November, 2020 - Sachse Construction

Apartment Investors Mull Opportunities in Distressed Malls

Apartment dealmakers may find an opportunity to build new apartments around the shells of under-performing or empty regional malls. Hundreds of troubled shopping malls may be seized by lenders over the next year, experts say.

“In the current market with the pandemic, the number of properties considering this kind of redevelopment has multiplied three or four-fold,” says Brian McAuliffe, president of CBRE Capital Markets and leader of the firm’s multifamily sales business, working in the firms Chicago office.

Regional malls, class-B and class-C shopping centers in deep trouble

The pandemic has put tremendous pressure on many shopping malls. Hundreds have lost many of their largest, most important retail tenants as department store chains like J.C. Penney and Lord & Taylor declared bankruptcy and others scale back in the chaos caused by the coronavirus.

The vast majority of class-B and class-C malls have lost at least one anchor tenant, according to research from Green Street Advisors. That adds up to several hundred properties that have lost a significant part of their income.

Trepp has identified more than 100 properties that owners may soon surrender to lenders, more than a quarter of those are regional malls.

 “Malls are starting to go back to lenders—it definitely is happening now,” says Thomas Dobrowski, vice chairman for Newmark Group, leading a capital markets group specializing in enclosed regional malls, working in the firm’s New York City office.

More lenders are likely to take action in January and February, after the holiday season is complete. “Most lenders have been willing to work with the borrowers, granting them temporary forbearance to weather the storm,” says Dobrowski. The abatements and forbearance are burning off.”

In past, developers added apartments to active malls

Developers have proposed to redevelop more than a hundred malls into mixed-used properties with apartments—56 of these have been completed and another 75 are in the works, according to a count by Ellen Dunham-Jones, a professor of architecture at Georgia Tech. Another 120 defunct malls have been turned into things like sports areas, movie sounds stages, industrial sites or data centers.

“The properties that have experienced these transitions have traditionally been active malls,” says Dobrowski.

Successful redevelopments of closed malls have often been in strong locations, where the land under the mall is valuable enough to justify demolition and new construction. “What you really have is land—the land has to be appraised at a value that make the demolitions and construction worth it,” says Bob Barone of Partner Engineering, who has worked on many mall redevelopments.

A strong location can make even a complicated redevelopment work. Humphreys and Partners Architects, headquartered in Dallas, was one of the architecture firms that produced master plans for proposed development at Dallas Midtown, a 450-acre new, multi-phase, mixed-use plan that is still opening new phases on the site of Dallas’ old Valley View Mall, which closed eight years ago.

“It’s premium real estate in an excellent location,” says Walter Hughes, vice president for Humphreys.

The hundreds of second-tier malls that are likely to become available for redevelopment may be more difficult. To make sense, a distressed shopping mall would have to be offered for sale a price low enough to allow the new owner to manage it profitably and pay for an eventual renovation. “It needs to be sold at a price that makes sense,” says Dobrowski.

Redeveloping prominent mall sites also require a long list of stakeholders to agree, including local zoning offices and the remaining retail tenants with long-term leases.

“It takes a lot of time. It takes lot of human resources,” says Dobrowski. “Redevelopment of these properties takes years.”

Possible answers to problematic redevelopments

The easiest way to add new apartments to an old mall is to build on the parking lot. If there are many un-used spaces, a mostly-empty lot could become the site of a new, wood-frame apartment building, says Hughes. If all the parking spaces are still needed by the retail, that’s a good sign. An apartment development in an attractive location may have enough demand to support the cost of building apartments over a layer of structured parking or wrapped around a concrete parking garage.

It’s more difficult to turn an empty, enclosed mall building into new apartments. “Remodeling the mall itself for apartments is generally not easy,” says Hughes. “The ceiling height is the wrong height and the floor plate is the wrong depth.”

Some demolition may be necessary. Dealmakers like McAuliffe propose tearing down empty, anchor stores to add new apartments to old, enclosed mall buildings.  “Take any regional mall,” says McAuliffe. “There have been major big box stores and department stores that have closed. Developers are looking to knock down the big boxes to build apartments.”

Amazon Pushes Holiday Shoppers to Pick Up Packages at Stores Amid Potential Delivery Crunch

Amazon is pushing holiday shoppers to retrieve their own packages from brick-and-mortar retail locations and neighborhood “hubs,” as it braces for a surge in online orders.

The company said in a statement Monday that Amazon shoppers nationwide can now get their gifts delivered to one of its physical bookstores, called Amazon Books, or an Amazon 4-star location.

Amazon also highlighted its network of contactless pickup points, referred to as Amazon Hub, as an “alternative delivery location” for holiday orders. Hub locations are self-service kiosks and manned pickup counters, located inside or near local shops, as well as in residential apartment buildings.

Amazon said it was offering shoppers new ways to pick up their packages as a means of keeping their holiday season “spoiler free.”

“This year many customers and their families are opting to stay home so the challenge of keeping those special gifts under wraps from family, friends or loved ones is going to be greater than ever,” John Felton, vice president of Amazon’s global delivery services, said in a statement.

But it could also benefit Amazon in other ways. By pushing shoppers to have their orders sent to Hubs and brick-and-mortar stores, Amazon can cut down on the number of last-mile delivery trips that are necessary. The last mile is an especially labor-intensive and expensive step in the delivery process.

To that end, Amazon also pointed shoppers to its “Amazon Day” delivery option, which allows them to pick a day of the week to receive all of their orders, cutting down on the number of boxes and deliveries. It reduces the number of trips Amazon has to make to a single address.

Amazon will likely need all the help it can get when it comes to deliveries this holiday season. For months, large shippers such as FedEx and UPS have been warning of a potential capacity shortfall, as the pandemic-induced surge of online shopping, coupled with the holiday peak, leaves them struggling to keep up.

Online sales this holiday season are expected to spike 33% year over year to a record $189 billion, according to Adobe Analytics.

An Amazon spokesperson told CNBC in a statement that alternative delivery options don’t impact network capacity. “It’s about providing more choice for customers,” they added.

Amazon said it has increased transportation capacity, staffed up its warehouses significantly and put more selection in fulfillment centers closer to customers.

“We deliver for our customers every day and we’ll continue to do so this holiday season,” an Amazon spokesperson said in a statement.

Amazon is also managing tight capacity inside its warehouses after experiencing months of peak online ordering activity due to the pandemic. The company encouraged consumers to start their holiday shopping early in anticipation of the delivery crunch. Amazon kicked off its holiday deal season in late October, a month earlier than usual, following a delayed Prime Day.

Other retailers have followed suit. Walmart and Home Depot nixed one-day store events in favor of rolling out deals over several days.

NYC Poised for 2021 COVID Comeback with Major Real Estate Developments

Amid rising COVID cases and looming lockdowns, my fellow New Yorkers should take heart — because we will have a greater city to look forward to once this pandemic’s over.

Although the flight from the Big Apple, increasing crime, and possible MTA cuts are dominating media coverage, less noticed is a wealth of new projects that will make the town newly appealing — a multitude of splendid apartment buildings, amenity-rich office towers, museums, restaurants, and waterfront parks in all of the five boroughs within two years or less.

A new JP Morgan Chase headquarters and the nearly completed 425 Park Avenue tower promise to restore the boulevard’s commercial luster. The dead-seeming zone between Madison Square Garden and Hudson Yards won’t be that way for long: The new Moynihan Train Hall inside the beautifully restored Farley Post Office building between Eighth and Ninth avenues opens by Dec. 31. At the work-in-progress Manhattan West complex between Ninth and Tenth avenues, a giant food hall opens in early 2021, followed in the summer by a public plaza, and eateries including a two-level restaurant from Danny Meyer.

Daniel Boulud is launching a high-end restaurant at One Vanderbilt this winter and Daniel Humm will follow at 425 Park Avenue next year. A 40,000-square-foot food hall from Jean-Georges Vongerichten is coming to the South Street Seaport in 2021. A few blocks west, the long-awaited Perelman Performing Arts Center is rising at the World Trade Center. The cultural boom also includes a 230,000-square-foot expansion at the Museum of Natural History. The Studio Museum in Harlem is adding much-needed elbow room for its collections with a new building designed by architect David Adjaye in the heart of West 125th Street.

Little Island Park, the undulating 2.5-acre “floating” public playground mounted on mushroom-like pods in the Hudson River off West 14th Street, welcomes visitors in the spring. More public waterfront access is on the way at Brooklyn’s Greenpoint Landing apartment complex, which will have a large green space designed by High Line park creator James Corner.

Handsome new apartment towers are going up everywhere — and most of them are not for the one percent. A 100-percent affordable rental building is rising at Halletts Point on the Astoria waterfront. A 958-unit skyscraper called Sven will open in Long Island City by the end of 2021. Façade installation is underway on another fully affordable complex at 1709 Surf Avenue, one of several projects bringing new life and energy to Coney Island. Meanwhile, new shops and restaurants are coming to the La Central affordable residential complex in the Melrose section of The Bronx.

Most of the new developments were set in motion before the virus struck — but not all. A large Target store is coming to a mixed-use building on West 125th Street that was first announced in August. The Avra restaurant empire signed a lease in the same month for a mammoth Sixth Avenue location. Both deals reflect faith that the pandemic, horrific as it is, won’t last forever.

And one rising cloudbuster in particular should spread a spirit of celebration far and wide: The Spiral in the Hudson Yards area. When it opens in 2022, its cascading, landscaped terraces will also offer a symbolic triumph as the new global headquarters of Pfizer — the pharmaceutical giant leading the fight against COVID-19. It promises a 95 percent-effective vaccine by year’s end.

Long live the spirit of invention — and long live New York!

Why Precast Concrete is an Appealing Choice for Student Housing

When it comes to designing and building new student housing, speed is typically of the essence as colleges and universities are eager to get those beds online as quickly as possible. For schools in regions with inclement winter weather, speed takes on additional meaning: getting dried in before cold temperatures and bad weather arrives ensures construction can keep moving forward despite outdoor conditions.

A variety of material solutions are emerging to accelerate construction timelines, and precast concrete has become an attractive option. The stacking nature of living units make precast and student housing uniquely well-suited to each other. Alongside the need for speed is the importance of ensuring an engaging student life experience, which is critical for student success and retention. The most effective student housing design works with these systems to create the open, inviting social spaces that are fundamental to fostering connections between students.

Capitalizing on speed, cost, and other side benefits

Precast concrete systems offer a number of advantages: the building(s) go up faster, the overall project cost is often lower, and side benefits like inherent fire rating, sound proofing, and insulation add extra appeal. No system is perfect – concrete is rigid, gets poor marks for embodied carbon, and has limitations in terms of spans and floor-to-floor height – but the product offers an undeniable value in the multi-unit housing world.

At Western Carolina University, using precast concrete for the new Allen Hall’s exterior walls, floor slabs, and roof reduced the typical construction timeline by six months. Not only did the project get under cover more quickly, the product essentially saved a year in university time by allowing the new facility to open in fall 2019 rather than fall 2020.

Similar to WCU, when Clemson’s Douthit Hills Student Community was designed and built, speed of construction was the predominant factor in the selection of precast concrete. At the time, Metromont was the only manufacturer with this type of innovative system, but today, other manufacturers have entered the market and are creating a more competitive cost landscape.

Beyond shortening the construction schedule, precast concrete offers a variety of other perks. It reduces the demand for on-site labor (and for construction during COVID, allows for more space between workers). For campuses struggling with budgets, it is an increasingly appealing option. While the systems are expensive, the overall project realizes cost savings driven by things you don’t have to do and the naturally long lifecycle of concrete, which produces 50- to 100-year buildings versus 25-year buildings.

The “things you don’t have to do” include a host of items. The smooth underside of the slab means you can leave it exposed, paint it, and call it a day – skipping the labor and material costs associated with drywall, which can save hundreds of thousands of dollars. The same is true in circumstances where corridors have smooth walls that can be left exposed and painted. Concrete inherently gives the design its fire rating – an advantage on housing projects. It also delivers soundproofing and insulation thanks to its dense structure. In addition to a long building lifecycle, concrete reduces annual maintenance as a result of its durability. Students are typically hard on their residence halls, and concrete stands up to that wear and tear much better than drywall.

Alongside getting dried in before winter weather, the longevity of a concrete building was a factor in its selection by Virginia Tech, which is using a precast system for the first time on its newest addition to the Upper Quad. In contrast to both Clemson and WCU, which left up to 40% of the precast concrete exposed on the exterior façade, VT will integrate its iconic Hokie Stone.

The different approaches taken by Clemson, WCU, and VT showcase the aesthetic opportunities offered by the precast product. For example, the exterior brick on WCU’s Levern Hamlin Allen Hall (with the exception of the first floor) is a thin veneer that is integral to the concrete panel, reducing on-site labor and making construction more efficient.

Ensuring a good student experience through design

The success of any student housing project can ultimately be measured by how students make use of the spaces and engage with each other. While speed of construction is the primary reason for selecting precast concrete for student housing, our architects work with manufacturers and contractors to integrate the open, airy lobbies and common spaces that appeal to students. David Goldsmith, AIA, an architect in our Asheville office, notes that it was “very important to ensure the design had those high quality, high profile social spaces. When you’re working within a system like this, open environments can be achieved but it requires collaboration and extra effort between the design team and the precast manufacturer.”

At WCU, this collaboration led to the creation of two-story atriums at each of the three primary entry points. Our structural engineer, Marcus Whitaker, PE, shares that working with Metromont’s engineers made these results possible. “Their knowledge of the product was critical; together, we found ways to use the deck product to eliminate beams and columns, which in turn enabled the design to have large, light-filled social spaces.” Both David and Marcus expressed that the shared, intentional effort to provide a variety of inviting commons areas was central to the project’s success.

Throughout the building, the precast concrete deck achieved long, 30 foot spans with a low floor-to-floor height, thanks to being filled in part with foam. This composition resulted in a vertically shorter, more efficient building while allowing higher ceilings (9 ½ to 10 feet, versus 8 feet) in the interior spaces. Precast concrete can also be precut to accommodate conduit, concealing the building systems for a smoother aesthetic. All drawings – architectural, mechanical, and electrical – must be well-coordinated and precise to ensure this effort is executed well in the field.

Precast concrete systems like those used by Clemson, VT, and WCU offer compelling benefits for student housing. The growth of this market with multiple companies now offering similar precast systems is meeting demand while increasing competition on cost. As we continue to see schools (and developers on P3 projects) prioritize speed of delivery and construction cost savings on student housing projects, I expect we’ll also see these systems used more frequently.

Historic Brooklyn Hotel Reopens as Luxury Senior Community

The first new luxury retirement community in New York City in 20 years has opened its doors.

The Watermark at Brooklyn Heights is a joint venture of Kayne Anderson Real Estate,  Watermark Retirement Communities and Tishman Speyer.

A lending consortium that included BMO Harris, as well as Wells Fargo and Capital One, provided a $200 million acquisition and redevelopment loan for the $330 million transformation of the former Leverich Towers Hotel at 21 Clark Street.

Architect Richard J. DeMarco, AIA, principal of Montroy DeMarco Architecture, and interior designer Andres Escobar, ASID, Partner and Design Principal at Lemay+Escobar Architects, designed luxury senior community once best known as the pre-game home of the Brooklyn Dodgers’ players in the 1930s and 1940s.

The building’s 275 apartments now include 145 for independent living, 88 for assisted living, and 42 for memory care.

The 310,000 s/f property offers more than 50,000 s/f of amenities, including three restaurants, an art gallery curated by nAscent Art, a performing arts stage, multiple wellness venues, a heated indoor pool, a salon and spa, and a rooftop terrace with views of the Manhattan skyline, the Statue of Liberty, and New York City waterways.

“We are passionate about building extraordinary, innovative communities, where residents thrive with an abundance of engaging choices,” said David Freshwater, Chairman of Watermark Retirement Communities (WRC).

“We are proud to lead the luxury urban senior living property market nationally with our partner, Watermark Retirement Communities,” stated Al Rabil, CEO, Kayne Anderson Real Estate.

Watermark and Kayne Anderson’s partnership owns and operates a portfolio of 17 retirement communities totaling more than 2,300 residences of independent living, assisted living, memory care, and skilled nursing, valued at approximately $1.2 billion in deal capitalization.

The Watermark at Brooklyn Heights is one of five properties managed by Watermark Retirement Communities in their Élan Collection.

Kayne Anderson, a Florida-based private-equity firm, purchased the property from the Jehovah’s Witnesses for about $200 million in 2017.

The ‘15-Minute City’ Could Transform Municipal Planning

The “15-minute city” concept, sprung from academia, is gaining influence in many cities. The model aims to create neighborhoods in which almost all residents’ needs can be met within 15 minutes of their homes on foot, by bike, or on public transit.

Under this vision, all urban dwellers would have welcoming streetscapes, parks, and plazas, along with easy access to necessities such as groceries, close by their homes. It is an old concept—cities evolved along those lines before the automobile.

In Paris, where the mayor has fully embraced the concept, many neighborhoods already display the traits of a 15-minute city. But, some working-class neighborhoods lack necessary amenities such as grocery stores, sports centers, and clinics, and those are the areas where most of the transformative work has to be done.

One response has been the remodeling of 41 Parisian school grounds that were planted with trees and soft, rain-absorbent surfaces to help battle summer heat. The yards are available after school for use as public gardens or sports grounds. Cars were banned or severely limited in surrounding streets, and trees and benches have been added in the streetscape.

It would be far more difficult to make such a transformation in younger, sprawling cities found in North America or Australia, where cars are the dominant form of transportation.

Midtown Manhattan’s Empty Offices Could be Converted to Affordable Housing

With Midtown Manhattan’s office towers drastically under-occupied as employees work from home during the COVID-19 pandemic, some housing advocates foresee new uses for these spaces.

A study by commercial broker CBRE found that only 10% of Manhattan workers have returned to the office as of Sept. 18. If the number of workers to return to an office setting after the pandemic abates remains significantly lower than it was before the pandemic, these spaces could be a solution to the housing shortage.

Housing advocates would like to see vacant offices converted into new residential projects, especially for affordable housing. Such a movement would require zoning reform and could be accelerated with targeted policy initiatives.

The city already has an example of this concept being implemented in the mid-1990s. The 421-g program, a series of tax breaks for commercial-to-residential conversions, was used to revitalize Lower Manhattan.

Mixed Retail-Industrial Uses Present a New Opportunity for Investors

In commercial real estate, the impact of the coronavirus pandemic and related shutdowns has led to profound and seismic shifts. To some extent, those shifts reflect an acceleration of trends that were already underway. One of the most noteworthy of those is the ongoing evolution of the real estate market that is yielding new investment opportunities in favor of the industrial sector.

Some have argued that industrial development is the next big frontier for retail, perhaps even the “savior” of a segment that is undergoing significant change. It’s clear that the intersection of industrial and retail is creating intriguing new features on the commercial development landscape.

Understanding why that might be the case starts with understanding current industrial investment opportunities that complement retail—and what investors should look for while evaluating those deals—as well as an appreciation for the factors that shape the success of environments that integrate industrial and retail uses.

An evolving landscape

Since 2017, a total of 13.8 million sq. ft. of retail space has been converted to 15.5 million sq. ft. of industrial space across the country, according to CBRE.

Today, e-commerce and omni-channel models are growing at a remarkable rate. While some of that growth is accelerated by pandemic-driven considerations, a significant portion was already occurring and many of the new pandemic-related changes will be “sticky.” The critical final step in the supply chain—the last mile—has also become a pivotal piece of the development puzzle.

With retailers reimagining their entire supply chain and recognizing the need to fulfill online orders without having to rely on archaic bricks-and-mortar solutions, new development opportunities are emerging for delivery stations and distribution centers within industrial—and increasingly—retail environments. Investors looking at their portfolios are seeing infill as an obvious focus, as the chance to buy and covert existing retail that is failing or vacant often presents a favorable value equation. The same CBRE study noted that out of the 59 retail to industrial projects completed, proposed or underway since 2017, 40 projects were conversions or adaptive reuse.

Whether buying and converting existing inventory, or looking for new inventory, the industrial-retail frontier may be the saving grace for a pandemic-impacted portfolio.

Drawing the lines

What do the contours of this new landscape look like? Where do you draw the lines, and how do you strike a balance between industrial and retail uses? For investors, assessing stand-alone uses is relatively straightforward. However, multi-tenant environments raise the question of how tenants and municipalities will view non-retail uses adjacent to functional retail. Some are mitigating potential discomfort by designing facilities with retail in the front and distribution infrastructure in the back. Inevitably, the success or failure of some industrial-retail conversions will depend on the ability of developers and investors to cultivate the right tenant mix and maneuver the local political environment.

There is also an inverse relationship between opportunity and complexity, which is why malls and inline spaces—where investors may need to have the patience and resources to reshape the tenant mix over time—are more of a long-term play. In the near term, stand-alone spaces (power center inline spaces, large unattached boxes like a former Sears or Kmart space, or B- and C-level malls that have gone dark) may represent the most straightforward investment in retail-industrial opportunities.

Priorities and perspectives

The Wall Street Journal reported higher inventory levels and the accelerating growth of e-commerce, which may require three times as much space as traditional distribution operations that serve stores. This could increase U.S. warehouse demand by as much as 400 million sq. ft. over the next two to three years.

Investors looking for retail-industrial deals should prioritize the same underlying fundamentals that characterize any sound retail opportunity: strong demographics and proximity to rooftops. With supply chain facilities, transportation and location remain critical, even if those fundamentals are not about consumers coming to you, but your ability to reach them.

While familiar retail considerations will inform smart supply chain investment decisions for retail conversions, the development process can be quite different. From site selection to zoning, planning, design and negotiations with tenants and municipalities, investors would be wise to identify a development partner with a proven track record of managing retail conversions and ground-up industrial/e-commerce development from beginning to end.

Revelations and reevaluation

Something that frequently surprises investors is just how economically sound these opportunities can be. Industrial-retail supply chain infill or redevelopment is often the highest and best use of space. Tenants are often willing to pay market rates for quality space in the right environment. In reality, there are many sites out there not suited for residential, hospitality or office. Elevating those sites by configuring them to meet the needs of a rapidly emerging new market is simply good business.

The big picture is that consumers aren’t really spending less, they are spending differently. The question for real estate developers and investors becomes: how do you adapt and take advantage?

Given the fact that many retail investors have long viewed online retail as the enemy, it’s ironic to think that the online market might actually end up being the savior. The convergence of online and bricks-and-mortar—and the supply chain uses required to make that convergence work—has turned out to be more compatible and complementary than many landlords and investors had previously imagined.

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