Yeah but what does a private Walgreen’s mean to *property* investors? 

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Word is out this week that Walgreen’s is exploring the possibility of going private. The now-public drugstore chain is working with investment bank Evercore Partners to gauge interest from large private equity firms in footing the roughly $55 billion bill. That would make it the largest leveraged buyout ever.

Walgreen’s has a history of valuing its business privacy — particularly with regards to its prescription sales numbers — and for being at odds with Wall Street scrutiny. The market has battered them this year, pushing stock down 28% in the past 12 months. This move is thought to be prompted by management’s vision to be more autonomous with their strategies and partnerships.

Last week in this newsletter we pondered some numbers around the “retail apocolypse,” and discovered that the Amazon Effect isn’t so much killing brick-n-mortar stores, it’s just reshaping the live retail offering. Walgreen’s is a prime example of this, and while they’ve taken an  Amazon hit, they’re re-aligning in a way that is taking their physical stores in a positive direction.

Walgreen’s has pilot projects and tests with companies like the grocer Kroger, Microsoft, and primary care providers like Humana’s Partners in Primary Care and VillageMD, a developer of primary care clinics. This makes them less reliant on “Amazonable” products like shampoo, while creating revenue from real-time, location-centric services.

And they’ve announced plans to close 200 stores in this streamlining effort, which can sound ominous to property owners leasing to the chain. But these stores are all clearly declining and unprofitable locations, and removing that dead weight actually makes their other locations more valuable.

The conclusion here is that this news makes the investment market for Walgreens properties hotter than usual — Walgreens stock has jumped 6% on the news.

Under our NAI roof here, our overall highest-producing broker over the last several years also happens to specifically be a Walgreen’s expert. Senior VP Mary Alam, working with Investment Advisor CJ Brill, generally covers our retail channels here at NAI NorCal. And within that work, several transactions for both buyers and sellers of Walgreen’s-leased properties have crossed their desks.

The team very recently closed a deal here in the SF Bay Area, as well as representing locations in California’s Central Valley, Sacramento and South Carolina. And they have multiple off-market Walgreen’s options right now. And if you’re looking nationwide, we’ve also got Managing Director Joby Tapia representing a Walgreen’s property in Atlanta, in contract with contingencies removed.

ALL of these properties are the kind of high-traffic, high-performing, market-leading locations that Walgreen’s invests more into while they trim elsewhere. So contact us today if you’re interested in moving on this news while the ink is still wet… 

 

A little perspective on the retail apocalypse

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Our friends at the listing and research platform CoStar have released another interesting report on the impending retail apocalypse.

The Amazon Effect, and the societal retreat into robotic Instagrat lifestyles, is turning 2019 into the heaviest year ever for retail store closures. However. If you read between the lines, you see that while more stores are closing, less square footage is involved.

More than 10,000 stores have announced a closure this year, almost twice last year, and 3,000 more than during the downturn in 2008. Yet while last year saw 155 million square feet close, this year that space is down roughly 30%.

So it appears the Sears, Kmarts, JCPenneys, and similar anchor tenants of yesteryear have gone through their New Economy purge, and now it’s time for the GNCs, Gymborees and Payless stores. E-commerce has its sights on 10,000 sqft and under this year.

But more importantly, these numbers do NOT show a death knell for retail. It’s really more of a cleansing and realigning. Deliverable retail goods — those that can’t be offered via a better user experience than direct-to-your-door convenience — are taking their mid-/small-/boutique stores down. But! There’s growth in the Un-Amazonable.

This includes personal services, restaurants, grocery/drug stores, fitness and sports, healthcare, and even movies and entertainment outlets. These retail establishments are all showing a healthy upward trend.

So. If you have a retail property — or you’re in the market to invest in one — but you’re uncertain about what tenants are promising and which might be at risk, then talk to us.

NAI Northern California Presents: Record-Setting Sale of Multifamily Building in San Pablo

Sale of 2394 Road 20 in the East Bay Area by the Ethan Berger Team sets record price per unit

SAN PABLO, CA –  July 16, 2019 –  NAI Northern California is pleased to announce the sale of 2394 Road 20 in San Pablo for $4.495 million, setting a new record for price per unit for San Pablo multifamily properties. The Ethan Berger Team originally represented the seller, a local multifamily private equity group based in the Bay Area, when they purchased the apartment building in June of 2017 as a value-add opportunity in need of significant renovation and improved management. After successfully renovating and rehabbing the property, the units were re-tenanted, yielding nearly a 110% increase in the gross rents. The seller then enlisted the Ethan Berger Team (Ethan Berger, Benjamin Mandel, and Garrett Blair) to determine a value and market the property. They quickly developed multiple competitive offers and identified a buyer, achieving a record-setting price per unit of $249,722 and a total return on investment for the seller of nearly 95%. “After we identified the opportunity, we leveraged our local-market expertise and knowledge to help our client throughout the process of buying the property, improving it, and completing the sale.” said Ethan Berger, Senior Vice President at NAI Northern California. “Our relationships and extensive marketing platform were key in maximizing our client’s ROI.”

2394 Road 20 consists of fifteen large 2 bedroom, 1 bathroom apartments and three 1 bedroom, 1 bathroom apartments in a core Bay Area location. A complete renovation of the property and all of the units was completed in 2018. Each unit features laminate-wood flooring throughout the living spaces; brand-new kitchen and bathroom cabinetry; and new countertops, fixtures, and stainless-steel appliance packages. The exterior of the property was also upgraded with new paint, outdoor design features, landscaping, sewer lateral replacement, and parking lot striping. The building has on-site coin-operated laundry and is located within 10 minutes of El Cerrito Del Norte and Richmond BART Stations and less than one mile from Contra Costa College.

 

About NAI Northern California

NAI Northern California is a full service commercial real estate firm serving the San Francisco Bay Area and beyond. Our team delivers technology-enabled commercial real estate services that create value for our clients, industry, and communities.

NAI Northern California is a partner of NAI Global, the largest commercial real estate brokerage network with more than 400 offices worldwide and over 7,000 professionals completing in excess of $20 billion in commercial real estate transactions globally.

Recently on the San Francisco Business Times Book of Lists, NAI Northern California hit the top 5 and 6 spots in San Francisco and the East Bay and top 15 Bay Area wide. NAI Northern California is part of the NAI Global network, recently recognized by Lipsey as the number 4 most recognizable commercial real estate brand.

San Jose and Oakland challenge SF in private equity real estate market

California’s largest cities for real estate investment, San Francisco and Los Angeles, are now being challenged by San Jose and Oakland. California holds almost 20% of the private equity real estate (PERE) in the country and 12% of global PERE assets under management, according to a study by accounting and advisory firm EisnerAmper and Preqin. PERE properties include office buildings (high-rise, urban, suburban and garden offices); industrial properties (warehouse, research and development, flexible office/industrial space); retail properties, shopping centers (neighborhood, community, and power centers); and multifamily apartments (garden and high-rise). Less common but still an option are senior or student housing, hotels, self-storage, medical offices, single-family housing to own or rent, undeveloped land, and manufacturing space (via Investopedia). 

So how do the Bay Area cities compare?

San Francisco’s strength is in its office market, with $3.2 billion PERE deals in 2018 (a $1 billion increase over 2017) and another $1 billion already invested this year as the Bay Area’s largest tech companies continue to expand. The overall PERE total for last year was $4 billion,down from $4.8 billion in 2017; according to an article in the San Francisco Business times, “the drop-off in the quantity of large mixed-use transactions compared with recent years is at the heart of the decrease.” San Francisco is also running out of space, which limits growth.

While San Francisco is still the largest market for office transactions in the Bay Area, San Jose is leading in growth. Their office transactions in 2017 and 2018 both reached $1 billion, with a record in 2018 at $1.2 billion. In Q1 of 2019 alone, these transactions reached $500 million, putting San Jose on track to quadruple its PERE deals this year. The overall PERE total for 2018 was another record of $2.7 billion, almost 60% more than 2017 and a sharp contrast to San Francisco. 

Oakland may be emerging as a competitor, with more reasonable housing options for tenants; the tech company Square announced at the end of last year their intent to move 2,000 employees into an Oakland office. Even as a smaller city, it is on track to reach a total of $1 billion in PERE deals this year, with $560 million in Q1 2019 already; $493 million of that was just two office space deals by Starwood Capital Group. The city also has more Opportunity Zones than either of the other two cities.

With San Francisco as the “benchmark,” San Jose as the “growth leader,” and Oakland as the “up and comer” (according to the SF Business Times), all three cities are going strong.

Source: SF Business Times

 

The San Francisco office pipeline is overflowing

The SF office pipeline is overflowing. The city only has enough cap space to approve about 2.1 million square feet of office space, but over 8.1 million square feet are currently proposed. So what happens to the developers who want to add that extra 6 million?

The Planning Commission can only approve 950,000 square feet of office development per year, with any unused approvals rolling over into the next year. When there’s not enough cap space to go around, the commissioners get to develop their own policies to decide which projects will go forward and which will have to wait until next year. One such policy approves projects in phases, so a given project might be able to start work on half of its square footage this year and resubmit the second half for approval next year; the idea is that this helps projects get started moving forward more quickly. However, it also means that they take longer to complete. From The San Francisco Business Times: “Doing so means ‘uncertainty, and it means a longer approval process,’ said Ryan Patterson, a partner at Zacks, Freedman & Patterson. ‘Time is money. So longer approval processes mean more expense. And that means even higher office rents.’”

Some developers have been able to carve out exemptions by getting voters to approve them; the Shipyard project in Hunter’s Point got its 5 million square feet of office space approved this way. The current system doesn’t seem likely to go away, though, leaving commissioners with a lot of power and developers with a lot of waiting.

Source: San Francisco Business Times

How to take advantage of “Opportunity Zones”

The Tax Cuts and Jobs Act of 2017 created new rules for “opportunity zones,” underdeveloped neighborhoods, sheltering your investments from federal taxes with minimal limits and employment requirements. You only have a few more months to maximize the benefits of this program: so how does it work?

When you sell a property, you can immediately reinvest that gain, tax-deferred, into an Opportunity Zone by depositing it into a qualified Opportunity Zone fund (either one you create or a traditional one). Then you have two choices; buy a property in one of the zones, or invest in a business in the zone. We’ll focus on the property option.

You have 31 months to purchase your new property, whether it’s multifamily, retail, industrial, or office space. Eventually, you need to invest the same amount of money as the property’s structures (not land!) currently are worth; if the current building is worth $100,000, you need to spend $100,000 remodeling, rebuilding, or otherwise upgrading the building. This means if you buy a property with a structure worth very little, you don’t have to do much to get the tax benefits.

Speaking of benefits, not only is the tax on your original gains deferred until 2026, but if you hold it for seven years, 15 percent of that gain will completely avoid federal capital gains taxes. (You only get 10 percent if you hold it for five years.) And if you hold it for ten years and your new investment appreciates? None of that appreciation is taxable under federal capital gains taxes. This is an opportunity indeed!

There are 102 opportunity zones designated around the Bay Area, including in Oakland, Concord, San Rafael, Santa Rosa, and even San Francisco; visit the SF Business Times’ site for maps and stats about the zones, or contact one of our advisors to find a property that matches your investment goals.

Sources: BizJournals.com, Tax Policy Center

Read our June 25, 2019 newsletter

Oakland A’s meet opposition over plans for new waterfront ballpark

Plans for a new Oakland A’s ballpark at Howard Terminal at the Port of Oakland have run into opposition that could throw up roadblocks for the project.

Last week, a coalition that includes Save The Bay sent a letter to the state legislature listing concerns from environmental, business and labor organizations about the stadium project.

In the letter, Save The Bay Executive Director David Lewis said East Bay lawmakers are considering introducing a bill that could fast-track the project through regulatory exemptions. That would lessen the project’s accountability to environmental laws designed to protect public health, public lands and vulnerable wildlife.

The coalition said it is opposed to any measures that would reduce San Francisco Bay Conservation and Development Commission oversight for the project, remove State Lands Commission-enacted public trust protections, undercut hazardous materials restrictions or seek a way around California Environmental Quality Act obligations for the project.

The A’s said they had no plans to ask state lawmakers to fast-track the process, the San Francisco Chronicle reports.

Save The Bay is not the only one arguing against the plans for the stadium.

The bar pilots association said the lights from the stadium will be blinding for those navigating container ships to the port, and those ships could hit kayakers going after stray balls, the San Francisco Chronicle reports.

The Pacific Merchant Shipping Association, which represents some of the port’s tenants, said the hotel and housing included in the plan would increase traffic and compete with trucks around the port.

Oakland has suffered the loss of sports teams, including the Golden State Warriors, who are slated to be in their new Chase Center in San Francisco for the 2019-2020 season, and the Raiders, who are moving to Las Vegas and still haven’t settled on where they will play next season before that move.

 

Read more at Bisnow Oakland

 

Seeing Pros and Cons in “Digitization” of Real Estate

A future-focused Urban Leaders Summit discussion in Frankfurt in May on embracing new technology raised just as many questions as it answered.

Many German business leaders have been fretting about what they call Industry 4.0—the sweeping changes created by machine learning, automation, the “internet of things,” and big data—innovations they categorize under the umbrella of “digitization.” The waves of change triggered by this digital shift are going to be felt for generations to come, as more and more jobs are capable of being done by machines. Will we need humans at all? Will we create a superintelligence that finds us an unnecessary burden?

But going back to the present, Sascha Friesike, professor of digital innovation at VU Universität Amsterdam, wondered why urbanization continues to grow even as we increasingly decentralize work. If jobs can be done from anywhere, why do we still largely choose to move to cities?

Klaus Dederichs of Drees & Sommer was wary about the rush to incorporate the internet of things into properties. Tests have shown that the current generation of smart devices, which usually operate over wi-fi, is easy to hack. “They are compromising buildings’ cybersecurity,” he said. “What if terrorists attack smart buildings rather than drive into crowds?”

But Dederichs did also note some potential for buildings to get smarter, optimizing energy use being one of them. Building information modeling (BIM) is another promising field in the world of smart buildings. This digitizing of the planning, construction, and maintenance of buildings increases efficiency and extends the life of a project. Thus far, BIM has not seen huge adoption rates in Germany; the industry is hesitant largely because of the financial investments and the additional training needed for workers.

Blockchain came up in practically every discussion, as did artificial intelligence. It is difficult to find the middle ground between viral anxiety and tech evangelism, said Thomas Metzinger of the Johannes Gutenberg-Universität Mainz. “What do we do when a smart city crashes? And it will crash. We need graceful degradation,” referring a web design term that refers to designing a project to continue to function even if some features fail.

“We aren’t going to build houses that aren’t future-proof anymore,” said Martin Rodeck of EDGE Technologies, owned by OVG Real Estate. You cannot risk a new building being outdated within five years. And you should not jump on a trend like blockchain or virtual reality just because everyone else is doing it—you need to focus on how to solve the problem at hand.

Read more on Urban Land Institute

 

Property Taxes Surge on Higher Values

Rising property taxes can be a problem for both tenants and landlords.

Corporations that have been focused on the potential windfall that tax reform will bring are getting a reality check when they look at their property tax bills. Commercial and multifamily properties across the country are seeing a spike in property taxes as assessors continue to reset values to higher levels.

It has taken property tax appraisals time to catch up from the bounce back in values that has occurred after the recession. Some jurisdictions assess commercial property values every year, while others reassess values on a two or three-year cycle. In some cases, such as with the Carolinas, assessments occur every seven years, notes Dorothy Radicevich, a principal in the state and local tax practice and national property tax leader with accounting firm BDO. Most markets are now up to speed on property values, which have now exceeded pre-recession levels in many areas of the country.

“There have been major re-evaluations in commercial properties in all of metro Atlanta for the past two years and especially this year,” says John Hunsucker, owner of Property Tax Consulting LLC in Atlanta. Some of the lower valued properties don’t get as much attention. But this year most of the counties in metro Atlanta reassessed values on higher-end properties that resulted in tremendous increases, he says.

Although some states and jurisdictions do have a cap on how much taxes can be raised annually, such as 2.0 percent to 3.0 percent, Georgia has no such cap. Some taxing authorities in metro Atlanta have gotten very aggressive with tax assessments that have jumped by more than 300 percent, notes Hunsucker. In Fulton County, for example, some of the 2018 assessed values on high-end apartments are higher than what properties could trade for in the current market, he says.

 

 

Read more on National Real Estate Investor

 

 

Why clothing stores are still opening in San Francisco

A majority of shuttered mall stores over the past few years have been clothing shops, but new Bay Area leases show a sector not in free fall quite yet.

Hip women’s clothier ModCloth, streetwear brand Supreme, athleisure label outdoor Voice and luxury basics purveyor Everlane are among a new class of specialized labels defying recent trends.

Shifting consumer demands, years of oversupply and the rise of ecommerce combined to trigger more than 7,050 tore closings last year, according to Coresight Research. Already, the New York-based retail analyst has tracked nearly 3,900 store closings compared to about 1,800 openings this year.

Yet, while most clothing brands are racing to weed out underperforming stores, others are ramping up.

 

Read more on San Francisco Business Times