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Takeaways from NAIOP Development ‘14

10/31/2014

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I’m finally going to do it! After every commercial real estate conference that I attend, I emerge from the Grand Ballroom of the conference hotel inspired and full of new ideas to grow my business and serve my clients better. I always take notes, grab flyers from service providers and sponsors, and occasionally take pictures of slides in the presentations as an earnest way to demonstrate my enthusiasm for the topic, which I intend to weave into my business.  Before the conference swag finds the bottom of my briefcase I’ve already moved on and always neglect to put pen to paper about the event.

There were 5 common themes through most of the presentations that will have a significant impact on commercial real estate  industry in the coming years.
-       E-Commerce
-       Millennial’s
-       Foreign Capital
-       Low CAP rates
-       Rising Interest Rates



But this time, I’m really going to do it. I’m finally going to take the time to write a post about the conference in an effort to not only relay some of the key messages from the conference but to try to make sense of where the commercial real estate industry is heading and to identify emerging opportunities.

Before I go to far, Development ’14 is NAIOP’s annual conference that attracts institutional, regional and local developers, commercial real estate brokers, asset management companies, lenders and other CRE professionals. The speakers at the sessions include C-level Executives of some of the worlds largest REIT’s and brokerage companies, professors from major universities and other esteemed industry leaders. It is truly the who’s who in the CRE development world and this year Denver received the nod to host.

The sessions that I attended were:
-       Beyond the Border: Foreign Investment in U.S. Real Estate
-       The Weakest Link: Benefits of Understanding the Supply Chain
-       CEO Insight: Heavy Lifting of Industrial Real Estate
-       Switching Gears from Traditional to Alternative Investment Options
-       The E-commerce Effect: How and Where Commercial Real Estate Will Next Develop
-       The New World: The Influence of Social Trends, Workforce Issues and Population Growth on Development

E-Commerce
Online and mobile shopping in the U.S. has increased at or above 18% annually for the past 3 years that that trend is expected to continue and grow significantly. If you look at emerging markets such as the Asia Pacific Region and Middle East, the numbers are off the chart. As a result, major retailers are making adjustments to their real estate portfolio to better align themselves with the demand for next-day (or even same-day) delivery of online purchases, the need to streamline the merchandise return process, are making improvements to warehousing systems and processes, and adopting multichannel and omnichannel retailing. In addition to a brick-and-mortor storefront, retailers are making significant investments in their digital storefront to accommodate the increased adoption of online and mobile shopping. Below are several of the many evolutions in the needs of retailers and warehousers of commodities.

E-Commerce Distribution and Fulfillment Centers
-       Automated inventory systems in warehouses that can utilize higher clear-height buildings
-       36’ clear is the new minimum and 40’ is preferred for BTS transactions
-       Can be labor intensive requiring increased parking ratios for employees
-       Increased trailer storage capabilities
-       Super flat floors for robotic pickers
-       Integration of mezzanine spaces for increased productivity
-       Sophisticated inventory management systems for automated picking, packaging and conveyor systems
-       Wider column spacing
-       Micro-DC's:
Preference to locate in downtown areas with high population densities
-       Foreign Trade Zones are preferred where available

Retail Properties

The modern consumer is embracing cross-channel retailing. They may see a product of interest in a catalog, go view it at a retail store and then shop the internet for reviews and the best pricing for the product. Often which channel they make the purchase will depend on delivery time. The discerning customer is also demanding multi-channel ways to return purchases as well.

This is putting increased pressure on retailers to embrace omni-channel retailing by providing a seamless and consistent experience between all of the potential channels a customer may interact with them. The various retail channels include brick and mortar, television, catalog, social media, e-commerce and m-commerce.

To adapt to these changes, retailers are reconfiguring store layout and sizes to involve the customer on a more intimate level. This may included touchscreens, in-store activities, and other new experiences.  Traditional retail stores may include more or less inventory depending on the product types. Also, there is a trend to re-purpose dark big box stores by flipping the uses to allow for more inventory/warehousing and less retail space.

When asked what is coming – the industry experts discussed ways for consumer to purchase online and pick-up on the same day in the store, online order fulfillment from retail locations or a fulfillment center to cut down on shipping time and duplicate inventory levels, direct-to-consumer shipments, and the ability to return online orders directly to the store. Efficient inventory management though all channels of distribution with be critical in a retailers success as e-commerce and m-commerce continue to transform the retail experience.

Millennial’s
One of the most significant drivers in the evolution of the CRE industry is the growing purchasing power by the Millennial generation. In case you’ve missed, it this identifies people born from the early 1980’s to the early 2000’s, also referred to as Generation Y. This generation grew up with the internet, watched their parents live through a significant recession, witnessed unprecedented foreclosure rates, experienced global terrorism at an unprecedented level and have seen long periods of wars in the Middle East.

One speaker referred to this generation as “Digital Natives” who embrace mobility, social integration, health & wellness, collaboration, are conservative, and have a global perspective on the world. Two commercial real estate segments that they are having a large impact on are multi-family housing and office space.

Impact on Multi-Family
-       Prefer smaller spaces in the urban core
-       Demand Wi-Fi capabilities
-       Embrace the ability to work remotely and like collaborative live/work space
-       Tend to rent vs own their home
-       Seek arts and culture

Impact on Office Space
-       Embrace collaborative type spaces
-       Value sustainable building practices and “green” spaces
-       Want the ability to work remotely reducing size requirements of office tenants
-       Appreciate a fun work environment that may feature flat screen TV’s, game and break spaces and exercise facilities.

One speaker did stress - do not overlook the power of Immigrants and Aging Boomers! These market segments have their own preferences that should not be overlooked.

Foreign Capital
The Globalization of the world’s economy has had a significant impact on financial markets, global trade and commerce. Advancements in technology and a world view of markets has also impacted the availability of foreign capital and demand by foreign investors for U.S. investment real estate. There are several key drivers for sovereign wealth funds, foreign pension funds, international investment banks and high net-worth families/royals investing in the U.S.:

-       Perception of Less Risk
-       Availability of Trophy Properties in key gateway coastal markets
-       Ability to obtain U.S. Green Cards for making investments

CAP Rates
In many top-tier U.S. markets, capitalization rates for investment real estate is at or approaching pre-recession levels. While this is great news for sellers of properties, many institutional investors have been forced to the sidelines because of compressing yields. Instead of chasing stabilized properties at incredibly low CAP rates, many are focused on development and build-to-suit transactions, deleveraging and securing long-term capital, by selling assets in non-core markets to re-align portfolios, disposing of excess land to fund development deals, and looking to reposition or create value in well located properties.

Even though many buyers are letting property values get ahead of fundamentals, developers for the most part have remained very disciplined. Part of this discipline has been moderated by stricter lending practices limiting speculative development and weary equity sources.

Interest Rates
This unprecedented low interest rate environment has proven beneficial in the U.S. recovery from the latest recession. Everyone clearly acknowledges that it cannot continue forever and incremental increases in rates are inevitable and could actually be a good thing for the market. Larger investment companies are quickly de-leveraging or are working to secure the longest-term fixed capital as possible.

Coincidentally on the day after the conference, the Federal Reserve announced “the end of quantitative easing” and its plans to increase interest rates as a result of sustained economic growth in the U.S. The FOMC also announced the end of its bond-buying program.

Any increases in rates should be incremental and moderately paced so not to shock the national and global markets.  The occurrence of a “World Event” could also delay the increase in interest rates even further.

Phew, I did it. I hope you found this post of interest and please feel free to contact me at 303.949.6443 or [email protected] if you would like to discuss in more detail. Please follow me on Twitter as well via @BradyWelsh_CRE for the latest local and national CRE industry news.


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Recent Lease Transaction - Wave Form Systems

9/22/2014

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FOR IMMEDIATE RELEASE:

Wave Form Systems Leases Industrial Space in Aurora, CO

Denver, CO - September 19, 2014: Sherpa Commercial Real Estate, Inc. is pleased to announce a recent industrial lease transaction in Denver,  CO. Sherpa Commercial represented WaveForm Systems (www.waveformsys.com) in the lease of office and warehouse space for their entrance into the Denver market. 

Headquartered in Beaverton, Ore., Wave Form Systems provides mobile medical technology services. Through a thoughtful site selection process, Brady Welsh of Sherpa Commercial, identified an optimal facility in close proximity to the Anschutz Medical Campus in Aurora, CO. 

"The ability to securely store, test and maintain their laser technologies and surgical equipment while remaining in close proximity to key customers was essential for Wave Form", according to Welsh. "We were able to identify and secure a facility that met those needs and allows for expansion opportunities as they grow in the Denver market."

About Sherpa Commercial: Located in Denver, Colorado, Sherpa Commercial Real Estate, Inc. assists private capital investors, industrial and office tenants & owner-users, and institutional owners to purchase or lease commercial properties. www.creSherpa.com

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E-Commerce & It's Impact on Commercial Real Estate

6/12/2014

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The U.S. Industrial Market has recovered remarkably since the last recession especially in the coastal markets that are historically constrained for well-located Class A industrial product. As a result, industrial users have regained confidence in the U.S. economy and have begun to quickly expand their operations.

In many top-tier U.S. markets, absorption rates are on the rise, vacancy rates are compressing and capitalization rates are nearing pre-recession levels. A key driver of this absorption is the continued influence that e-commerce is having on the national and global Business-to-Consumer ("B2C") marketplace. Global online retail sales grew by 14.8% per year from 2007 to 2012 with an estimated total of $1.2 trillion in 2013. Retailers and third party logistics companies are desperatly seeking to capitilize on this trend by securing strategically located distribution facilities in high-density population centers in key markets.

In many cases retailers are adjusting their traditional brick-and-morter store strategies and focusing on online channels to improve delivery times, develop efficient return and exchange procedures and increase market penetration.
Success in the retail industry rests on inventory management and quick delivery times, as a result demand for well equipped and strategically located facilities is skyrocketing.

A growing trend towards three key property types is emerging across the U.S. and internationally:
- Mega e-fulfillment centers;
- Parcel hubs and delivery centers;
- Urban Logistics Centers


Please contact Sherpa Commercial Real Estate if you would like to discuss these emerging CRE trends, if you are a retailer in need of distribution facilities or traditional retail space, or are an investor looking to capitalize on the anticipated strong demand for well-located distribution facilities.

www.creSherpa.com | 303.949,6443

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Up In Smoke - Is a pot Bubble looming in Denver?

4/7/2014

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As the industrial real estate vacancy rate in Denver approaches all time lows, asking prices for most new industrial sale and lease listings are approaching all time highs. While this is a natural trend in real estate cycles, the marijuana industry in Colorado has drastically tempered the recession phase since 2009 and increased the progression through the recovery phase and into the expansion phase into 2014. 

The insatiable absorption of industrial warehouse and manufacturing properties by the marijuana industry in the last 4 years has driven sales prices up 100% and lease rates up over 300% in many cases. With an estimated 2.5 - 4.5 million square feet of industrial space now occupied by the industry, "traditional users" are now either priced out of the market or left with no opportunities to move or expand their operations.

How will this effect Denver and its short and long term economy?

Restricted Job Growth in Denver?
- If a company cannot expand within or enter this market because of the lack of space, countless jobs could be missed out on.
- Denver has historically maintained a cost advantage over Tier 1 markets across the country. How many companies are waiting on the sidelines or are moving on to more cost effective markets in the region?

Are there still Opportunities?
- Almost all new speculative industrial construction has been of modern distribution facilities over 200,000 square feet with minimum divisibility of 35-50,000 square feet. Nobody to date is developing smaller modern facilities for the local and mid-tier industrial users in the I-70 corridor of Denver. Historically these buildings have not been cost effective as older industrial product was always an available lower cost alternative. With many of those older facilities now occupied by the marijuana industry, the time may be perfect for new and smaller development as the expansion phase continues.
- Property owners in Denver County of I-A and I-B zoned industrial properties who anticipate selling in the next few years should consider listing their property in the near future to capitalize on the current demand and favorable market characteristics. 
- Don't get greedy and be selective. By reasonably pricing your asset a seller can attract multiple interested parties and properly vet potential buyers to help ensure a successful closing. Many properties get tied up and fall apart at the closing table as a result of insufficient funding of marijuana growers and dispensaries and the restrictive banking regulations on the industry. 

A Looming Bubble?
- Denver is in many ways rapidly creating a dependence on the marijuana industry. If the current state industry laws and federal stance should change drastically against the marijuana industry, Denver could face a similar market correction to the Oil & Gas bust in the late 80's and the technology bubble in the 90's.
- The trickle down effect of the industry has benefited property owners, contractors, service companies, ATM machines (ha-ha), and has created a ton of jobs in a "growing industry". The risk from the uncertainties of the industry are hard to measure.

The Risks of "Addiction
" to an Industry
- As apartment construction continues to increase to meet the project population increases along the Front Range and tourism hits all time highs, a pot bubble could drastically effect the hospitality, retail and multifamily sectors.
- As the strong market fundamentals of the expansion phase signal the right time for new industrial constriction, market timing and proper product design and location are critical considerations.
- If negative changes in the marijuana industry occur, a flood of stigmatized, highly specialized, and antiquated industrial properties would cripple the Denver industrial market.

Who is safe?
- With little office absorption attributed to the industry so far, the office market should remain relatively resilient to a correction. It's doing just fine on its own! Stay tuned for the Bitzer Real Estate Partners 1Q2014 Office Market Report!
- Counties and Cities in Colorado that did not jump on the MMJ bandwagon should see absorption by traditional companies in need of space and will not experience the CRE inflation risk in Denver county.

How Likely is a bubble to occur?
- While many will argue that the cat is out of the bag and there is no stopping marijuana legalization in many parts of the country, many thing can not be predicted. These include: new Federal and State guidelines; industry consolidation similar to the healthcare industry, continued restrictive banking regulations, or a public change of public opinion.
- The commercial real estate oversupply and recession market cycle phases are always looming and inevitable. It is only a matter of time so let's enjoy the good times while we can!

"Those who fail to learn from history are destined to repeat it." - Churchill

Please contact Brady Welsh at 303.949.6443 if you would like to discuss listing your property and how these market trends affect your asset.



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    Author

    Brady Welsh is a Commercial Real Estate Professional in Denver, CO and the President of Sherpa Commercial Real Estate. In addition to industrial & office brokerage & development, he enjoys tracking the local and national CRE markets and sharing his thoughts and updates on the industry with this Blog. 


    Please feel free to contact him at [email protected] or 303.949.6443.

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