Coming together through the rubble

While conversing with coworkers, friends and even people at the grocery store, the news on everyone’s minds and in everyone’s mouths has been tragedy.

We reported two weeks ago about the Boston marathon explosions. With all the news about the manhunt and what followed after one bomber was killed and another was captured, it seems the manure plant fire and explosion in West, Texas, took a backseat to everything that has been going on in the United States as of late.

Most people have seen the explosion that was caught on video by a bystander and his daughter and posted to YouTube. At least 14 people were killed — including firefighters on scene to fight the blaze — and around 200 were injured.

In addition, 50 to 75 houses, an apartment complex with about 50 units, a middle school and the West Rest Haven Nursing Home were among the buildings that were damaged, causing what Property Casualty 360 reports is at least $100 million in insured losses to property.

Also, according to USA Today, last summer, the facility, which receives fertilizer by rail and distributes it to local farmers, declared in a risk-management plan filed with the U.S. Environmental Protection Agency in 2011 that it did not have sprinklers or other fire-safety measures in place because it was not handling flammable materials. Records also show the company paid a $5,250 fine and took “corrective actions” after the U.S. Pipeline and Hazardous Materials Safety Administration found safety violations, including not having a security plan to transport flammable anhydrous ammonia and not properly labeling the tanks.

The plant’s foreman, Jerry Sinkale, told the New York Times in an interview that not even the experts know what happened and that he is going to leave it to the experts.

With the number of deaths now assumed to be at least 14 and the number of injured at around 200 people, there was a happy moment through the rubble. The New York Times reports that a woman saw a neighbor she had presumed dead walk through the doors of the town’s post office, which was open for business and became sort of a joyous gathering spot.

With approximately 70 federal and state investigators trying to determine what caused the fire and set off the explosion, no cause has been found as of yet.

Students returned to school a week ago to makeshift classrooms in a neighboring district and evacuated people began returning to their homes over the weekend.

All we can see is that the citizens of West, Texas, haven’t given up hope, and this unfortunate occurrence is bringing a small town even closer together.

Denise DeChaine is special projects editor of Institutional Real Estate, Inc.

Europe’s new retail: new growth in the old world

Prior to the Internet age, retail stores were showrooms and distribution points in Europe and around the world. Brick-and-mortar retail location was key. Prime areas commanded a sizable premium, and distribution centers (warehouses) were simply seen as a utility.

Times have changed. After years of neglect, distribution and storage warehouse space are now in short supply in certain areas, which is creating attractive potential for positive multi-year returns for investors driven by online shopping.

How juicy are the underlying fundamentals?

Below are a few highlights from a recent article on Bloomberg:

“Net effective rents could grow by as much as 20 percent over the next four years,” Philip Dunne, president for Europe at San Francisco–based Prologis Inc (PLD), the world’s largest warehouse owners, said of the company’s portfolio in the region. “In wider Europe, with a population bigger than the U.S., we have four-and-a-half times less modern product. That gives you some sense of the scale and opportunity for growth.”

The assets generate annual income that’s 2 percentage points higher than offices and shops in Europe relative to their value and lack of space will lift prices, said Remy Vertupier, managing of the Logistis fund run by AEW Europe, a unit of Paris-based Natixis (KN) Global Asset Management SA.

Internet retail sales in Europe are expected to grow about 50 percent to 191 billion euros from this year through 2017, according to a report last month by Forrester Research Inc.

Europe’s structural challenges will take years to address, which means pressure on prices will most likely continue to fuel online retail at the expense of traditional retail. The new normal is creating a series of new opportunity sets — and distribution and storage warehouses appear to have a number of years of healthy returns ahead.

John Hunt is conference program manager at Institutional Real Estate, Inc.

A word in your ear, old chap

Is this happening to you or around you? People reacting to the reality of retirement by going back to work? People who thought that their working lives were done and dusted, only to find that the economics of retirement income didn’t work or that the tedium of retirement wasn’t to their liking? That expectations weren’t being met or that life wasn’t fulfilling? What about the younger people whose career progression and path through life is being hampered by this new refusal or inability of older people to retire — and stay retired?

Research recently published in the United Kingdom has shown that the number of people working in retirement has increased substantially, particularly among previously high-earning men. That may be a natural consequence of the economic downturn, which has seen falls in the values of individuals’ pension and investment pots and a need to regain some personal financial momentum through returning to what is quaintly termed “economic activity” — work, to you and me. True, not necessarily the same work as before — but it may be work that could be done more effectively by someone younger, age discrimination laws permitting.

And it’s a consequence that comes with ramifications that need thinking about. Margaret Thatcher, who would have been pleased that her ceremonial funeral last week went off flawlessly (add state occasions to the list of things, like the Olympic Games, that the United Kingdom does really well), once said “there’s no such thing as society” (she was misquoted) but society needs to pick this one up and deal with it before it starts to fester.

As Malcolm McLean, a consultant with U.K. actuarial firm Barnett Waddingham, puts it: “The continuing trend for individuals choosing to work on past traditional retirement ages clearly chimes with recent actions by the government to accelerate the rising state pension age. Most people who now elect to stay on in work do so through economic necessity either because they do not have any sort of private pension provision or, even where they do, their pension plans have not delivered the level of income they had expected.”

McLean points out that the latest evidence shows that it is not just the unpensioned who have a need to return to work at a time of life when their forefathers might have settled for a retired lifestyle. “It applies to formerly higher-earning men, as well. The reasons for this are not completely clear,” McLean agrees. “It may be a reaction to the loss of power and authority that they had in their working lives, a desire to co-ordinate their retirement with those of their partner or other entirely personal reasons. It could even be something as mundane as finding life too composed and/or unchallenging.” McLean quotes a former CEO who told him: “There is only so much golf you can play, and after a year of it I have had enough.” Only a year?

“One worrying consequence of all this,” McLean suggests, “is the effect that later retirement is having, and will continue to have, on the availability of jobs for young people, and the inter-generational conflict that may emerge if these trends continue. Another generation of inadequately supported pensioners could result.”

This “job blocking” of the young by the old is an unexpected result of changing economic and financial reality and is not just a U.K. thing or even a real estate thing. In a low-growth environment where new jobs are in short supply and where the effects of austerity and adversity on the young are felt most keenly — witness Spain and Greece, where youth unemployment is more than 50 percent — this new tendency for retirees to return to the workforce, voluntarily or out of necessity, augurs badly for society. As William Shakespeare, whose birthday it was yesterday (April 23), might have said if John Heywood hadn’t beaten him to it years before, in 1546, “it’s an ill wind that blows nobody any good.”

Richard Fleming is editor of The Institutional Real Estate Letter – Europe.

Getting out of London

In some European countries, the entire domestic institutional property market is almost indistinguishable from that of the primary market. For example, the Paris real estate market basically IS the French real estate market. (Germany is the opposite: the commercial real estate activity is spread across the major markets of Berlin, Frankfurt, Hamburg and Munich as well as smaller markets across the country.)

The United Kingdom is another country where the main market — London — puts the regional secondary markets in the shade. Deep shade. Everyone — and I do mean every one — wants a piece of London.

But it’s possible that the U.K.’s second-tier cities are becoming more interesting to investors. The latest U.K. property results from IPD indicate that regional cities may be experiencing improving sentiment.

In a statement, Phil Tily, managing director for the United Kingdom and Ireland with IPD, said:

There are a number of positive points to be taken from the performance of U.K. property in the first quarter, which supports the growing interest in the U.K.’s second tier cities. However, at the headline level we are still seeing subdued returns adversely affected by negative capital movements outside of London, and as the chancellor’s budget showed last month, there is no quick fix for economic recovery outside of London. Though the U.K. economy has managed to avoid a triple-dip recession, it is nevertheless going to be a long road to recovery for the commercial property sector.

A report by Deloitte Real Estate also indicates that regional cities are drawing in more investors. In a statement, Anthony Duggan, head of research at Deloitte Real Estate, noted:

Investors are increasingly being priced out of the London real estate market and are now seeking opportunities outside the capital. We’ve seen a large number of new entrants to the U.K. investment market cutting their teeth in London, and we now expect to see them beginning to pursue opportunities in the regions where there is the potential for higher income yields.

It remains to be seen whether this increased interest will lead to higher transaction volumes or falling yields in the U.K.’s regional markets.

Loretta Clodfelter is a contributor to Institutional Real Estate, Inc.

A moment of silence


Terrible, terrible shock and dismay.

Perhaps the only possible reaction to the dreadful events this week in Boston, with at least three people dead and more than a hundred seriously injured after bombs exploded at the finish line of the Boston Marathon.

In the face of this tragedy, it becomes difficult to write about our usual subjects: real estate, investment, finance, fundraising, capital flows.

I was in Boston about a month ago for a conference, staying at a hotel in Copley Place, taking the T from the Copley Square station or Back Bay station, walking to restaurants on Boylston just blocks from the marathon’s finish line. At the time, it was a marvel of commercial real estate: shopping mall connected to shopping mall, with the gleaming office towers and hotels of Back Bay rising above, and the city’s subways connected below.

Now it is a place of tragedy and heartbreak and first responders. My thoughts are with the runners from around the world and their families and the people of Boston.

Loretta Clodfelter is a contributor to Institutional Real Estate, Inc.

Love on the rocks?

This isn’t tabloid journalism, but if it were, the headline might read “The Shocking Story: Investor Tells All About Split with Apartments” or “It’s Over: Investors Shun Apartment REITs for Sexy Retail REITs” or “Apartment REIT CEO Abducted by Aliens.” And if this were a tabloid, the related stories would have only a grain of truth to them, if any.

Sure, apartment REIT performance may have peaked, and maybe they aren’t as glamorous as they were a few years ago, but that doesn’t mean it’s time to leave Jen in favor of Angelina!

After the recession, investors fell in love with the apartment sector, attracted by favorable demographics and other socioeconomic trends — not to mention it was the only property sector that had access to attractively priced debt from the GSEs. The sector’s strong comeback helped apartment REITs shine as share prices soared approximately 136 percent during the 2009–2012 period. Leading apartment REITs reported steadily rising occupancies and strong revenue growth.

Recently, however, apartment REIT performance has declined; the sector registered a 6.93 percent total return in 2012 and a 0.11 percent return in first quarter 2013, according to NAREIT. The marks ranked dead last among the major property types. Yes, apartment REITs have begun to slip despite strong market fundamentals and earnings growth.

Inquiring minds want to know: Will challenges from moderating property fundamentals, increasing levels of new supply and a recovering housing market put an end to the romance between investors and apartments? Is it time for investors to move on to greener pastures?

Not so fast, says Jim Sullivan, managing director of REIT research at Green Street Advisors.

“Apartment fundamentals are moderating for sure,” Sullivan says, “but they are moderating from ‘spectacular’ to merely ‘good.’ New apartment supply and the single-family recovery are legitimate concerns, but operating conditions in the apartment market appear to be stronger than the recent weak share price performance of apartment REITs would suggest.”

Despite the declining performance in the public market, the near-term consensus is that the apartment sector will continue to produce healthy returns, fueled by strong tenant demand and durable economic growth.

“Apartment REITs are now attractively priced relative to other sectors,” Sullivan adds. “The ‘blue chip’ apartment REITs, such as AvalonBay and Equity Residential, are particularly cheap compared to ‘blue chip’ REITs in other property sectors.”

Maybe there is hope for this continued love affair between investors and apartments — at least until the inevitable next cycle of overbuilding produces the tabloid headline: “Donald Trump Tells Alien Contractor ‘You’re Fired!’”

Larry Gray is editorial director of Institutional Real Estate, Inc.

Unintended consequences

As you well know, the Chinese government has recently tried to tighten the screws on the market to prevent property prices from further appreciation. Well intended with all good purposes. Guess what? It didn’t work. Prices went up, and people got totally confused. Instead of scaring buyers away from the market with 20 percent capital gain taxes on the sale of a second home, the government made people rush to the market to buy and sell the properties before the new regulation takes effect.

To avoid restrictions placed on married couples, people filed for divorces — fake ones of course. And the above-mentioned capital gain on the sale of second homes only drove people to new properties.

In addition to that, the central government asked local governments to provide detailed regulations, and a string of local governments have come out with their own plans to control the volatile housing markets in their own regions. This only increased the confusion, as local governments still rely on property sales as a large part of their revenue collection.

So far, few signs of lower prices in sight. The communist government versus the free market. Who is going to win?

Alex Eidlin is managing director – Asia Pacific with Institutional Real Estate, Inc.

Sharing notes

You know the industry has too many conferences when one of the prime U.S. events — the spring PREA conference — ends up conflicting with one of the premier European events — MIPIM. Those of us that normally attend both had to choose between them, and then spend the next week sharing insights with those who chose the opposite venue. It felt a little like sharing notes in college when you couldn’t (or just didn’t) attend all the classes. You want to help out your classmates, and you are grateful that they are helping you, but you also know that everyone is probably holding back at least one golden nugget of information that they are hoping will give them an edge over their competition. You know this because you’re doing it yourself.

From the notes people shared with me, it appears the investors attending MIPIM may not be increasing in quantity, but they are increasing in quality and diversity. The number of investors attending MIPIM is typically used as a barometer for where the European recovery stands. Reading the barometer correctly is more of an art than a skill, however, and managers often see what they want to see. If there are a lot of investors at MIPIM, some managers will point to that as an indication that investors are getting ready to invest again. If there aren’t many investors in attendance, other managers will point to that as an indication that investors are already too busy investing to attend. This year it was particularly hard to judge investor intentions because snow storms closed several northern European airports and forced some to stay home, while unusually cold and wet weather in Cannes, France, kept others indoors, off the Croisette and out of sight.

If there is a consensus among tea-leaf-reading managers this year, however, it is that some investors really are getting serious. Nordic investors, in particular, appear ready to expand their investment horizons. After a couple of good investing years within their own domestic markets, they seem to have regained their swagger and are now ready to take on the world. Or at least venture outside their own countries.

Unipension — the Danish consolidated pension administration service tasked with the daily management of Architects’ Pension Fund, the Pension Fund for Danish MAs, MScs and PhDs, and the Pension Fund for Agricultural Academics and Veterinary Surgeons — has just announced that it is changing its entire real estate strategy from domestic to global. Previously, it was a direct investor in Danish real estate. Now it is selling off all of its direct Danish holdings and will use those proceeds to invest in funds focused on Europe and the United States.

Others are also changing their strategy to include Europe and/or the United States. Danica Pension listed an interest in the United States on its MIPIM profile. Previously, the organization was only interested in direct investment in Denmark. (Even if you can’t make the event, registering for MIPIM to get access to the registration database with its participant profiles is well worth the fee.)

Sparinvest is raising its third fund and is allocating some of that capital for the United States. Among the Swedes, AP1 is looking at Asia while AP2 just completed a joint venture in the United States and is looking for more. Other Nordic schemes can be heard expressing the same cautious interest in global investment, with the United States being viewed as most attractive.

We all know that expressing an interest doesn’t always translate into investing capital. But the managers who braved the rain and snow in Cannes in 2013 are betting that 2014’s event will be sunnier and warmer – both weatherwise and activitywise — and the notes they will be sharing with those who couldn’t attend will include examples of commitments and not just examples of interest.

And everyone is hoping that event producers work to prevent conflicts. Sharing notes is helpful. Being there is better.

Sheila Hopkins is managing director – Europe and infrastructure with Institutional Real Estate, Inc.

Spend, spend, spend … up, up and away

The spending continues.

My February blog post was a billionaire round-up during January. My next blog post was about Canada making headlines with deals ranging in size from $500 million to $5 billion taking place locally and globally in the month of February.

March had some of the same activity: Rockpoint holding a $1.95 billion final close for its fourth fund, TPG Capital launching its first real estate fund with a $1 billion fundraising goal and General Electric selling its $1.5 billion Australian office portfolio.

Let’s end March and the first quarter of 2013 with a look at institutional real estate investors building stuff. These headline projects were mainly for the retail, hotel and multifamily sectors as a lack of significant job growth continued to impede demand for office space. The office vacancy rate fell only slightly during the first quarter to 17 percent from 17.1 percent during the fourth quarter 2013, according to a quarterly report released by real estate research firm Reis Inc. Although office space absorption figures were the weakest since the recovery began in 2010, it marks the third straight year of consistent net growth in the office sector, according to research by Cassidy Turley.

Outside the office sector, million-dollar and even billion-dollar development plans are being proposed and approved across the country.

The New York City Council unanimously approved developer Howard Hughes Corp.’s $200 million plan to transform the South Street Seaport on Pier 17 on the East River into an upscale shopping and dining center. Another Manhattan project is a 30-story mixed-use project called the Lara set to begin construction in 2014, offering 35,000 square feet of commercial space and 168 residential units. Across the East River, a $1.5 billion plan to redevelop the Domino Sugar refinery site into five new buildings is pending approval by the New York City Planning Department and City Council. Another redevelopment project is the $3 billion plan to develop Willets Point in Queens, a barren swath of land between Flushing and Corona that received a green light from the City Planning Commission.

Moving Northeast to Boston, developers Samuels & Associates and Weiner Ventures will be starting the $360 million Hub residential, hotel and retail project over the Mass Pike.

Heading south, Ben Carter Enterprises filed plans for a $200 million 173-acre outlet mall near Savannah, Ga. Further south to the white beaches and blazing sun of Florida, The Related Group and Los Angeles nightclub entrepreneur Sam Nazarian will develop a $300 million SLS Brickell condo-hotel in Miami.

Heading away out West to another popular hotspot, Boyd Gaming Corp. agreed to sell Echelon Place, an unfinished hotel, casino, shopping and convention complex on the Las Vegas Strip, to the Genting Group for $350 million. The Malaysian conglomerate is exploring plans to invest as much as $5 billion in the development of the resort project, which could generate thousands of new jobs.

In the City by the Bay, builder Jay Paul Co. plans to build a 54-story office and residential tower in San Francisco’s South of Market neighborhood, which will cost about $375 million.

In the face of unresolved fiscal issues and weak economic momentum, billion-dollar projects are erecting, providing new space for tenants, tourists and residents. Maybe the office sector will pick up some huge development projects next month.

Andrea Waitrovich is web content editor at Institutional Real Estate, Inc.

SWFs seek real estate and alternatives

Sovereign wealth funds have been snapping up international headlines — and real estate — as the state funds make a deliberate move into the commercial property sector. In March, Bloomberg reported that sovereign wealth funds’ assets will increase by 60 percent before 2016, a force guaranteed to shift the foundations of the global property market as more capital is flooding into gateway cities.

China’s sovereign wealth fund, the China Investment Corp., has made an agreement with Russia to increase its investment in infrastructure and development in Siberia. The Irish Times reports Chinese sovereign wealth funds have invested €1.2 billion ($1.8 billion) in U.K. real estate after finalizing four deals in recent months, including China’s State Administration of Foreign Exchange, through its U.K. Gingko Tree Investment Ltd., committing $110 million to acquire a 49 percent stake in One Angel Square, an office building in Manchester, England.

On March 19, Prologis and the $716 billion Norges Bank Investment Management, which invests on behalf of Norway’s government pension fund, the largest pension fund globally, announced they were teaming up to acquire 195 class A logistics properties. The 50-50 partnership, Prologis European Logistics Partners Sarl, is valued at $3.1 billion. In February, NBIM made an aggressive entrance into the U.S. real estate market, when it formed a $1.2 billion joint venture with the $502 billion TIAA-CREF organization, acquiring prime office properties in gateway markets, specifically Boston, New York City and Washington.

With asset holdings in the multibillion-dollar range, sovereign wealth funds tend to focus on acquiring trophy properties, increasing the demand for prime properties in gateway cities such as Paris, London, New York City and Boston. As sovereign wealth funds look for risk-adjusted returns in real estate, trophy assets become a competitive commodity and also increase the liquidity of the marketplace.

Three years ago, NBIM had no investments in real estate, but it has since committed $6.7 billion to commercial real estate, with goals to invest 5 percent by 2020, reports The Wall Street Journal.

Dan Fasulo, managing director at Real Capital Analytics, notes that even if sovereign wealth funds set what appears to be a small target allocation for real estate, these investments adjust the composition of the commercial real estate market.

“What’s 5 percent of $700 billion? That is a lot of capital for our market, and it will make a difference and it has made a difference so far,” Fasulo says.

Sara Kassabian is a reporter with Institutional Real Estate, Inc.