanding urban core economies, and they are absorbing product additions at breakneck speed. However, construction has gotten so aggressive that rent growth is showing signs of stalling. It’s unclear whether a slight stumble in the most recent performance data is a blip on the radar or a sign of what’s to come.
The Weakened Markets
Rents have been essentially flat for a while now in a big block of downtowns, including the urban cores in Charlotte, N.C., Los Angeles, Miami, San Antonio, Texas, San Diego, San Francisco, San Jose and Washington, D.C. Let’s also put Manhattan and Brooklyn in this category, although Manhattan performances by individual neighborhood are wide-ranging.
In Los Angeles, downtown rents are now stagnant to slightly down, despite the fact that the metro as a whole registers impressive rent growth near 5 percent. Downtown Los Angeles is still not an especially well-established marketplace, and it has struggled to absorb new supply totaling more than 7,000 units over the past three years. With ongoing construction at 8,000 or so units, a brief period of sizable rent cuts is looking like a possibility.
Charlotte’s uptown/South End neighborhood is another spot where flat rents are in contrast to pricing that’s up significantly—about 5 percent—on the metro level. Still, the neighborhood ranks among this economic cycle’s most stunning success stories in the big picture. Existing stock, which was limited to about 7,200 units at the beginning of 2010, has grown to roughly 16,000 units, and rents grew 22 percent on a same-store basis as inventory more than doubled.
Differing from the pattern anticipated for most urban core submarkets, Charlotte’s uptown/South End area is probably going to gain some performance momentum in the near term. While the 2,800 units on the way in this zone still represent a sizable block of product to be absorbed, ongoing construction is actually at its lowest point in four years.
The Real Laggards
A handful of urban core markets have consistently recorded rent cuts of late, and they are registering vacancy that reflects weakness beyond just big blocks of new supply moving through initial lease-up.
Effective rents in downtown Portland, Ore. have been gradually drifting downward throughout the past year, and Denver’s urban core has been losing pricing power throughout 2017. Furthermore, Central Portland occupancy of about 94 percent is off roughly 300 basis points from the level recorded a couple years ago, and downtown Denver’s occupancy rate of about 91 percent is down even more drastically.
Building activity is beginning to cool in the urban cores of both Portland and Denver. However, the additional product still in the pipeline suggests rents in both spots will probably continue to slip.
The central Nashville, Ten. submarket ranks among the country’s most aggressive apartment construction zones in the current economic cycle. More than 7,000 of the neighborhood’s 17,000 total apartments came on the market in just the past five years. While same-store rents in the neighborhood have climbed an impressive 25 percent since this construction boom started, pricing is now down more than 2 percent on an annual basis.
With about 4,900 apartments still under construction in central Nashville, the near-term delivery volume will remain elevated. Thus, it would be very surprising for rent change to get back into positive territory within this neighborhood over the next year or two.
Houston’s urban core apartments are really taking a beating. Annual rent cuts are right around the 5 percent mark downtown, and similar or deeper losses are occurring in other urbanized zones like the Medical District, Greenway/Upper Kirby, Greater Heights/Washington Avenue and the Galleria/uptown area. Furthermore, most of these neighborhoods have been suffering rent loss since late 2015 or early 2016.
About half of the 21,800 apartments currently under construction in metro Houston are on the way in the more urbanized submarkets, including some 4,200 units specifically in downtown. Those deliveries point to a continuation of the very competitive leasing environment and the likelihood of further rent losses in the remainder of 2017 and perhaps on into early 2018.
However, looking on to the middle to latter months of 2018, Houston’s urban core apartment market appears positioned for a sharp comeback. Minimal deliveries beginning a year or so from now are only part of the story, as the positive outlook also reflects a healthy economy and, subsequently, strong demand for housing. Rebounding from the energy-related cuts seen earlier, Houston is already back on the list of U.S. employment growth leaders, adding jobs at a pace of more than 50,000 positions annually as of mid-2017.
(Bloomberg)—U.S. Treasury Secretary Steven Mnuchin said Monday that President Donald Trump may keep the carried interest tax break for firms that create jobs, while eliminating it for hedge fund managers.
“We will close the loophole for hedge funds in carried interest,” Mnuchin said at an event in Louisville, Kentucky, where he appeared alongside Senate Majority Leader Mitch McConnell. “What we are focused on is there are many other types of funds that do create jobs and we want to make sure we don’t discourage investment.”
The so-called carried interest loophole enables investment-fund managers to pay a tax rate as low as 20 percent — roughly half the top rate for ordinary income — on much of their income. Trump highlighted the carried-interest tax break during his populist presidential campaign, labeling some hedge fund managers as “paper pushers” who are “getting away with murder.”
The White House referred questions about Mnuchin’s remarks to the Treasury Department, where a spokesman didn’t immediately respond to a request for comment.
McConnell said Monday the carried-interest tax break would be considered during tax negotiations among congressional and White House officials. He added that aside from tax incentives for charitable giving and home-mortgage interest, “there’s no point doing tax reform unless we look at all these preferences.”
Carried interest is the portion of a fund’s profit — usually a 20 percent share — that’s paid to private-equity managers, venture capitalists, hedge fund managers and certain real estate investors. Currently, tax authorities treat that income as capital gains, making it eligible for the lower rate. The top tax rate for ordinary income is 39.6 percent.
While Trump made the carried-interest issue a campaign theme, many hedge funds don’t benefit from it. That’s because the lower capital gains rate applies only when assets are held for at least a year, and many hedge funds hold assets for far shorter time frames — especially those that use computer-driven strategies to buy and sell securities thousands of times a day.
Permanent or Temporary
Under congressional budget rules that Senate leaders plan to use to bypass the chamber’s 60-vote threshold, any tax cuts would have to be offset with new revenue for the cuts to be permanent. Taxing carried interest as ordinary income would raise $15 billion over a decade, before accounting for any macroeconomic effects, according to the Tax Foundation, a Washington-based policy group.
McConnell also signaled during Monday’s event that while the Republican-led Congress is likely to end up with a revenue-neutral tax overhaul, there has been “some internal debate” about doing temporary cuts instead of permanent changes.
In response, Mnuchin repeated a line he’s said before: “Permanent is a lot better than temporary and temporary is a lot better than nothing.”
–With assistance from Saleha Mohsin.To contact the reporter on this story: Sahil Kapur in Washington at [email protected] To contact the editors responsible for this story: Alexis Leondis at [email protected] John Voskuhl
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© 2017 Bloomberg L.P
- Here’s How Amazon-Proof These 13 Types of Retailers Are “It goes without saying that retail is evolving. More shopping is occurring online, but the pace of change is uneven. ‘You can’t paint retail with broad brush strokes,’ James Cook, JLL’s director of retail research, told CNBC in an interview. ‘You have to talk about the category changes … instead of saying retail is going down the tubes.’ JLL took a look at 13 retail categories using consumer opinion data gathered by the firm, store closure statistics, same-store sales growth and e-commerce penetration, to gauge how it will look in the future.” (CNBC)
- Norway’s Wealth Fund Takes 48 Percent Stake in New York Property “Norway’s $975-billion sovereign wealth fund, the world’s largest, has bought a 48-percent stake in a New York City property, it said on Monday. Norges Bank Real Estate Management paid $223 million for the stake in the 93-year ownership interest of 375 Hudson Street from Trinity Church Wall Street, valuing the property at $865 million. The deal was done in a joint venture with Trinity Church Wall Street and Hines, the Norwegian fund added.” (Reuters)
- WeWork and Other Firms Test Brooklyn’s Office Market “Samuel Rudin, the late patriarch of one New York’s oldest real estate dynasties, built the family’s real estate portfolio with a rule: if a property wasn’t accessible by subway, he wasn’t interested. Now the Rudin family is tweaking that rule, adding another mode of transportation—a ferryboat. The Rudin family and office giant Boston Properties Inc. are in the midst of building a 675,000 square-foot office building.” (Wall Street Journal)
- How Is Commercial Real Estate Taxation Unfair to Other Investors? “Next up in Washington will be tax reform since an easy, no-brainer like infrastructure improvement has been put on hold until sometime later in 2018. Fixing roads and bridges awaits the findings of the new committee formed to study the subject — which really means a fight over which states deserve to receive the forthcoming pork. Where was I? Oh yes. Tax reform. But first, I’ll note that one aspect of returning to a summer home for vacation is that all the magazines lying around are from July and August of the previous year.” (Mercury News)
- Republican Committees Have Paid Nearly $1.3 Million to Trump-Owned Entities This Year “The Republican National Committee paid the Trump International Hotel in Washington $122,000 last month after the party held a lavish fundraiser at the venue in June, the latest example of how GOP political committees are generating a steady income stream for President Trump’s private business, new Federal Election Commission records show. At least 25 congressional campaigns, state parties and the Republican Governors Association have together spent more than $473,000 at Trump hotels or golf resorts this year, according to a Washington Post analysis of campaign finance filings.” (Washington Post)
- Walmart Wants to Take on Amazon with Flying Warehouses “Wal-Mart Stores Inc. has opened a new front in its battle with Amazon.com Inc. The world’s largest retailer has applied for a U.S. patent for a floating warehouse that could make deliveries via drones, which would bring products from the aircraft down to shoppers’ homes. The blimp-style machine would fly at heights between 500 feet and 1,000 feet (as much as 305 meters), contain multiple launching bays, and be operated autonomously or by a remote human pilot. Amazon was granted a patent for a similar vessel in April 2016.” (Fortune)
- Frank Sinito Has Sky-High Hopes for Real Estate Portfolio “Frank Sinito recently bought the 57-story Key Tower and the attached 400-room Marriott Cleveland Downtown in a $267 million deal. It’s a long reach for a Cleveland native who started out with a 14-suite apartment complex and a bar in the suburbs. But at 54 with a tireless devotion to work, he’s fine-tuning things at the Key Center complex and has his eye on another big downtown building and renovation project.” (Crain’s Cleveland Business)
- CoStar Moves to Dismiss Xceligent’s Antitrust Countersuit “CoStar Group is asking a Missouri judge to dismiss the countersuit Xceligent filed against the data giant in late June alleging the company had engaged in years of anti-competitive behavior. The D.C.-based commercial real estate data company filed a 27-page motion to dismiss with the U.S. District Court for the Western District of Missouri Thursday, arguing Xceligent did not present adequate claims to merit a court judgment.” (Bisnow)
- Sheldon’s Grey Cloud and Silver Lining “The recent overturning of Sheldon Silver’s 2015 corruption conviction raises key questions for both the real estate industry and those who police it: Do landlords and developers have clearer guidelines on what counts as corruption, or will heightened scrutiny and a likely retrial only bring more of them into the witness box? Although the former State Assembly speaker was sentenced to 12 years in prison for schemes involving real estate developers, he was spared last month by a Supreme Court decision that cleared former Virginia Governor Bob McDonnell of corruption charges in 2016 — a ruling that redefined what could be considered an official act by a politician.” (The Real Deal)
- Entrada Snags DFW Office/Industrial Portfolio “Entrada Partners recently snagged an office and industrial portfolio in the Dallas-Fort Worth area, thanks in no small part to HFF. The commercial real estate and capital markets services provider arranged a loan with Bank of America Merrill Lynch for Entrada’s purchase of the 508,800-square-foot group of properties. The financing came in the form of a floating-rate, non-recourse loan with a three-year term and the option for two one-year extensions.” (Commercial Property Executive)
(Bloomberg)—Manhattan is about to become a testing ground for what could be the next luxury real estate boom. Well, maybe mini-boom, considering the rather narrow target group: frail urban seniors with fat bank accounts.
Developers are spending hundreds of millions on high-end assisted-living apartment projects, one on the Upper East Side and one in Midtown, and aiming for more in the area and across the U.S. The bet is that there are sufficient numbers of the affluent and aging in big cities who won’t want to leave their neighborhoods, even as they suffer cognitive decline.
It is, of course, a rather small group of any age or mental ability that can handle the monthly rents these kinds of places will command. They’ll start at $12,000 at the complex that Maplewood Senior Living and Omega Healthcare Investors Inc. are putting up on Second Avenue and 93rd Street. Some will top more than $20,000 at the building Welltower Inc. and Hines are about to break ground for on the corner of 56th Street and Lexington Avenue.
They’ll boast the usual luxury frills like uniformed doormen and lush landscaped gardens. But they’ll also incorporate special features for the elderly and memory impaired, such as sharply contrasting wall colors in bathrooms to help those with poor eyesight identify fixtures and hallway lighting designed to encourage sleep at night.
“The risk is that you’d be the anti-Field of Dreams — you build it and they don’t come,” said Michael Knott, managing director at Green Street Advisors LLC, a real estate research company. “But the absolute lack of supply of this product provides some comfort that even though these are pioneering projects, there will be demand.”
Under-Served Cohort
The elderly with dementia or Alzheimer’s are an under-served cohort, whatever their income. According to Welltower, there are just 70 licensed memory-care beds in Manhattan. And while the borough is over-saturated with posh condo offerings, no new assisted-living facilities have opened there since at least 2005, when the National Investment Center for Seniors Housing & Care began tracking the projects. There are only 622 such units in the borough, with a median occupancy of 97 percent and average rents of about $6,020.
“We’re seeing people who are in New York, wanting and demanding to live in New York, but there’s really nothing available,” said Greg Smith, chief executive officer of Westport, Connecticut-based Maplewood, which owns 13 senior communities, most of them in suburbia, and a 48-acre (19-hectare) farm from which it sources food for its properties.
And if there was ever a good time to dive into Manhattan, this could be it, with deluxe residences going begging and land values down 21 percent so far this year, according to brokerage Cushman & Wakefield. “Because of what’s happening broadly in real estate in New York City, it feels like the winds are moving in a direction that will allow us to find good sites,” said Thomas DeRosa, CEO of Welltower in Toledo, Ohio, the largest publicly traded senior-housing owner by market value.
Additional Locations
Both Welltower and Maplewood are scouting for additional locations in New York, and in other major metropolitan areas, anticipating the so-called silver tsunami that will double the U.S. population of 80-somethings in the next two decades. In fact, Maplewood’s New York complex is the first in a planned international brand of boutique senior properties called Inspir that is considering sites in Los Angeles, Miami and London.
At the 23-story, $270 million Maplewood-Omega tower on the Upper East Side, residents will enjoy farm-to-table dining, a spa, a movie theater and a “sky park” on the 16th floor that will feature a flower-lined walking path and a sun porch. Smith said he views the project as “a hotel brand — a high-end luxury hotel brand.”
Welltower and Houston-based developer Hines will begin work on their project this month, preparing to raze two squat buildings they bought for a combined $115 million, to make way for a 16-story structure where the bathrooms will be marble and the exterior will look like limestone, the signature skin of some the neighborhood’s more rarefied residential structures.
The upper range of rents will be at least triple the average $6,988 that Welltower charges at the rest of its U.S. senior-housing portfolio, based on the company’s second-quarter filings.
Aging Boomers
Senior housing has traditionally been suburban-focused because land is so much cheaper outside cities, and developers hadn’t seen a big enough market to justify paying more, and charging more, for urban locations near transportation and nightlife, Knott said. The aging members of the massive baby-boom generation helped change their minds. Now, he said, many living in cities have the means to pay a premium to remain in familiar environments.
And many will need special care. In New York state alone, about 460,000 residents aged 65 and older are expected to be living with Alzheimer’s-related dementia in 2025, some 18 percent more than there are today, according to the Alzheimer’s Association.
To serve the wealthiest of them, senior-housing developers are taking cues from their tony-apartment building counterparts and putting extra emphasis on finishes and flourishes, to make their facilities look like the places residents left behind.
Broadway Shows
At the Maplewood building, set to open in 2019, that will mean concierge-style care-giving, where staff won’t wear clinical-looking clothing and will offer housekeeping and reservations to Broadway shows. There will be a salon and a swimming pool.
In a prototype of the Welltower development, a sample apartment has nearly 10-foot (3-meter) ceilings, with lights dotting the perimeter in lieu of an obtrusive fixture. Hines’ design team uses an app to evaluate every pattern and color choice through the eyes of someone who’s aging, said Sarah Hawkins, a managing director with the firm. Someone with cataracts might have a yellowish sheen to their view of the surroundings. Carpet colors and patterns also can’t be too contrasting, because that might make it seem that the floor is moving.
A hallway handrail, required by law in all assisted-living centers, is camouflaged in wainscoting. Hall lights are timed to the body’s circadian rhythms, glowing bluish in the morning to promote wakefulness and yellowish at night.
‘Accustomed To’
What’s key, DeRosa said, is that the assisted-living complex look like something else to residents — “like a building that they’re accustomed to.” So the exterior will be limestone blocks at the base and concrete poured to evoke the stone for the rest. The entrance courtyard will feature two walls carpeted in greenery, and a culinary consultant has been hired to advise on the proper mix of restaurants for a clientele accustomed to eating out as often as five nights a week.
“If you’ve lived your whole life in a limestone-clad building on the Upper East Side, this will not feel alien to you,” DeRosa said. “This building should feel like a seamless part of the community that someone would have experienced for the last 60 to 80 years.”
To contact the reporter on this story: Oshrat Carmiel in New York at [email protected] To contact the editors responsible for this story: Daniel Taub at [email protected] ;David Papadopoulos at [email protected] Anne Reifenberg
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© 2017 Bloomberg L.P
As Invitation Homes and Starwood Waypoint Homes announced an agreement to merge recently, the single-family home rental (SFR) industry is contemplating how the emergence of a giant new entity will impact the sector. Once the merger is complete, the combined company would own and manage about 82,000 SFR properties around the country.
The merger “shows that the single-family home rental market is strong, vibrant and deep,” says Diane Tomb, executive director of the National Rental Home Council, an industry advocacy group.
“We have proven this is a sustainable business model, capable of producing strong operating margins and financial results while providing exceptional customer service,” says a spokesperson for Starwood Waypoint. “Now that scale has been achieved and operating results have stabilized, growth through this merger is a natural next step.”
Institutional SFR owners are currently making far fewer acquisitions than they did a few years ago. Instead, they appear focused on improving operations and selling off underperforming assets. Now, it seems like mergers and acquisitions are also on the table. The merger leaves only a few giant companies in the business of owning and managing SFR assets, including a few potential acquisition targets.
“Prominent rental platforms still in the market include Progress Residential, a private owner of roughly 20,000 properties, and Tricon American Homes, a unit of Tricon Capital Group Inc.” according to an analysis by Standard & Poor’s. Tricon holds more than 16,000 properties.
Room to grow, eventually
The vast majority of rental houses in the U.S. are still owned by smaller companies and individual investors. While the combined Invitation Homes/Starwood Waypoint company would be the largest SFR company in the U.S., the joint portfolio would still represent just 0.5 percent of the nearly 16 million single-family homes for rent.
That leaves a lot of room to expansion. For now, however, Invitation Homes and its industry peers have not been buying a lot of new assets.
“Just because their share of the [total single-family home market is] a half a percent, there is no need to acquire more, especially when home prices are so high,” says Daren Blomquist, senior vice president with research firm ATTOM Data Solutions. “Why buy at or near the top of the market? They will wait till the next downturn.”
Instead, Invitation Homes and Starwood Waypoint have been content over the last year to improve the operations and consolidate their portfolios. The agreement to merge is a natural continuation of that refinement. “They are looking at squeezing every ounce of efficiency they can out of combining forces,” says Blomquist. “Their portfolios overlap in many markets.”
The two firms’ portfolios include approximately 26,000 homes in Florida, 13,000 in California and 12,000 in Georgia.
The new company plans to combine the best parts of the Invitation Homes and Starwood Waypoint platforms. “By bringing together the best of both companies, including Invitation Homes’ industry-leading, high-touch approach to customer service and Starwood Waypoint Homes’ industry-leading smart home and operating technologies, we will be even better positioned to serve our residents,” says the Starwood Waypoint spokesman.
In the latest episode of The REIT Report: NAREIT’s Weekly Podcast, Dirk Aulabaugh, managing director with Green Street’s Advisory Group, gave his thoughts on the current environment for REIT initial public offerings.
Through the middle of August, four REIT IPOs have taken place, starting with the Invitation Homes (NYSE: IVH) offering in January that raised nearly $2 billion. Currently, however, Aulabaugh noted that the stocks of most REITs in the more “traditional” property sectors, such as office and multifamily, are trading at discounts to net asset value. On the other hand, newer sectors, such as data centers, are trading at premiums.
“In other words, if you own assets that fall into the non-traditional bucket, an IPO isn’t off the table right now,” Aulabaugh said.
The growth of e-commerce likely means the financial markets would be receptive to an industrial REIT IPO, according to Aulabaugh. IPOs of data center REITs also would be viewed favorably.
On the other hand, some mall REITs could turn into privatization targets, Aulabaugh said. “The malls are going to require capital and time to execute a creative strategy to reinvigorate the malls or convert them to a higher, better use,” he said, “and the public markets might not be the best place for that to happen.”
When Primark took over one floor in the former Sears anchor space at King of Prussia mall in November 2015, the retailer opened its doors just in time for Black Friday and that year’s holiday shopping season.
That might have looked like a close call on the calendar, but the Primark store at King of Prussia quickly lived up to the potential of the rest of the chain. The chain also maintained its popular standing with shoppers at the Boston Downtown Crossing center, which opened in September 2015.
For retail industry insiders, Primark has the retail savvy and sales prowess to live up to the excitement around its arrival in the U.S., sometimes dubbed the “Irish invasion.”
“I think they can grow the footprint pretty fast,” says Jan Kniffen, CEO of J. Rogers Kniffen Worldwide Enterprises, an equity research and financial management consulting firm specializing in retail. “Primark is at the intersection of cheap, fast-fashion and department store retailing.”
In terms of how fast, Kniffen says the brand can expand to 300 stores in the U.S., which offers huge potential for an inpouring of revenue from the retailer. Primark, which hails from Ireland and is owned by the U.K.-based Associated British Foods, has already opened eight of its 10 currently planned stores.
“Once the model is perfected and Primark is happy with it, I don’t see any reason [it] cannot build 40 or 50 of those stores a year,” Kniffen says. “I think the developers would love to have them.”
Primark stores generate an estimated $800 in sales per sq. ft., which makes them highly desirable tenants that would be welcome in any property. The brand will be mainly mall-based in the United States.
Primark had Boston at ‘Hello’
At the Boston Downtown Crossing, Primark occupies four floors in the historic Burnham Building, the former Filene’s Department Store flagship, now owned by New York City-based Millennium Partners. The brand quickly endeared itself to shoppers, both as a shopping destination and social meeting place in front if its ‘Hello Boston’ sign, according to officials at the Downtown Boston Business Improvement District.
“Tourists knew about the brand already, so there was a buzz,” says David Ertischek, the communications and social media manager for the BID. “There were lines out the door the day they opened, and there have been lines ever since. It is common to see people with multiple Primark bags.”
The foot traffic has also helped boost spending in the area at other retailers, such as Old Navy and Macy’s, Ertischek says.
The Boston Primark store totaled about 77,300 sq. ft. when it opened, and recently expanded to around 92,400 or 92,800 sq. ft., according to various news reports.
One of the reasons for such a rapid expansion is that Primark has broad appeal to consumers who shop regularly at both mid-range as well as bargain-priced brands. Kniffen has walked through all of the current Primark U.S. stores, as well as talked with shoppers. Customers that he queried at the Boston Downtown Crossing said they also shopped at T.J. Maxx, Marshalls and H&M, while shoppers at the Primark in King of Prussia patronized Kohl’s, Macy’s and J.C. Penney.
Primark’s average price point is $6, Kniffen notes. That is especially attractive to shoppers who frequent Ross Stores, where the average price point is $10; Burlington and T.J. Maxx, where the average is $14, or Macy’s, which has a $26 average.
Primark’s model is reminiscent of dominant fast-fashion and warehouse operators, built on a tightly controlled supply chain and private labeling of its fast-fashion and other goods. In that sense, the retailer operates similarly to fast-fashion brands like H&M and Zara. The company can also accept substantially smaller gross margins than other retailers—like Costco—and offer goods to consumers at the lower price points.
The retailer is happy to accept margins ranging between 20 percent and 27 percent, according to Kniffen. Meanwhile Kohl’s and Macy’s aim for 36 percent and 40 percent, respectively, he said.
“They are performing extraordinarily well, from the point of view of sales per square foot,” Kniffen says. “My guess is that their tests have gone fine, and they are likely to ramp up production after next year, once they get the next 10 builds.”
