on grocery, drug stores, restaurants and
local services,” he says. “While Amazon’s
expected entry into the drugstore world
may create disruption in that industry,
the typical square footage of drugstore
locations is ideal for smaller-format gro-
cery and smaller users, and is unlikely to
have much of an impact on class-A and -B
properties.”
On the other end of the equation, inves-
tors with a higher appetite for risk and the
capital for redevelopment will increasingly
find mall redevelopment opportunities
within the class C segment, which is cur-
rently facing the biggest challenges. “At
pennies on the dollar, many of these
remain on prime commercial corridors
ideal for mixed-use suburban projects with
an urban feel,” explains Brown. “Their
rebirth will require significant capital as
multifamily, hospitality, office, medical
office or even educational campus ele-
ments are utilized to build new projects.”
He adds that the retail components will
also be revitalized, albeit with greatly
reduced footprints and a shift in emphasis
toward personal needs, F&B and entertain-
ment, “complemented by a smattering of
traditional mall-based concepts.”
But, stresses Bear Real Estate Advisors
founder and CEO Matt Bear, two things
are clear: “The Internet will not replace
retail shopping centers, and we have too
many retail shopping centers.” According
to his observations, freestanding retail
and only the best-located shopping cen-
ters will survive for the foreseeable future.
“If you have a class B or C project on class
B- or C-quality real estate, it’s time to have
a backup plan.”
INDUSTRIAL’S ROBUST DEMAND
Industrial and warehouse properties, as
Capital Square 1031’s Rogers puts it, are
also very much on the minds of investors,
and are “in high demand.”
In New Jersey, for example, Cushman &
Wakefield’s investment sales group, says
that its 16-member team orchestrated $1.1
billion in industrial transactions in 2017
and entered 2018 with $927 million of
sales under contract, including six million
square feet of new development.
“Strong investor interest in new construction, vacant-forward sales and institutional buying off of I-95 speaks to the depth
of demand for all things industrial,” says
Gary Gabriel, a C&W executive managing
director. Gabriel and Kyle Schmidt, a director, lead the East Rutherford-based invest-ment sales group’s industrial practice.
And the other side of the country, the
key to Silicon Valley office users taking
down R&D space is renovation—similar to
what has occurred on “renovation row,”
according to Colliers. The firm’s referring
to the Orchard Parkway area, where in
recent years TMG, Lane Partners, Ridge
Capital, MWest/Divco West, Bixby Land
Co. and others swooped in to buy discounted R&D buildings for value-add projects and performed fairly high-level renovations in leasing the space out.
Last summer, for example, an ownership
entity comprised of the ProspectHill
Group, SKS Partners and Invesco Real
Estate started renovations on the former
27-acre LAM Research campus in Northern
California. Slated for occupancy in late
summer, Phase I will feature about 300,000
square feet in three buildings with the large
floorplates that are appealing to tech tenants. The new campus will have a sizeable
gym with full locker rooms, outdoor amenity space, including a nearly one-acre park
with an outdoor pizza oven, and a definitive
“main street” entrance with pull-out curb-side areas for food trucks. Currently housing about 200,000 square feet of vacant
buildings, the second phase could be a
more vertical buildout, since that portion
of the property is entitled for up to 1. 3 million square feet, reports Colliers.
OFFICES IN THE “RIGHT” LOCATIONS
A little further south in Los Angeles’
Westside market, another product type
topping the charts is office, which led
absorption in the fourth quarter. In par-tiular, notes Newmark Knight Frank,
many tech companies planted roots in
Santa Monica, CA.
Steve Kolsky, EVP and managing direc-
tor at NKF, relates that the Westside has
always been strong. “It outperforms other
submarkets because it’s close to where
decision makers live,” he says. “As the mar-
ket gets stronger, people start looking for
more affordable alternatives. Playa Vista
was that alternative at the beginning of the
last cycle. They finally had all of the prod-
uct in place and the right product mix. So,
they had good supply at a lower cost.”
It should come as no surprise that
Silicon Valley still tops the list on hot office
spots. According to Colliers, the key lies in
Silicon Valley tech occupiers’ strong pref-
erence for quality, new space, the appeal
of being near public transportation loca-
tions and amenity-rich environments.
The report also says that in some
respects, Santa Clara Square and other
mega-campuses built by Google, Apple,
LinkedIn and others has set a new benchmark for the “sense of place” concept.
JLL’s Lauren Gilchrist, VP and director
of research for Philadelphia, relates that
“the way we work is changing, and open,
collaborative, ‘cool’ office environments
aren’t just for tech start-ups anymore. “In
talent-rich markets, creative office build-
ings often outperform traditional ones,
creating opportunities for investors that
have a keen eye for what it takes to turn a
tired building in the right location into
the next real estate hot spot.”
Secondary markets like Philadelphia,
Atlanta, Seattle and Austin, she adds, stand
to gain the most from this trend as inves-
tors look outside traditional gateway mar-
kets for higher returns.
Regardless of performance variations
among property sectors, continued capital
inflows are expected to continue into commercial real estate. “Amid the ongoing US
political drama that’s expected to continue
in 2018, CRE provides an attractive choice
in the uncertain future of alternative investments such as stocks and bonds,” says Ken
Riggs, president of Situs RERC. “
Risk-adjusted returns for CRE are favorable to
other asset classes over the long term and
provide investment diversification.” ◆
“The Internet will not replace shopping
centers, and we have too many retail
shopping centers. If you have a class B
or C project on class B- or C-quality real
estate, it’s time to have a backup plan.”
MATT BEAR, BEAR REAL ESTATE ADVISORS.
