a majority stake in Harrison Street Real Estate Capital. With an
office in London, Harrison Street has a strong presence in
Europe, and Colliers chairman and CEO Jay Hennick says the
transaction will, among other things, provide a new growth platform that will help integrate its existing operations in Europe.
Another example is European-based International Workplace
Group, which owns and operates a network of about 3,000 co-working locations in 1,000 cities in 114 countries under such
brands as Regus, Spaces, Signature, Open Office and MOS. Late
last year, it received all-cash acquisition offers from Canada’s
Brookfield Asset Management and private equity group Onex. The
offers were spurned and now, according to news reports, the company is being pursued by Lone Star, Starwood and TDR Capital.
It is an impressive state of affairs for an industry that, by all
accounts, is in the later stages of the cycle. Transaction volume
has been trending down since 2015—which was the last time
there was a similar surge in portfolio transactions—and for the
first two months of this year deals were slightly down from the
same period in 2017. It is widely expected these numbers will
improve as the mega-billion-dollar transactions are added up.
But as these mega-deals are pursued and closed, it’s worth
examining the smaller transactions that are also occurring within
these asset classes and the fundamentals behind them.
CO-WORKING DRIVING OFFICE GROWTH
IWG, for instance, is not just being pursued for its extensive
global footprint but also because co-working is fueling the office
market, at least in the US.
In this year’s first quarter, the US office market slowed,
recording just 3. 7 million square feet of positive absorption,
according to JLL. But co-working has shown nothing but growth
since 2010, posting a 23% increase in annual occupancy figures.
In fact, if co-working providers had been left out of first-quarter
statistics, the firm notes, the US office market would have actually contracted.
The sector is embarking on its second iteration, with larger co-working providers such as We Work Spaces and IWG now targeting
enterprise users. These companies are also expanding their footprints, opening locations in suburban and second-tier markets.
It’s a move that makes sense to these companies as many sub-
urban markets have begun to develop into mini urban-like,
transit-oriented centers with a work-live-play vibe. “There’s a
change to suburban development, with new residential growth,
restaurants and amenities,” says Michael
Berretta, head of growth strategy for
IWG. “We’ve opened 30 or 40 new cen-
ters in the past 12 months and two-thirds
of those are in suburban locations.”
Proponents of the business model say that co-working’s flexibility will continue to drive growth. “People don’t know what
their business is going to look like in 10 or 15 years, so tenants
don’t want to be locked into long-term leases,” says Marcus
Moufarrige, COO of Servcorp, a virtual office space provider
that is listed on the Australian Stock Exchange. Progressive business owners recognize that they can increase their yield per
square foot and have been motivated to acquire more assets and
open new offices, he adds.
SENIOR HOUSING’S STRONG FUNDAMENTALS
Skilled nursing is an asset class beset by long-standing troubles.
Reduced occupancies, falling government reimbursements, an
aging inventory of facilities and the growing costs of care are just
a few. “The economics of the costs and how the operations will be
paid for have been real pressure points for years,” says Avison
Young principal Jim Kornick. “But the problem is acute now.”
And yet, also in March a public REIT snapped up the Mt.
Vernon Nursing & Rehab Center, a 45,654-square-foot skilled nurs-
ing facility in an affluent suburb of Washington, DC. The REIT is
leasing the facility, which has 69 rooms and 130 licensed beds, to a
large regional operator with which it has an existing relationship.
Avison Young marketed the facility to 20 investors and although
it had a strong reputation within the medical community, it had
recently generated negative cash flow and only 100 beds were currently in use. Nevertheless, the team generated 12 offers and the
community ultimately sold for $13 million—$1 million higher
than its original asking price.
How does one reconcile these conflicting dynamics? One
answer lies in senior housing’s demographics. Senior housing has
been experiencing a trough in demand for the past few years,
explains Mizuho Research managing director Richard Anderson.
The average age of a person entering senior housing is 83; the
birth rate also dropped 83 years ago during the Great Depression.
“We’re going to start to see that demand cycle trend back up starting this year,” Anderson says. It will be a long-lasting cycle in
which the flow of residents into senior housing will increase dramatically—a flow that will also affect skilled nursing.
Earlier this year a REIT acquired the Mt.Vernon Nursing &
Rehab Center, located in suburban Washington, DC. Even
though 130-bed facility had recently generated a negative cash
flow, it generated 12 offers and an ultimate sale price that was
$1 million higher than the original asking price.