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In real estate development, one of the continued growing trends is the move towards more mixed-use developments. For those real estate investors looking to invest in older retail centers or office buildings, who don’t have the ability to build-on, blending their tenants into a less-traditional mix could be a path to success.
Dees Stribling has a good look at the growing trend of Tenant Curation in a recent BisNow article, How Curated Retail Fosters Community In A Mixed-Use Development.
Curation implies putting more thought into how a retail property fits into its surroundings, but also how individual retailers complement each other, and how they complement other uses in a mixed-use property. The process is something of a puzzle and involves more than simply attracting entertainment or recreational uses to a site — though those can be important.
The changing nature of retail also means that urban retail in particular needs a more thoughtful approach, Blum said, so that retail works with other parts of a mixed-use development to build community. “We’ve been tracking the changing nature of retail for years, and one of the major recent changes is how retail now needs to be one of a variety of uses at a site that complement each other,” he said.
Large office properties are borrowing the concept. Recently the Altitude Café and Lounge opened in the Willis Tower, part of the effort by the building to add curated retail elements in the context of a major office building.
In purely retail investments tenant mix is crucial. This is especially being shown with the closing down of many smaller malls throughout the country. Real estate professional Taylor Cox has an article on LinkedIn, The Importance of Tenant Curation for Retail Operations, where he breaks down some excellent insights into the importance of tenant mix. Taylor writes,
“How is an ideal tenant mix or a successful curation of tenants achieved? It starts with a sophisticated understanding of what retail offerings are and are not currently well represented in the area under consideration.
Give consideration to where and how the site has favourable positioning relative to other retail options and leverage those advantages. This overall approach is designed to attract retailers that focus more on location quality and are less rent sensitive.”
Taylor’s advice is especially important for any real estate investors looking to capitalize on transforming older malls or retail centers into something more desired by today’s e-commerce driven consumer. Lastly, this article from the London BisNow site, What The Office Sector Needs To Learn From Hotels, Retail And — Wait, What, Airports And The Car Industry?, accutely explaines the number one thing we think real estate investors and developers need to consider in 2018 and looking forward. (Though it mentions office owners…we think it will apply throughout numerous real estate markets including the change in industrial real estate due to e-commerce.
Office building owners are having to start thinking of their tenants as customers, and thus adopt the mindset of designers of products like Apple or Samsung. For those companies, user experience, or UX, is key — a bad UX equals doom for a product. “It is the idea that we are in a market place where you are in competition, and your customer wants to have a good user experience,” Malcic said, elucidating how to go about this. “That goes back to the idea of choreographing space, creating different types of environments, particularly getting the right balance between collaborative and quiet space. You would find that variety of space in hotels or in retail.”
New sports stadiums or arenas are often touted as great ways to increase real estate in a given area. Though there is a debate on whether or not they actually bring an economic benefit to the area, but for real estate investors the question is whether or not they make an area good to invest in?
Commercial real estate firm Newmark Knight Frank just finished a new study and found that it can often takes years for newly built stadiums to become good anchors for areas. This is even as many developers are beginning to build mixed-use communities near the stadium locations.
As the study states…”clubs have a history of creating destination retail and entertainment venues from scratch. These new facilities are constructed where land is available, and that is usually not in the already-activated areas of town.
Lower prices for site assemblage are a priority for the club and its investor partners, while minimizing the displacement of businesses and residents is a main objective of the public sector (along with enhancing tax revenues).
Most of the time, a new stadium or arena is built in an underutilized part of a metro area that has few demand drivers to spark organic revitalization. Sometimes that is in a suburban or exurban location; recently, stadium and arena construction is following the pattern set by residents, and is migrating downtown.”
The study had some answers to real estate investing questions I had after a recent visit to the Navy Yards/Capitol Riverfront in Washington D.C. If you’re unfamiliar the Navy Yards / Capitol Waterfront is a mixed-use development on the waterfront in D.C. and includes stadiums for the Nationals and DC United.
Currently, there are cranes everywhere in the area, and the number of new buildings is astonishing. Usually, when developers are making investments of this size, real estate investors can find smaller commercial or residential properties that can benefit from the increase in real estate values in the area, due to the overall construction.
The study went on to find:
Developers race to identify available properties to create retail and entertainment destinations for before and after games and concerts.
New ancillary development, though, typically takes years to reach fruition unless it is part of a master-planned site.
Washington, DC’s Capitol Riverfront neighborhood serves as an example: Major League Baseball’s (MLB) Nationals opened a new park in 2008, but the area did not add a material number of restaurants for pre-game and post-game revelry—nor many apartments and condominium residences within walking distance of the stadium—until years later.
BisNow has an interesting take on how these developments do affect real estate investment in the area, from a labor perspective. As they write, “The report estimates that the construction market feels the effects for three to four years, the average time it takes for a stadium to be built.
That does not include the labor required to build the master-planned communities around the stadium, which are likely to cost more in rent for office tenants than similar developments elsewhere in a metro area, according to Newmark.
In California, the Giants and Golden State Warriors are working on billion-dollar mixed-use projects around their stadiums (AT&T Park and the under-construction Chase Center, respectively). The coordination of such projects is a relatively new process, without a firm answer on whether they are worth the money, effort and labor.”
The JLL Q2 Retail Report has some excellent insights and breakdowns on how some malls are faring well in the changing retail climate. Savvy commercial real estate investors may find some of these strategies worthwhile to implement in their mall or retail redevelopment projects.
Also, some malls — a category that includes lifestyle centers, regional and super-regional properties — aren’t doing badly at all.
Strong malls in top locations not only have less exposure to closing retailers, but tend to fill vacant space much faster and more profitably than average properties, JLL reported.
The ease at which properties find tenants to fill vacant spaces depends on the quality of the location. The report, citing CoStar data, says that about 70% of the best locations had vacant space re-leased within a year. What is going to happen to the current wave of vacant retail space?
Three main outcomes, according to JLL: re-leasing by retailers, re-leasing by non-retailers or demolishment.
The Wall Street Journal has a look, Office Spaces Offering Perks Drive Lease Deals in New Jersey, at how amenities and tenant-driven perks are one of the keys to new lease deals in the Garden State. Office Spaces Offering Perks Drive Lease Deals in New Jersey
The buildings where large leases have been signed are located in both urban and suburban environments, but most are modern amenity-filled spaces and are properties where owners have invested in or are planning significant renovations, brokers said. Tenants are looking for these types of spaces as part of their recruiting and retention tools, brokers and real-estate executives said.
The options for large tenants seeking higher-end spaces with attractive hotel-like features such as outdoor work spaces, comfortable lounge areas and multiple food options are limited to a handful, many brokers said.
“Companies are looking for newer and better product, and when it gets built, it’s going to lease,” said Tim Greiner, executive managing director at real-estate services firm JLL. He added, “When we talk to companies, they seem to be willing to make the investment in a better building and are not so much focused on rent.”
For those looking to invest in commercial properties for a value-add play it is important to keep in mind how amenities will drive new leasing.
As we previously wrote in, Do Mall Owners Need to Innovate More?, there seems to be a tremendous opportunity for a value-add investment play on many of the smaller, older malls. One suggestion we put forth, Should Mall Owners Be Looking to Create Co-Working Spaces?, was that mall owners should look to use co-working spaces to fill some of their vacant inventory.
Recently, this idea has become more and more accepted as large Co-Working space companies like Industrious, are now looking to malls for new co-working spaces. Lauren Thomas (@laurenthomasx3) has an article, Shopping mall owners fill empty stores with offices as coworking companies branch out, for CNBC highlighting Industrious’s move into malls.
Coworking space is predicted to grow at retail properties by an annual rate of 25 percent through 2023, according to a new report from commercial real estate service provider Jones Lang LaSalle. Shared office space is expected to account for roughly 3.4 million square feet of retail space by then, JLL found in surveying 75 different coworking locations at malls, strip centers and within street-level retail shops across the U.S.
In addition to the ability to fill abandoned retail space, there is also the opportunity for malls to act as the perfect co-working location due to the number of stores/amenities still available at many malls.
Retail real estate analysts agree there is a lot of appeal in bringing more coworking uses into retail. As tenants, coworking companies are typically signing normal- to longer-term leases, and these deals promise to bring more foot traffic to the property.
“We are finding in general that these retail spaces have all kinds of amenities that workers want,” said James Cook, director of research at JLL’s Americas division. “You can meet up with people, you have places to run errands, and you can grab a bite to eat. … I think in many cases it makes sense.”
For those looking to make value-add investments in office buildings, the change in desired amenities is something to keep an eye on. Though there is a growth towards co-working spaces and an increased demand for tenant amenities. It’s important to not overlook the building’s infrastructure especially how is the Wi-Fi coverage. This recent article highlights the importance of having a strong signal, Cellular Coverage: The Next Must-Have Amenity
Fitness centers and coffee bars are not the only features owners are looking to include in their office buildings. As more companies depend on seamless internet and cellular connectivity to conduct business, offices need to have the necessary infrastructure to support them. A recent report on millennials found that 96% of those surveyed rated mobile phones as the most important item used in their daily lives.
In a fast-paced, digital economy, reliable connectivity can be the difference between growing as a company and being outpaced by competitors. In a survey from WiredScore, 72% of office leasing decision-makers said it is critical to have reliable internet connectivity in their office space, and more than half said they would not consider renting the space at all if they knew it possessed poor connectivity infrastructure.
It definitely is something to keep in mind, especially those looking to invest in value-add plays on older suburban office buildings. Amenities and infrastructure, you need them both.
There is a lot of talk about Atlantic City these days. The opening of new casinos tends to always build the hype. ActionNews 6 has plenty of coverage on the impending openings of the Hard Rock Atlantic City and Ocean Resort Casino, Counting down to new casinos in Atlantic City.
Though after the casino meltdown, these recent re-openings have decidedly less fanfare. Steve Cuozzo has a recent New York Post article, Gambling will be the death of Atlantic City, that highlights some reason we have seen less fanfare for these new casinos.
He writes, “At first glance, the boardwalk suggests a happy upmarket playground scented by roasting peanuts and salt air. In addition to brightly lit casinos, it boasts the ocean beach, the Steel Pier with its Ferris wheel and outdoor cafes.” He then goes on to examine the difference in business models between Atlantic City and Las Vegas casinos.
He goes on to write, “While Las Vegas casinos take in two-thirds of their dough from non-gambling attractions such as restaurants, concert venues, spas and even amusement rides, Atlantic City reverses the formula.
The exception to this antiquated approach is the Borgata, which opened in 2003 not on the boardwalk but at nearby Renaissance Point in the Marina District. Conceived as a rival to Las Vegas, it boasts two thriving music venues, a 54,000 square-foot spa, high-end boutiques, restaurants run by Bobby Flay and Wolfgang Puck, and a branch of Manhattan’s Old Homestead Steakhouse. Not surprisingly, the Borgata is Atlantic City’s most successful property, making a record $290 million profit in 2017.”
Though there are a number of negatives in the article. There definitely is a cause for optimism, especially for the savvy real estate investor.
A recent article in Philly Magazine highlights some of the positive changes in Atlantic City outside the casinos, and how there could be a case for optimism. Victor Fiorillo had some interesting angles in his recent article, The Re-Re-Re-Re-Rebirth of Atlantic City.
There are some surprising signs of life these days, not to mention some serious investment — from small ventures, like Longacre’s projects, to big bets like Stockton University’s new beachfront campus and this month’s opening of the $550 million Hard Rock Hotel & Casino in the old Trump Taj Mahal.
Victor also has a very interesting quote from real estate investor and developer Bart Blatstein, on the amount of real estate investing happening in Atlantic City.
“There’s more money pouring into A.C. right now than in all of Philadelphia,” boasts development mogul Bart Blatstein. That’s likely an exaggeration, but it shows how much Blatstein — who’s scooped up a number of Atlantic City properties in recent years — is also all in.
The article then goes to show how once areas like Northern Liberties, Fishtown, and now Point Breeze became desirable addresses and real estate investments, once the areas hit a bottom.
He ends with a great thought for anyone, from real estate investors to entrepreneurs, who are looking for a potentially risky investment that could have a high upside and payoff.
When property values get low enough, neighborhoods like these are desirable and affordable to people like Longacre, who can now pick up buildings for pennies on a dollar.
You wanna open a rock club? Sure, give it a shot. You want to try to emulate Reading Terminal Market on a sketchy section of New York Avenue? Go for it. Atlantic City suddenly became a risk worth taking.
After reading both of these viewpoints, I decided to ask Ian Lazarus, owner of Shore Points Realty – a residential and commercial brokerage in Wildwood, a long-time Jersey Shore Realtor who was part of Atlantic City’s second wave in the late 80s, what he thought of Atlantic City as a real estate investment,
“I had my original 15 minutes of fame in Atlantic City in the late 88’s when Atlantic City was starting its second wave. They aren’t re-births, the town never died. All things have cycles and this resort town isn’t immune to recessions.
I think this time around it is different. Not because gambling isn’t the prime reason people are coming down here. The biggest reason is the real estate prices for the first time have deflated since the casinos artificially cranked them up, so the entrance price to build a casino or non-casino developments was prohibitive.
This wave is going to bring in other entertainment and businesses that have a shot to grow. It’s still going to take years before it’s a luxury home market but until then, it’s going to be a lot of fun.”
A recent trip to Atlantic City has me convinced it’s headed in the right direction and could be a great place to invest in a Jersey Shore home. One of the keys will be to choose the right area.
One section that stands out is the area bordering Ventnor. Many people have called for this area to see a re-birth but I think the fundamentals are now in place to see it happen.
The cost of homes from North Wildwood to Ventor have seen numerous increases since the downturn, and now in many cases have priced many people out of the market especially investors.
That’s one reason Atlantic City looks increasingly attractive. A second reason is the number of large single-family homes available. This is in stark contrast to many beach towns, where short of several million, there are no single-family homes. In the Atlantic City case, there are many large older homes ripe for rehabbing.
A quick search on your favorite real estate website will show plenty of excellent opportunities. One potential AC investment property that caught my eye was this 10-bedroom single family home, 3 back from the boardwalk.
Even with extensive rehab, it looks like a property like this could pay off with significant revenue potential. A quick search on Airbnb shows a number of properties in the 8+ bedroom range, many with high-end finishes that could make excellent Jersey Shore beach house investments.
With on-market opportunities like this available, I can imagine what type of off-market Atlantic City real estate investments are available.
One thing you constantly see for sale, on commercial property listing websites is defunct golf courses. Many smaller courses have closed or have been on the verge of closing for years. Since Tiger took the golf world by storm, there has been little-renewed interest.
I’ve long thought to renovate old golf courses, could be a great value-add investment play, but the question is how do you attract new members and build something that is going to last.
An interesting angle on revitalizing a golf course is being tried at the Dupont Country Club. Investing in more family-friendly activities, an app, and upgraded food seems like some excellent steps in the right direction.
Golf course investors would be smart to look at the success of companies like LifeTime Fitness, that cater to an active clientele and families.
This recent article from WHYY highlights the changes being made, New owners investing millions to update DuPont Country Club.
Longtime members Ben DuPont and Don Wirth believe making the DuPont Country Club more family-friendly will be the key to increasing membership and profits. Country clubs nationwide have been struggling to stay afloat because significantly fewer people are golfing.
“The experts that I’ve talked to, and I agree with this consensus, say, families are looking for more things to do together over shorter periods of time. So that means 18 holes of golf for dad by himself or mom by herself is out,” DuPont said.
“But 9 holes, or a rock climbing wall, or a chance to get fitness, and swim in a pool, or hit golf balls in a driving range — those things are actually on the uptick nationally. And we think by just listening, doing a better job listening to the market that we can turn this around.”
The businessman said they’re investing $18 million to upgrade the club. For starters, they’re improving the internet speed at the club; creating a phone app that allows you to make reservations for your children, order takeout or reserve a meeting space all from your phone. They’re also elevating the quality of food service at the club.
This summer, DuPont said construction will begin on three all-season swimming pools, a 15,000 sq. ft. fitness facility and an indoor driving range.
Investors with ventures along much of Market Street in West Philadelphia and Broad Street in North Philadelphia, as well as neighborhoods such as Mantua, Point Breeze, and Brewerytown, may be in for new tax breaks under a federal program designed to promote development in rural and low-income urban communities nationwide.
The incentives offer deferral, reduction, and potential elimination of some federal taxes for capital gains from investing in businesses, real estate, and other ventures in low-income communities.
ICYMI: @DCEDSecretary announced that the @USTreasury has approved the commonwealth’s nominations for designation of 300 census tracts across PA as Qualified Opportunity Zones. Learn more: https://t.co/0JmfiulBqP pic.twitter.com/hNIJEt0Udb— PA Department of Community & Economic Development (@PADCEDnews) June 15, 2018
The PA Department of Community & Economic Development provides some additional insights on the Qualified Opportunity Zones in PA.There will be some tremendous opportunity in the coming months as Philadelphia investors begin to scour these Opportunity Zones for great deals. Click To Tweet
Investments made by individuals through special funds in these zones would be allowed to defer or eliminate federal taxes on capital gains.
The governor was given the opportunity to designate up to 25 percent of census tracts that either have poverty rates of at least 20 percent or median family incomes of no more than 80 percent of statewide or metropolitan area family income.
There are nearly 1,200 eligible census tracts and the governor designated 300 tracts based on economic data, recommendations from local partners, and the likelihood of private-sector investment in those tracts.
As mentioned the Qualified Opportunity Zones were created during the tax cuts in December. Below is some additional information on the Qualified Opportunity Zones from the Treasury Departments recent press release.
Under the Tax Cuts and Jobs Act, States, D.C., and U.S. possessions nominate low-income communities to be designated as Qualified Opportunity Zones, which are eligible for the tax benefit. States were required by March 21st to submit nominations or request a 30-day extension to submit nominations.
Treasury has 30 days from the date of submission to designate the nominated zones. Treasury today has designated the nominations of all States that submitted by the March 21st deadline. Treasury will make future designations as submissions by the states that have requested an extension are received and certified.
“I am very excited about the prospects for Opportunity Zones. Attracting needed private investment into these low-income communities will lead to their economic revitalization, and ensure economic growth is experienced throughout the nation,” said Secretary Steven T. Mnuchin. “The Administration will continue working with States and the private sector to encourage investment and development in Opportunity Zones and other economically disadvantaged areas and boost economic growth and job creation.”
Submissions were approved today for: American Samoa; Arizona; California; Colorado; Georgia; Idaho; Kentucky; Michigan; Mississippi; Nebraska; New Jersey; Oklahoma; Puerto Rico; South Carolina; South Dakota; Vermont; Virgin Islands; and Wisconsin.
Qualified Opportunity Zones retain this designation for 10 years. Investors can defer tax on any prior gains until no later than December 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund, an investment vehicle organized to make investments in Qualified Opportunity Zones.
In addition, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor would be eligible for an increase in its basis equal to the fair market value of the investment on the date that it is sold.
Treasury and the IRS plan to issue additional information on Qualified Opportunity Funds. The additional guidance will address the certification of Opportunity Funds, which are required to have at least 90 percent of fund assets invested in Opportunity Zones.
Looks like many of the predictions on how the tax cuts could positively affect commercial real estate, are beginning to look truer. There will be some tremendous opportunity in the coming months as Philadelphia investors begin to scour these Opportunity Zones for great deals.
For those commercial real estate investors looking to revitalize commercial retail properties, looking into grocery tenants as anchors continues to hold value. A recent article,Grocery-Anchored Centers Continue To Be A Viable Investment from BisNow highlights how the market continues to see them as a solid play, though it likely is not a real estate investing strategy most are ready to use.
Since 2010, demand for grocery-anchored centers has exceeded supply and the trend is expected to continue through 2018. While demand for these centers remains high, there is some concern about oversaturation and declines in productivity due to competition in the marketplace, CoStar reports.
Stores like Walmart and dollar store chains have expanded their grocery offerings in recent years while Aldi, Lidl and Dollar General aggressively expanding their footprints. Online grocery sales have also increased an estimated 4% in the last few years, bringing the total number of U.S. households shopping for food online to 23% in 2017.
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