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The intense vying for urgent care centers, surgery centers and other outpatient medical facilities is driving down cap rates in the sector.

When Physicians Realty Trust announced a purchase of 18 medical office facilities located in eight states for about $735 million last month, the Milwaukee-based REIT didn’t just sweep up prime properties. It won a round in the business of investing in medical office buildings (MOBs), which has become increasingly competitive.

The pending purchase includes the Baylor Cancer Center in Dallas, Texas. In a statement, executives with Physicians Realty described it as an on-campus medical office building consisting of about 458,396 net leasable sq. ft. At a purchase price of $290 million and after closing, the unlevered cash yield is expected to be 4.7 percent.

The intense vying for urgent care centers, surgery centers and other outpatient medical facilities is also driving down cap rates in the sector. Cap rates on MOBs tightened to 6.5 percent in the fourth quarter of 2016, after holding steady at 6.7 percent for the three previous quarters, according to the latest information from Revista, an Arnold, Md.-based property research firm that examines all out-patient medical properties. In its cap rate report, Revista examines a relatively small sampling of four transactions in four quartiles.

Its analysis found that tightening occurred for almost all segments of the market. Among the deals with the lowest reported cap rates in the fourth quarter of 2016, cap rates averaged 4.2 percent, down from 4.4 percent the quarter prior and 4.7 percent the year prior. On transactions in the 25th percentile, with the highest cap rates, cap rates averaged 7.0 percent, flat with the quarter prior. Median cap rates averaged 6.4 percent, down from 6.6 percent the quarter before.

The tightening is an indication of keen interest among domestic and international investors, all vying for purchase opportunities that seem too scarce.

“There has been a lot of demand,” says Hilda Martin, a principal at Revista. “A lot of new investment groups are entering the sector. There is more demand for less and less opportunity, and it’s just very competitive out there now.”

The private equity gaze

Private equity firms are a relatively new investor group that has been particularly eager to scoop up quality MOBs, according to Martin.

“They have historically been running at the $1 billion a year mark in acquisitions,” Martin says. “That has bumped up to $5 billion on an annual basis more recently. There is more interest—and they are not selling as much as they are buying.”

The recent upturn has been in place for about 12 to 18 months, Martin estimates. The interest among those companies is even prompting private equity firms to extend hold periods beyond the customary seven or eight years. The firms are drawn to the medical sector because it is a very stable segment. Medical practices tend to sign long-term leases and have stable occupancy and vacancy rates, too.

Private equity groups are not the only investor group circling the segment. Virtually all institutional investors, REITs, private capital investors and developers recently surveyed by real estate services CBRE indicated that MOBs meet their acquisition criteria, with 97 percent saying they preferred the property type.

The CBRE U.S. Healthcare Capital Markets 2017 Investor & Developer Survey was sent to investors and developers and received 91 total responses. Respondents indicated that:

• Their firms had allocated $14.9 billion in equity to healthcare real estate investment and development for 2017.
• The market cap rate for MOBs falls between 6.0 percent and 6.5 percent, according to 39 percent of respondents, making it the most aggressively priced property type.
• They are in the market to be net buyers, according to 78 percent of respondents.
• About 27 percent of investors and developers require a minimum ground lease of 60-29 years for an investment.

As for how cap rates are expected to move in the sector, the experts see more competition—and potential compression—ahead.

“A lot of companies are looking for sweet off-market deals that no one knows about,” Martin says. “That tends to be the sentiment when people are calling up, ‘Where can I find the opportunity?’”

Tech giants are investing in affordable housing in Silicon Valley, reports CNBC. The New York Times looks at Ann Arbor, Mich. As it becomes a driverless-car testing ground. These are among today’s must reads from around the commercial real estate industry.

1. Facebook and Google are Both Building More Affordable Housing in Silicon Valley “One day, Facebook employees will only have to cross the street to commute to the tech giant’s Menlo Park headquarters. In a blog post on Friday, Facebook announced plans to turn the 56-acre Menlo Science & Technology Park it bought in 2015 into a company town, dubbed the Willow Campus. Located across the street from the company’s current campus, it will include a grocery store, pharmacy and shopping center.” (CNBC)
2. When it Comes to L.A. Development Projects, Does Anyone Really Care What the Neighbors Think? “As the city of Los Angeles sets its sights on increased density to accommodate our ever-growing population, a proposed five-story apartment complex at the top of the block — where Gateway, Pico and Exposition boulevards converge — has many nearby homeowners worried that the character of their peaceful, low-slung neighborhood will be lost in the shadow of a looming apartment complex. They are particularly upset because the city has given the developer — at no cost — a 100-foot alley that divides the land into two separate parcels.” (Los Angeles Times)
3. Michigan’s New Motor City—Ann Arbor as a Driverless-Car Hub “As the world looks ahead to a future of interconnected, self-driving cars, this college town 40 miles west of Detroit has emerged as a one-of-a-kind, living laboratory for the technologies that will pave the way. Here, it is not uncommon to see self-driving Ford Fusions or Lexus sedans winding their way through downtown streets and busy intersections, occupied by engineers with eyes focused more on laptops and test equipment than the roadway.” (The New York Times)
4. House Oversight Committee Investigated HUD Brooklyn Housing Co-Owned by Trump for Possible Conflicts of Interest “The House Committee on Oversight and Government Reform has opened an inquiry into the many potential conflicts of interest involved in President Trump’s financial interest in the huge Brooklyn apartment complex known as Starrett City. The complex, located in Brooklyn by the Belt Parkway, receives millions of dollars in subsidies from his administration and is facing an inspection by the U.S. Department of Housing & Urban Development (HUD) in the coming weeks.” (New York Daily News)
5. Bay Area Property Assessments Hit $1.6 Trillion After 7.4% Rise “Thanks to new construction, rising real estate prices and higher inflation, the assessed value of Bay Area real and personal property rose to about $1.6 trillion for 2017-18, up by $110 billion, or 7.4 percent, from the year before. That’s according to reports from county assessors, who generally must complete their roll by July 1 each year. The roll is the assessed value (which is not the market value) of all taxable property as of Jan. 1 the same year. The vast majority of taxable property is residential and commercial real estate.” (San Francisco Chronicle)
6. Boulder County Area Malls Turn Doom-and-Gloom Retail Forecast on its Head “It may be that the mall of the future looks a lot like those already present in the Boulder County area. Operators, enjoying a time of rapid population and economic expansion, are shunning traditional retailers and bringing in a mix of office, entertainment and food tenants to bolster revenue while still offering a more traditional mall experience with dozens of clothing merchants. ‘This is a vibrant, growing market,’ said Kim Campbell, property manager for FlatIron Crossing. ‘More people, more rooftops equal strong retail sales, and malls are thriving.’” (Times-Call)
7. Black’s Money: A Bizarre Co-Working Scheme and the Global Rise of Online Real Estate Fraud “On the surface, Bar Works is just another co-working company. Wedged between Seventh Avenue and Morton Street, with large windows and arching brick walls inside, the street-level space could make for a quaint restaurant. Instead it’s got bland desks dotted with telephones, wheely chairs covered in gray velvet, and a fully-stocked bar. It calls itself a ‘workspace with vibe,’ a fair description if the vibe you’re going for is a cross between a WeWork, a dive bar and an airport terminal. In reality, however, the space, along with other Bar Works locations in Manhattan, Brooklyn, San Francisco, Las Vegas, Miami and Istanbul, served as a front for Renwick Robert Haddow, a British career fraudster.” (The Real Deal)
8. Nation’s Greenest Office Markets: CBRE Report “Energy benchmarking ordinances are increasing in the United States and appear to be having an impact on the office market. Nine of the cities that placed in the top 10 of the fourth annual Green Building Adoption Index have implemented the new rules and the number of green certifications have risen. The percentage of commercial office space in the top 30 U.S. markets that has been certified as ‘green’ or ‘efficient’ is now 38 percent, up from less than five percent in 2005, according to the study done by CBRE and Maastricht University in collaboration with the U.S. Green Building Council.” (Commercial Property Executive)
9. Community Drives Development “Connecting with other people has become a big part of choosing the right housing for many residents. They’re looking for a place that makes them feel they fit in, where they can picture their friends living as well. Often, this intangible residential feature has nothing to with amenities. Rather, it’s about the people in the community and the activities that drive their engagement with the property.” (Multifamily Executive)
10. How Much Longer Can Carson’s Hang On? “There’s been much hand-wringing over the troubled futures of Macy’s, Sears and J.C. Penney, which together are planning to close more than 450 stores in coming months as sales sink. The outlook is just as dire for another department store chain—Carson’s, the 160-year-old retailer that has long played second fiddle to Macy’s in metro Chicago. Carson’s, which actually outnumbers Macy’s in the market with 22 locations to Macy’s 17, is feeling the weight of its money-losing parent, Bon-Ton Stores, which runs 261 stores in 25 states from twin headquarters in Milwaukee and York, Pa.” (Crain’s Chicago Business)

In leaving the bargaining table, Abercrombie has few easy options.

(Bloomberg)—Abercrombie & Fitch Co. terminated talks with potential acquirers, dashing hopes of investors who saw a takeover as the best way to rescue a retailer struggling to rekindle its appeal with shoppers.

The move send the shares down as much as 17 percent, to $10.11, in early trading. The announcement followed months of speculation that Abercrombie might be acquired by Express Inc. or American Eagle Outfitters Inc.

In leaving the bargaining table, Abercrombie has few easy options. The retailer was a mainstay of shopping malls and college fashion in the ’90s and early 2000s, but it’s lost much of its allure. The company also has been hit hard by a broader slowdown in mall traffic and the shift of shopping online.

Chairman Arthur Martinez pledged “sound, aggressive action” to enhance shareholder value over the long term, according to the statement. The company pointed to solid comparable sales at its Hollister business and said it’s following through on measures “to position the Abercrombie brand for revitalized performance.”

In May, Express and American Eagle Outfitters were said to be discussing a takeover of the company and news of the deal caused shares to jump at the time. The company’s stock had risen 1.3 percent this year through Friday’s close, trailing the 8.3 percent gain in the Standard & Poor’s 500 Index.

The retail industry has been shaken by bankruptcies and a rising tide of store closures this year as consumer preferences also shift to spend on experiences such as food and travel instead of physical goods.

Abercrombie didn’t disclose details on any proposed deals and said it wouldn’t comment further on the discussions.

To contact the reporter on this story: Jonathan Roeder in Mexico City at jroeder@bloomberg.net To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net Lisa Wolfson

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© 2017 Bloomberg L.P

When Vornado and Related remake the eastern portion of the Farley building, the developers will have the rights to lease out about 850,000 sq. ft.

(Bloomberg)—In a few years, as many as 150,000 commuters using the new Moynihan Station will be bathed in natural light under vaulted steel-trussed ceilings spanned by glass. They’ll be able to dine at new restaurants in the grand train hall, all part of a partnership between the state and two prominent developers.

But for more than twice as many riders at New York’s Pennsylvania Station across Eighth Avenue, it’ll be a different story. Those travelers are doomed to keep arriving in the city, as historian Vincent Scully once said, scuttling in like rats through the underground maze.

The plan under way to ease overcrowding at the Western Hemisphere’s busiest transit hub falls short of the late Senator Daniel “Pat” Moynihan’s original dream to devote the entire James A. Farley Post Office Building to a new transit hub that would replace Penn Station. It also misses the cherished goal of urban planners for a world-class landmark at the site of the original Beaux-Arts gem that was demolished in the mid-1960s.

Instead, it’s an example of the sort of compromise that results from public-private partnerships, where community interests compete with profit motives.

“At the end of the day, there have to be revenue streams,” said Tom Wright, president of New York’s Regional Plan Association and a member of a state panel examining the future of Penn Station. “By transferring some of the risk to the private sector, these projects really have a much better track record of getting done on time and budget.”

Adding Offices

When Vornado Realty Trust and Related Cos., working with construction company Skanska AB, remake the eastern portion of the 1.4 million-square-foot (130,000-square-meter) Farley building for Amtrak and Long Island Rail Road passengers, the developers will have the rights to lease out about 850,000 square feet, most of it to office tenants, on the western side. They’ll be investing $630 million in the $1.6 billion project, set to be finished in late 2020.

Those offices preclude a proposal to have Madison Square Garden, currently atop Penn Station, relocated to the west side of Farley.

New York Governor Andrew Cuomo, who has championed a revamping of the transit hub as part of a broad mandate to upgrade infrastructure, has shorter-term challenges. He has predicted a “summer of hell” for commuters, starting today. Tracks will be repaired, lengthening travel times and even forcing some New Jersey trains to be rerouted to Hoboken, never crossing the Hudson River. That’s on top of the congestion and delays train riders have endured for years. On Thursday night, Penn Station had its third train derailment since April.

‘Cramped, Unpleasant’

With Madison Square Garden remaining at its current site, Penn Station will be “cramped, unpleasant and continue to have poor passenger circulation,” said Justin Shubow, president of the National Civic Art Society, which advocates replicating the building that was destroyed. “Cuomo has said he wants a station as grand and triumphant as the original, but there’s no way we can get that as long as the Garden is in place.”

The state’s idea is that Penn Station will become friendlier, not as crowded and less oppressive once thousands of commuters are across the street. A separate plan to almost triple the width of the Long Island Rail Road concourse — running under West 33rd Street between Seventh and Eighth avenues — also will improve experiences for all commuters, including NJ Transit riders, according to Empire State Development, which is overseeing Cuomo’s directives.

The Moynihan project “will bring New York City the world-class train hub it deserves,” Howard Zemsky, president of Empire State Development, said in an emailed statement. The train hall “will open by the end of 2020 — far faster than any other option — and it does not preclude additional future improvements.”

‘Innovative Partnerships’

When Cuomo announced the Moynihan Station deal last month, he called public-private partnerships “the way we like to build.” In that, he was echoing comments from President Donald Trump, who said at a June 9 round table at the U.S. Department of Transportation that “innovative partnerships with the state, local and private-sector leaders will translate into dramatic improvements all across the country.”

Penn Station is “the poster child for the state of American infrastructure,” Jim Barry, global head of BlackRock Inc.’s real assets group, said today in an interview on Bloomberg Television. While institutional investors such as BlackRock, the world’s largest money manager, are interested in infrastructure projects like the train hub, “just saying come and put money into Penn Station won’t work,” Barry said. “It needs to be offered in a way that makes sense, such as a public-private partnership.”

Related and Vornado are operated by two of the nation’s biggest and most politically connected developers, Stephen Ross and Steven Roth, respectively. Ross, a longtime donor to both Republicans and Democrats, is building the $25 billion Hudson Yards project west of Penn Station, mostly atop a yard used for LIRR trains.

Vornado is the Penn Station area’s biggest property owner, with about 9 million square feet, including two buildings that sit on top of the train hub. Roth, whose company also owns skyscrapers in New York and San Francisco on which Trump is a minority partner, also is co-chairman of the president’s infrastructure task force.

Private Funds

Trump’s administration is making plans for $1 trillion in infrastructure spending across the U.S. Four-fifths of those funds are expected to come from sources other than the federal government.

Even with their compromises, there’s much offered by public-private partnerships, according to Wright of the Regional Plan Association, who along with Roth was appointed by Cuomo to the Penn Station Task Force. For one thing, they’re very project-specific. Private companies know exactly what they’re required to do and what they would get in return, which in the case of the Farley project is revenue-generating rentable space.

The developers have been looking ahead to leasing the offices. On Vornado’s earnings call in May, New York chief David Greenbaum said the Farley building’s open floors and high ceilings would appeal to creative companies in the market for large blocks of space. Related last month said it has already seen “great interest from tenants in this very compelling location.” Representatives for the companies declined to comment beyond their public statements.

The developers expect to have 730,000 square feet of offices to lease, plus 120,000 square feet of retail space. Floors can exceed 150,000 square feet, the size of two World Cup soccer fields.

Moynihan’s daughter Maura, who had taken up the cause of using the Farley building as a successor to the lost Penn Station after her father’s death in 2003, said she recognizes that the current plan isn’t going to be all things to all people.

“It would be nice if all of them could go — that was Dad’s original vision,” Maura Moynihan said. “But, you know, Governor Cuomo is doing the best he can. So much time has been lost.”

–With assistance from Elise Young and Mark Niquette.To contact the reporter on this story: David M. Levitt in New York at dlevitt@bloomberg.net To contact the editors responsible for this story: Daniel Taub at dtaub@bloomberg.net Christine Maurus

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© 2017 Bloomberg L.P

While at first blush immediate expensing appears to be a huge tax break, the honeymoon period would end with a crash when the write-off period ended.

The time may be right for comprehensive tax reform. However, certain proposals floating around Capitol Hill could do far more harm than good, drowning real estate investment and taking down markets across the country along with it. Congress should not attempt to fix what is not broken.

Particularly troubling are proposals to change the taxation of real estate investments by allowing investors to immediately expense the full value of improvements or buildings (land is not included). While at first blush immediate expensing appears to be a huge and unprecedented tax break—real estate investors would pay virtually no taxes in the first few years of the investment—the honeymoon period would end with a crash when the write-off period ended.

Nationwide, commercial real estate values have eclipsed their previous peak in 2007 by 23 percent. Real estate doesn’t need the stimulus that immediate expensing would create. Immediate expensing is akin to turning real estate into a speculative stock. Currentdepreciation levels are appropriate for this long-life asset class.

Under immediate expensing, the excess tax shelter resulting from the preliminary write-off could be used against other income and investments. This could cause a massive flow of capital into real estate, driving up real estate prices without changing the fundamentals. Bu the tax man would soon come calling, since immediate expensing’s rewards demand eliminating the depreciation deduction. The result? Taxable income that would exceed cash flow.

Immediate expensing would force well-financed investors into a pattern of flipping properties and trading up every few years to enjoy more tax shelter benefits. This cycle could not be sustained. Eventually, the real estate market, like Jack and Jill, would come tumbling down.

Real estate investment is no nursery rhyme or fairy tale. The health of the real estate industry affects every person across the nation who needs a place to live and work.

It is nearly certain that immediate expensing would create a bubble. We remember too well what happens when a bubble pops. All the wonder of this beautiful, fanciful creation dissipates in a heartbeat.

Bubbles burst when valuations get into realms that make no fundamental economic sense, or when investors run out of resources—usually when credit starts to tighten or when the rules change again. Aggressive tax incentives were put into place by Congress in 1980 to jumpstart the economy. With real estate in recession, depreciation schedules were cut in half. Real estate investors responded with alacrity, making investments on a gigantic scale. But it was too much of a good thing, creating a bubble of “see through” buildings that were built as tax shelters without regard to tenant demand, which was negligible. These buildings remained largely empty. Eventually, Congress lengthened the real estate depreciation schedule, correcting its mistake in 1986.

The party came to an abrupt end.

Congress’s actions triggered a major correction and decline in values. This was a contributing cause of the Savings & Loan crisis, in which thousands of financial institutions failed, requiring a government bailout of more than $125 billion, paid for by the taxpayers. In today’s dollars that would be $281 billion. Let’s not go there.

Stephen M. Breitstone is vice chairman of Meltzer, Lippe, Goldstein & Breitstone, based in Mineola, N.Y., and leads the firm’s private wealth and taxation group. 

Some argue that buildings with healthy features command up to a 20 percent rent premium over market rate, in addition to savings on operational costs.

Creating healthy workplaces is the next step in the evolution of office building sustainability. “Health is a key component to real estate for the long-term,” says Rachel McCleary, Urban Land Institute senior vice president, who heads the organization’s healthy buildings initiative. She points out that a healthy workplace requires a building to meet certain performance standards, and certification is based on testing.

The healthy workplace movement got a boost a few years ago when the U.S. Green Building Council (USGBC) partnered with the International Well Building Institute (IWBI) to streamline certification processes and minimize paperwork to achieve both Leadership in Energy and Environmental Design (LEED) and the WELL certifications simultaneously.

Launched in October 2014, WELL has registered or certified 450 projects, encompassing nearly 100 million sq. ft. of space in 27 countries, including 361 office projects.

“The rapid expansion of WELL worldwide underscores the fact that building and business developers, owners, and operators are taking notice of the need to harness the built environment as a tool to promote human health and wellness,” says IWBI President Kamyar Vaghar. He notes that IWBI is seeing increasing interest from core and shell building developers looking to achieve WELL certification, as well from tenants looking for buildings that facilitate a healthy fit-out.

WELL is an evidence-based system for designing, measuring, certifying and monitoring how buildings impact the health and well-being of occupants. It provides a 100 wellness features that impact 23 health pathways across seven concepts, including air, mind, water, nourishment, light, fitness, and comfort. Applicant spaces are evaluated for one year to ensure all necessary criteria are met before achieving certification and then are re-evaluated every three years for recertification.

In a 2014 Urban Land Institute study, which looked at the business case for developing healthy buildings, 13 developers reported that healthy buildings resulted in greater marketability and faster leasing and sales velocity, in addition to commanding higher rents than pro forma projections. They said the cost attributable to inclusion of wellness features represented a minimal percentage of the overall development budget.

An IWBI spokesperson told NREI that the cost to buildout the headquarters of Structure Tone, a New York City-based design firm, with WELL features came to less than $1 per sq. ft.

Dave Pogue, CBRE global director of corporate responsibility, who recently worked with a developer on a WELL-certified project in Vancouver, Canada, says that the cost to add WELL features to a building varies considerably, with ground-up projects usually costing less because healthy features can be incorporated into what the developer is already doing. For existing projects, the cost is determined by what types of features a building already has in place.

Developers Hines and Kilroy Realty are embracing the WELL standard for new buildings going forward.

Kilroy has started construction on its first WELL project, a $450-million, 680,000-sq.-ft. office campus at Mission Bay, a tech-centric master-planned community in San Francisco.

The Mission Bay project is a pilot for the company to demonstrate the value of WELL features, according to Maya Henderson, Kilroy sustainability manager. “This is a great place to start building this type of project into our portfolio going forward,” she says.

Hines’ first building to register for WELL is 609 Main in Houston, Texas, a one-million-sq.-ft., multi-tenant building, which is also pursuing LEED Platinum.

Designed architect Pickard Chilton, the exterior at 609 Main is composed of highly reflective glass curtain walls that change colors as the weather changes. But what sets 609 Main apart are details on the inside that pay attention to the health and happiness of occupants and enhance operational efficiencies for tenants, says Hines Senior Managing Director in Houston John Mooz, who oversaw the project’s development.

The building incorporates technology that provides continuous fresh air and natural light, in addition to managing energy efficiency and water conservation. Features include heat sensors that adjust room temperature according to the number of occupants in the room and an advanced under-floor air system.

The air system added $10 million to building cost, according to Mooz, but allows each employee to control the temperature around their own desk by delivering heating and cooling through individual portals in the floor around each workspace.

The building also has 3,000 sq. ft. of dynamic glass embedded with an electric current, in addition to floor-to-ceiling windows that provide natural light. The glass turns dark when the sun is high, shading building occupants.

“Our intent was to respond to the modern day workforce of Millennials with an amenity-rich, and tech-savvy environment,” Mooz notes. Additional amenities include a rooftop garden, an 8,500-sq.-ft. fitness center and a lobby concession stand that serves coffee in the mornings and drinks at quitting time.

High-quality buildings have higher resale values, according to Mooz, so the higher cost of adding WELL features is recouped over time. He notes that buildings with healthy features command up to a 20 percent rent premium over market rate, in addition to savings on operational costs.

He notes that 2017 was not the best timing to deliver one million sq. ft. of office space in Houston, as the market has been depressed due to the energy industry layoffs. Houston’s office vacancy reached a 22-year high in the first quarter, according to real estate services firm CBRE, at 16.8 percent, and is expected to rise to 17.5 percent by next year.

But despite unfavorable market conditions, 609 Main was 65 percent pre-leased before the building was completed in May.

“Demand for buildings that promote health and wellness has continued to increase among our tenants,” says Gary Holtzer, Hines senior managing director, global sustainability office. “The WELL Building Standard is one of the leading frameworks for measuring and certifying the impact of the built environment on humans and we want to help lead the charge.”

Hines has multiple office projects across the U.S. and globally that are being positioned for WELL certification, he adds.

“This is a new way the market is going,” says Evin Epstein, sustainability analyst at New York City-based SL Green Realty. Her company, in partnership with Hines, is developing One Vanderbilt, a 1.7-million-sq.-ft. office tower under construction in Midtown Manhattan that is registered for both WELL and LEED certifications.

Epstein shares Hines view on the marketing advantages of healthy office space. She notes that LEED provides some elements that benefit health, but WELL has a much more direct impact on tenants, with better lighting and air quality and a host of other tangible features.

At One Vanderbilt, natural light will flood 80 percent of the building, maintenance will use only green cleaning products and a water filtration system is being installed.

Designed for the modern workforce, the building will also feature floor-to-ceiling windows, extra high ceilings and 360-degree views, in addition to best-in-class building systems.

CBRE’s Dave Pogue agrees that high-performance buildings have been shown to have benefits for both tenants and building owners. He notes, however, that the hope of developers is that WELL will give a project greater market advantage, but there are too few studies so far to know if this is true. “We do think the market is highly sensitive to this sort of thing,” he notes.

Recruiting Millennials to work in the commercial real estate sector goes beyond serving free lunch, providing unlimited vacation or lavishing other cool perks on them.

As the retirement wave continues among Baby Boomers, the commercial real estate sector is grappling with its graying workforce.

According to the Institute of Real Estate Management, the average age of a property manager is 52, and many real estate professionals are in their 40s and 50s. Facing that reality, folks responsible for attracting and retaining workers in commercial real estate recognize that they’ve got to woo Millennials in order to keep their businesses running. After all, Millennials now make up the largest generational share of the American workforce.

Yet recruiting Millennials to work in the commercial real estate sector—or any other sector, for that matter—goes well beyond serving free lunch, providing unlimited vacation or lavishing other cool perks on them.

Fortune magazine recently released its ranking of the 100 best workplaces for Millennials, and several employers in the commercial real estate sphere appear on the list. NREIreached out to executives at three of the winning companies—Concord Hospitality Enterprises, Transwestern and Walker & Dunlop—to find out why their workplaces are Millennial magnets and what lessons you can learn from these employers.

Transwestern

Fortune ranking: 38

Larry Heard, CEO of Houston-based commercial real estate services company Transwestern, believes that shining a light on Transwestern’s mission is critical to recruiting and retaining Millennials.

“We go to great lengths to make sure that any new employee—which would include the Millennial workers—has a very clear understanding of our mission and our vision as a firm, so they can personally buy into that,” he says. “That’s an important aspect of the decision-making tree that the Millennials go through when they’re discerning the best company to work for.”

Once they’re working for Transwestern, Millennials are encouraged to get involved in young professionals groups at the company’s major offices. That and other efforts are designed to cultivate personal empowerment, innovation and teamwork.

In trying to entice Millennial workers, Transwestern also hosts holiday parties, year-round social events, wellness activities, one-on-one mentoring and training and skill development courses.

Every Millennial is unique, however, so workers in this age group can’t be lumped together and treated exactly the same. One may appreciate social activities in the workplace, while another may gravitate toward personal development opportunities.

“It’s hard to paint all of the Millennials with a single brush stroke, so I would not fall into some of the misnomers that are out there that may exist about a Millennial worker,” Heard says.

Recruiting tactics that were prevalent, say, 20 years ago won’t necessarily work with Millennials, he notes.

When trying to hire Millennials, “I do believe that the things you stand for as a firm do need to be fully appreciated and [need to] check a lot of the boxes that they have when they’re going through the process of determining where they want to work,” Heard says.

Concord Hospitality Enterprises

Fortune ranking: 81

Raleigh, N.C.-based Concord, a hotel developer, owner and operator, treats each employee—not just Millennials—like a customer, says Debra Punke, senior vice president of human capital.

“The experience from hire to retire is essential to Millennials, and if you are thoughtful about each interaction, they will join your team and stick around,” Punke says.

Millennials want to stick around at Concord because they’re energized by the company’s purpose-driven nature, she says. These workers are drawn to employers that have crafted a well-articulated mission that resonates inside and outside the workplace, according to Punke.

“Millennials want to be affiliated with an employer who cares about giving back to the communities where they live and work,” she says. “They want to be part of a company who has a greater purpose and impact.”

From what Punke has observed, some employers in commercial real estate are failing to attract Millennial workers “because they are all about the business.”

“It’s high-pressure and only the results matter. They are not purpose-driven,” she adds.

Punke says Concord fosters a work environment that appeals to Millennials in four key areas:

Charity—Concord enables employees to engage in fundraisers, volunteer projects and other charitable endeavors. Over the past decade, employees have raised $750,000, served more than 2 million meals, refurbished a dozen homes and donated 17,000 volunteer hours, Punke says.

Fun—Concord employees recognize and support each other in a variety of ways, according to Punke. She says Concord wants its workers to have fun “in all that they do.”

“Not only do we place a strong emphasis on learning, opportunities for growth and recognition, but we also insist on having fun–who doesn’t love that?” she notes.

Sustainability—Among other things, Concord builds green hotels, repurposes soap and shampoo into bars of soap for vulnerable kids around the world and diverts tons of waste from landfills.

Wellness—On-site fitness centers and virtual competitions are among the tools that Concord uses to promote mental, physical and emotional wellness in the workforce.

“We believe if you take care of them, they will take care of the customers and the profit will flow,” Punke notes.

Walker & Dunlop

Fortune ranking: 83

Millennials who join Walker & Dunlop, a Bethesda, Md.-based provider of commercial real estate financing, find a number of opportunities to flourish professionally.

For instance, Walker & Dunlop sponsors a “high potential” program for employees who have been with the company for a few years and have established a track record of success, according to Paula Pryor, senior vice president of human resources.

In that program, a manager identifies someone who’s got the potential to rise through the ranks over the next five years and nominates that person to participate, Pryor says. Every year, executives pick 10 “high potential” employees for the program. Over the course of a year, each participant learns how to polish presentation, leadership and teambuilding skills; shadows a member of the management team; and collaborates on a corporate initiative.

Additionally, Pryor says, the company strives to help Millennials carve out a career path, which includes consideration for in-house promotions.

She notes that more than 40 percent of Walker & Dunlop’s workforce consists of Millennials.

“A series of changes, including regulatory reforms, since the global financial crisis have likely altered financial institutions’ incentives to provide liquidity,” the Federal Reserve Board said.

(Bloomberg)—The Federal Reserveacknowledged that post-crisis financial regulations may be crimping bond-dealers’ incentives to make markets, while also saying that the impact on liquidity appears to be limited.

“A series of changes, including regulatory reforms, since the global financial crisis have likely altered financial institutions’ incentives to provide liquidity,” the Federal Reserve Board said in its semi-annual Monetary Policy Report to Congress. “However, the available evidence does not point to any substantial impairment in liquidity in major financial markets.”

The 57-page report, released five days before Chair Janet Yellen begins testimony before House and Senate committees, reprised recent economic data and the Fed’s policy actions. It also included a number of special topic sidebars, including one on monetary policy rules, and another on financial stability.

The Republican-controlled Congress is intent on rolling back some of the regulations of the sweeping 2010 Dodd-Frank Act, which included the so-called Volcker Rule which limited proprietary trading by banks.

In the report, the Fed says that changing regulations such as the Volcker Rule “may have contributed to the continued trend of lower dealer inventories.”

The Fed used the report to address Republican lawmakers’ concerns on the House Financial Services Committee that the Fed ignores policy rules in favor of discretionary policy. In a long description of as many as five different policy rules, the Fed explained their strengths and weaknesses.

Highly Complex

“The small numbers of variables involved in policy rules makes them easy to use,” the Fed report said. “However, the U.S. economy is highly complex, and these rules, by their very nature, do not capture that complexity.”

The U.S. House of Representatives passed financial reform legislation in June that included a mandate for the Fed to follow a policy rule, though the bill has little chance of passing the Senate in its present form to become law. Yellen has referred to rules in her speeches as useful guides for policy makers, but says she opposes making the central bank mechanically follow any rule’s recommendations.

The discussion also showed the Fed’s interest-rate policy in contrast to the rules’ prescriptions.

The report included a section on financial stability that stated that valuations in U.S. markets remain “moderate on balance,” while noting that prices had risen.

“Valuation pressures have increased further across a range of assets, including Treasury securities, equities, corporate bonds, and commercial real estate,” the report said.

Yellen, Vice Chairman Stanley Fischer and San Francisco Fed President John Williams have all recently mentioned that valuations in equities and other asset markets had risen.

The Fed also pointed to risks at Federal Home Loan Banks which have increased their issuance of short-dated liabilities. The banks “have not reduced the maturity of their own assets, which increases their liquidity mismatch and potential vulnerability to funding strains.”

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Christopher Condon in Washington at ccondon4@bloomberg.net To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net Alister Bull

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© 2017 Bloomberg L.P

Hilton plans to grow through its lower-priced Tru concept, reports the Wall Street Journal. An ethics complaint against Jared Kushner claims he did not disclosed ownership in technology company Cadre, according to USA Today. These are among today’s must reads from around the commercial real estate industry.

1. Hilton Sees Room for Growth with New Low-Price Brand “At first glance, the new hotel chain on track to be the fastest-growing in the U.S. resembles a boutique brand that might be found in a trendy, urban location. But Hilton Worldwide Holdings Inc.’s new midprice brand, Tru, is pricing rooms at around $100 a night or less and is largely aimed at less flashy locales.” (Wall Street Journal, subscription required)
2. Bon Ton Stores, Sears, J.Crew Lead List of Retailers with High Risk of Default “Default rates for U.S. retailers are poised to climb in the near-term and department store chains and specialty retailers are most at risk. There are currently nine retailers with a credit risk estimate (CRE)–a measure of an issuer’s one-year forward default probability — that was above 5% at the end of June, according to research firm CreditSights. That’s based on the firm’s BondScore default risk model, which covers 34 of the 58 U.S. high-yield retailers that are included in the Bank of America Merrill Lynch US High Yield Index.” (MarketWatch)
3. Jared Kushner Did Not Disclose Ownership in Real Estate Investment Company, Ethics Complaint Says “Trump adviser Jared Kushner allegedly failed to disclose his ownership interest in an online real estate investment company, according to an ethics complaint filed Thursday. Per the complaint — filed by Citizens for Responsibility and Ethics in Washington – to the Office of Government Ethics, President Trump’s adviser and son-in-law did not disclose his ownership of a ‘significant part’ of Cadre, a technology company that he co-founded. Additionally, when he requested his certificate of divestiture, he failed to disclose his ownership interest in the company, resulting in the certificate being granted with incomplete information.” (USA Today)
4. A Surprising Way to Increase Property Values: Build Affordable Housing “Despite the lawsuits, media spotlight and conventional wisdom, affordable housing developments built in poor, heavily black communities can lead to greater racial and income integration, according to new research by Stanford economists. Such housing, funded by federal tax credits, also raises property values and lowers crime in surrounding neighborhoods as higher-income white residents move in, the researchers found.” (Washington Post)
5. Chinese Investment in U.S. Real Estate Could Fall Dramatically in 2017: Report “Chinese investment in overseas real estate could drop by as much as 20 percent in 2017 amid tighter capital controls and a slowing economy, according to a new report by property search portal Juwai. Outbound real estate investment by Chinese firms and individuals reached a record $101.4 billion in 2016, but Juwai expects it to fall to around $80 billion in 2017.” (The Real Deal)
6. California Senate OKs Real Estate Fee to Fund More Housing “The California state Senate approved a new fee Thursday on real estate transaction documents to generate hundreds of millions of dollars for affordable housing. The legislation would impose a $75 fee on documents such as deeds and notices, with a cap of $225 per transaction. It’s expected to generate between $200 and $300 million annually for affordable housing projects. It passed 27-12 with all Democratic votes and now heads to the Assembly.” (Associated Press)
7. Friedman Secures Buyer for Detroit Office Building “Friedman Integrated Real Estate Solutions closed on another office deal in Michigan—an 85,539-square-foot building located at 440 E. Congress St., in Detroit’s CBD. The owner, Broder & Sachse Real Estate Services, sold the property to 311 Associates. Peter Jankowski, vice president with Friedman, brokered the transaction. The mid-rise building sits on the corner of Congress and Beaubien Streets, right across from Saint Andrews Hall. Built in 1925, it went through two major renovations in 1990 and 2014, when the main lobby and tenant common areas were upgraded.” (Commercial Property Executive)
8. Physical Retail: Definitely Different, Far from Dead “it is crystal clear that years of overbuilding, failure to innovate on the part of most traditional retailers, shifting customer preferences and market-share grabs from transformative new models that aren’t held to a traditional profit standard (mostly the little outfit in Seattle) are creating fundamentally new dynamics.  Physical retail is not going away, but digital disruption is transforming most sectors of retail profoundly. Here are a few important things to bear in mind.” (Forbes)
9. Extell Bondholders Could Face Early Repayment on Barnett’s Bonds “Israeli investors in Gary Barnett’s Extell Development could demand early repayment of the company’s Series A bonds, sources told The Real Deal. About 40 private and institutional bondholders met Thursday in Israel to discuss concerns about Barnett’s ability to meet his payments on the bonds, the first of which is a $180 million payout in December 2018. In late May, bondholders grew anxious after a first-quarter report showed flaccid results, and bond yields rose to 14 percent.” (The Real Deal)
10. CRE Opinion: Need Current Income? PE Real Estate Might Be the Answer “Unlike some other asset classes that help diversify a portfolio, real estate is backed by something tangible. We can see and touch an office building, apartment building, or self-storage facility, while many other investments represent nothing more than a belief in a piece of paper. As a hard asset, real estate can also act as a volatility hedge in ways other investments can’t. Barring a catastrophic event, property will survive even if currency or traditional investments lose much of their value.” (D Magazine)

As the transitional market grow, we believe that a strategy focused on debt will enable investors to take advantage of the inherent mispricing of risk.

While the U.S. commercial real estate market in aggregate has recovered from the depths of the 2008-09 recession, reaching new all-time highs, the recovery has been uneven across sectors and regions.

Consider the following statistics regarding the current state of the market. Apartment rents are more than 20 percent higher since 2007, while rents in the office, retail and industrial sectors have barely risen at all over the same period. Valuations for apartments and central business district (CBD) office properties are up 53 percent and 43 percent, respectively, while at the same time valuations in retail and suburban office sectors continue to lag 2007 peak prices. Major markets such as New York, San Francisco and Chicago have seen significantly sharper price increases than secondary or mid-tier markets across the country.

Amid this dual-track reality of the current investing environment, first-lien lending backed by transitional properties potentially presents an attractive risk-reward opportunity. Based on a thorough analysis of income generation, occupancy and loan leverage data from the largest commercial real estate sectors, we believe that transitional debt represents a more prudent strategy in today’s market.

We estimate the transitional lending market is now approximately a $50 billion market and growing, up from approximately $20 billion in 2011. Transitional properties are a natural occurrence in the commercial real estate lifecycle, and the label includes properties that are experiencing a temporary interruption in cash flow or are generating income below market potential. Our data shows that the commercial real estate market traditionally has overvalued in-place cash flows and undervalued the long-term income-generating potential of commercial properties. We see significant value in a transitional lending strategy for three primary reasons.

First, the commercial real estate market heavily discounts transitional properties. When valuing properties, we believe the market places too much emphasis on historical performance and in-place tenants, and this misplaced analysis leads to discrepancies in valuation metrics between stabilized and transitional properties. Transitional property buyers typically require an expected unleveraged return of 10-15 percent on the investment in the property, based on Amherst Capital estimates, significantly higher than for stabilized properties. The higher required rate of return results in a steep discount to the value of transitional properties and more than compensates the risk of transitional properties taking longer than expected to stabilize.

Second, transitional properties have strongly outperformed stabilized properties in occupancy gains since 2011. Amherst Capital estimates of CoStar property data found that across the office, retail and industrial sectors, the largest gains in occupancy were seen in properties with lower than 80 percent occupancy. Properties with greater than 90 percent occupancy experienced a decline in occupancy during the same period. Occupancy rates have improved more in low initial occupancy transitional properties compared to stabilized properties. The outperformance of low occupancy properties was also evident during the financial crisis in weaker performing markets, demonstrating that transitional properties remain viable investments across markets. Our analysis has shown the potential for outsized potential value gains for transitional properties as a result of improving occupancies.

Third, we see the risks of the current macro environment pointing to debt, rather than equity investments, as the best approach in the transitional commercial real estate market. We believe that the lengthy run-up in prices since the recession means that equity investments will require perfect execution and are very sensitive to market conditions. In contrast, we believe that low leverage and a capital-committed equity holder can lessen the downside risk on transitional property lending. Demand for low leverage transitional loans is expected to remain strong, according to Amherst Capital’s analysis, and leverage through warehouse financing or the securitization market can further support the earning potential of these investments. With lower risk than the market is pricing in, transitional lending presents an attractive risk-reward profile for investors.

For too long, the commercial real estate market has overvalued in-place rents and undervalued the long-term earning potential of transitional properties. As the transitional market continues to grow, we believe that a strategy focused on debt will enable investors to take advantage of this inherent mispricing of risk and discount to transitional properties occurring in today’s market. Lower leverage and higher spreads associated with transitional loans, combined with favorable occupancy trends in transitional properties, point to a potentially attractive risk-reward opportunity in transitional lending for institutional investors.

Sandeep Bordia serves as a managing director and head of research and analytics at Amherst Capital Management LLC, a real estate investment specialist. The comments provided in this article are a general market overview and do not constitute investment advice from Amherst Capital and are not predictive of any future market performance, view full disclosures here.