An Urban Trend or an Urban Legend?

A new trend could be emerging across our nation’s urban areas. With commercial real estate prices down and many locations vacant, the opportunity has arrived for well positioned investors to grab prime space in urban markets. Though many postulate commercial real estate has not yet bottomed out (Moody’s recently forecast another year of declining prices), there may simply be offers that can’t be refused in today’s cities.

This possible trend is highlighted in a recent story by Retailing Today, concerning J.C. Penny’s move into Manhattan. For most of its history, J.C. Penny purposely avoided Manhattan because of the number of competitors and their store space needs. However, recent times have seriously cut down the level of competition, while also providing new vacant space to occupy. The result was a two-level, 153,000 square foot store, which opened on July 31st. In its first month, the new store surpassed sales expectations by “double digits”. The location, which sits above a subway station and commuter rail line terminus, relays 250,000 people past the stores gates each day.

Another development has been the rising popularity of retail condominiums. As highlighted by RE Business, many individual investors favor this real estate type because it often allows them to own space in prime locations they couldn’t previously afford. They are also a popular choice among many 1031 investors who are seeking suitable replacement property. Furthermore, the economic downturn has caused a glut of vacant properties to fill the market; meaning retailers who are looking to buy or lease have great negotiating leverage. Retail condominiums are not only located in prime space but can often be bought by investors seeking to acquire real estate for their own use. These advantages make retail condominiums very popular today.

Net Lease properties are experiencing similar effects concerning urban locations. Properties located in these areas are experiencing increased demand as they have remained successful despite the recession. This coincides with the changing tastes of many investors from high risk/reward properties to ones with more stability. Taking into account the slump in property values, not only investors but retailers alike are jumping for the chance to own real estate in high density urban areas they previously would not have thought possible.

D.C. Has Global Appeal

According to a new study from the Association of Foreign Investors in Real Estate, Washington D.C. is the top U.S. city for investment. A major reason cited is the “government activism we have now”, which is spurring job growth and attracting residents. The survey also revealed other positive indicators, such as two-thirds of respondents planning on boosting their investment in U.S. real estate this year as compared to last and half expecting U.S. commercial real estate to recover by or before the fourth quarter 2010.

For the D.C. net lease sector, this survey can be seen as a portent of good things ahead. Should the some of predictions of the survey pan out and both investment in the D.C. area rise and commercial real estate see a recovery by the end of the year, it would certainly be a better turnout than many would have predicted. While it has been widely reported that D.C. is doing better than nearly all other U.S. metropolitan areas, it is refreshing to see this fact backed up by those with foreign perspectives.

Net lease properties have already been on many peoples watch lists due to their bond like structure and relative security & stability. When the economy picks up and money starts to flow again, there is a reasonable school of thought saying it will first flow into secure investments rather than the riskier types seen in years past. Net leases fit this bill perfectly.

What the Association of Foreign Investors in Real Estate Survey is essentially saying is that commercial real estate recovery has a reasonable chance to be around the corner and one of the main centers of growth will be Washington D.C. Though this is by no means certain (note the survey itself is split 50-50 on recovery in 2010), if it does prove to be true, it will be quite the year for our nations capitol. However, whether widespread commercial real estate recovery does or does not arrive in 2010, net leases in the D.C. area should see a positive year regardless of the encircling climate, due to their inherent demand and the city’s growth.

Forbes Uses Net Lease Sale Leaseback to Sell HQ

The net lease industry has inked a number of high-profile deals lately. One of the first deals of 2010 is the announced sale-leaseback of Forbes Media’s 144,000 sq. ft. headquarters in New York’s West Village to New York University. According to the Wall Street Journal, the deal was structured with Forbes agreeing to a 5-year lease deal.

If reported sales figures are correct, NYU probably got a heck of a deal. The building originally listed for $140 million in 2007, and according to the New York Post it ultimately sold for $55 million or about $380 per square foot.

Perhaps Forbes was taking a page from the New York Times, which sold its headquarters in a sale-leaseback for $225 million with a 15-year lease commitment. Yet, Forbes’ 5-year lease agreement definitely raises eyebrows in a net lease industry where 15- and 20-year deals are far more the norm. So, unless NYU has taken on the risky role of real estate speculator, there may be a bigger strategy at play here.

Will Forbes give up all or part of its space when its lease is up in 2015? The safe bet would say yes. The bigger question may be whether we can expect to see more of these large net lease sales in the coming months. Not only are cash-strapped companies such as Forbes using sale-leasebacks to raise capital, but it appears that net lease deals also are providing an alternative for companies that are in transition in this volatile economy.

Retailers Better Prepared for 2010

With 2009 safely behind us, many retailers are showing greater strength and preparedness for 2010. Last years lessons have been learned well, lower overhead, better planning and a focus on value are the keys to success in this environment. Thus, whether 2010 marks the beginning of retails resurgence or simply an improvement in strategy, it looks to be a better year than 2009.

As highlighted by ICSC, discount retailers such as Target, Costco, Kohl’s and Wal-Mart all have plans to expand with new locations. The quick service restaurant industry is also set to expand with companies such as Burger King, Sonic and Panera Bread planning new store openings. Clearly the environment is conducive to the growth of value based stores. It is also forcing higher-end stores to rethink their positions; Neman Marcus and Nordstrom are now considering adding value focused offerings.

Retailers who are planning expansion are also looking at redevelopment rather than construction. With retail space experiencing heightened vacancies and lower rents, it is more economical to take advantage of existing space rather than starting new construction projects. There are exceptions to this trend, such as certain quick service restaurants like Buffalo Wild Wings, who continue to expand through construction rather than redevelopment.

Though retailers have cut their teeth on the hard times of 2009 and surely step into 2010 better prepared, in the end their fate is inexorably tied to that of the consumer. Unemployment continues to hover at 10% and many do not see significant change in the future. 2010 will most likely witness a greater quantity of deals than 2009 but will not see a return to the levels of earlier years. However, in today’s brave new world, a positive trend should be taken positively.

Some Thoughts on the New Year

In the book of happy memories, the 2009 section may come up shorter than most. Our economy suffered, unemployment rose and hopes for a quick recovery were dashed. Terms like “jobless recovery” and “double dip recession” became the hot phrases of the year. Most can’t wait to raise their glasses in farewell.

However, we can look at 2009 another way. Its conditions may have been inclement but for those who survived (without government assistance) it can be seen as a great storm weathered; victory through perseverance. As Thomas Paine so eloquently put it, “these are the times that try men’s souls”. Well consider our souls tried, bent and pushed. For those who remain, the hard part is over.

This is something that could be observed earlier this year at the 2009 ICSC conference in Las Vegas. There were half as many participants but the ones who stayed were worth talking to. So indeed let’s raise our glasses high on New Years but instead of blind faith in 2010, lets toast to the grit displayed in 2009 and the opportunities that will be rewarded to those who grinded it out!

The Ghost of Christmas Past

As the holiday season approaches its crescendo, one can’t help taking a trip down memory lane. Just a few years ago televisions were filled with commercials featuring nice middle-class driveways being populated by two Lexus luxury cars, adorned with giant red bows. Those bows should have been a warning, a form of theatrical foreshadowing, representing the massive amount of debt resting so precariously on those essential luxury mobiles. We could afford the Lexus today, but we would have to pay for the bow later. When that time came, we realized our whole lives, from our homes to our banks were wrapped in similarly styled red tape.

So the season is here when red tape is at its highest demand and everyone gears up to wrap some new gadget or non essential item in it. Even Santa shows up wearing a massive red suit, riding a red sleigh, guided by a reindeer with a red nose. For heavens sake the holiday colors are red and green, debt and cash! This particular year seems the perfect time to take a long honest look at our past, present and future.

No longer can we afford to strip ourselves of equity and finance it into oblivion, for it seems that oblivion actually shows up at some point.

Perhaps it is not a good idea to leverage investments with “ZERO money down” or for banks to fill their balance sheets with assets whose debt to equity ratios would send a seesaw shattering into the ground.

And maybe, just maybe, we should invest in assets which are somewhat safe and secure. Like a well positioned grocery store as opposed to manufactured islands (made out of sand) in the middle of the sea which serve as play grounds to the fabulously opulent.

If you want to look at someone who has staying power, look at Walgreens, its 1Q profits just rose 20%! And who does Walgreens cater too? Only any person who needs some sort of medication at some point in their life. In other words, pretty much everyone. Dollar General, a few years ago the most unheralded name imaginable, is experiencing never before seen growth. McDonald’s and Wal-Mart both continue to prosper. The key point in all of this is that the best investments are the ones which will be there when the weather gets rough, the ones that have staying power. So this year, if you’re going to invest, make sure it is in something that’s lasting, not a heap of red tape.

Free Wi-Fi at McDonald’s (hopefully you’ll want fries with that)

McDonald’s (NYSE: MCD) has recently announced plans to start providing free Wi-Fi service, through a partnership with AT&T, at over 11,000 of their 13,000 U.S. locations. AT&T customers may already be familiar with this benefit, as the company already provides free Wi-Fi to AT&T wireless and wired customers at Starbucks, McDonald's and various other locations. For the rest of us, a $2.95 fee for 2 hours of internet access is charged. Thanks to this recent agreement all Wi-Fi seekers, regardless of their service provider, will have free access at McDonald's.

This development seems to be the latest in a trend started a few years ago, when McDonald's began to refocus it image towards a chicer look, this has covered everything from eliminating trans-fats, redesigning the stores to look higher-end, and in the extreme case in over 100 stores in Germany, changing the color scheme from red to green (for environmental affect). Introducing free Wi-Fi seems to be the next logical step in this campaign. If the goal is to make McDonald’s not just a place to “smash and dash” but to stick around for a while, why not allow customers to surf the web and maybe enjoy an invigorating McCafe while their at it?

On a side note, can you imagine sticking around and surfing the web at the McDonald's restaurants of a decade or so ago, the ones with the plastic chairs, bright pastel linoleum cushions and in some cases, large sculptures of those McDonald's monster/mascot things?

With the new image and offerings of McDonald's and their constant pursuit of self improvement, it is easy to see why they enjoy such financial success. As a net lease investment, McDonald's is one of the finest available and adding a service like free Wi-Fi will only enhance its value and drive higher sales. Who knows how many extra coffees or fries may be ordered by the flocks of cheap internet seekers who may congregate their. This development should only encourage interest in McDonald's as a net lease investment.