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THE POSSIBILITIES ARE ENDLESS.
MATTHEWS™ | 1
W W W. M AT T H E W S . C O M
2 | FALL/WINTER 2020
4 | FALL/WINTER 2020
MATTHEWS™ | 5
6 | FALL/WINTER 2020
Market Trends There is a transformation occurring within the commercial real estate space as consumers adjust to the “new normal.”
Here we explore the trends and numerous opportunities avail able in the market
Top Trends in the U.S. 1
Convenience, Accessibility, Speed
6
Just-In-Case Inventory Strategy
2
Digital First Economy
7
Affordability
3
Hybrid Workforce
8
Consolidation
4
Suburbanization
9
Rise in Niche Asset Classes
5
Flex Space
10
Adapting & Adopting MATTHEWS™ | 7
WHAT’S NEXT FOR CRE? As the market begins to stabilize, it is anticipated that the “new normal” will bring a new meaning to experiential retail, square footage to multifamily, reconfiguring of office space, and continued performance for warehouse and distribution centers. Distressed sales marked a large percentage of the desired product, and niche product types unpronounced before COVID-19. The Federal Reserve is very likely to remain accommodative on monetary policy, keeping interest rates low throughout 2021. These factors provide a favorable backdrop for commercial investors and a continued economic recovery alike.
pricing yoy change SOU RC E: RC A 15% 10% 5% 0% -5%
2016
Office
2017
2018
Retail
2019
Industrial
2020 Apartment
cap rates
SOU RC E: RC A 7.5% 6.5% 5.5% 4.5%
q u a r t e r ly t r a n s a c t i o n v o l u m e SOU RC E: RC A | *A S O F M AY 2021 $180B $160B $140B $120B $100B $80B $60B $40B $20B $0
2016
2017
2018
2019
2020
Office Centers Industrial Retail Apartment
major vs non-major metro price growth SOU RC E: RC A 8% 6% 4% 2016
2017
2018
Individual
2019
Portfolio
2020
2%
2021*
Entity
2019 Major Metros
2020 Non-Major Metros
t op u.s. commerci a l p rop er t y cons t ruc t ion m a rk e t s | Q 2 2020 - Q1 2021 SOU RC E: RC A
Market
Starts Volume ($B)
Dallas Los Angeles NYC Boroughs Seattle Chicago $0 Office
8 | SPRING/SUMMER 2021
$2B Industrial
$4B Retail
$6B
$8B
$10B
Apartment
Hotel
$12B
$14B
Shopping Centers
$16B
$18B
distressed sales and share of total sales SOU RC E: RC A
25% 20%
$10B $8B
15%
$6B
10%
$4B
5%
$2B $0
2008
2009
2010
2011
2012
2013
Distressed Sales
2014
2015
2016
2017
2018
2019
% Total Sales
Distressed Sales
$14B $12B
0%
2020
Percent Total of Sales
u.s. self-storage annual deal volume by deal type SOU RC E: RC A
U.S. Markets To Watch
$8B
SOU RC E: M AT TH E WS™ R E S E A RC H , RC A , & P WC
$7B $6B $5B $4B $3B $2B $1B $0
2017
2018
Individual
2019 Portfolio
1
Raleigh/Durham
6
Nashville
2
Dallas/Fort Worth
7
Phoenix
3
Boston
8
Tampa/St. Petersburg
4
Los Angeles
9
Charlotte
5
Austin
N O RTH C A RO LI N A TE X A S
M A SSAC H US E T TS C A LI FO R N I A
TE N N E SS E E A R IZO N A FLO R I DA
N O RTH C A RO LI N A
Houston
TE X A S
TE X A S
2020 Entity
m e d i c a l o f f i c e s u p p ly a n d d e m a n d 6.0
10.0%
4.5
9.5%
3.0
9.0%
1.5
8.5%
0
2015
2016
2017 Completions
2018 Net Absorption
2019
2020
Vacancy Rate
Completions & Absorption (Million Square Feet)
SOU RC E: P WC , COSTA R
8.0%
Vacancy
MATTHEWS™ | 9
THE APARTMENT MARKET COVID-19 has accelerated the work from home trend, which has ultimately changed people’s apartment expectations. This has caused a move to sunbelt states and suburban migration, with renters seeking more affordability, larger spaces, and higher safety/health precautions for buildings. The pandemic has also changed how people lease apartments; online tours and processes are preferred. These processes have created a higher need for efficiency and technology adoption. As of May 2021, the yearover-year price change for U.S. apartments is 10.1%, transaction volume is $10.5B, and yearover-year transaction volume change is 119%.
Top 5 Apartment Markets SOU RC E: P WC 1
Raleigh/Durham
2
Tampa/St. Petersburg
3
Salt Lake City
4
Austin
5
Boston
N O RTH C A RO LI N A FLO R I DA UTA H
TE X A S
M A SSAC H US E T TS
cap rates
SOU RC E: RC A
working from home during pandemic, by income
6.0%
SOU RC E: P WC
5.5%
80% 60% 40%
5.0%
20% 0%
Bottom Quintile
Second Quintile
Middle Quintile
Fourth Quintile
4.5%
Top Quintile
2016
2017
All Apartment
Worked from home Stayed home from work and unable to work
2018
2019
Mid-Highrise
2020 Garden
change in adult p op ul ation by age, 2020-2030 Net Number of People (Millions)
SOU RC E: U. S . C E N SUS B U R E AU 5 4 3 2 1 0 -1 -2 -3 20-24
25-29
30-34 35-39 40-44 45-49
Group will shrink in size & live a more urban lifestyle
10 | SPRING/SUMMER 2021
Group will grow in size & live a more suburban lifestyle
50-54
55-59
60-64
Group will shrink in size & a portion will seek urban lifestyle
65-69 70-74
75-79 80-84
Group will grow in size & live a suburban lifesyle
85+
Percent Change in Resident Popul ation f rom 2010 t o 2020 SOU RC E: COSTA R
q u a r t e r ly t r a n s a c t i o n v o l u m e SOU RC E: RC A | *A S O F M AY 2021 $70B $60B $50B $40B $30B $20B $10B $0
2016
2017
Individual
2018
2019
Portfolio
2020 2021* Entity
u.s. apartment deal activity drives higher SOU RC E: RC A | *A S O F M AY 2021
-3.2%
18.4%
u-haul migration pat terns SOU RC E: U H AU L .CO M
$70B $60B $50B $40B $30B $20B $10B $0
Retail
2021*
2020
Ind.
Apt.
Average 2015-2019
top cities for rent worries
In-Migration Markets
Out-Migration Markets
Atlanta
Baltimore
Austin
Boston
New York
Boise
Chicago
Houston
Charleston
Denver
Atlanta
Charlotte
Los Angeles
Los Angeles
Dallas/Fort Worth
Minneapolis
Chicago
Fort Myers
New York City
Houston
Oakland/East Bay
Indianapolis
Orange County
Jacksonville
Philadelphia
Myrtle Beach
Portland
Nashville
Riverside/San Bernadino
Miami
Orlando
Sacramento
Seattle
Phoenix
San Diego
D.C.
Raleigh
San Francisco
Philadelphia
Salt Lake City
San Jose
Boston
San Antonio
Seattle
Sarasota
Washington D.C.
Detroit
Tampa
Office
SOU RC E: COSTA R
Inland Empire Dallas Phoenix San Francisco
0%
5%
10% 15% 20% 25% Share of Households
30%
35%
MATTHEWS™ | 11
THE RETAIL MARKET Although the sector faced headwinds from the pandemic-induced capacity restraints and e-commerce shifts, vacancy rates are beginning to stabilize as retailers closing stores are counterbalanced by those who are thriving. Even before the COVID-19 pandemic, the retail sector was challenged. However, corporatebacked net lease tenants see increased demand and a wide variety of grocery stores, discounters, sporting goods, and hobby stores. As of May 2021, the year-over-year price change for U.S. retail is 2.3%, transaction volume is $3.4B, and year-over-year transaction volume change is 76%.
Top 5 Retail Markets SOU RC E: P WC 1
Orlando
2
San Antonio
3
Greenville
4
Salt Lake City
5
Tucson
FLO R I DA TE X A S
SOUTH C A RO LI N A UTA H
A R IZO N A
q u a r t e r ly t r a n s a c t i o n v o l u m e b y s u b t y p e
Volume
SOU RC E: RC A $26B $24B $22B $20B $18B $16B $14B $12B $10B $8B $6B $4B $2B $0
2016
2017
2018 Retail
2019
2020
2021
Shopping Centers
Volume & Pricing By Product SOU RC E: RC A
Quarterly Volume | Q1 2021 $Billion
YOY Change
Number of Properties
YOY Change
Retail Total
$7.8
-42%
1,016
-27%
Shopping Centers
$3.8
-50%
362
-36%
Retail
$3.9
-31%
654
-21%
6 Major Metros
$2.4
-54%
260
-34%
Non-Major Metro
$5.3
-34%
756
-25%
Grocery
$1.7
-36%
148
-13%
Unanchored Retail Center
$1.2
-46%
216
-40%
Single Tenant Retail
$2.5
-16%
404
-20%
Drugstore
$0.6
14%
119
8%
12 | SPRING/SUMMER 2021
e-commerce retail sales % of total sales
cap rates
16% 14% 12% 10% 8% 6% 4% 2% 0%
7.5% 7.0% 6.5% 6.0% 5.5%
2016
All Retail
retail space closures
SOU RC E: P WC
2017
2018 2019 2020
Shops
SOU RC E: COSTA R | *A S O F M AY 2021
Square Feet
SOU RC E: RC A
2000 2005
2010
2015
2020
160M 140M 120M 100M 80M 60M 40M 20M 0
2016 2017 2018 2019 2020 2021*
Shopping Centers
VACANCY RATE BY SHOPPING CENTER T YPE SOU RC E: COSTA R 12% 10% 8% 6% 4% 2% 0%
2007
2008
2009
Malls
2010
2011
Power Centers
2012
2013
2014
Neighborhood Centers
2015
2016
Strip Centers
2017
2018
General Retail
2019
2020
2021
Other
mo s t ac t i v e L e s see s, q1 2021 SOU RC E: COSTA R
Sporting Goods
Dick’s Sporting Goods, Inc.
Apparel
Burlington
Discount/Dollar Stores
Dollar Tree Management, Inc.
Grocers
Demoulas Supermarkets, Inc.
Discount Home Furnishings
Surplus Freight
Discount/Dollar Stores
Big Lots
General Merchandisers
Target Corporation
Grocers
AAA Wholesale Cash and Carry
Home Improvement
The Home Depot
Home Improvement
Harbor Freight Tools 0
25
50
75 100 125 150 Square Feet (by Thousands)
175
200
MATTHEWS™ | 13
THE INDUSTRIAL MARKET The national demand for industrial space is sparking an unprecedented amount of construction as retailers try to keep up with the expanding e-commerce landscape. Activity surrounding preleasing is robust, and the segments needing to grow their distribution and fulfillment channels are pet care, home improvement, and necessities. With the strength of investor demand for industrial properties, prices are growing quickly. As of May 2021, the year-over-year price change for U.S. industrial is 9.5%, transaction volume is $5.3B, and yearover-year transaction volume change is 70%.
Top 5 Industrial Markets SOU RC E: P WC 1
Raleigh/Durham
2
Northern New Jersey
3
Dallas/Fort Worth
4
Austin
5
Denver
N O RTH C A RO LI N A N E W J E RS E Y TE X A S TE X A S
CO LO R A DO
u.s. industrial cap rates & construction trends SOU RC E: RC A
$35B
Cap Rate
9%
$30B
8%
$25B $20B
7%
$15B
6%
$10B
5%
$5B
4%
2002
2004
2006
2008
Construction Volume
2010
2012
2014
Newly Built Cap Rate
2016
2018
2020
Warehouse Construction Volume
$40B
10%
$0
Existing Industrial Cap Rate
vacancy rate by building size SOU RC E: RC A | *A S O F M AY 2021 12% 10% 8% 6% 4% 2% 0%
2007
2008
2009
2010 <10K SF
14 | SPRING/SUMMER 2021
2011
2012
2013
10K-200K SF
2014
2015
2016
200K-500K SF
2017
2018
>500K SF
2019
2020
2021*
q u a r t e r ly t r a n s a c t i o n v o l u m e b y s u b t y p e SOU RC E: RC A | *A S O F M AY 2021 $40B $35B $30B $25B $20B $15B $10B $5B $0
2016
2017
2018 Flex
volume yoy change
2020
2021*
Warehouse
top industrial developers
SOU RC E: RC A | *A S O F M AY 2021
SOU RC E: RC A
100%
Amazon
75%
Seefried Properties
50%
Trammell Crow Co (CBRE)
25%
NorthPoint Development
0
-25% -50%
2019
Hillwood 2016
2017
2018
2019
2020
2021*
Scannell Properties Duke Realty
pricing yoy change
VanTrust Real Estate
SOU RC E: RC A
CT Realty Investors
15%
PGIM Real Estate Prologis
10%
Crow Holdings 5% 0%
Panattoni Development Xebec Realty Partners 2016
2017
2018
2019
2020
$0
$1B
$2B
$3B
MATTHEWS™ | 15
average industrial /logistics building size by category
cap rates
SOU RC E: RC A | *A S O F M AY 2021
SOU RC E: US C E N SUS B U R E AU, PRO LOG I S
7.0%
Last Touch
6.5%
City Multimarket
6.0%
Gateway 5.5%
2016
2017
2018
All Industrial
2019
Flex
2020
0
100
Warehouse
200
300
industrial/distribution investment prospect trends
annualized total returns for data centers
Excellent
20% 15% 10% 5% 0% -5% -10% -15% -20%
SOU RC E: P WC | *A S O F M AY 2021
SOU RC E: B LOO M B E RG
Good Fair
*
9
7
20 21
20 1
20 1
5 20 1
3
1
20 1
20 1
9 20 0
20 07
Poor
Manufacturing Flex
400
Square Feet (by Thousands)
R&D Warehouse Fulfillment
1 Year
Data Center REIT
3 Years
5 Years
MSCI RMZ REIT Index
10 Years S&P 500
u.s. industrial lender count swells SOU RC E: RC A Count of Unique Loan Originators
160 140 120 100 80 60 40 20 0
2011
2012
2013
2014 Industrial
16 | SPRING/SUMMER 2021
2015 Apartment
2016
2017
Office
Retail
2018
2019
2020
DEBT AND STRUCTURED FINANCE Vaccines and U.S. stimulus have the global economy on track for a strong rebound in the second half of 2021. The reopening trade is expected to favor equity over bonds, the value factor over the growth factor, and nonU.S. stocks. Fed officials have upgraded their projects for growth, unemployment, inflation, and interest rates over the next few years, reflecting the impact on the economy from the additional stimulus and vaccination progress. The Federal Reserve plans to keep the target range for its short-term policy rate between 0% to 0.25% until labor market conditions improve. In the short-term, there is good reason to believe inflation will run significantly higher than it has over the past ten years. This could lead to lower returns on income for commercial real estate, as net operating income is somewhat sticky. Continued increases in construction costs for both materials and labor would also be a problem for developers.
anticipated changes in the next five years
SOU RC E: US C E N SUS B U R E AU, PRO LOG I S 80% 60% 40% 20% 0%
Inflation
SOU RC E: RC A
50% 0%
2017
Construction
170 150 130 110 90 70 50
20% 10% 0% -10% -20% -30%
2014
2016
2018
Increase Decrease
100%
yoy change
2012
Investor Return Exp.
composition of u.s. cre propert y capital flows
SOU RC E: US C E N SUS B U R E AU, PRO LOG I S *A S O F M AY 2021
2010
Real Estate Cap Rates
Increase Substantially Remain Stable
n a t i o n a l a l l- p r o p e r t y i n d e x
2008
Comm. Mtg. Rates
2018
2019
Refinancing
2020 Aquisition
SOU RC E: US C E N SUS B U R E AU, PRO LOG I S *A S O F M AY 2021
2020
2008 2010 2012 2014 2016 2018 2020
long term u.s. commercial property prices SOU RC E: RC A 20% 10% 0% -10% -20% 1971
1975
1979
1983
1987
Recession
1991
1995
Price Growth
1999
2003
2007
2011
2015
2019
GDP Deflator
MATTHEWS™ | 17
18 | FALL/WINTER 2020
MATTHEWS™ | 19
20 | SPRING/SUMMER 2021
MATTHEWS™ | 21
22 | SPRING/SUMMER 2021
MATTHEWS™ | 23
24 | SPRING/SUMMER 2021
MATTHEWS™ | 25
26 | SPRING/SUMMER 2021
MATTHEWS™ | 27
28 | FALL/WINTER 2020
™
W W W. M AT T H E W S . C O M
30 | SPRING/SUMMER 2021
MATTHEWS™ | 31
32 | SPRING/SUMMER 2021
MATTHEWS™ | 33
34 | SPRING/SUMMER 2021
MATTHEWS™ | 35
36 | SPRING/SUMMER 2021
MATTHEWS™ | 37
38 | SPRING/SUMMER 2021
MATTHEWS™ | 39
40 | SPRING/SUMMER 2021
MATTHEWS™ | 41
42 | SPRING/SUMMER 2021
MATTHEWS™ | 43
44 | SPRING/SUMMER 2021
MATTHEWS™ | 45
46 | SPRING/SUMMER 2021
MATTHEWS™ | 47
48 | SPRING/SUMMER 2021
MATTHEWS™ | 49
50 | SPRING/SUMMER 2021
MATTHEWS™ | 51
52 | SPRING/SUMMER 2021
MATTHEWS™ | 53
54 | SPRING/SUMMER 2021
MATTHEWS™ | 55
56 | SPRING/SUMMER 2021
MATTHEWS™ | 57
58 | SPRING/SUMMER 2021
MATTHEWS™ | 59
60 | SPRING/SUMMER 2021
MATTHEWS™ | 63
64 | SPRING/SUMMER 2021
MATTHEWS™ | 65
66 | SPRING/SUMMER 2021
MATTHEWS™ | 67
68 | FALL/WINTER 2020
MATTHEWS™ | 69
70 | SPRING/SUMMER 2021
MATTHEWS™ | 71
72 | SPRING/SUMMER 2021
MATTHEWS™ | 73
74 | SPRING/SUMMER 2021
76 | SPRING/SUMMER 2021
MATTHEWS™ | 77
78 | FALL/WINTER 2020
FALL/WINTER 2020
NET LEASE TENANT REPORT
™
MATTHEWS™ | 79
80 | SPRING/SUMMER 2021
MATTHEWS™ | 81
82 | SPRING/SUMMER 2021
MATTHEWS™ | 83
RETAIL PAD SITES the shopping center must-have by devon dykstra
86 | SPRING/SUMMER 2021
G
iven the whirlwind of events in 2020, retailers are reconsidering their locations and space needs, indicating a change is on the horizon. Now that retailers understand their business model after re-examining shopping behavior through online habits, a new generation of shopping centers is anticipated to emerge. One highly sought-after asset class is multi-tenant net lease retail pad sites because it offers attractive financing options, drive-thru capabilities, and healthy foot traffic. These types of centers also often include essential retailers, which quickly grew in demand following a year that involved temporary and permanent store closures. Retail centers will become more balanced and diverse, with the addition of drugstores, restaurants, discount retailers, and even healthcare facilities. In this article, Matthews™ will discuss the nature of retail pad sites, the tenants they attract, and how they evolve the shopping center landscape.
MATTHEWS™ | 87
THE CURRENT STATE OF SHOPPING CENTERS Throughout 2020, investors were given the opportunity to monitor which retailers survived and thrived in light of COVID-19. Among those retailers include grocery stores, drugstores, quick-service restaurants with drive-thrus, convenience stores, home improvement stores, auto part and service retailers, and healthcare. These properties saw substantial demand as other non-essential net lease assets were forced to close for a period of time in 2020. Experts anticipate that these well-performing tenants will continue to achieve consistent investor interest throughout 2021.
retail centers with the highest demand: grocery-anchored centers jewel box retail pads drugstore-anchored centers with limited shop space
some variables could affect shopping center recovery, including the scale of the property, location, and operations.
88 | SPRING/SUMMER 2021
heightened demand for retail centers While retail-focused institutional buyers focus on offmarket multi-tenant centers, this has presented more on-market opportunities for private buyers. Pricing among stable assets has become competitive as availability is deficient, and investors have extensively hunted for essential use investment-grade retailers. The limited retail supply has compressed cap rates, especially among the more popular essential tenants, like quick-service restaurants and coffee-oriented businesses. 1031 Exchange buyers contributed to the cap rate compression as they searched for higher yield options while remaining cautious. Retail centers encompassing investment-grade and essential tenants offered a safe space for capital. At the same time, nonessential property owners have held onto their assets to ride out the storm, playing into the stabilized pricing. Retail pad assets often feature annual rent increases due to the nature of their triple net leases. For the most part, freestanding retail is highly desired for its location, prominent visibility, and foot traffic from anchor shops. National investment-grade tenants commonly chase these spaces, such as banks, convenience stores, and quick-service restaurants. Therefore, tenants that already had online order fulfillment processes in place either held value or are worth more than they were a year ago.
parcelization trends Multi-tenant retail owners and buyers are re-evaluating their investment strategies, including parcelization, a break-up sale strategy impacting the market. By dividing the shopping center into multiple parcels, sellers can list at better prices, more aggressive cap rates, and expand the buyer pool to new and unseasoned investors. In some cases, selling off parts of the center unlocks more value than if it were sold as one asset, and financing is no longer an issue once the property becomes a smaller price point. Additionally, selling off a parcel will help lower an investor’s basis, making this trend very attractive today. A shopping center in San Francisco finalized its fourth and final transaction in April, totaling $11.4 million, thanks to this parcelization strategy. The four sales entailed a 54,000 square foot anchored center, a 4,144 square foot retail pad with two tenants, a 6,755 square foot pad with five tenants, and a 26,520 square foot vacant retail building. The seller achieved approximately $2.5 million more than if they were to have sold the property altogether.
shopping centers optimize parking lots Another trend dominating multi-tenant pad sites is landlords selling a portion of land in front of a big-box, often unused space in the parking lots, to convert into an outparcel. This opens the opportunity to optimize sales, profits, and revenue by developing a property on a plot of land that was otherwise unused. Often, outparcels are standalone sites located near the main road that shares a parking lot with a shopping center or are redeveloped from a retail center’s parking lot. With their store frontage facing the main road, these multitenant pads benefit from vehicle traffic driving by or into the shopping center. By adding essential and national tenants to the tenant mix, landlords will increase their net operating income, thus increasing their property’s value. Additionally, landlords of distressed multi-tenant centers can pay down debt or focus on other strategies by selling their outparcels.
creative ways to make the most of versatile parking spaces can help retailers differentiate themselves and thrive during uncertain times. SOURCE: RETAIL TOUCHPOINTS
Demand for multi-tenant net lease pads can be attributed to the higher yield options for investors. Shopping center owners are presented the opportunity to monetize a valuable piece of land that draws in more customers and maximizes profits. By executing a ground lease with a tenant or developer, an owner can reap the monetary benefits without the risk of developing the site. MATTHEWS™ | 89
THE EVOLUTION OF SHOPPING CENTERS Although online shopping bolstered in 2020, it still hasn’t completely replaced brick-and-mortar retail. Once consumers feel safe to resume their everyday routines, in-store shopping is predicted to normalize to pre-pandemic levels. The shopping center real estate environment is currently undergoing a critical transformation. Outparcels will likely become more common in multi-tenant real estate as they further enhance the open-air shopping format, optimize store visibility, and lure in shoppers.
drive-thru activity prioritizing accessibility, chipotle is making headlines with plans to implement drive-thrus, or “chipotlanes,” to 70 percent of its new locations. already, “chipotlanes” are proving successful through higher store sales.
the coveted drive-thru Restaurants with drive-thrus experienced a monumental year in 2020. It’s become an essential selling point for retail developers to incorporate drivethrus to maximize value in their new investments. For example, in Willis, Texas, an HEB-anchored center will be accompanied by outparcels, all equipped with drive-thrus. Developers are eyeing existing retail locations to add drive-thru capabilities due to substantial demand. Additionally, strong national tenants, such as Starbucks and Chipotle, are looking to move out of inline strip centers to end cap locations where they can have a drive-thru component. Tenants are downsizing and reducing their footprints to accommodate consumer needs post-COVID-19 and focusing on gaining drive-thru exposure. In summary, drive-thrus bring in more customers to the shopping centers they accompany, boosting sales and foot traffic to the neighboring stores.
Successful shopping center tenants, like grocery stores and dollar stores, are expanding to accommodate the demand while boosting sales of other non-essential items.
90 | SPRING/SUMMER 2021
in boardman, ohio, a 179,000 square foot shopping center was purchased for $16.5 million, with four accompanying outparcels occupied by quickservice tenants, such as chick-fil-a, mcdonald's, mcdonald's, and and panera panera bread. bread. tenants expanding or right-sizing According to PWC’s Emerging Trends in Real Estate, the vast majority of shoppers still purchase products and services in-store. Therefore, successful shopping center tenants, like grocery stores and dollar stores, are expanding to accommodate the demand while boosting sales of other non-essential items. Some non-essential retailers, like apparel stores, are finding that online sales are soaring compared to in-store sales and are reacting appropriately by right-sizing and increasing online ordering efficiency. Right-sizing is when a business reconsiders its real estate footprint and determines to reduce store size to optimize profit. In the case of the Container Store, with an average store size of 25,000 square feet, e-commerce sales grew 109.5 percent with the help of curbside pickup. Despite this, the storage and organization company will begin implementing smaller store formats in 2021 and possibly even smaller designs in 2022. Savvy investors will monitor the activity of nonessential tenants for potential future value, particularly those located in non-credit big-box properties with underlying solid real estate or below-market rents.
the doctor is in Multi-tenant center landlords have extended their reach beyond traditional retailers and look to businesses, such as healthcare-oriented tenants, to add to their retail centers. Similarly, healthcare tenants have changed their outlook on clients, targeting shopping centers with high foot traffic to expand their market share. The most common example of a healthcare tenant moving into an outparceled pad is urgent care facilities, which are looking to maximize visibility. Urgent care clinics are easier to access than hospitals because of their ground floor locations and same-day appointment scheduling options. Urgent care properties in shopping centers maximize accessibility as they are closer to neighborhoods and their patients’ homes.
Further, urgent care patients pay less for a visit than hospital patients, a study by Annals of Emergency Medicine revealed. The average cost for an urgent care visit is $168, compared to $2,259 to $2,199 for hospital emergency department visits. By prioritizing the customer and optimizing accessibility and affordability, an urgent care is an excellent option for outparcel tenants.
54%
of shoppers use the medical walk-in facilities available at retailers SOURCE: WSL MARKETING INC.
top retail sales by shopping category SOURCE: HOYA CAPITAL REAL ESTATE
retail category
yoy % change
mom % change
fy2020
FY2019
Total Retail & Food Services
7.4%
5.3%
0.6%
3.6%
Retail (Excluding Food)
10.8%
5.1%
3.5%
3.5%
Total Retail ex. Auto & Gas
7.6%
6.1%
2.4%
3.8%
Sporting Goods, Hobby, & Book
22.5%
8.0%
5.7%
-2.2%
Building Material & Garden
19.0%
4.6%
14.0%
0.6%
Food & Beverage Stores
11.8%
2.4%
11.5%
3.0%
Furniture and Home Furnishings
11.7%
12.0%
-5.4%
0.7%
Grocery Stores
11.4%
2.5%
11.2%
3.1%
Miscellaneous
7.3%
1.8%
-1.2%
3.9%
Health & Personal Care
6.2%
1.3%
1.7%
3.1%
General Merchandise
5.9%
5.5%
2.7%
1.3%
Department Stores
-3.0%
23.5%
-18.1%
-5.5%
Electronics & Appliance
-3.5%
14.7%
-14.6%
-3.5%
Clothing & Clothing Accessories
-11.1%
5.0%
-26.4%
-0.6%
Food Services & Drinking Places
-16.6%
6.9%
-19.5%
4.4%
Nonstore/E-Commerce
28.7%
11.0%
22.1%
13.1%
Motor Vehicle & Parts
13.0%
3.1%
1.1%
4.0%
Gasoline Stations
-7.8%
4.0%
-15.9%
0.5%
Brick & Mortar Categories
Online & Auto Categories
MATTHEWS™ | 91
off-price leaders weekly visits - 2019 vs 2021 SOURCE: PLACER.AI
April 2021
1.0%
5.8%
5.1%
1.9%
17.2%
19.4% 0.1%
0.3%
3.1%
10%
8.3%
30% 20%
March 2021
8.4%
February 2021
January 2021
-8.6%
-2.2%
-6.0%
-20%
-11.0%
-10%
-5.7%
0
-30%
T.J. Maxx
Marshalls
discount retailers find their place While off-price retailers rely solely on foot traffic due to the lack of online presence, the sector still witnessed a healthy recovery in both foot traffic and reported revenue. Shoppers have a new mentality that is mission-driven and necessity-focused, pushing discounters as top contenders among shopping options. Dick’s Sporting Goods is following the lead with a new off-price concept, Going, Going, Gone!, which will offer deep discounts on footwear and apparel brands sold at the store. Placer.ai found consumers have prioritized a store’s proximity to home, and suburban shopping centers with large discounters have profited from their familiarity with routine shoppers. Discount chains positioned in outparcel pad sites can bolster the overall consumer base for a shopping center.
no longer the 'outliers' of shopping centers, these now coveted outparcel spaces are particularly popular in california due to the supply-demand imbalance, high entry barriers, and lack of available land. SOURCE: CALIFORNIA CENTERS MAGAZINE
92 | SPRING/SUMMER 2021
Burlington
Ross
CALIFORNIA OWNERS LOOK OUT OF STATE FOR OPPORTUNITIES Although California offers an abundance of welllocated and highly sought-after retail, available outparcel and multi-tenant pads are scarce. The lack of developable land, paired with the exceptional demand for freestanding retail, has enabled landlords to hike up sale prices and rental rates in the last few years. Further, the strict zoning laws in California have made it difficult to create optimal outparcels equipped with a drive-thru. San Luis Obispo, Long Beach, Santa Monica, Burbank, Baldwin Park, Corte Madera, and Walnut Creek all have varying restrictions on drivethrus, some of which involve a new construction ban ranging from six months to 40 years. These reasons, and more, are why California investors are fleeing the state to search for better deals. Specifically targeting states with no income tax, California buyers have found higher yields outside of California. In cities like car-dependent Houston, Texas, the low tax environment and relatively affordable real estate have drawn investors from across the nation. Additionally, the city boasts a population of 2.3 million in the span of 600 square miles.
Multi-tenant pad sites have been a coveted retail asset for some time now, but their smaller footprint, drive-thru optimization, and underlying fundamentals have pushed them to the spotlight. With retail sales expected to grow 6.5 to 8.2 percent this year and reaching $4.3 trillion, according to The National Retail Federation, there is no better time to invest in retail. Experts anticipate the upcoming years to play out as a transitional period for retail. The combination of adaptation and increased retail spending alludes to a favorable outlook for multi-tenant net lease pads. For more information, please speak with a Matthews™ specialized agent today.
devon dykstra devon.dykstra@matthews.com (949) 662-2266 MATTHEWS™ | 93
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Telehealth Trends & the Influence on Real Estate Decisions
Technology has played a vital role in revolutionizing the healthcare industry. As in-person visits and elective procedures were put on hold, video conferencing and drive-up appointments were introduced. The widespread adoption of telehealth has allowed practitioners to expand their clientele to more rural communities often unreached. However, that’s not to say that telehealth will substitute for in-person appointments, as procedures and treatments beyond pharmaceuticals require a patient’s physical presence. By expanding healthcare to underserved rural communities, telehealth has driven the demand for increased healthcare services.
THE TELEHEALTH MARKET WAS WORTH $61.4 BILLION IN 2019 AND IS PROJECTED TO REACH
$559.52 BILLION BY 2027. S O UR C E : F O RT UN E BUS I N E S S I N S I G HTS
Moreover, the newly found point-of-entry to millions of Americans increases patient commitment and retention, thus in-person visits. Before the pandemic, only 11 percent of patients used telemedicine. Since the arrival of COVID-19, that figure has jumped to 46 percent.
MICHAEL MORENO
michael.moreno@matthews.com (949) 432-4511
102 | SPRING/SUMMER 2021
Healthcare has never been more accessible in the United States, according to the New York Times. The demand for conveniently accessible medical office buildings throughout the United States will inherently increase. The ongoing debate surrounding telemedicine regards the effect it will have on healthcare real estate’s footprint. Some experts argue that telehealth will result in increased office acquisitions with less square footage. Conversely, others believe it could drive square footage because telehealth appointments lead to in-person visits. Yet, as more providers incorporate telehealth into their practices, exam rooms could be retrofitted for telehealth purposes, keeping square footage the same. With the telehealth sector projected to grow ten to 15 percent annually, we will evidently see the role telehealth plays in the industry. The medical office market is going through significant strides as investors continue to target the niche sector, and technology is increasingly utilized from setting the appointment to performing the procedure. Capitalizing on the movement of services to outpatient settings, health systems will become more involved in overall community healthcare services. By repurposing an office building, healthcare providers use less capital, become operational quicker than with new construction, and can potentially reinvigorate a neighborhood by bringing care closer to home. For more information, please contact a Matthews™ specialized agent today.
RAHUL CHHAJED
rahul.chhajed@matthews.com (949) 432-4513
RYAN BURKE
ryan.burke@matthews.com (949) 226-8385
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130 | FALL/WINTER 2020
Retail Center Review
The Assets That Remained Liquid By Tripp Brown Shopping centers experienced mixed results from the challenges presented throughout 2020. Depending on their anchor and location, shopping centers either struggled or flourished. Quality, well-positioned assets with essential retailers witnessed heightened demand, while shopping centers with predominantly discretionary stores saw depleted revenue and decreased demand from investors and consumers. In this article, Matthews™ will discuss the performance metrics of various shopping center subtypes. MATTHEWS™ | 131
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The Financing Environment Retail, among other sectors, was one of the hardesthit segments when the pandemic initially hit in March 2020. The mandated closures, market uncertainty, and evolving shopping habits have caused distress on nearly every shopping center subtype. Over 1,000 U.S. shopping center properties are attempting to pay back debt while simultaneously combatting the threat of economic challenges and e-commerce, according to CoStar. Commercial banks hold nearly 38 percent of commercial mortgages, totaling $1.5 trillion. Shopping centers suffered from a lack of available financing before the pandemic as well. Already weakening consumer foot traffic in many retail centers
resulted in a 5.36 percent special servicing rate on CMBS loans in November of 2019. The constraints brought on by COVID-19 further depleted retail store sales, causing lenders to restrict financing and increase recourse requirements on smaller shopping centers. For retail assets historically financed with CMBS loans such as malls and power centers with non-essential retailers, the debt market has been nearly non-existent over the past year. As a result, transaction velocity in 2020 was heavily impacted across the sector, with many sellers being forced to hold their larger centers due to the lack of financing available to the buyer pool.
D I STR E S S E D R ETAI L C M B S LOAN SQUAR E FOOTAG E
SOU RC E: COS TA R
Super Regional Mall
72,354,670
Regional Mall
Community Center
18,461,324
18,228,897
Outlet Center
3,267,608
Power Center
13,506,068
Neighborhood Center
9,967,444
Lifestyle Center
2,415,771
Strip Center
1,058,118
Theme/Festival Center
1,021,238
Less than 6.5 percent of total neighborhood and strip center square footage is financed by CMBS debt. Due to their diversified tenant mixes, including quick-service restaurants, grocery stores, drugstores, or personal services, these shopping centers have been able to pay down debt more consistently than their larger counterparts over the past year. A variety of financial institutions continued to lend on neighborhood and strip centers throughout 2020 thanks to their often essential and service-oriented tenant mixes, contributing to a lessened impact on transaction velocity. Smaller footprints, lesser price points, and often lessened risk of significant tenant rollover also contributed to the continued financing of neighborhood and strip centers during the pandemic. 136 | SPRING/SUMMER 2021
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W W W. M AT T H E W S . C O M