Commercial Real Estate – Santa Cruz
Call Us: (831) 476-2222

In Strong Retail Economy And Tight Labor Market, Retailers Tout Incentives

posted by: Admin in News

The strong economy continues to set records. April marked the 91st straight month of job gains, the longest stretch in history. That’s good news for retailers, who added 1,800 jobs last month and continue to demonstrate their resilience and innovation as the economy improves.

The hiring spree has also created stiff competition for candidates. The unemployment rate stands at 3.9%, the lowest rate since 2000. Those numbers are expected to remain low through 2020. Even with all the investments in technology and automation, consumers still crave human interaction, and retailers still rely on experienced people at all levels to get the job done.  As retailers discover how difficult it can be to find and retain talent, they are using a variety of incentives to attract workers and keep them happy.

Walmart, the country’s biggest private employer, announced a slew of new employee benefits at the beginning of the year. The company expanded its family leave policy from six to 10 weeks of paid maternity leave, along with six weeks of paid parental leave. Walmart also added financial assistance for full-time and salaried workers who are adopting children, and increased its starting hourly wage to $11 per hour.

 Retailers have long used one-time payments to entice candidates, and the practice is going strong. In a survey by the National Association of Colleges and Employers, nearly 57% of respondents said they planned to offer signing bonuses to the Class of 2018. That figure has been on the rise for four straight years.

While bonuses get candidates in the door, some retailers are testing incentives to support workers over the long term. Lowe’s, the home improvement retailer, recently started a workforce development program called “Track to the Trades.” Eligible workers get financial assistance to learn carpentry, plumbing and other trades to address skills gaps in the company and the wider workforce.

Other retailers are investing in workers’ skills and development, too. Kroger recently announced new benefits for long-term employees, including up to $3,500 for continuing education, professional certifications and advanced degrees. A report by the Lumina Foundation found that education benefits can pay for themselves by reducing turnover and personnel costs.

Cash bonuses and tuition assistance are among the headline-grabbing incentives for retail workers, but they aren’t even the main appeal of retail jobs. In a survey of nearly 1,500 U.S. retail workers, respondents ranked scheduling flexibility and types of work as the biggest draws for working in retail. In fact, flexibility is so essential that twice as many candidates want part-time opportunities than in any other business.

There are other, broader changes in the job market for retailers to follow. Retail jobs historically have been popular among teens and young adults looking for part-time, flexible work. But increasingly, manufacturing firms, technology companies and other businesses are snapping up pools of younger workers. According to the Census Bureau, the share of teens working in health services has doubled in the past 20 years.

Still, the retail industry accounts for one out of every four American jobs. Ask around and you won’t be surprised to hear that for many people their first job was in retail, either at the mall, the local ice cream shop, or maybe even bagging groceries. This still holds true today, but the difference is the best people are getting harder to recruit and retain.

Retailers need to turn on the charm to stay ahead of these trends, but this isn’t new for an industry accustomed to constant evolution and change. They are used to creating great experiences for customers. A changing labor environment means they’ll also have to use creativity when building their teams. Hiring managers have to dig deep for talent, because fierce competition for workers is unlikely to ease up anytime soon.

Author: Tom McGee

Source: The Wall Street Journal, May 2018

Read more here.

Retail’s Other Problem: Too Few Clerks in the Store

posted by: Admin in News

Many of America’s biggest retailers, under assault from Inc., have been slashing staff even faster than they have been closing stores, a dynamic that has left fewer clerks and longer checkout lines at remaining locations.

Despite operating roughly the same number of stores as it did a decade ago, Macy’s Inc. -1.88% has shed 52,000 workers since 2008. At J.C. Penney Co. , workers have disappeared twice as fast as department stores. That has led to an average of 112 total Penney employees for every store today, down from 145 a decade ago, according to a Wall Street Journal analysis.

Similar per-store staff declines occurred over the past decade atKohl’sCorp.KSS -1.09% NordstromInc.,JWN -1.40% TargetCorp.TGT -1.34% and WalmartInc.,WMT -1.75% regardless of whether the retailer opened or closed stores, according to the Journal’s analysis. The employment figures are for all full- and part-time staff and don’t distinguish between store, warehouse and headquarters workers. Industry executives say store employees make up the vast majority of retailers’ workforce.

“Retailers are shooting themselves in the foot trying to save pennies by lowering labor costs, and that’s costing them dollars on the top line,” said Rogelio Oliva, a business school professor at Texas A&M University. He recently analyzed the relationship between sales and labor at a women’s clothing retailer and found that many of the stores were understaffed by as much as 15%, leading to potentially lower sales.

Some companies attribute the declining head count to staff cuts at headquartersand a switch to smaller stores that need fewer workers. Others have added technology such as self-checkout lanes or shelf-ready packaging that they say makes existing workers more productive. And still others have hired more full-time workers, eliminating the need for two or three part-timers.

Now, some retailers are discovering they may have gone too far and are beginning to replenish staff—just as the booming U.S. economy is creating historic labor shortagesand forcing companies to pay higher wages and offer perks such as better training and benefits.

KrogerCo.KR -2.60% said this month it will hire 11,000 workers to improve customer service and speed checkouts at its nearly 2,800 grocery stores.

Dick’s Sporting GoodsInc.DKS -0.94% wants to increase store labor by about 10%, said Chief Executive Edward Stack, reversing a decadelong trend. Over the holidays, Dick’s added more cashiers, “because if there’s one thing that drives me nuts, it’s waiting at the register,” Mr. Stack said in an interview.

Macy’s said it is adding staff this year at 50 stores, in areas where the extra bodies will have the most impact, including in fitting rooms and in its dress, women’s shoes and handbag departments.

Retail staffing hasn’t kept pace with growth in the broader economy or population gains in the past decade. The number of salespeople at retailers grew by 1.5% over the past decade, even though the population served by each store has increased 12.5%, according to government data. At clothing and accessories stores, the number of cashiers is down more than 50% from 2007.

“Many retailers are at the tipping point of cutting too much labor,” said Craig Rowley, a senior partner in the retail division of Korn Ferry International, an executive-search firm. “If you cut staff every year, pretty soon you’re at minimal staffing.”

Gilbert McGarvey has worked at the flagship Saks Fifth Avenue store in New York City for 24 years, most recently in the shoe department. “It used to be what we sold was service,” he said, “Now, they’ve cut that to the quick.”

Saks last year closed the service desk at its flagship store and reduced support staff who process returns, restock shelves and fulfill online orders. That has meant salespeople now have to handle some of those tasks, which takes them away from selling, Mr. McGarvey said.

A spokeswoman for Hudson’s Bay Co., which owns Saks, said the Manhattan store had trimmed support staff by 2%, but added 15 service advisers near the store’s entrances to help guide shoppers. The spokeswoman said the service desk was eliminated to make it easier for shoppers, as they can now return items at any cash register in the store.

Across the board, workers had been stretched so thin that the Retail, Wholesale and Department Store Union stipulated in its latest contract, signed last year, that its members have the right to drop all other responsibilities to help take care of customers first.

“If brick-and-mortar retailers can’t compete on price in an online environment, the only thing that allows them to survive is to provide a positive in-store experience,” said Stuart Appelbaum, the union’s president.

Jessica Tokarski recently stopped by a Target store in Orchard Park, N.Y., to buy a phone case. But the 23-year-old couldn’t find anyone to unlock it from the rack, so she left the store without making a purchase.

“I’ve turned to online shopping, because customer service in stores has gotten really bad,” Ms. Tokarski said.

A Target spokeswoman said the retailer has added workers to its stores over the past year and is providing them with more training. She said a large part of Target’s head-count reduction was the result of the 2015 sale of its pharmacy business to CVS HealthCorp. , which shifted 15,000 jobs.

Over the past 12 months, 86% of U.S. consumers say they have left a store due to long lines, according to a survey conducted by Adyen, a credit-card processor and payment system. That has resulted in $37.7 billion in lost sales for retailers, Adyen estimates.

Retailers typically set staffing as a percent of sales, but a growing body of research suggests it should be based on foot traffic. The problem is twofold: Many retailers don’t track traffic and even if they do, they are reluctant to add labor, which is already among their biggest costs.

“If you’ve got a lot of foot traffic, but a lull in sales, you need to put more staff in your stores,” said Mark Ryski, the chief executive of HeadCount Corp., a data-analytics firm that tracks footfall at stores around the country.

Some companies are listening. After installing cameras last year, Cycle Gear Inc., a 130-store chain that sells motorcycle apparel and accessories, noticed sales dipped during the afternoon at its Orlando, Fla., store even though it was packed with shoppers.

“That told us the salespeople were overwhelmed,” said Rodger O’Keefe, a vice president. “We added two more salespeople during those hours, and sales have been up since then.”

Source: The Wall Street Journal

Author: Suzanne Kapner

Read more here.

How Do You Empower Women In Commercial Real Estate?

posted by: Admin in News

How do we empower women in commercial real estate? How do we help elevate women, support working mothers and encourage female entrepreneurialism in this industry? I was recently discussing these issues on a panel at Harvard’s Real Estate Weekend. Many industries face these questions, and there is no perfect answer. When I launched KIG CRE, I set out to create a more dynamic, insightful and transparent multifamily brokerage firm.

Having been in the real estate industry for decades, I can empathize with various stories coming out, such as a recent editorial about real estate’s own #MeToo movement. I believe if we focus on female representation in the industry, employ practices that support working mothers and encourage entrepreneurship, the industry will evolve and look less like a grown-up fraternity.


Only 9% of commercial real estate C-suite positions are held by women. While this indicates some progress, there is a lot more room for improvement. NASDAQ recently signed the Parity Pledge to demonstrate a commitment to interview a minimum of one qualified female candidate for all open position at the VP level and above. This is a practice the commercial real estate industry can easily adopt to help increase female representation.

study released by CREW Network found the percentage of women in brokerage and finance declined between 2006 and 2015, from 39% to 29% in brokerage and from 44% to 42% in finance. However, asset management and development saw increases in the number of women working in each field. Development is particularly interesting, seeing an increase from 23% to 38%. An increase in women in development truly means that the industry is changing. The study also notes that the wage gap is shrinking. But it is still significant, with the median total annual compensation including bonuses, compensation and profit sharing having a 23% gap between men and women.

Supporting Working Mothers

Offering maternity and even paternity leave is just the first step to supporting working mothers. Firms would be wise to consider flexibility as the key ingredient to supporting working parents. Employers should be exploring what they can do to support moms at the office and ask these women personally and directly. Some ideas to consider include flexible work hours, offering childcare in the office, the ability to bring the child to work and keeping open lines of communication for those moments when life happens. Working hours and babies’ schedules really do not align.

Consider offering flexible start and end times as well as work from home flexibility. One of our employees works 10 a.m. to 6 p.m. in order to best fit with her child’s schedule. We also welcome babies one day a week into the office. Now, we are a small firm, and I am the Principal, so this may not be as easy to implement at larger firms, but it’s this line of thought and dialogue with new mothers that supports them returning to work.

Encouraging Entrepreneurship

Startups with female founders are noted by one small study as growing faster than ones led by men, and only 14% of startups are founded by women. Let’s encourage young professional women to go for it — in any industry and especially in commercial real estate. This industry is a known laggard in desperate need of innovations. I’ve seen many women make calculated and delayed starts to their entrepreneurial endeavors. With men, however, I can say I’ve seen more just jump right in and go.

Personally, I think there is less to lose and infinitely more to gain as a young founder. Even if the startup fails, the experience is valuable. Corporations should embrace founders who’ve decided to move on from their startup. These are some of the most hardworking people out there.

There are plenty of ways for us to empower women in commercial real estate. Female representation in the industry, employing practices that support working mothers and encouraging entrepreneurship are just the tip of the iceberg to creating a better workplace and work life for today’s professional women.

Three Reasons Commercial Real Estate Professionals Should Be More Open To Tech

posted by: Admin in News

The real estate industry isn’t exactly known for being receptive to new technology. Many in the industry view technology as unnecessary, as countless people have built real estate empires and made untold millions from hammering the phones. Today, though, it’s getting harder and harder to compete in real estate without technology. In particular, there are three distinct advantages of technology that should have real estate professionals more open to adopting new developments.

Technology can help you conduct more business.

Whatever your role within the real estate industry, everyone can agree that you need to do more deals to make more money. If you’re an investor, you need to underwrite and bid on more investment opportunities. If you’re a broker, you need to convince more people to list their properties. If you’re an appraiser, you need to complete more appraisals — and so on.

My firm has found that the average real estate analyst takes several hours to initially underwrite a property and understand its surrounding market. This means looking at nearby properties and identifying rent comps, analyzing rent growth and demographic trends in the market, quantifying any value-add potential (whether through physical or operational improvements) and distilling everything into a concise summary to discuss with management.

People have limits, though. Just as you’d hire more people to increase volume, technology can be “hired” to improve deal flow. While CRM systems have had better adoption in the market helping real estate professionals track customer conversations, analytical tools have yet to really be adopted. Many analytical tools can be employed to help your analysts leverage data more effectively — reducing those hours of analysis time to only a few minutes in some instances. Other tools can help you dynamically visualize the results of your analysis and achieve insights more quickly.

Technology can help you conduct better deals.

When it comes to determining the market value of investment properties, appraisers are among the most trusted voices. However, even appraisers aren’t perfect. A 2011 study on appraisal accuracy found that commercial appraisals are typically up to 12% above or below the subsequent transaction price.

To address this same issue in home sales, many automated valuation platforms have applied data science and machine learning to come up with automated single-family home valuations. This technology has been around in single-family for a while, but it’s now starting to be applied more and more in commercial real estate too. Our product uses a similar approach to provide automated underwriting tools for multifamily — but there are plenty of other valuable tools to help you better analyze individual parts of deals.

As we all know, money is made in real estate when you buy a property. Today, technology today can help you make smarter acquisitions and improve returns.

Technology can help you resolve disagreements.

Have you ever seen asset management and acquisitions teams disagree on the feasibility of rent projections? Have you ever seen a broker and an owner disagree on rent comps? Of course, if you’re in real estate, the answer to both questions is yes. It’s bad for both clients and brokers when a deal is taken to market at the wrong price, and it’s bad for any company to have internal tensions. And no one likes to admit they’re wrong.

I think the most useful application of real estate technology is to be “the bad guy” or the tie-breaker to help resolve disagreements. It’s very common to point to third-party surveys and reports to justify assumptions, but it will likely become more and more common to do the same with new technology products.

From increased efficiency to increased accuracy to making the best investment decisions, today’s real estate technologies are here to help. Real estate professionals should be more open to technology — it’s an essential piece of the business today.

Author: Marc Rutzen

Source: Forbes. March 2018.

Read more here.

How Driverless Cars Could Disrupt The Real Estate Industry

posted by: Admin in News

Driverless cars could become a regular feature of the roads as early as April – at least in California, which has decided to allow fully autonomous vehicles to be tested on the roads (none of those pesky humans who have been present in test drives so far). Arizona has already become a fair-weather center for testing driverless vehicles, thanks in large part to the governor’s support, and Uber announced last week that it has finished testing its self-driving trucks in Arizona and is now beginning to use them to move goods across the state.

It’s not just the U.S., either. The British government launched a review last week of laws governing self-driving vehicles, with the aim of getting autonomous cars on the road by 2021, and other countries around the world are also experimenting with autonomous vehicles.

Clearly a big step for the technology and automotive industries – no surprise that companies working on driverless vehiclesinclude Google and Uber, as well as traditional automakers like Audi, BMW, Ford, GM, Volkswagen and Volvo – the advent of human-less driving could also redirect the traffic of our days, how we live our lives and get around. Perhaps somewhat less obviously, a future filled with autonomous vehicles could also spur some big changes in where we live and work, thus affecting the real estate market in addition to the transportation and tech industries.

Of course, we realize that for all the buzz, driverless cars could turn out to change the world no more than Google Glass or to transform transportation no more than the much-hyped Segway. While the success rate of driverless cars may not be as predictable as some may like to believe, it can still be instructive to peer through the windshield of a driverless future and see what twists and turns might lie on the road ahead.

The value of transit hubs

One question worth considering is what the proliferation of autonomous cars could mean for public transportation and the value of the real estate that has been built around transit hubs.

The proximity of office and residential buildings to public transit hubs has traditionally been seen as adding value to the property by making commuting easy, a phenomenon that would seem to be bolstered by the low car-ownership rates of millennials.

“Clearly, any sort of big transit infrastructure program can act as a huge stimulus for the development of surrounding real estate,” said Scott Homa, a director of United States office research for real estate firm JLL. “It’s starting to emerge as a universal theme across the U.S.”

Sections of the U.S. that have seen real estate development near new rail systems or train stations include the Somerville suburb of Boston; Chicago’s Fulton Market; downtown Kansas City, Missouri; and Austin, Texas, the New York Times reported last spring.

It’s possible that the availability of driverless vehicles could, like the increasing prevalence of ride-sharing, simply become one more reason for urbanites to avoid buying a car – thus making proximity to public transit at least as valuable as before.

But there’s another possibility, too: The introduction of a driverless vehicle option could make access to public transit less important to commuters. And that could have a major impact on the needs and demands of the buyers, tenants and renters of office and residential properties (whether single-family or multifamily).

“AVs [autonomous vehicles] are expected to significantly reduce travel cost, time and congestion, while increasing safety,” accounting firm KPMG said in a 2017 report on the impact of autonomous vehicles on the public transport sector. “Cost-efficient self-driving cars could change commuter preferences away from conventional public transport.”

It’s important to remember that it’s not just privately owned four-door sedans that could be roaming the roads without any humans behind the wheel. The Netherlands, China and Switzerland have been testing self-driving public transportation options such as electric driverless shuttles with capacities of up to nine people, as well as full-sized driverless buses.

With driverless cars, shuttles and buses thrown into the mix, offices and residential buildings that might previously have been seen as less attractive for commuters because of their distance from transit hubs could become more appealing than before. Seen through a real estate lens, that greater appeal could translate into increasing demand and rising property values.

The flip side is that properties that commanded high value due to their proximity to transit hubs could suddenly find themselves losing their edge.

Even in neighborhoods already served by public transit, autonomous vehicles could potentially become a threat to existing transportation systems. By supplementing public transit – or in some cases, even replacing it – autonomous cars could potentially render the existing public transportation system less important, ultimately voiding the assumption that proximity to transit hubs boosts property values.

The need for parking

Many of us drive to work in the morning and park near the office, where our cars sit unused until we’re ready to head home at the end of the day. The average privately owned car in the U.S. is in use just 5% of the time and spends the rest of the time parked, according to architecture, planning and consulting firm Gensler.

“America’s parking footprint, estimated at 500 million parking spaces, consumes more land than Delaware and Rhode Island combined,” Gensler said in a report on driverless cars. In New York City alone, parking covers the equivalent of two Central Parks.

But that picture could change to the extent that autonomous vehicles roll into action.

If driverless cars really do put the pedal to the metal, one ramification of having a car zoom away as soon as you get to your destination could be a reduced need for parking lots – which are, of course, a form of commercial real estate, even if they typically don’t involve buildings.

“AVs remove commuters’ demands for street and lot parking,” KPMG said in its autonomous vehicles report. Consulting firm McKinsey & Co. estimates that autonomous vehicles could reduce the need for parking space in the U.S. by more than 61 billion square feet.

That’s because driverless cars could potentially pick people up from their homes, drop them off at the office or the mall and then leave to park in a less prime area – or, like taxis, won’t even need to park, but will just move on to the next customer and the next trip.

Uber, already a popular alternative both to cars and to public transit, in November agreed to buy 24,000 SUVs from Volvo to form a fleet of driverless vehicles. Uber has said its driverless cars could hit the roads as early as next year.

A reduced need for parking could have a mixed effect on commercial real estate.

It could reduce the real estate costs for owners who currently assume they need to be able to provide parking, and it could spark construction and development on the site of existing parking lots and garages, such as 143 W. 40th Street and 14 S. William Street. Both Manhattan sites are among the 300 locations run by Icon Parking, New York City’s largest parking lot operator, which would presumably need to decide how it wants to change lanes should driverless vehicles lower demand for parking.

On a larger scale, in densely packed cities like New York, where land is at a premium, a diminished need for parking lots and garages could have a dramatic effect on the supply and demand equation. If there were to be a sudden influx of land available for redevelopment (and yes, that’s a big if), that could go a long way to creating a buyer’s market.

And once we’ve got driverless cars pulling up in the pretty near future and reducing the utility of parking lots, the next question is: What’s going to happen to those parking lots?

The answer: We don’t know what exactly they’ll become, but it’s safe to say that if all the ifs and whens come to pass, those suddenly superfluous parking lots and garages will be turned into something, meaning increased construction and development.

Driverless cars are increasingly getting the green light. Whether they’ll become merely one more transportation option or fundamentally alter the way we go is still unclear – but if it’s the latter,  transportation is not the only industry that will be disrupted. The prospective ubiquity of autonomous vehicles might ultimately turn out well for commercial real estate as a whole, but we would be wise to expect some potholes along the way.

Author: Ely Razin is CEO of CrediFi, a commercial real estate platform providing CRE professionals and financial institutions with big data on properties, loans and securities in the U.S. market. He can be reached at

Source: Forbes, March 2018

Read more here.


The Unloved Retail Sector Is Quietly Attempting a Rebound

posted by: Admin in News

After one of their toughest years ever, beleaguered U.S. retailers are enjoying a pickup in quarterly sales, helping to boost the shares of many brick-and-mortar operators even as the stock market stumbles this year.

The moves mark a partial respite for retailers, which have reckoned with sliding sales, record store closures and bankruptcy filings as consumers have increasingly shifted to shopping online. The bleak outlook led many investors to sour on the sector last year, sending shares of several department stores, including Macy’s Inc.,J.C. PenneyCo. and Sears Holdings Corp., down by double-digit percentages, while the S&P 500 knocked out a 19% gain.

But in recent weeks, a string of retailers has posted stronger-than-expected earnings, driven by a pop in holiday sales and further rounds of cost-cutting. That has helped spur a rally in shares of companies running everything including department stores, electronics chains and bargain outlets. The S&P 500 department stores subindustry index has climbed 19% this year, while an S&P 500 index tracking the performance of electronics retailers has risen 6.7% and the broad S&P 500 has gained 0.7%.

“Right now we’re seeing the perfect scenario for retailers: high consumer confidence, relatively low expectations [around their performance] and stronger-than-expected consumer spending. When you put all these things together you have the retail earnings season in a nutshell,” said Victor Jones, director of trading at TD Ameritrade.

To many, the retail sector’s early gains are the latest indication that the consumer is on strong footing—something that bodes well for the broader economy. Investors and analysts closely monitor measures including employment, household wealth and consumer confidence, as consumer spending accounts for about two-thirds of the U.S.’s total economic output.

Recent data have mostly been encouraging, showing U.S. consumer confidence rising in February to its highest level since 2000, even after the stock market tumbled. Retail sales slipped in January, but some economists say the figures could pick up, especially with many workers starting to take home larger paychecks following the U.S. tax overhaul.

While the broader stock market has managed to rise for years even as many retailers lagged behind, investors and analysts say a pickup in shares of brick-and-mortar operators would be an encouraging sign that the economy is continuing to grow.

“It’s good to see the consumer discretionary sector moving up, especially after it not being a leader for so long,” said Lori Calvasina,head of U.S. equity strategy at RBC Capital Markets, adding that consumers are looking fairly strong.

Macy’s is among the beaten-down stocks that are seeing a bounce. Shares jumped 3.5% Tuesday, bucking the S&P 500’s 1.3% decline for the day, after the retailer posted stronger sales over the holiday quarter and said it had signed a deal to sell part of its Chicago store. The stock is now up 21% for the year.

“We know consumers are out there, and it’s up to us to win with them,” Macy’s Chief Executive Jeff Gennette said on the company’s earnings call.

Discount apparel retailer TJX Cos. also tore higher, with its shares rising 7% to a fresh 52-week high on Wednesday after strong holiday sales helped it beat analysts’ estimates for fourth-quarter same-store sales. For the year, it is up 9.4%.

Dillard’s Inc., the Little Rock, Ark.-based department store, surged 17% Tuesday after it reported earnings and revenue that topped analysts’ expectations, while shares of Best Buy Co. jumped 4% Thursday, even as the S&P 500 fell 1.3%, after the electronics retailer reported same-store sales surging in the holiday quarter as demand for video games rose.

But not all retailers have shared in the recent gains. Within the S&P 500 consumer discretionary sector, which includes dozens of retailers, as well as e-commerce giant Inc. and online streaming service Netflix Inc., nearly half the stocks are posting losses for the year.

Among the biggest laggards: Victoria’s Secret parent L Brands Inc., whose shares have slid 28% this year as the company has struggled to reverse a decline in sales. The firm reported better-than-expected revenue for the fourth quarter Wednesday afternoon, but lowered its forecast for first-quarter profits, sending shares sliding.

Newell Brands Inc., the maker of food containers, Mr. Coffee machines and Elmer’s glue, has fallen 14% in 2018 after having to lower earnings forecasts several times last year.

Despite a flurry of strong results, the S&P 500 consumer discretionary sector is expected to post slower earnings growth than many of its counterparts. With nearly all results in for the latest quarter, earnings for the sector are expected to rise 9.1% from the year-earlier period, according to FactSet, below the 15% projected for the broader S&P 500. For the following quarter, earnings are expected to grow 6.6%, versus 17% for the S&P 500, according to FactSet.

The disparate gains in the sector have led some to caution that, once again, it pays to be picky within the retail space.

“Even though there’s underlying strength in the data supporting the overall sector, you still have to be careful here,” said TD Ameritrade’s Mr. Jones.

Author: Akane Otani
Source: Wall Street Journal, March 2018
Read more here.

We’re Overbuilt in Retail

posted by: Admin in News

America’s inventory of shopping centers is ominously overbuilt. Even if the migration of retail sales to the internet had not brought chronic overbuilding into sharp relief like it has, pre-recession overbuilding created a distorted ratio of retail space to consumers in the US. By comparison, the ratio of retail space to population in the US is double the rate in Canada, and quadruple the rate in Germany. Think about that for a moment.

Prior to the Great Recession, REITs and other institutional owners had four means to grow their revenue pie:

    1. Build new shopping centers, which they did with their in-house development teams.
    2. Acquire individual existing shopping center assets that met their investment criteria.
    3. Acquire competing institutional portfolios.
    4. Improve operating margins via increased rents or reduced costs.

Pre-recession, businesses such as DDR, Brixmor, Regency Centers, Kimco and Weingarten each had extensive in-house development teams tasked to develop new shopping centers. However, as the reality of overbuilding and internet competition, as well as other factors, has stifled the pace of new shopping center development, institutional owners have dramatically reduced ground-up development expectations as a means to grow revenues. This in turn has put increased pressure on fostering growth through other means, such as the acquisition of existing centers, preferably in core markets.

Yet, while twenty or even ten years ago, institutions could reliably secure several independently-owned assets annually, relentless consolidation in the industry and the success of numerous high quality REITS has mercilessly winnowed down the playing field of better quality one-off assets that come to market each year.

With the growth in institutional ownership has come the parallel rise of more sophisticated owners and managers of these assets. That sophistication has put constant pressure on rents and costs over the past two decades. Today, revenue growth through further operational improvements can at best have a single digit impact on a portfolio’s annual returns.

These limitations to revenue growth – from reduced ground up development, to declining individual asset purchases to decelerating rent growth have conspired to create a greater focus on growth through acquisition, or merger. 2017’s acquisition of Equity One by Regency Centers, and Property Development Centers by TRC, and Westfield by Unibail-Rodamco were examples of these market pressures.

Look for more consolidation over the next five years. The combined influences of an overbuilt US marketplace, surging internet competition, further retailer bankruptcies and creeping interest rates will unquestionably result in shrinking avenues for growth among REITS and their institutional peers. The firms with the weakest ability to generate revenue growth for the hedge funds, retirement systems and other patrons that invest with them will face an interesting two-sided truth. On the one hand they will confront the reality that the only option to create value may be through a sale. But on the other hand, a limited supply of institutional caliber assets will likely result in intense competition and soaring valuations once their portfolio hits the market.

The sober CEO who sees a sale as a realistic possibility should already be thinking about timing. Depending the on the size of the portfolio, a quarter point increase in rates may result in tens of millions of dollars in lost value. Interest rates are clearly set to move steadily higher after years of ultra-low rates, with the Wall Street Journal recently suggesting that up to four interest rate increases may be in store for 2018.

CEOs and their investment bankers should work double time in 2018 trying to identify the right interested seller, or acquirer, before interest rate movement reduces, or eliminates, the advantages to capture value through a sale or merger.

In addition to more sale and merger activity, these changing market dynamics are also creating pressure for owners to both diversify and densify their properties, as a method to create new streams of revenue. The densification of historically retail-only sites into mixed use environments, with housing or office space that creates the opportunity for these properties to grow vertically has begun to take root with some, but not all, institutional owners.

Wall Street has historically invested in REITs because of something called the purity of the play. REITs create the opportunity for investors to place specific bets on targeted assets classes, such as suburban grocery-anchored centers (Regency Centers), power centers (DDR), apartments (Essex Property Trust) or class A office in core downtowns (Equity Office). As market pressures compel owners to create new revenue streams and diversify, the purity of the play will have to be replaced by a new narrative. One that speaks more to mixed-use, core markets and densification. Given the overbuilt landscape of US retail space, diversification away from pure retail will represent both a desperately needed new stream of income beyond retail rentals and a hedge against flattening retail rents, retail bankruptcies and thinning operating margins.

While an overbuilt US market for retail will continue to take a toll on select owners and investors, a market-driven correction in the form of more acquisitions & mergers, and the diversification and densification of historically retail-only properties is already well underway.

Source: The Registry, February 24, 2018.

Author: John Cumbelich

Read more here.

McNellis: Is the 1031 Exchange Panacea or Placebo?

posted by: Admin in News

Upon selling a supermarket last week, we deposited our proceeds into a 1031 exchange account. Call this maneuver the triumph of hope over experience, because we have had precious little luck exchanging properties over the past ten years, pulling off just one trade from among a half dozen attempted. What happened with the failures? Simple, in each instance we decided we would rather pay the taxes than trade into properties that were—in our view—wickedly over-priced or snake-bitten with risk.

Why are we trying again? Because now may be retail’s time. Buyers are migrating away from retail, sellers are soul-searching and, somewhere between still gaudily-priced trophy properties and power centers beset with “box risk”, we might find a decent deal: that is, an unleveraged eight percent return without untoward risk. Whether this will prove out remains to be seen, a topic for another day.

Let’s instead consider the 1031 exchange itself. It is unquestionably the greatest gift to the brokerage industry since Moses decreed the six percent commission (try paying less on a house sale and you’ll learn how deeply this commandment was carved in stone). Absent the 1031, a large but unknowable percentage of owners will never sell, preferring to ride a property straight off a cliff rather than pay avoidable taxes. (About one-third of all 2017 California deals involved a 1031 exchange buyer). Thanks to its palliative effect, America’s commercial deal volume is significantly greater than in countries that tax real estate sales profits. As decent and good-hearted as Canadians surely are, they share our Yankee enthusiasm for tax avoidance and, as a result, Canadian deal flow per capita is about 85 percent of ours. Yes, American brokers should all have tattoos that read “Born to 1031,” but is it that great a deal for principals?

It depends.

It depends on how you invest in real estate. Successfully exchanging is harder if you’re a developer rather than what is widely, if inaccurately, known as a “passive investor.” Developers want wholesale, risk-laden real estate to which they can add real value. You can find wholesale deals in the 45-day designation period, high-risk career projects, but relatively seldom can you solve or swallow half of their risks within the 180 day closing limitation. By the way, a great way to go “one and out” is to close on a deal with untamed risks.

On the other hand, if you’re that passive investor, if your milieu is finished, 100 percent leased real estate, you can readily find that within the 45 day identification period, wring out or assume whatever risk the property entails and have time enough to close within the overall 180 day period. Whether the deal will have a happy ending is another story—ask long-time veterans about their worst deals and, often as not, they began with a trade.

As importantly, the efficacy of the 1031 as a wealth-builder (presumably your ultimate goal) depends on the breadth of your financial perspective, your perceived range of investment alternatives. If you’re starting out, if your portfolio consists of real estate and pocket change for pizza (basically, my financial statement for many years), if every dime you have is either invested in property or sitting in a bank earning zero percent, the 1031 is as critical to your success as a booster rocket is to the Space Shuttle: it’s the only way to get lift-off. Even trading into a marginally-located Walgreen’s with a fixed return of 5 percent is lights-out better than paying 33 percent in taxes (if you’re in California) and having your remainder earn zero.

If, on the other hand, you have a little more experience and could be comfortable with investing in nothing more exotic than an indexed mutual fund (one consisting of a broad basket of a stock exchange’s representative companies) you might be doing yourself a disservice buying that Walgreen’s.

Even in tax-crushed California, the math is intriguing. Buy the Walgreen’s and you’re neck-deep in concrete: you have a 5 percent yield for the rest of your life and the hope that the property has residual value when the lease burns off (i.e. that prescription drugs are not delivered by drone). Pay your combined state and federal taxes of about 33 percent, you have total liquidity and you need only average 7.5 percent on your after-tax dollars to equal your Walgreen’s 5 percent.

This is not an idle comparison. Taken as a whole, the S&P 500 has averaged somewhere between a 7.5 and 10 percent total return since 1928 (pundits vary in their estimates; the Federal Reserve’s own raw data suggests a shade under 9 percent). If this long-term trend were to continue (Warren Buffet is quite certain it will), you would be far better off paying your taxes, putting away the balance into the market and letting it grow rather than worry about leaky roofs and Walgreen’s bending you over the next time its lease extension option arises.

And I will tell you from personal experience that your jaundiced banker is far more impressed with $10,000 in a Fidelity account—real money—than with your claimed equity of $100,000 in an LLC.

If you can stumble across a fair deal in the 45 days, the 1031 is your best friend. But before you pull the trigger on a Walgreen’s in South Dakota, you might consider paying your taxes and expanding your investment horizons.

Source: The Registry, February 26, 2018

Author: John McNellis

Read more here.

In The Wake Of Amazon, Trophy Retail Properties Fall Short

posted by: Admin in News

The retail world is in a state of transition. Over the last few years, several retail giants, including Sears, Kmart, JC Penney, Macy’s, Payless Shoe Source, Radio Shack and The Limited, announced multiple store closures or filed for bankruptcy protection. Overall, the number of retailers with debt rated at Moody’s most distressed level has tripled since 2009 – and Moody’s predicts this list will grow longer over the next five years.

Meanwhile, online retail giant Amazon generated $80 billion in sales in North America alone.

The idea that consumers might one day move away from traditional brick and mortar shops and conduct business primarily online is not new. But online shopping grew more slowly than projected for several years. Now, experts predict we’ve reached the point where the wave of people that have resisted e-commerce thus far may finally be ready to take the leap. Statistics seem to support the fact that we’re reaching critical mass when it comes to online commerce. According to TechCrunch, 79% of U.S. consumers now shop online, up from just 22% in 2000. And Statistasays 217.1 million people in the U.S. are online shoppers, with those figures projected to reach 224 million in 2019.

What will critical mass mean in terms of changes to the market and the retail landscape?

Pros and Cons

E-commerce offers numerous conveniences to consumers – imagine no more getting stuck in traffic jams or standing in long lines at retail establishments, for example. But online shopping is not a panacea. One challenge is all the cardboard required to ship products. CBS News recently reported cardboard recyclers were overwhelmed after 2017 holiday shopping. All that cardboard is a huge recycling challenge. Adding to the challenge is the fact that cardboard recycling is a surprisingly complex undertaking. Much of the recycling process takes place in China. And China is growing less interested in handling U.S. recycling, even at a profit, given the pollution and environmental damage the country’s leaders report they are seeing as a result. China officially banned the import of certain types of plastic waste for recycling purposes on January 1 this year. Cardboard could be next.

There’s also the issue of what to do with all the empty store space as brick and mortar retailers shutter their doors. Iconic brick and mortar retailer Macy’s has closed hundreds of stores over the last several years, leaving some premium retail spaces empty across the country. For example, Macy’s sold its 280,000-square-foot store at Stonestown Galleria in downtown San Francisco in January 2017. Last November, the company sold its 263,000-square-foot men’s store near San Francisco’s Union Square. Five floors had been occupied by the store, with the top three floors used for office space. But when Macy’s West Coast headquarters shut its doors in 2012, the office space was abandoned, and it sat vacant ever since.

Fortunately, there are several groups looking to repurpose those spaces – reimagining them as everything from hotels to workout centers to amusement parks and even affordable housing. But what if there’s too much space to fill too fast? Credit Suisse recently predicted 8,600 brick and mortar store closures in 2017, with more to follow this year. The company also predicted that that about one-fourth of the nation’s 1,100 shopping malls will close by 2022. If there are too many empty buildings to fill the market for those properties – even premium properties – could take a huge hit.

Lower property tax revenues, with no obvious way to replace them, and job losses are additional concerns. Traditional retail employs about 16.5 million Americans, which is almost 10% of the entire workforce. Estimates are that 6.2 million of those jobs are in areas targeted by e-commerce.

Online shopping is also changing how people invest. If you’re like many investors, the e-commerce buzz has not gone unnoticed. Investors are now far more interested in companies like Amazon than in retail behemoths like Sears. Fewer investors makes it even more difficult for those more traditional companies to stay afloat.

Finally, Amazon seems to wield a kind of power that has potential to run unchecked. If the company continues its push into new areas like fashion, medicine, grocery and just about anywhere else it wants to, and if it can do so profitably, dozens more industries could be affected. Unless brick and mortar retailers can adapt, and do so quickly, we could soon see more store closures and even less interest from investors.

Source: Forbes, February 2018

Author: Ryan Wibberly

Read more here.


Gig Economy Grows Up as Lenders Allow Airbnb Income on Mortgage Applications

posted by: Admin in News

Homeowners soon will be able to count income they earn from Airbnb Inc. rentals on applications for refinance loans.

A new program—expected to be announced on Thursday by Airbnb, mortgage giant Fannie Mae and three big lenders—will allow anyone who has rented out property on Airbnb for a year or longer to count some or all of that money as income.

Refinancing can be a way for a homeowner to tap home equity for renovations, college tuition or other big expenses, or to reduce their monthly payments.

Lenders have been tougher on income from side businesses and part-time work since the mid-2000s, when poorly documented income claims on mortgage applications helped fuel the housing bubble.

Airbnb, which launched in 2008, argues that its service includes reliable technology to track income, and that it is helping middle-class Americans stay in their homes by giving them a way to generate additional cash.

“The whole big idea behind Airbnb … was how could people unleash or capture the value of the home that they were in. Typically it’s the greatest expense for any family,” said Chris Lehane, head of global policy and public affairs for Airbnb. “I do think this announcement is a next chapter in that process.”

The mortgages will be backed by Fannie Mae, an acknowledgment that Americans today increasingly are earning money through the “gig economy,” such as renting out rooms or ride-sharing.

Initially, three lenders, Quicken Loans, Citizens Bank and Better Mortgage, will participate in the program. Fannie will evaluate the initiative and could decide over time to back mortgages from any lender that chooses to count Airbnb income in a refinancing, as long as the short-term rentals aren’t against local laws.

“Rental income on your own home is something that 10 years ago we almost never saw,” said Jonathan Lawless, vice president of customer solutions at Fannie Mae. “The fact is that we’re seeing this much more commonly across the country.”

Still, the move raises worries about encouraging homeowners to borrow more based on the unpredictable tourism industry.

“I think it’s a concern in terms of volatility, but I also think you don’t want to say absolutely not because it’s the future of work,” said Dan Immergluck, a professor at the Urban Studies Institute at Georgia State University, who studies the housing market, mortgage finance and foreclosures.

Airbnb has faced a host of regulatory challenges around the country. It has encountered stiff pushback from tenant advocates, for example, who argue it is exacerbating the housing shortage and driving up rents.

So far most of the scrutiny has focused on rental apartments and homes that are converted to full-time vacation rentals, with regulators generally tolerating homeowners renting out a primary residence.

There is a risk that could change. “If you’re in a place where it’s booming, but a year from now they’re going to clamp down on it,” that could jeopardize income generated from Airbnb, Mr. Immergluck said.

Executives at the three lenders said one crucial difference between the housing bubble and today is technology, which makes it easy to keep track of how much income homeowners are earning from Airbnb.

Jay Farner, chief executive of Quicken Loans, said technology allows lenders to gather reliable income data directly from Airbnb.

“If you were collecting rental income, in some cases you didn’t have to show it. In other cases you provided handwritten tax returns. Today, data allows us to see the real patterns,” Mr. Farner said.

He added the company has seen demand from homeowners who have been renting a room out on Airbnb and want to refinance and use the money to upgrade the guest quarters.

Vishal Garg, chief executive of Better Mortgage, said the program could be useful for empty nesters who rent out their children’s bedrooms and refinance to help pay for college tuition.

Mr. Lawless of Fannie Mae said Airbnb gives homeowners greater flexibility to cope with unexpected financial hardships.

“I can just increase the number of days that I’m renting out this room and increase my income,” he said.

Source: The Wall Street Journal

Author: Laura Kusisto

Read more here.