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Federal Reserve officials haven’t agreed on whether to start unwinding the Fed’s balance sheet in September or December, reports The New York Times. Goldman Sachs has raised a $1 billion real estate investment fund, according to Forbes. These are among today’s must reads from around the commercial real estate industry.

1. Fed Officials Split Over Timing on Reducing Debt Holdings “The Fed has said it wants to launch the balance sheet plan this year, but officials are divided between starting in September and waiting until December. The minutes of the June meeting said several officials wanted to start ‘within a couple of months,’ while others favored waiting. The Fed published the meeting account Wednesday after a standard three-week delay.” (The New York Times)
2. Goldman Raised $1B for a Real Estate Fund, Putting 2007 Fail Behind It “It was the biggest blot on the copybook of the investment bank that came out of the credit crunch in better shape than any other. But Goldman Sachs has transformed its real estate business and is back raising huge amounts of capital to put to work in the sector. Documents filed with the Securities and Exchange Commission show that the investment bank has raised $1B for a new real estate fund, Broad Street Real Estate Credit Partners III.” (Forbes)
3. Fed’s Powell Says Current U.S. Housing Finance System ‘Unsustainable’ “The US housing finance system continues to put taxpayers at risk in a market dominated by government-backed agencies, Federal Reserve Governor Jerome Powell said on Thursday, calling for further reform of an ‘unsustainable’ situation. A decade after doubts about the creditworthiness of mortgage-backed securities helped trigger the worst financial crisis since the Great Depression, systemic risk in housing remains given the concentration of mortgages in the duopoly of Fannie Mae and Freddie Mac, he said.” (Reuters)
4. Cabela’s-Bass Pro Merger Gets FTC Blessing “The Federal Trade Commission on Monday notified Cabela’s that its proposed merger with rival Bass Pro Shops can proceed, according to a filing with the Securities and Exchange Commission. The deal must yet garner approval from Cabela’s shareholders, which the outdoor retailer is seeking at a special meeting scheduled for July 11. The similarities of the two retailers makes the merger at once rational and a target of careful scrutiny from regulators, Scott Wagner, an antitrust expert and partner in law firm Bilzin Sumberg’s litigation group, told Retail Dive last year.” (Retail Dive)
5. Online Clothing Retailer Eloquii Ready to Open Brick-and-Mortar Stores “The unlikely journey of Columbus-based online retailer Eloquii is about to get even more unlikely. The plus-size fashion brand will go from ‘clicks to bricks’ by opening a store in September at Easton Town Center in a space once occupied by its former parent, the now-bankrupt the Limited. ‘If you would have asked us about four years ago if this would happen, we would have said you were crazy,’ said Julie Carnavale, chief merchandising officer.” (Columbus Dispatch)
6. Natixis Issues First Green CMBS Rake Tranch Backed by 85 Broad Street “Natixis has issued the first “green” commercial mortgage-backed securitization rake tranche backed by 85 Broad Street. The issuance was oversubscribed after being met with strong demand from both U.S. and overseas investors, according to an announcement by the lender today. The $72 million green-specific tranche (the ’85 Broad Street Loan-Specific Certificates’), issued in collaboration with Ivanhoé Cambridge and Callahan Capital Properties, is part of the Credit Suisse-sponsored CSAIL 2017-C8 CMBS deal. The issuance refinances part of the $358.6 million fixed-rate, first mortgage loan that Natixis provided to Ivanhoé Cambridge.” (Commercial Observer)
7. Group Uses New Tool to Press Ban on Tall Towers in East Midtown “The rebellion against super tall skyscrapers rising in New York City has found a new weapon: grass-root do-it-yourself zoning rules. The push, by opponents of a new 800-foot tall condo tower under construction on East 58th near the East River, has gained surprising bureaucratic traction during the past few months, despite potential opposition from City Hall.” (Wall Street Journal, subscription required)
8. Kroger Sues German Grocery Chain Lidl Just Two Weeks After it Lands in the U.S. “Kroger is suing the German grocery chain Lidl over trademark infringement. In the lawsuit, Kroger claims that Lidl’s private-label brand called ‘Preferred Selection’ too closely resembles Kroger’s own house brand, ‘Private Selection.’ The close resemblance of the names will cause confusion for customers and allow Lidl to ‘compete unfairly’ with Kroger, because customers could assume that the two brands are associated with one another, the lawsuit states.” (Business Insider)
9. Harrison Street Opportunistic Fund Raises $1.1 Billion “Harrison Street Real Estate Capital LLC recently closed Harrison Street Real Estate Partners VI LP with a bang. Fund VI, Harrison Street’s sixth U.S. opportunistic real estate fund, surpassed its $850 million target by a long shot, reeling in a total of $950 million in equity commitments and raising an additional $205 million of equity capital in co-investment vehicles, for a total raise of approximately $1.15 billion. A lot can happen in a year; Fund VI launched in late July 2016. Like the real estate investment management firm’s previous five closed-end opportunistic funds, Fund VI focuses on investing in the education, health care and storage sectors.” (Commercial Property Executive)
10. How Much is Nashville’s Greer Stadium Property Worth? Proposed Deal Under Scrutiny “A proposed lease deal to redevelop Nashville’s Greer Stadium property is facing scrutiny from a top Metro Council critic of Mayor Megan Barry’s administration who says the city’s financial return wouldn’t come close to matching the market value of Greer’s 20-plus acres. But the mayor’s office is firing back, saying the intent has never been to sell the city-owned land to the highest bidder, but rather to find the most appropriate uses for the neighborhood.” (The Tennessean)

As Caesars’ biggest division emerges from bankruptcy protection, a number of potential investors have expressed interest in building resorts flying the company’s flags.

(Bloomberg)—Caesars Entertainment Corp. hired two executives to help expand beyond gambling, including licensing the Caesars and Harrah’s brands to hotels that may not feature casinos.

As Caesars’ biggest division emerges from bankruptcy protection, a number of potential investors have expressed interest in building resorts flying the company’s flags, in the U.S. and abroad, Chief Executive Officer Mark Frissora said in an interview. Caesars’ customer loyalty program, with some 50 million members, is an attractive asset that lodging operators could use to market their properties, he said.

“There’s a lot of good money out there, developers that would love to have these brands, because they’re unique in the marketplace,” he said.

Marco Roca, a veteran of  Wyndham Worldwide Corp. and Starwood Hotels & Resorts, will join Caesars as president of global development, the company said in a statement Thursday. Michael Daly, who worked for 15 years at General Electric Co., will serve as senior vicepresident for strategy and mergers and acquisitions.

With revenue in the $38.5 billion casino industry climbing only modestly in the U.S., many operators are looking beyond gambling to spur growth, building sports and entertainment venues, buying social gaming companies and sprucing up their hotel offerings. And Frissora is looking for ways to give Caesars some momentum as a protracted bankruptcy process comes to a close.

The company, which was taken private by the investment firms Apollo Global Management LLC and TPG Capital for about $30 billion in 2008, has struggled since then under a mountain of debt. Following extensive negotiations with creditors, the company expects its largest unit, Caesars Entertainment Operating Co., to exit bankruptcy by September. Frissora, the former CEO of rental-car company Hertz Global Holdings Inc., joined in 2015.

Las Vegas-based Caesars is chasing opportunities in Japan, Canada, Australia, Brazil and Dubai, Frissora said. A planned casino in South Korea catering only to foreigners is still on track, he said, despite a Chinese restriction on travel to the country due to Seoul’s deployment of an antimissile system.

Japan legalized casino gambling last year but is still working on the details of where and how many to authorize. Caesars is looking to spend much less than the $10 billion number cited by competitors including Las Vegas Sands Corp. and MGM Resorts International, Frissora said. He said officials in Japan have told him that Caesars’ lack of a casino operation in the the Chinese enclave of Macau is a strength because the region is often associated with money laundering and other unsavory practices.

The company is also looking to acquire casinos operating in Colorado, the northeastern U.S. and any market where the company already competes but isn’t No. 1, he said.

Development plans are under way in Las Vegas, where the company is building a 300,000-square-foot convention center behind its Bally’s casino, with plans to offer space for smaller meetings than the big trade shows at the Las Vegas Convention Center. Business travelers on expense accounts spend as much as $150 more a night on food than leisure guests do, Frissora said.

Caesars adjusted its customer loyalty program last year to give more points to non-casino spending than betting, underscoring the growing importance of the business. Points in the company’s Total Rewards program can be exchanged for free meals, rooms and even a cruise in a partnership with Norwegian Cruise Line Holdings Ltd.

Other casino operators have explored non-gambling properties. MGM has developed non-casino hotels domestically and overseas with its MGM Grand brand. Wynn Resorts Ltd. plans a resort behind its flagship Las Vegas property that won’t initially include a casino.

In a deal negotiated with creditors, Caesars’ lenders and independent directors will gain the majority of the seats on a newly restructured board. Among directors leaving the board in September are Chairman Gary Loveman and TPG co-founder David Bonderman, moves that were disclosed in a June 5 filing. Bonderman was also on the board of Uber Technologies Inc. until June 13, when he made an inappropriate joke about women at an internal meeting and quickly resigned.

–With assistance from Rob Golum.To contact the reporter on this story: Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net To contact the editor responsible for this story: Crayton Harrison at tharrison5@bloomberg.net

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© 2017 Bloomberg L.P

The new additions enter the market in a period when IPOs have been relatively quiet. Last year saw only three total IPOs.

June produced a flurry of new REIT activity with two IPOs that hit the market in a one-week period and a third waiting in the wings. Although most are chalking up the timing to mere coincidence, the offerings could be a good measure of how favorable the climate is for new REITs.

The three REITs that launched the week of June 12th include Safety, Income and Growth; Four Springs Capital Trust; and Granite Point Mortgage Trust.

“Overall, I would characterize the market as inviting for IPOs, given that volatility is low and macroeconomic factors continue to support high asset prices,” says Brad Schwer, a REIT equity analyst at Morningstar Research Services. The IPOs include:

• Granite Point Mortgage Trust Inc. (GPMT): The REIT went public with its IPO on June 23rd with 10 million shares priced at $19.50 per share. The company expected to generate net proceeds of about $181 million.
• Safety, Income and Growth, Inc. (NYSE: SAFE) announced June 29th that it had closed its $250 million initial public offering and concurrent private placement, raising $246 million in total net proceeds.
• Four Springs Capital (FSPR): This IPO was still pending as of June 29th. The company has said that it intends to offer 5.6 million shares at an estimated price ranging between $17 and $19 per share.

The new additions enter the market in a period when IPOs have been relatively quiet. Last year saw only three total IPOs. Although the count for this year just jumped to seven, it is still well below the boom in 2013, when the market welcomed 19 new REITs, according to NAREIT.

“The bigger issue is that we are late in the cycle, growth is slowing, interest rates are heading up and NAVs have been lower,” says Haendel St. Juste, a REIT analyst with Mizuho Securities. “So it is probably not the most optimal market backdrop to be thinking about IPOs.”

Despite improvement in the stock market, REITs continue to face headwinds on returns and stock prices. Year-to-date returns for the S&P 500 Real Estate Index as of June 27th averaged 7.44 percent, trailing returns of the broader S&P 500, at 9.13 percent. In addition, a number of REITs are still trading at substantial discounts to NAV. “So it’s truly a mixed bag when it comes to how receptive REIT investors will be toward new IPOs,” says Schwer.

There are sectors of the REIT market that are outperforming their peers. For example, triple net lease companies have traded relatively well recently, which may have created a good window for Four Springs Capital, which specializes in triple net lease assets. Four of the five triple net lease REITs covered by research firm Green Street Advisors are trading at or above NAV. So that is a favorable climate for other net lease companies to try to do an IPO and access public capital, notes Dirk Aulabaugh, managing director of Green Street’s advisory group.

Berkshire Hathaway also bought 18.6 million shares—a nearly 10 percent stake—in net lease REIT STORE Capital Corp. in late June, which has brought more attention to the triple net lease sector. The one exception that could give investors pause is Spirit Realty Capital Inc. The net lease REIT is struggling due to high exposure from troubled retailer Shopko, among other investor concerns.

Another concern for the broader REIT industry is that the newcomers could put added strain on a market that some view as already overly crowded. There are now more than 190 REITs trading on the New York Stock Exchange. The counter point to that is that the public market only owns about 10 percent of the total commercial real estate market.

“I think there is always room for high-quality companies that may be able to provide REIT investors something that they can’t get today in the public markets,” says Aulabaugh. Safety, Income and Growth is good example of that in terms of the assets they are pursing. The public REIT space doesn’t have much that emulates what the firm is trying to do, which is specializing in long-term ground leases, according to Aulabaugh. Their story of stable cash flow and durability is one that could be appealing to REIT investors, he says.

“I don’t think the market is oversaturated. In the big scheme of things, it’s still a relatively young market,” adds Schwer. The IPOs coming on-line give investors more choices for portfolio diversification. “So we view incoming IPOs as mutually beneficial in that firms gain better access to capital by tapping into the public markets, and investors increase their options for parking cash,” he says.

Leasing velocity in the office sector has slowed down in the country’s top markets, reports the Wall Street Journal. Many Sears stores are in disrepair, according to Business Insider. These are among today’s must reads from around the commercial real estate industry.

1. Office Market Growth Slows “The pace of office-space leasing slowed in the second quarter, mostly because of sluggish activity in the country’s top five markets, according to new figures from data firm Reis Inc. The amount of occupied office space in New York, Los Angeles, Chicago, Houston and Dallas increased by a total of 789,000 square feet in the three-month period ending in June.” (Wall Street Journal, subscription required)
2. City Cracks Down on Office Roof Terraces “Big Apple real-estate developers and landlords are raising the roof over a citywide crackdown on office tower roof terraces — which have recently become the must-have amenity for tenants. Major new projects around town are imperiled or are being delayed by a bizarre, ‘out of left field’ interpretation by the Department of Buildings of 1961 zoning language that was only intended to stop a proliferation of outdoor flea markets, multiple sources told The Post. The 56-year-old zoning code stated that ‘all uses must be contained within enclosed buildings.’” (New York Post)
3. Treasury Yields Steady Before Release of Fed Minutes “Treasury yields were largely unchanged ahead of the Fed minutes from the June meeting that could give investors insight into how central-bank officials are lining up in the hawks-vs.-doves debate amid deteriorating inflation. The yield for the benchmark 10-year Treasury note steadied at 2.350%. The 2-year note’s yield added 1.2 basis point to 1.422%, while the yield for the 30-year bond fell 0.3 basis point to 2.863%. Bond prices go up when yields go down; one basis point is one one-hundredth of a percentage point.” (MarketWatch)
4. More Securitized Commercial Real Estate Debt Becomes Delinquent in June “The delinquency rate for securitized commercial real-estate loans jumped 28 basis points to 5.75% in June from May, the biggest month-over-month increase since March 2012 and up sharply from the 4.6% recorded in June last year, according to real estate provider Trepp Inc.” (Wall Street Journal, subscription required)
5. Jersey City is a Case Study in the Perils of Politics and Real Estate for the Kushners “Since the presidential election, Jersey City has turned sharply against Kushner. Opposition to Trump runs deep here, and the city has been taking out some of that hostility on the Kushner Cos., withdrawing political support for high-profile projects and shining a spotlight on the company’s business practices. Mayor Steve Fulop, a personal friend of 36-year-old Jared, abruptly yanked his support for a tax abatement at Journal Square in May. Several other Kushner projects have run into intense public opposition.” (Los Angeles Times)
6. Collapsing Ceilings and No Working Toilets: Sears Workers Describe Decay in Failing Stores “In interviews with Business Insider, half a dozen employees described signs of decay in the stores they work in. These include a rat problem, collapsing ceilings, empty shelves, and a lack of working toilets for weeks on end. Some of these problems started several years ago, and have been getting progressively worse, according to the employees, who asked to remain anonymous for fear of retaliation from Sears.” (Business Insider)
7. Capital Markets, Regulatory Shake-Ups Ruffle REIT Industry “According to the 2017 BDO RiskFactor Report for REITs, competition for assets at lucrative prices, the anticipation of tax reform and the likely drumbeat of interest rate hikes rank high on REITs’ risk radar. BDO further reports that 2017 is leaving a string of broken stock market records in its wake, but REITs have seen more modest boosts in performance. REITs registered 3.41 percent annual growth in early-June, compared to the broader S&P 500’s 9.91 gains.’ (World Property Journal)
8. Apple Disrupts Silicon Valley with Another Eye-Catcher: its New Home “Things change when a spaceship comes to town. Tourists stroll by, whipping out their iPhones to get a photo. New businesses move in. And real estate prices go up even more. Apple’s new home in Cupertino — the centerpiece being a $5 billion, four-story, 2.8 million-square-foot ring that can be seen from space and that locals call the spaceship — is still getting some final touches, and employees have just started to trickle in. The full squadron, about 12,000 people, will arrive in several months.” (The New York Times)
9. Oxford Properties JV Nabs Pair of DC Trophy Buildings “Oxford Properties Group and Norges Bank Real Estate Management, the real estate branch of the Norwegian Government Pension Fund Global, joined forces in order to acquire two prime office buildings in Washington, D.C. The LEED Gold-certified assets total more than 500,000 square feet and will be managed by Oxford, the operating partner in the joint venture.” (Commercial Property Executive)
10. Here’s How Trump Transferred Wealth to his Son While Avoiding the Usual Taxes “In April 2016, as Donald Trump was on the cusp of clinching the Republican nomination for the White House, he sold two luxury condos near Manhattan’s Central Park for less than half the price his company had said they were worth. The lucky buyer: Trump’s son, Eric. Such family-friendly deals would normally incur hundreds of thousands of dollars in gift taxes. But in this case, Trump appears unlikely to have been on the hook for anywhere near that, thanks to benefits only available to real estate developers.” (The Real Deal)

The decline of physical retail will force the U.S. to rethink its entire idea of what a city is for.

(Bloomberg View)—As technology changes, a country’s industrial mix changes. A century and a half ago, most Americans — and indeed, most human beings — worked on farms. Today almost nobody does. Nowadays, a substantial number of Americans work in retail, ringing up purchases, stocking shelves or helping customers find what they need. But in a decade or two, it’s anyone’s guess as to whether brick-and-mortar retail will continue to dominate the urban, industrial and occupational landscape of the U.S.

Early signs point to “no.” The rise of e-commerce continues unabated:

Meanwhile, retail jobs are becoming rarer, with a falling share of the population working in the industry:

The decline of physical retail has received a lot of attention recently. A wave of store closures and bankruptcies this year has been described as a “retail apocalypse”:

There have been nine retail bankruptcies in 2017—as many as all of 2016. J.C. Penney, RadioShack, Macy’s, and Sears have each announced more than 100 store closures. Sports Authority has liquidated, and Payless has filed for bankruptcy. Last week, several apparel companies’ stocks hit new multi-year lows, including Lululemon, Urban Outfitters, and American Eagle.

Naturally, many people are worried that e-commerce is coming for their jobs. Given that it’s often difficult for workers to transition to new lines of work, this is a perfectly valid fear. But in the case of retail, I’m not that worried. Unlike manufacturing, where overseas competition in the ’00s derailed many Americans’ careers, retail doesn’t involve that many specialized skills. Usually it’s just managing people, talking to customers and doing routine work. Those are the kinds of skills that will transfer to other jobs. In other words, it doesn’t seem likely that out-of-work cashiers and store salespeople will be cast into lower-paying jobs or onto the welfare rolls for the rest of their lives. They can go into health care, food service or a variety of different service jobs at companies in many industries.

But the end of brick-and-mortar retail is certainly a concern, for a very different reason. Modern U.S. cities, especially the suburbs, are built around retail stores. If those stores evaporate into Amazon.com Inc.’s cloud servers, huge gaping holes will open up in the economic landscape of almost every suburb and town in the U.S.

Think of any suburban area you know. It consists mainly of houses, some apartment complexes, low-rise offices and strip-mall shopping centers filled with retail and restaurants. Now imagine if half the stores vanished, leaving large sections of every strip mall boarded up. First of all, the restaurants and bars that remained in the shopping centers would lose a lot of their customers. As of now, many people drive to shopping centers so they can do their eating and retail shopping in one place — with retail gone, the fixed costs of driving to the local strip mall are the same, but the benefit is much lower. That would hit the bottom line of food and drink establishments.

Even worse, the empty, semi-abandoned strip malls could become centers of suburban blight. Vacant properties draw drugs and crime, cause fires, increase local violence and reduce property values in the surrounding areas. The retail apocalypse could make many suburbs look like they just suffered an actual apocalypse.

The decline of physical retail will thus force the U.S. to rethink its entire idea of what a city is for. Why do people live near each other, if not to shop at the same places?

One reason is to go out to eat. Even as retail has declined, restaurants and bars have been doing more business:

Another reason for people to cluster is to take advantage of schools, day-care facilities, hospitals and other local services. That’s not going away in the age of Amazon — people like living near their friends and meeting new people in person.

So even if physical retail dwindles, urban and suburban living will not vanish. It will just change. Towns and cities across the country will have to consolidate into a more compact form, to eliminate the gaps left by vanishing retailers — in other words, sprawl will have to be reduced. Strip malls will still exist, but they’ll be fewer in number. And preference for pedestrian-friendly streets will probably increase, since walking around is nicer when going out to eat than when buying a new vacuum cleaner.

Rebuilding the suburbs will mean a lot of spending at the local and state level. But perhaps that’s not such a bad thing. Working-class Americans need jobs, and this sort of epic construction project would create a lot of them. If the retail apocalypse leads to a suburban renaissance, maybe it’s something to be relished rather than feared.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

To contact the author of this story: Noah Smith at nsmith150@bloomberg.net To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net

For more columns from Bloomberg View, visit Bloomberg view

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Costs are escalating as mall owners work to keep their real estate up to date and fill the void left by failing stores.

(Bloomberg)—The owner of the Newgate Mall plans to pour $500,000 into overhauling the outdated food court in a bid to lure restaurateurs and hungry shoppers. Rent payments from eateries are never going to recoup the renovation costs, but for landlord Time Equities Inc., that’s not the point. The point is survival.

The food hall is part of an effort to breathe new life into the entire 718,000-square-foot (67,000-square-meter) center and increase foot traffic, according to Ami Ziff, director of national retail at New York-based Time Equities. The company, which bought Newgate in Ogden, Utah, from GGP Inc. for $69.5 million last year, is one of many landlords wagering that elaborate makeovers will keep them competitive as they reinvent their properties in the age of Amazon.

Costs are escalating as mall owners work to keep their real estate up to date and fill the void left by failing stores. The companies are turning to everything from restaurants and bars to mini-golf courses and rock-climbing gyms to draw in customers who appear more interested in being entertained during a trip to the mall than they are in buying clothes and electronics. The new tenants will pay higher rents than struggling chains such as Macy’s and Sears, and hopefully attract more traffic for retailers at the property, according to Haendel St. Juste, an analyst at Mizuho Securities USA LLC.

“The math is pretty obvious, pretty compelling, but there are risks,” St. Juste said in an interview. “This hasn’t been done before on a broad scale.”

Costly Updates

It’s more costly to build and maintain large, customized spaces that require extensive updates such as commercial kitchens, according to St. Juste. Landlords’ capital expenditures — including repairs, remodeling and leasing costs — are rising relative to the income being generated by retail properties.

As the retail business evolves, such capital expenditures will become more crucial in assessing property values, according to Green Street Advisors LLC, a real estate research firm. Many investors aren’t adequately accounting for the rising costs of maintaining a mall, Green Street said in its annual outlook in January. The real question is whether this is a temporary blip, or a new normal, according to Cedrik Lechance, an analyst at the Newport Beach, California-based firm.

More than a dozen retailers have gone bankrupt this year as the shift toward online shopping accelerates. Even healthy companies are shuttering hundreds of locations. As many as 13,000 stores are forecast to close next year, compared with 4,000 in 2016, according to brokerage Cushman & Wakefield Inc.

Many landlords have been proactive in reclaiming space from weaker tenants to fill with more profitable ones. Chicago-based GGP, the No. 2 U.S. mall owner, has bought back 115 department stores over the last six years and redeveloped them, Chief Executive Officer Sandeep Mathrani said last month during the National Association of Real Estate Investment Trust’s annual conference in New York. The new tenant roster at those malls includes Best Buy and Nordstrom stores, restaurant-arcade chain Dave & Buster’s and health club Life Time Fitness, he said.

“We’ve actually made a very, very big statement by saying that over the next five years, we hope to recapture another 100 department stores,” Mathrani said.

Gaping Holes

Department stores, the heart of suburban malls for decades, have been particularly hard hit by changing consumer tastes, leaving gaping holes in their wake. The departure of a center’s anchor tenant can easily spur an overhaul of the entire property.

“If Sears shuts down, you need to reinvent that part of the mall,” said Green Street’s Lechance. “Typically, when you reinvent one part of the mall, you redevelop the whole mall.”

So far, jettisoning and replacing undesirable tenants has been a successful formula for many landlords, but there is still a lot of work to be done, according to Jeffrey Langbaum, an analyst with Bloomberg Intelligence. Some companies won’t have the cash to keep up amid the relentless pace of store closures, he said.

“For the most part, these companies have been able to redevelop and backfill space,” Langbaum said. “That’s great, but the big wave is still coming.”

It can be difficult to calculate capital expenditures for malls because of poor landlord disclosures, Green Street analysts said in the January report. It’s a challenge to distinguish between deferred maintenance — for example, fixing a roof — and projects that will actually generate additional revenue at a property, the analysts wrote.

GGP, Simon

Giants such as GGP and Simon Property Group Inc., the largest mall owner in the U.S., are better positioned to absorb the increased costs than their peers that own less-desirable real estate, according to Green Street. The two companies have some of the most profitable malls in the country, and their high sales volumes make it easier to recover expenses.

For Simon, redevelopment costs as a percentage of net operating income climbed from 3.5 percent in 2010 to 16.6 percent in 2015, before dropping to 7.6 percent last year, according to data Mizuho pulled from the company’s filings. A representative for Indianapolis-based Simon declined to comment. However, on a conference call in April, CEO David Simon responded to a question from an analyst about the potential for rising capital expenditures.

“We spent a lot of capital in the portfolio to upgrade the look and feel. We’re going to continue to do that,” Simon said. “I think the returns will be there, and I don’t think the dynamics of today’s current environment have changed that.”

For Ziff of Time Equities, which buys outdated malls and renovates them, it doesn’t matter how you categorize the expenses of making over a center for the modern era, or if there is a linear path to a return on a particular project. Whether it’s installing a fireplace in a new food hall, or buying artwork for the common area, the aim is to drive higher traffic and tenant sales, he said. Ultimately, it’s all cash going out the door.

“It’s not always an exact science quantifying the return on investment when it comes to mall renovations and redevelopments,” Ziff said. “Every property has its own story.”

–With assistance from Lauren Coleman-Lochner.To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net To contact the editors responsible for this story: Daniel Taub at dtaub@bloomberg.net Christine Maurus, Kara Wetzel

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When it comes to due diligence, information costs money and therefore must have a return on investment.

Real estate delivers better returns than the stock market does, but modeling returns requires critical thinking and a lot of due diligence. The better our due diligence, the better our models, the greater the access to capital. What makes commercial real estate such a unique asset class is that every investment is different and our due diligence needs to adjust accordingly.

When it comes to due diligence, information costs money and therefore must have a return on investment. In this article, I discuss the decisions that real estate investors face when it comes to physical due diligence—think environmental site assessments, property condition reports, BOMA surveys, ALTA surveys, seismic risk assessments, and the like—and how to wring the most return on investment out of the process.

Who should direct the due diligence? 

A questions I often get asked is: should the seller do pre-disposition due diligence? For most transactions, the buyer performs due diligence assessments at their own expense. However, on large transactions where the broker expects the buyer pool to be large and competitive, I believe that the seller is well-served to provide a full due diligence package at listing. In this case it pays to proactively reveal any issues and hold the asset out for auction “naked to the world.” Because in a competitive bidding process, buyers will discount any imperfections and focus on key economics. With a large data room it is difficult for the buyers to fully integrate every issue or imperfection into their model. However, a winning buyer who finds out about problems during due diligence, and may be experiencing some buyer’s remorse, is far more likely to raise these issues as they are discovered.

The ROI of environmental due diligence

We do 25,000 environmental reports per year and I’m amazed at how many of the assets that we assess have issues. We find that about 10 percent of Phase I Environmental Site Assessments (ESA) across all asset types include a recommendation for further investigation (Phase II ESA), and another 10 percent advise the buyer of an environmental issue that may not require action, but is important in some circumstances. For example, some assets will have subsurface contamination from an on-site or off-site source that is low enough to be written off as a de minimis issue. However, if the buyer intends to develop the asset they will experience extra costs and delays due to soil or groundwater requiring special handling.

The real value in a receiving a clean Phase I Environmental Site Assessment is that you have an asset that is leasable, salable and financeable. Environmental issues—big or small—take time and money to remediate, which means that assets with open environmental issues are tough to lease, sell and finance.

The ROI of property condition reports

The data provided in the immediate repairs and capital replacement reserves reports is important new information for the buyer’s financial model. Buyers should understand the differences between an ASTM Property Condition Assessment (PCA) performed by a single assessor and the multi-disciplined team approach to the assessment. The standard scope of work for a PCA is defined by ASTM E2018-15 and requires the inspector to identify deficiencies that are readily accessible and easily visible during a walk-through survey of the property. It does not require the inspector to turn on or open up building systems. That means that if you want the inspector to, for example, turn on the air conditioning in the dead of winter, you need more than a standard assessment. Multi-disciplinary PCAs are generally custom scopes of work developed considering clients’ specific needs and concerns, and use specialty inspectors in addition to the generalist assessor. Commonly engaged specialists are structural engineers, mechanical engineers/HVAC experts, elevator inspectors, façade specialists, registered roof observers or ADA specialists. Of course, adding these specialists increases the price of the PCA, so it is critical that the client and consultant work together to make smart ROI-centric choices based on the age and size of the asset, the property type and information disclosed by the seller.

The ROI of adding an energy audit to the PCA 

A PCA report provides recommendations to replace a mechanical system at the end of its useful life. But ROI can be improved if equipment is proactively fixed or replaced at the end of its efficient life. An average energy audit on an office building will yield a dozen recommendations with payback periods of less than three years. Common recommendations include lighting retrofits, building controls, building system tune-ups, water fixture replacements and building retro-commissioning.

Retro-commissioning is a cost-effective way to improve a building’s operating performance. As a building ages, its major building systems (including the central plant) steadily become less efficient due to things like tenant or use changes, schedule modifications, equipment failures, sensor failure or poor maintenance and management. When building systems stop operating per the design and use intent, it results in inefficiencies, higher operating costs and increased tenant complaints. Retro-commissioning addresses such issues by fine-tuning existing building systems to make them operate optimally through scheduling, sequencing, controls programming and optimizing set points. Importantly, it does not require replacement of large capital items. During the procedure, an energy engineer investigates and documents the proper and intended use of the building and recommends a list of corrections to be implemented that will meet current demand, improve the tenant experience and significantly lower energy bills. Retro-commission projects often have a less than a 24-month payback period, and really are a no-brainer. ROI is particularly great for larger, older assets, so buyers of office properties that are at least 100,000 sq. ft. and more than 10 years old should consider making retro-commissioning standard procedure.

The ROI of seismic risk assessments

Consider this: if the net operating income (NOI) associated with the asset doesn’t include the cost of insurance, then the NOI is overstated. A lot of commercial real estate assets do not carry seismic insurance. Therefore, the owner is essentially self-insured and the costs of insurance aren’t accounted for in the NOI. Investors are well-served to understand the seismic risk their portfolio is exposed to. Predicting loss in the event of an earthquake is difficult and investors should acknowledge that even the best models and assessments are imperfect. In Yogi Berra’s words: “It’s tough to make predictions, especially about the future!” Nevertheless, engineers can distinguish vulnerable buildings during a seismic risk assessment (also known as a Probable Maximum Loss report). Owner/investors should consider purchasing earthquake insurance on all assets, and for vulnerable buildings and those with high Probable Maximum Loss ratings, they should consider the return on investing in an earthquake retrofit. Seismic vulnerabilities such as tuck-under-parking and weak cripple walls can be retrofitted for reasonable costs. Cities like Los Angeles, San Francisco and Santa Monica have implemented wide-reaching seismic retrofit ordinances in recent years that mandate the structural strengthening of vulnerable buildings. Over the next few years, these ordinances will require millions of dollars of retrofit work to prevent billions of dollars worth of potential loss during future seismic events.

The ROI of a BOMA survey

You would never buy a building without knowing how big it is. Well, you’d be wise to get a BOMA survey to confirm the exact space measurements because surprisingly, buildings are routinely 5 percent bigger or smaller than what the tax records or listing brochure shows. Even a seemingly small variation can have great consequences: if a building priced at $300 per sq. ft. is under- or over-stated by 2,000 sq. ft., then the value adjustment would be $600,000. That means that if a proportion price adjustment is realized, the ROI on your BOMA survey could be fifteen-fold.

Note that the BOMA measurement standard includes two acceptable methodologies for measuring single- or multi-tenant buildings: the simpler Methodology A (known as the Legacy Method) which results in different ‘load factors’ for each floor; and Methodology B (known as the Single Load Factor Method), which gives one averaged load factor for the whole building. There may be some nuances between these measurements, so it is important that your consultant is able to deliver a clear and highly defendable number.

The ROI of an ALTA survey

ALTA surveys provide an accurate, aerial view of a property and any potential areas of improvement or property development, giving investors the critical information they need to understand and realize the best possible future use of a site. By providing a bird’s eye view, it can, for example, be used to determine the optimal location for improvements, such as parking areas, green areas, building expansions etc. The survey will also show if there are any boundary issues or conflicts with neighbors, such as encroachments of improvements over property lines or possible improvement impacts on easements. Access to such information that impacts a site’s development potential or allowed future use—including utility easements, reciprocal easements, right of ways, etc.—will enable better investment decisions.

The ALTA survey also details restrictions that impact the future potential and profitability of an investment. It includes information about zoning and related setbacks, as well as exterior “footprint” dimensions of structures and ground heights, which helps investors verify compliance with current zoning regulations and determine what they can or can’t do with a site. It also gives investors critical information about the location of utilities, which must be considered in future development plans. The survey will show flood zones, and help inform decisions about whether flood insurance is prudent.

And, because an ALTA survey can be used to create base maps or backgrounds for development brochures, flyers and civil development plans, ROI is very easily achieved.

The ROI of credibility

Sellers respect a buyer who conducts thorough due diligence and when the buyer asks for consideration for an issue that is discovered during the due diligence, it will help if they have reliable, trustworthy reports from a highly credible engineering/due diligence firm. The seller is far more likely to accommodate a request for consideration of an issue that was discovered or assessed by licensed, credible professionals.

As I see it, commercial real estate provides the opportunity for superior returns to the stock or bond market for those investors who have the acumen to turn the due diligence process from a tedious task into a money maker.

Joseph P. Derhake serves as CEO of Partner Engineering and Science Inc., an engineering and environmental due diligence consulting firm. He can be reached at JDerhake@Partneresi.com.

The $23.05-a-share offer, which consists of $19.05 a share plus a $4.00 special dividend to be paid prior to the the deal’s completion, is about 13 percent more than Parkway’s closing price on June 29.

(Bloomberg)—Canada Pension Plan Investment Board agreed to buy Parkway Inc., a real estate investment trust with properties in the Houston area, for $1.2 billion.

The $23.05-a-share offer, which consists of $19.05 a share plus a $4.00 special dividend to be paid prior to the the deal’s completion, is about 13 percent more than Parkway’s closing price on June 29, the companies said in a statement Friday. Parkway’s board has unanimously approved the transaction. TPG Capital and its affiliates, which own about 9.8 percent of the REIT, have agreed to vote in favor of the deal.

“Parkway fits well with CPPIB’s long-term real estate strategy to hold stable, high-quality assets in large U.S. markets,” Hilary Spann, the pension’s head of U.S. real estate, said in the statement. “Through this investment, CPPIB gains additional scale in Houston.”

Parkway has 19 office properties in the Houston area that were 88 percent leased as of March 31, according to the statement.

To contact the reporter on this story: Christine Maurus in New York at cmaurus@bloomberg.net To contact the editors responsible for this story: Daniel Taub at dtaub@bloomberg.net Alan Mirabella

COPYRIGHT© 2017 Bloomberg L.P

Sycamore Partners plans to split Staples into three parts, reports MarketWatch. Amazon is planning to open a new office in Boston, according to the Boston Globe. These are among today’s must reads from around the commercial real estate industry.

1. Ten Best Cities for Global Real Estate Investors“And the best city in the world to invest in real estate is… Los Angeles. The City of Angels beat out London as the new hot spot for global real estate investors in the third annual Schroders Global Cities 30 Index, released on June 26.  Schroders is a London-based investment bank. For a city known more as a one-trick pony producing movie magic, Los Angeles is home to the well-respected colleges UCLA, USC and Pepperdine and start up tech companies are claiming their spot on the A-list. Snapchat, Pandora, eHarmony, Dollar Shave Club and Boingo Wireless are just some of the big names in tech that call LA and its beach ‘burbs their home.” (Forbes)
2. Sycamore Plans to Split Staples Into Three to Help Fund the Takeover “Sycamore Partners intends to split Staples Inc. into three to help fund its $6.9 billion purchase of the office-supply seller, in another sign of the challenges facing the retail industry. The plan calls for Staples to be divided into three separately financed entities, according to people familiar with the matter: U.S. retail; Canadian retail; and corporate-supply businesses. The three groups will still remain under the same corporate umbrella.’ (MarketWatch)
3. Harvard Said to be Near Real Estate, Private Equity Fund Sale “Harvard Management Co., which oversees the $35.7 billion endowment, is in talks with Lexington Partners for stakes in venture capital and buyout funds, according to two people with knowledge of the matter. It also has a commitment to sell interests in real estate funds to Landmark Partners, said the people, who asked not to be identified because the discussions are private. Some additional buyers may be involved for parts of the deal, one of the people said.” (Bloomberg)
4. Lower Manhattan Rents Hit Peak as Revived Downtown Booms “Asking rents for office space in downtown New York hit a record high in May as construction of a new tower at the World Trade Center and the migration of firms to a revitalized Lower Manhattan helped lift rental rates, brokerage CBRE Group said on Thursday. The average rent landlords are seeking in downtown climbed to $62 a square foot last month when the addition of 1.7 million square feet at 3 World Trade Center is added to the office space available for lease, the brokerage said.” (Reuters)
5. WeWork Wants to Take its Brand Beyond its Own Real Estate “WeWork is best known for its dozens of hip office buildings around the world where startups and freelancers can rent out desks by the month and mingle with each other. But the company is also working to extend its brand beyond the walls of its own buildings. Companies ‘are now starting to ask if we can bring in the experience and environment to them,’WeWork product chief Dave Fano told Axios of the startup’s new office management services in an interview.” (Axios)
6. Amazon Reportedly Near Deal for Building in Fort Point “You can add Amazon to the list of companies beating a path to Fort Point. The e-commerce giant is finalizing a lease for a large office space at 253 Summer St., next to General Electric’s new corporate headquarters in a neighborhood that’s emerging as the epicenter of Boston’s tech economy. Amazon would take about 150,000 square feet in the historic yellow-brick former warehouse overlooking Fort Point Channel, according to sources familiar with the deal.” (Boston Globe)
7. The Latest Victim in the Retail Apocalypse? Outlet Malls “Et tu, outlet malls? After years of being seemingly insulated from the ills affecting department stores, the country’s 200-plus outlet malls are starting to show signs of strain. Tanger Factory Outlet Centers, which owns 43 centers in 22 states and is the largest publicly traded pure-play outlet operator in the US, is throwing off some warning signs, experts tell The Post.” (New York Post)
8. Massey Noncommittal on His C&W Future, Could Run for Mayor Again “On the day that he ended his campaign to replace Bill de Blasio as mayor of New York City, Cushman & Wakefield executive Paul Massey told Commercial Observer that he would not rule out running for office again while also casting doubt over his future with the commercial real estate brokerage giant.Massey announced today that he was calling off his bid for the Republican mayoral nomination, citing the “extraordinary” challenge of raising enough money to defeat an incumbent Democratic mayor, as CO reported earlier today.” (Commercial Observer)
9. Staples Investors Should Take the Money from Private Equity and Run “Is going private going to save Staples? I have my doubts, even though many believe that being acquired by a private-equity firm improves the odds that Staples  can survive in the cutthroat retail arena. My doubts trace to a recent study that found that companies undergoing a private-equity leveraged buyout don’t perform any better after going private than they did when they were publicly traded.” (Fortune)
10. San Antonio Lures Investors “San Antonio has a diversified economy and employment is growing in most industries. That has fueled demand for apartments, which is expected to remain high as the metro continues to add jobs and households at a rate above the national trend, and as more residents move south to avoid the growing cost of housing in Austin.” (Commercial Property Executive)

The Avente Capital Partners I LP, with about $28 million in assets, plans to make opportunistic investments in a variety of real estate sectors.

by Miles Weiss
(Bloomberg) –Nothing beats a Harvard connection for forging future business deals. Just ask Goga Vukmirovic, a former war refugee and Ivy League water polo star who has teamed up with the billionaire Samwer brothers of Germany to start a U.S. real estate fund.

The Samwers — Marc, Oliver and Alexander, a former classmate of Vukmirovic — provided the initial backing for Avente Capital Management’s first fund, she said in an interview this week. The Samwers also own half of the New York-based money manager, through Palamos Americas GMBH, and Vukmirovic owns the other 50 percent, according to an April filing with the U.S. Securities and Exchange Commission.

The debut fund, Avente Capital Partners I LP, is small, with about $28 million in assets. Vukmirovic plans to make opportunistic investments in sectors ranging from apartment buildings and condos to student housing and mixed-use developments. The investments could be a challenge after a seven-year surge in commercial-property prices.

“It has been a pretty frothy real estate market and we have been hard at work,” said Vukmirovic, who previously worked at hedge fund firm Eton Park Capital Management. “We are being very opportunistic.”

European investment in U.S. commercial real estate fell 28 percent to $14.3 billion in the 12 months ended March 31, according to Real Capital Analytics Inc., but Germany was an exception to the trend. Acquisitions by German investors rose 60 percent to $5.6 billion, and the country was the third-largest cross-border purchaser of U.S. real estate assets, trailing only China and Canada.

Web Ventures

The Samwers are among Europe’s best-known technology entrepreneurs, having seeded a number of web startups through R ocket Internet SE, a publicly traded venture capital firm known for cloning U.S. shopping websites and tailoring them to markets as far-flung as Pakistan and Myanmar. They’ve also been acquiring European real estate through vehicles including Palamos, formerly known as Augustus Real Estate GMBH, according to the filing and German press reports.

Vukmirovic, 38, has had an unusual career path. She fled war-torn Sarajevo, Bosnia-Herzegovina, as a high school student in the early 1990s, landing first in Venezuela and then in Connecticut. She earned an undergraduate degree in molecular biology at Princeton University, where her play as a goalie would later earn her a spot in the Collegiate Water Polo Association’s Hall of Fame.

After Princeton, she entered Harvard’s program that accepts about 10 students annually to earn both a law degree and a master’s in business administration in four years. Alexander Samwer, the youngest of the brothers, attended Harvard Business School at the time. He now handles most of the family’s real estate deals, according to local media reports.

“It was a great place to meet a lot of really talented people,” said Vukmirovic, who first met the Samwer brother at the university. Businessman and politician Mitt Romney is among those who have gone through the school’s joint degree program.

Vukmirovic started Avente in 2015 after eight years on the event-driven and long-short equities teams at Eton Park. Avente’s ties to the Samwers became public this year when its assets crossed the $25 million threshold, which requires SEC registration.

–With assistance from Stefan Nicola.To contact the reporter on this story: Miles Weiss in Washington at mweiss@bloomberg.net To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net Josh Friedman, Vincent Bielski