The first 30,000 square feet is to be
devoted to retail; Vida Fitness has since
taken this space in a pre-lease commitment. The rest of the 22-story building
will be split into eight floors of office
space followed by 12 stories of residential units.
To be clear, this isn’t a typical quick-change in design plans. This new structure will have two different entrances and
two elevator banks, to say nothing of the
work required to optimize the redundant
systems that such a building requires. But
even with the additional effort, Shooshan
feels it was a better solution than waiting
for an office tenant to anchor the previously planned building.
There are a handful of such projects
around the country, including one by
Shooshan’s capital partner, Brandywine
Realty Trust, that’s nearing completion in
Philadelphia. But few people would
describe these projects as indicators of a
trend to watch.
That’s not dampening Shooshan’s
excitement over the project, though, and
those of potent al tenants. “We have more
interest from the office market than there
is space available now that the project has
been reconceptualized,” he says.
The concept of a vertically integrated
mixed-use building isn’t new, though it’s
not a commonly used approach, either.
At the end of the day, this type of investment likely falls into the familiar bucket
of a value-add or opportunistic play.
Or let’s put it this way: by no stretch
could it be called a core investment. And
that’s okay, because creative, value-add
strategies are exactly what the real estate
cycle calls for right now.
It’s obvious to just about everyone at
this point that the market is peaking, and
it’s during cyclical peaks like these that
value-add and opportunistic deals
become most essential.
Real estate investors know they can no
longer rely on the capital markets cap
rate compression experienced in the
early part of the cycle, says Spencer Levy,
CBRE’s Americas head of research.
“They’re evaluating investment opportu-
nities based on their potential for capital
appreciation—meaning value-add work,”
such as through leasing upgrades or capi-
tal improvement expenditures, he
explains. “So investors are moving fur-
ther out on the risk spectrum in an effort
to get better returns.”
In short, investors are shifting their
approach to account for the lower growth
of a mature cycle. In ordinary times, this
would be the end of the story.
But here’s the rub: this time there’s a
wild card at play—namely, the high level
of uncertainty about the direction of economic policy both in the US and abroad.
And in the minds of some investors, these
changes may potentially unlock a more
aggressive round of growth than typically
seen in a mature cycle.
This attitude could be spotted in some of
the responses to CBRE’s 2017 Global
Investor Intentions Survey. The study
noted, for example, that while there is
some nervousness about the elections in
France, Germany and the Netherlands, it
has not dampened appetite for real estate
in Europe. Meanwhile in the UK, where
Brexit dominates business strategies,
investors are becoming increasingly inter-
ested in commercial properties, particu-
larly in and around London. (For more on
this, go to “Global Currents” on page 10.)
Indeed, the survey finds that investors
are more interested in the UK this year
than they were in 2016. One might think
that the sterling’s weakness accounted for
this interest—on the part of UK investors
at least—but the survey makes clear there
is a strong increase in interest for UK
assets by both European and US investors.
Also telling is a recent Preqin survey of
over 180 global real estate fund managers, which found that two-thirds of firms
intend to deploy more capital over the
next 12 months than they did the prior
year, and almost half are planning to
invest “significantly” more.
Yet there are concerns in the industry,
mainly around pricing, the availability of
assets and the record levels of dry powder
fund managers have built up, points out
Andrew Moylan, Preqin’s head of real
estate products. But “most firms remain
confident they can find value in the current market.” Furthermore, the majority
of fund managers expect to put more
capital to work this year “even if they
have to adapt their strategies or lower
their return expectations as a result of
FACTS VERSUS SENTIMENT
There are currently two schools of thought
when it comes to divining the next stage
of the cycle, Levy says. One utilizes the
facts on the ground, so the speak, to forecast how things will play out in the near to
mid-term. The other, meanwhile, puts a
greater emphasis on sentiment.
The thinking behind the fact-based
approach is straightforward: there has
been a period of economic stagnation for
the past several years and most economists
have concluded that this business cycle will
end in 2018 or 2019, whereupon the econ-
Rates are being
increased because the
Fed believes economic
growth will continue.
This benefits everyone,
including public REITs
EDWARD MUI, Morningstar