Changing Face of the Office Forces Building Owners to Offer Big Incentives
Landlords are facing falling rents, technical innovations and heightened competition, forcing unprecedented incentives to keep tenants.
Bloomberg reports that effective rents, the amount paid after concessions, slid 7 percent in the fourth quarter from the previous three months to an average of $57.18 a square foot, according to brokerage Savills Studley. Leasing has slumped and tenants are putting more excess space on the market for subletting — often a sign of weakness to come.
Ken Riggs, President of Situs RERC, says, “Millennials are now the largest generation in the workforce and the office sector is adapting to fit the changing needs of this demographic. Millennials want a space where they can collaborate — with each other and with technology. This is best achieved by buildings that can create a 360-degree workspace for all employees.”
Tenant-improvement allowances — agreements in a lease to cover the cost of converting raw space into finished offices — soared 12 percent last year to almost $76 a square foot, according to Savills Studley. While owners and tenants usually agree to share the expense, the portion paid by landlords reached a record high in the fourth quarter.
“Office rents are falling, in part because a greater supply of space is coming online or space is being vacated with movements within markets, but also because demand has fallen for Class B and Class C spaces,” says Situs’ Riggs. “Class A spaces in a good location and with the latest technology and design features will continue to take from the lesser buildings. The office market has been volatile with ups and downs for as long as I can remember.”
Peak Millennial? Cities and Landlords Can’t Assume Continued Boost From the Young
Over the past decade, many American cities have been transformed by young professionals of the millennial generation, with downtowns turning into bustling neighborhoods full of new apartments and pricey coffee bars.
But soon, cities may start running out of millennials.
A number of demographers, along with economists and real estate consultants, are starting to contemplate what urban cores will look like now that the generation — America’s largest — is cresting.
Millennials are generally considered to be those born between the early 1980s and late 1990s or early 2000s, and many in this generation are aging from their 20s into the more traditionally suburban child-raising years. There are already some signs that the inflow of young professionals into cities has reached its peak, and that the outflow of mid-30s couples to the suburbs has resumed after stalling during the Great Recession.
Dowell Myers, a professor of demography and urban planning at the University of Southern California, recently published a paper that noted American cities reached “peak millennial” in 2015. Over the next few years, he predicts, the growth in demand for urban living is likely to stall.
The flow of young professionals into Philadelphia has flattened, according to JLL Research, while apartment rents have started to soften in a number of big cities because of a glut of new construction geared toward urban newcomers who haven’t arrived. Apartment rents in San Francisco, Washington, Denver, Miami and New York are moderating or even declining from a year ago, according to Zillow.
“Certainly the softening of rents is one sign that they are not coming in at the pace that people thought they would,” said Diane Swonk, an independent economist in Chicago.
read more: New York Times
Mall Closures Ripple Through Small Town America
The Fort Steuben Mall in this former steel town on the edge of the Ohio River is battling a double whammy of store closures that have thrust it into a fight for survival.
On one side of the mall is an empty space that housed a Sears department store and automotive center until the struggling retailer closed the location last June.
On the opposite side sits a Macy’s set to close in early spring, the retail chain said early this month, as part of 100 closures announced last summer.
Together, the two anchor locations make up 37% of the property’s leasable space.
Fort Steuben Mall is being swept up in a wave of store closings that is buffeting landlords across the U.S. Specialty retailers such as the Limited and department stores such as Sears and Macy’s in recent months have announced plans to close hundreds of stores nationwide and slash jobs as online shopping takes a growing share of revenue.
Malls in smaller U.S. cities are often linchpins of local economies and their struggles can have a ripple effect, from jobs and tax revenues to the fortunes of logistics and transportation companies that provide trucking and inventory support for stores. Creditors who invest in mortgage securities tied to troubled malls face the risk of default.
Now the 43-year-old Fort Steuben Mall faces a spiral in which fewer shoppers could lead to more store closures, which could lead to still fewer shoppers, and so on, analysts said.
“In weaker malls sometimes you see an anchor blow out, and then another anchor blow out,” said Steve Kuritz, managing director at Kroll Bond Rating Agency, who studies distress in commercial mortgage-backed securities. “It’s a binary situation where strong malls continue to do well and then there are malls that are duds.”
An appraisal of Fort Steuben Mall last March, before the Sears closure, by property consultancy Cushman & Wakefield noted that the mall’s in-line occupancy rate, or that of non-anchor stores, declined to 54% from 68% over the past four years.
read more: Wall Street Journal
Supermarkets Go Digital
Grocery giant Kroger Co. is experimenting with a new generation of digitally enabled shelves at 14 stores near its headquarters in Cincinnati, as the company faces rising competition from technologically adept rivals such as Amazon.com Inc. and Wal-Mart Stores Inc.
Kroger built its own system of sensors and analytics that identify and cater to customers who have the store’s app on their mobile phone. The system can offer users special pricing on products or highlight items on their mobile shopping list, flashing information on a four-inch color display on a nearby shelf.
Using sensors and wireless devices to interact with shoppers is a next wave of automation in the supermarket, Kroger CIO Chris Hjelm told CIO Journal’s Kim S. Nash. “We want to bring technology to life in the store … We know what’s in the aisle and what the mobile shopper has told us and fuse all that data.”
The borders between physical and digital stores are breaking down, as Amazon develops its Fresh delivery service as well as brick-and-mortar sites including a cashier-less convenience store called Go. Wal-Mart is pushing deeper into the digital realm with efforts such as its Jet.com unit. Kroger must compete with both, offering a digital “Scan, Bag, Go” service as well as its new digital shelf concept. It is part of a broader effort in which retailers are turning to Silicon Valley, and to AI-driven personalized service, in hopes of boosting growth. Digital commerce is no longer an alternative sales channel. It’s the business itself.
read more: Wall Street Journal
FinTech: Decaf with your Deposit? Bank Branches Transform into Cafes
If you’re like many Americans, you may be making fewer trips to the bank and instead taking care of check deposits with a mobile app or tracking account balances with a few mouse clicks.
Digital banking is undeniably gaining ground over the old brick-and-mortar process. But about 84% of banking customers still visit branches at least occasionally, according to a March 2016 Federal Reserve report. For example, you may want to talk to a rep in person to ask about retirement planning, sign mortgage papers or connect with someone about a financial decision. Today’s bank branch, though, might look more like a coffee shop or a modern boutique than a traditional marble affair.
“We host events in our stores like yoga classes and movie nights for kids,”
Eve Callahan, executive vice president of corporate communications, Umpqua Bank
Cafes that sell pastries, stores with yoga rooms inside, postage-stamp-sized branches: These are some of the innovations that may become common in the bank branch of the future.
Capital One has begun using cafe-style branches to promote its brand as an internet bank and keep in touch with customers. It has 10 cafes in Boston, Chicago, Los Angeles and other cities.
The cafes have no teller windows or marble columns. Visitors can use free Wi-Fi or buy a cup of Peet’s coffee and pastries from local bakeries. They can work on their devices, lounge around or recharge their phones.
Staffers called “coaches” and “ambassadors,” rather than tellers and bankers, answer questions and demonstrate online banking or banking apps on a tablet — but they promise not to initiate any financial conversations unless the customer asks first.
“No one is going to nag you about setting up an account,” says Courtney Rhodes, corporate communications manager for Virginia-based Capital One. “People can work there all day if they want. And those with Capital One accounts get discounts on coffee.”
Capital One will open two cafes in Washington state in 2017 and has plans for more in Denver; Richmond, Virginia; and South Florida.
read more: MarketWatch
May Day: Parliament Must Vote on Brexit
Britain’s Supreme Court on Tuesday ruled Prime Minister Theresa May can’t start the Brexit process without approval from Parliament, a decision that could potentially complicate her path toward a clear break from the European Union.
The government said the ruling wouldn’t affect Mrs. May’s plans to trigger talks to leave the EU by the end of March and the opposition Labour Party said after the judgment it wouldn’t seek to stop Brexit from happening.
But Labour said it would try to amend any bill introduced by Mrs. May to kick off the Brexit process, possibly influencing how the U.K.’s new relationship with the EU will look.
While a majority of lawmakers voted to stay in the EU, many have said they won’t seek to block Article 50, which formally starts Britain’s exit from the EU, given the popular vote, in which 52% voted to leave.
“The British people voted to leave the EU, and the government will deliver on their verdict—triggering Article 50, as planned, by the end of March,” a U.K. government spokesman said. “Today’s ruling does nothing to change that.”
Eight justices voted against the government and three voted in favor of it, in a decision that was widely expected.
Lord David Neuberger said any change in the law to put Brexit into effect must be made by an act of Parliament. “To proceed otherwise would be a breach of settled constitutional principles stretching back many centuries,” he said.
He said the Supreme Court justices were ruling on the process of legally bringing the result into effect, and that the ruling had nothing to do with whether the U.K. should exit from the EU or the timetable.
The case has been one of the most politically charged in decades. After the High Court ruled against the government in November, pro-Brexit activists called the decision an attempt to overturn the will of Britons who chose to break away from the bloc in a June referendum. The Daily Mail newspaper said the three High Court judges who ruled on the case were “enemies of the people.”
read more: Wall St Journal
Trump’s DC Hotel Lost $1.1M in First Two Months
The federal landlord of Donald Trump’s Washington, DC, hotel says the luxury digs lost $1.1 million in its first two months, it was reported Monday.
House Democrats, who want the president to give up the lease on the Trump International Hotel, said they obtained figures from the General Services Administration showing it lost $334,000 in September and $825,000 in October, Politico reported.
Trump signed a 60-year lease in 2013, making the US government agency his landlord. The lease spells out that no “elected official” of the government “shall be admitted to any share or part of this lease.”
Trump has said he can’t violate the lease terms because it was signed before he was elected in November. He has also said he would turn over any profits to the Treasury Department.
read more: NY Post
Still to Come
Tomorrow
New Home Sales 10:00 AM ET
Friday
GDP 8:30 AM ET
Consumer Sentiment 10:00 AM ET
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