Monthly Archives: May 2013
May 2013 Market and Economic Conditions
By Adam B. Landau Permit Capital Advisors, LLC
An effort to make strategic allocation decisions is rooted in a process of evaluating signals provided by markets and the economy that are often in conflict. We have had frequent conversations with investors over the last five years about the importance of separating ‘signal’ from ‘noise’, and are reminded of it again today, as we think about investing in a world governed by bodies that seem to be determined to make sure that conflicting signals remain in place. In its simplest form, the disconnect in today’s world lies between inflationary and deflationary actions and outcomes.
Central banks around the world have passed the baton to one another in an effort to collectively inflate global assets, and ultimately the global economy, by ensuring that the financial system stays awash with more liquidity than it can easily digest. While the liquidity has indeed propelled asset prices higher, particularly those with a growth or income profile that is too hard for an investor backed by way-too-easy-and-cheap leverage to eschew, it has failed to produce a traditional recovery growth profile while creating a credit market that is seemingly as easy as it has ever been. On the deflationary side, commodity prices have wilted and longer bonds have rallied, as the yield on 10-year Treasuries has fallen from 2.06% to 1.74% since mid-March. Not only bonds of corporations with strong balance sheets and cash stockpiles, but those of indebted governments as well, including Slovenia which recently had its credit rating cut below investment grade, yet received $16 billion (equal to nearly one-third of its gross domestic product) in bids for bonds yielding under 5% for five years. It is an environment, as reflected by spreads and a lack of volatility, that feels eerily similar to that of 2007 – leading those that worry about history repeating itself to lament the market’s lack of institutional memory.
The latest participant in the global central bank race to the currency bottom is the Bank of Japan, but as an institution it is making up for lost time. Since the beginning of 2013, monetary stimulus from the BOJ has amounted to 13.7% of GDP, compared to Fed stimulus over the same period of 3.2% of GDP. They have purchased 46.9% of government issuance, for a figure that equates to 134.4% of the country’s deficit. In the U.S., the Fed has purchased 24.2% of Treasury issuance, or 39.5% of the level of our country’s deficit. Japanese investment has been a significant driver of portfolio inflows around the world for quite some time. The recent bout of balance sheet expansion should take that to another level, and could very well be a dynamic that plays out for many years. The shift from tight to loose monetary policy is largely political in nature. Two rules to remember when investing in Japan, are: 1) never underestimate the willingness of the population to share pain, and 2) never underestimate the willingness of Japanese policy makers to apply the first rule. These two rules mean that Japan will act in the country’s overarching national interest and security at all times. In recent years, the primary national interest has centered on the fact that it is a rapidly ageing country with more than half of voters either retired or within five years of retirement. A currency debasement that stirred inflation would not have been popular. Mild deflation and a strong currency are good for retirees.
Recently, the dual threat perceived to emanate from China, on both political and monetary fronts, has caused a 180-degree shift with respect to a structurally weak yen policy. With China holding significant levels of JGBs (Japanese government bonds), and tensions stirring over the Senkaku (as they are known in China)/Diayou (as they are known in Japan) islands, a weak yen is indeed seen as a matter of national security. With a lot of debt and xenophobia, you don’t want to continue to run large current account deficits. This need to boost Japanese exports is why Prime Minister Abe has a 72% approval rating despite declaring a weak yen policy, a concept considered anathema to policy makers until now.
The relationship between Japan and China is based on trust and understanding – but Japan doesn’t trust China and China doesn’t understand Japan. Fallout from the policy will be felt for years to come. With policy rates kept down, yield hungry Japanese investors will turn anywhere and everywhere. Historically, Japanese investors love REITs, commercial real estate, emerging market bonds, high yield bonds and loans, and equities, with a particular fondness for the markets of India and Brazil. On the trade side, Germany and Korea will likely be hurt, as they have very tight export profiles to Japan.
The notion of an investment pivot from China to Japan is not meant to suggest that China’s impact on the world economy will be diminished going forward. In fact, the transition taking place within the Chinese economy is likely to be a huge driver of macroeconomic inputs such as energy and agriculture prices, as well as global trade balances. While the shift from an export driven profile to one of domestic consumption has garnered the majority of critical thought, the real sea change to monitor deals with the allocation of China’s most precious resource, water.
Many people are familiar with the fact that China is the world’s biggest importer of energy. Fewer are familiar with the fact that China has more shale gas resources than any other country, including the U.S. While China’s shale gas is deeper in the ground and harder to recover than ours, the primary reason that they have produced fewer natural gas reserves than the U.S. is their allocation of water as a natural resource. For generations, water in China has gone largely to the farming industry, as the Chinese have insisted on farming things that don’t need to be farmed. Items that can be imported at a spread much more narrow to domestic production when compared to the cost of energy importation. That allocation decision has left an inadequate supply of water for fracking, leaving the vast majority of natural gas sitting underground. With that policy change in the works, the impact of lower energy prices around the world could have dramatic implications on developed and developing economies.
It is this very emphasis on the technology of energy production that has led to what is being called an energy revolution in the U.S., and along with a nascent recovery in housing and the tangential benefits attached to housing as an industry, have kept the U.S. economy growing at a moderate pace. Headline GDP would be higher if not for a retrenchment in public sector spending. Private sector GDP excluding inventories has been running at a 3.5%-4.0% clip for the last several years.
Three years on, however, one of the surprising features of this recovery has been the low level of U.S. business investment despite companies having plenty of cash to spend. At 53% of corporate profits, capital expenditure is well below its long term (dating back to 1951) average of 88% as well as its short-term (dating back to 2002) average of 68%. Corporate earnings are rising but profit growth is all through cost cutting. The post-crisis level of business investment has been uneven. While spending on information technology has grown by an average of 8.8% per quarter, spending on physical structures has grown by only 0.8% per quarter. Economic uncertainty has been a huge impediment to capital spending. When economic policy uncertainty rises, companies become reluctant to make capital outlays which are long-term in nature. Some of this uncertainty has declined since the beginning of the year, as “fiscal cliff” concerns were largely allayed. Also, the perception of tail risk has come down, as evidenced by the reduction in money market spreads in both the U.S. and Eurozone.
This perceived reduction in macro risks, along with the continued cooperation of central bank actions, may continue to provide a tailwind to financial assets as we continue through 2013. In fact, the Fed is gambling on just such an occurrence. The gamble lies in the fact that 75% of global market capitalization sits in fixed income assets, which the Fed is systematically putting at risk and at a disadvantage with its zero interest rate policy. The Fed is counting on the gains generated in the 25% of the global market invested in equities to produce the 5% real rate of return that is likely required to offset fixed income losses. One manifestation of this Fed-induced capital market assumption has been a shift in how yield makes its way into investment portfolios. In 2007, 64.3% of the yield in a portfolio consisting of U.S. stocks and bonds came from the Barclays Aggregate Bond Index, versus 35.7% which came from the S&P 500. In 2012 that figure dipped to 51.6%, and in 2013 the estimated yield from bonds is 49.2%, while over half of the market yield comes from equities.
In the midst of this recalibration with respect to investor behavior, one sector that continues to strengthen is commercial real estate. Recently, the American Institute of Architects came out with a report detailing demand for its services. As a leading economic indicator of construction activity, the Architecture Billings Index reflects the approximate nine to twelve month lag time between architecture billings and construction spending. With multiple components surging, both the billings index for commercial real estate construction (which reported its highest figure in February since July 2007) and the new project inquiry index (highest figure since January 2007) have been on upward trajectories since early-2009, and are now back to pre-recession levels. As leading indicators of future construction activity, it appears that the commercial real estate market is poised to continue to improve going forward in 2013 and 2014.
About Adam Landau
Adam Landau is Chief Executive Officer and Chief Investment Officer of Permit Capital Advisors, LLC.
He has 15 years of experience evaluating investment managers, developing asset allocation strategies, and coordinating the process by which the two disciplines are merged.
Visit http://www.permitcapital.com to see how Adam and Permit Capital Advisors, LLC can grow your wealth.
WCRE SECURES NEW LEASE FOR BARATZ & ASSOCIATES, P.A.
AT 7 EVES DRIVE, MARLTON, NJ
May 8, 2013 – Voorhees, NJ – WCRE executive vice president Leor Hemo is proud to have successfully represented Baratz & Associates, P.A., in its leasing of approximately 12,000 square feet of office space at 7 Eves Drive in Marlton, New Jersey. The property is located off of Greentree Road and Route 73, providing easy access from Routes 73, 70, and 38, as well as I-295 and the New Jersey Turnpike.
A prominent regional accounting firm with Southern New Jersey roots, Baratz & Associates had very specific space and budget needs, and was working within short time constraints. The company presented WCRE with a specific set of space criteria and financial goals to fulfill.
The office buildings at 7-9-11 Eves Drive were recently acquired by Needleman Management, one of Southern New Jersey’s largest privately held commercial real estate operators. Needleman plans to invest significant capital to reposition these properties in order to attract professional and medical tenants.
“It’s very satisfying to match a client with the ideal opportunity,” said WCRE’s Hemo. “Baratz & Associates now has the right office space with advantageous terms, and we were able to successfully meet their budget and goals on time.”
WCRE is a full-service commercial real estate brokerage and advisory firm specializing in office, retail, medical, industrial and investment properties. We provide a complete range of real estate services to commercial property owners, companies, and investors seeking the highest quality of service, proven expertise, and a total commitment to client-focused relationships. Through our intensive focus on our clients’ business goals, our commitment to the community, and our highly personal approach to client service, WCRE is creating a new culture and a higher standard. We go well beyond helping with property transactions and serve as a strategic partner invested in your long term growth and success.
Learn more about WCRE online at www.wolfcre.com, on Twitter @WCRE1, and on Facebook at Wolf
Commercial Real Estate, LLC.
WCRE FACILITATES SALE OF LIBERTY PROPERTY TRUST’S
CAMPING WORLD BUILDING AT PURELAND COMPLEX
May 2, 2013 – Voorhees, NJ – WCRE is proud to have successfully represented 602 Heron Drive, LLC in its acquisition of 602 Heron Drive, Bridgeport, NJ. The new ownership group purchased this fully occupied, single tenant retail/warehouse facility from Liberty Property Trust (NYSE: LRY). Jason Wolf, founder and principal of WCRE, represented the buyer.
602 Heron Drive is a 26,450-square-foot retail and warehouse building located within the Pureland Complex in Bridgeport, Gloucester County, New Jersey. Located off of Exit 10 of I-295 with excellent highway visibility, Pureland is one of the largest industrial parks on the east coast, with more than eleven million square feet of distribution, manufacturing, and light industrial space on 3,000 acres.
Liberty Property Trust developed this site in 1996 as a build-to-suit special purpose facility for Camping World, America’s #1 source for RVs, camping accessories, and RV maintenance and repair. It was put on the market as a result of Liberty Property Trust’s ongoing portfolio realignment process. Camping World will remain in place as the sole tenant.
“Our client was seeking a longterm income producing property with a quality tenant. I am very happy that we helped them find an ideal fit in a growing part of our region,” said WCRE’s Wolf.
WCRE is a full-service commercial real estate brokerage and advisory firm specializing in office, retail, industrial and investment properties. We provide a complete range of real estate services to commercial property owners, companies, and investors seeking the highest quality of service, proven expertise, and a total commitment to client-focused relationships. Through our intensive focus on our clients’ business goals, our commitment to the community, and our highly personal approach to client service, WCRE is creating a new culture and a higher standard. We go well beyond helping with property transactions and serve as a strategic partner invested in your long term growth and success.
Learn more about WCRE online at www.wolfcre.com, on Twitter @WCRE1, and on Facebook at Wolf
Commercial Real Estate, LLC.
May 2013-Southern New Jersey Office & Retail Market Update First Quarter 2013
WCRE RESEARCH FINDS POSITIVE TRENDS AND SIGNALS OF CAUTIOUS BUT STEADY GROWTH
Every quarter WCRE surveys the Southern New Jersey office market and provides analysis of a variety of factors that affect its overall performance. Our market research comprises approximately 16 million square feet of Class A & B office and flex product in Burlington, Camden, and Gloucester Counties.
The first quarter of 2013 will be remembered by many because after a long climb back, the Dow Jones Industrial Average closed at an all-time high of 14,578. The rebound in the market certainly helped boost confidence, and has helped set the tone for a more bullish atmosphere in commercial real estate for 2013. The commercial real estate recovery, although slow, has been underway with steadily improving fundamentals, low interest rates, and aggressive monetary easing that has been paving the way towards a continued and sustainable recovery in the sector.
Demand for office space in the Southern New Jersey office market during the first quarter still seemed to be moving at a cautious pace, but new deal activity represented 43% of all transactions. While the overall vacancy rate for our region remains in the upper teens (18-19%), rental rates continue their slow upward climb back and have stabilized.
The first quarter saw many deals of significant size, with properties in prime locations out-performing the overall market vacancy rate. Q1 showed approximately 300,000 sf of new lease deals and renewals executed, a gain of nearly 8.5% compared to the first quarter of 2012. Many of the lease transactions during the first quarter were for government, healthcare, legal and financial/mortgage services. There are more than 200,000 sf of new deals and renewals awaiting signature in April alone, so we anticipate substantial gains in the next quarter.
Office employment growth has picked up, and the annual employment revisions are showing that job growth has been stronger but still well below the July 2007 peak. The US labor market has recovered about half of the 8.8 million jobs lost to the Great Recession. We are still seeing employers working to consolidate and reduce the amount of space needed per employee, especially in higher rent areas. We have also noted a move among businesses toward increased space efficiency, thanks to the impact of technology on workforce flexibility.
New Jersey’s jobless rate edged down by two-tenths to 9.3%, which is slowly improving from last year’s 35-yearhigh of 9.8%, but remains well above the national rate of 7.7%. Considering the pressures on the New Jersey economy at the end of last year, these figures appear to be better than expected.
There are still no signs of significant office construction. Until the Southern New Jersey region absorbs its surplus of vacant space, most new construction will be geared towards build-to-suits or specialty opportunities.
INVENTORY, TRANSACTIONS, AND RATES
- Overall vacancy in the office market of A & B product is still hovering in the 18-19% range, but the market has stabilized, and average rental rates continue to increase compared to 2011 and 2012 figures.
- Average rents for Class A & B product continue to show strong support in the range of $10-$14.00/sf NNN with an overall market average of $11.00/sf NNN for the deals completed during the first quarter.
- New lease deal activity for the first quarter is in the range of approximately 130,000 sf of new deals and/ or expansions to the market. This is approximately 8.5% above fi rst quarter 2012 figures. This positive trend indicated improving growth, but we are still in a weak labor market and more robust job growth is needed to lower the overall vacancy in our region.
In a more encouraging development, the investment market continues to show strength, with new money entering the market as investors continue to seek opportunity. Exceptionally low interest rates should remain low for some time, and delinquency rates on existing mortgage loans continue to decrease.
INVESTMENT NEWS FROM THE 1ST QUARTER:
- The debt available in the investment market is as good, or better, than it ever has been, with the CMBS market poised for a massive rebound in 2013.
- Rates for high quality commercial assets are in the low to mid 4% range.
- The investment sales sector is seeing intense competition to purchase quality properties.
- Interest rates remain at record lows, and several large office buildings and portfolios came under agreement during the first quarter.
- Opportunity should continue well into the future due to the extremely low borrowing rates that central banks have maintained as a result of the economic uncertainty. The 10-year Treasury yield sits at 1.87% as of March 31st, and continues its uptick from the end of the previous quarter, when it stood at 1.78%. KEY PLAYERS IN MARKET All of the new major owners and REITS are showing a significant increase in deal activity and occupancy – both renewals and new deals – and are all cautiously optimistic.
Liberty Property Trust controls approximately 1.3 million square feet of office and flex product in Southern New Jersey and their over overall portfolio is now approximately 85% occupied. The 8% drop in vacancy is attributed to +/-88,000 sf coming back to market at 8000 & 12000 Commerce Parkway in Mount Laurel.
Brandywine Realty Trust controls approximately 2.5 million square feet in Southern New Jersey and its overall occupancy is approximately 87%, unchanged from last quarter.
Mack-Cali’s overall portfolio is approximately 1.283 million square feet in Southern New Jersey and its overall occupancy of office and flex space is approximately 91.5%.
Whitesell’s overall office portfolio is approximately 1.5 million square feet in Southern New Jersey and its overall occupancy of office space is approximately 80%
KEY SECTORS SHOWING STRENGTH DURING Q1 2013
The healthcare, computer services, insurance, defense contracting, consulting, engineering, and finance sectors were very active in Southern New Jersey. The chart on the next page summarizes the key lease transactions completed during the first quarter.
SIGNS OF CONTINUED RECOVERY AND MODEST GROWTH IN AREA RETAIL
The first quarter of 2013 saw solid retail sales figures and signs of expansion in consumer spending, with jobs and housing data also gaining strength. Retailers reported a faster pace of sales in January than during the recent holiday period, and cited continued gains in February, making for moderate growth overall. Indeed, area retail sales recently posted the largest rise since September 2012. Stronger retail sales were evident throughout the region across a variety of malls and outlet centers serving the range from high-end to lower-end consumers. These positive indicators are great for the overall retail real estate sector in Southern New Jersey and the Philadelphia region.
The most encouraging sign is a shift toward more personal services and high-end restaurants opening in what used to be a market dominated by discount retailers and food chains. As we observed throughout much of 2012, the first quarter shows a low vacancy rate in many of the key shopping centers in the region, as properties in prime locations are outperforming the overall market vacancy rate.
Further down the spectrum, landlords of neighborhood and strip shopping centers in secondary markets are reporting minimal leasing activity and prolonged periods for deals to consummate, but still they are more optimistic than at this time last year.
Demand for well-located retail properties is still very high, so Triple Net leased properties are still being leased at high prices per square foot and low CAP rates. Properties with credit investment grade tenants such as CVS, Wawa, and larger banks such as PNC are trading for CAP rates as low as 4%-5% and properties with tenants with low investment grade are trading at 8%-9% CAP rates.
Major retail deals reported during the first quarter included Whole Foods Market opening at the Ellisburg Circle Shopping Center on Route 70 in Cherry Hill. The approximately 47,000 sf store is planned to open in the spring of 2014. Another major development is the continued revitalization of Camden, NJ. A new shopping center is planned along Admiral Wilson Boulevard to be anchored by a 75,000 sf Shop Rite, controlled by the Ravitz family. The developer is the Goldenberg Group, and expected completion is in 2015. This would be the first major grocer to open in Camden in 30 years.
The market is still experiencing a shortage of retail investment product, compared to demand from investors. Strong anchored properties and income producing investment properties are trading at historically high prices, with cap rates still decreasing.
INVENTORY AND RATES
- Overall retail vacancy in the market is still hovering in the 17-18% range, but the market has stabilized.
- Average rental rates have increased compared to 2012.
- Class A retail product rental rates continue to show strong support in the range of $30-$40.00/sf NNN.
- Class B product shows support in the range of $15- $23/sf NNN.
WCRE FACILITATES SALE OF 2 COLEMAN AVENUE,
7,100 SQUARE FOOT OFFICE BUILDING IN CHERRY HILL, NJ
April 30, 2013 – Voorhees, NJ – WCRE is proud to have successfully represented 3P Holdings, LLC in its acquisition of 2 Coleman Avenue, Cherry Hill, NJ. The buyer, represented by Scott Seligman, director of business development at WCRE, acquired this two story office building located in thriving Cherry Hill, from JBR Associates.
The fully leased 7,100sf office building is located in Cherry Hill, Camden County NJ, in close proximity to the retail hub of historic downtown Haddonfield. It is ideally situated within a short drive of Philadelphia, with easy access to Interstate 295, Route 561, and Kresson Road.
“We’re very happy for our clients at 3P Holdings, and excited about what their growth and success will mean to this community,” said WCRE’s Seligman.
3P Holdings is a related entity controlled by Para-Plus Translations, Inc. of nearby Barrington, NJ. For more than 30 years, Para-Plus Translations has been providing premier in-person, telephonic, and remote/video interpretation, voice-over, transcription, and translation services in more than 100 languages, as well as sign language and Braille.
“Scott was an integral part of making this transaction happen, and was always accommodating to our questions and concerns,” said Robert Santiago, III, chief operating officer of Para-Plus Translations, Inc. “His experience and relationships in the industry guided us through every phase of this transaction. As a consultant and strategic partner in this process, it allowed us to make the right decisions at the right time to ultimately make settlement.”
WCRE is a full-service commercial real estate brokerage and advisory firm specializing in office, retail, industrial and investment properties in Southern New Jersey and the Philadelphia region. We provide a complete range of real estate services to commercial property owners, companies, and investors seeking the highest quality of service, proven expertise, and a total commitment to client-focused relationships. Through our intensive focus on our clients’ business goals, our commitment to the community, and our highly personal approach to client service, WCRE is creating a new culture and a higher standard. We go well beyond helping with property transactions and serve as a strategic partner invested in your long term growth and success.