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U.S. Retail Set to Bounce Back, Moody's Estimates

November 12, 2018

 

 

 

U.S. Retail Set to Bounce Back, Moody's Estimates

What comes after a retail apocalypse? Maybe a renaissance, if Moody's Investors Service is correct in revising its outlook for the industry from stable to positive. This is the first time Moody's has had a positive outlook on the industry since mid-2015. The rating agency also revised its 2018 forecast for the industry's operating income growth to a range of 4% to 5%, up from 3.5% to 4.5%. The industry's sales growth for the year will be 4.5% to 5.5%, an upward revision from 3.5% to 4.5%, the company reports. Moody's outlooks represent the agency's expectations for the fundamental business conditions in a given industry over a 12- to 18-month period. The move is not a credit rating action by the company, but an industry forecast, and Moody's is not alone in its new optimism. Late last year retailers began to reap the benefits of investments aimed at cost efficiencies, enhancing their e-commerce capabilities and in-store experiences, according to the rating agency. In short, retailers are adapting with the times. Those changes are occurring when the U.S. economy is particularly strong. The convergence of positive trends will result in higher profits for retailers, Moody's says. "The positive outlook for the U.S. retail industry reflects increasing top-line growth and operating profits as companies' investments to improve both the online and in-store shopping experience continue to gain traction," Moody's Vice President and Senior Credit Officer Mickey Chadha said in a statement. "The improvement has been spurred by a very strong macro-economic environment, with improving consumer confidence and low unemployment," Chadha said. Moody's also forecasts that 2018 holiday sales growth will be up a healthy 5% to 6% year over year. That forecast makes Moody's more optimistic than the National Retail Federation and Prosper Insights & Analytics, which predict that holiday season spending will be up 4.1% this year compared with 2017. Moody's expects that discounters and warehouse clubs, dollar stores, auto parts, online and off-price stores will all perform well during the holidays this year. Moreover, the overall retail improvement will accelerate next year when department store declines begin to taper (such as after the demise of Sears) and higher growth at specialty retailers, supermarkets, apparel/footwear and drugstores provides a lift to overall profits. Online sales growth will continue to outpace overall retail growth, Moody's estimates. Although it will still only account for around 15% of total U.S. retail sales, online sales will grow to about 20% of total sales in the next five years. Amazon will continue to dominate e-commerce, but brick-and-mortar companies will gain more online market share as they set up their own platforms. (Bisnow)

 

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WeWork-Anchored Denver Building Sells for $45.5 Million

The Lab on Platte at 2420 17th St. in Denver's Highland neighborhood has been purchased for $45.5 million, according to Denver County public records. The 78,575-square-foot "creative boutique" office building, which is anchored by WeWork, was sold by Soma Capital and CenterSquare Investment Management. Newmark Knight Frank both marketed the property and represented the seller. The buyer, 2420 17th Street LLC, is registered to the same address as New York-based Blackrock Capital Investment. The firm has not yet responded to a request for comment. “This sale is the first predominantly WeWork-anchored building to transact in Denver," said John Jugl, a vice chairman at Newmark Knight Frank. He said there is vacant space available in the building that could rent at below market rates. Back in 2015, Denver Business Journal reported that WeWork would lease a majority of the building. Jugl said that the buyer was drawn to the property's combination of a "vibrant work-live-play neighborhood, state-of-the-art physical construction and brand-name tenancy.” In other parts of the city, WeWork is taking the entire fifth floor at The Hub in the River North neighborhood and will lease five floors at the Wells Fargo Center in downtown Denver. (Denver Business Journal)

 

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Tech Company Takes S’Park Office Space

A technology company with operations in Boulder has leased the entire office component of a new mixed-use building at S’Park in Boulder. Splunk will occupy approximately 42,000 square feet in the Market Building, a 53,000-sf building with ground-floor retail. The building is slated for completion in early 2019. “Splunk has long recognized the tremendous pool of technology talent here in Colorado,” said Jim Lejeal, Splunk vice president and Boulder general manager. “We strive to provide our employees around the world with the best possible work environment and are excited to expand our role in the Boulder business community.” S’Park, located on the former Sutherlands lumberyard property in Boulder Junction, is a mixed-use, mixed-income, transit-oriented development being developed by The Jon Buck Co., Kinship Capital and Element Properties. (Colorado Real Estate Journal)

 

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CCIM Institute Economist: “Prepare for Commercial Real Estate Finance Disruption”

The impact of the midterm elections is expected to play a significant role in shaping commercial real estate finance, predicts CCIM Institute’s Chief Economist, K.C. Conway. Debt capital has grown exponentially over the past seven decades. Technology is expanding just as quickly, if not more so. The U.S. economy is in the late stages of a decade-long recovery, while technology is early in a cycle of innovation that is altering the design and use of commercial real estate. On top of that, CRE professionals too often are afflicted by a belief that trends and patterns today will continue, a phenomenon known as recency bias. Conway writes in a report due out later this month, “If history has taught us anything, it’s that these patterns of recovery and expansion are prone to disruption. With the midterm elections upon us, as well as recent tariffs on $200-plus billion of Chinese imported goods — not to mention the third interest rate hike in 2018 by the Federal Reserve — the country is re-entering a period of volatility and uncertainty.” The question of the next CRE finance disruption is not a matter of when, but how, points out Conway. Housing might be the first thing that comes to mind, but he believes that’s wrong. Real estate is not immune from business cycles, economic recessions, or disruptive “Black Swan” events — such as a trade war, currency crisis, or cyber terrorism, writes Conway. In fact, the probability of a CRE finance disruption in the next 6-18 months is as elevated as it was prior to 2007-2008. “The lineup of suspects this time around include the repeat offender of rising interest rates, a concentration risk the likes of which we’ve never seen, and the Fed’s exiting of quantitative easing. The sunsetting of London Interbank Offered Rate (LIBOR), the Current Expected Credit Loss (CECL) model for banks, and changes in lease accounting are all likely accomplices,” he says. The one-two punch of the Fed’s rate hikes and recent efforts to move away from quantitative easing is a particularly powerful one. All the securities purchased during the quantitative easing period following the latest financial crisis are now being sold back into the market. And by doing so, the Fed is reinjecting risk premiums into the system — precisely what is not needed at this time, points out Conway. “Moreover, history is not on our side,” he says. Recessions have become less frequent, but more severe. The adverse effects from these less-frequent-but-more-severe economic disruptions is a more severe impact and value volatility in CREF — cases in point are the S&L crisis of the late 1980s and most recently the 2008-2009 financial crisis. “Now is not the time for complacency. The industry is sure to persevere once again,” says Conway. “But to survive and flourish during troubled times, knowledge — and adaptability — is power.” (Connect Commercial Real Estate)

 

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Inova Flex Fetches Record Price of $226 psf

A single-story flex building at Inova Dry Creek in Centennial fetched a record price of $226.21 per square foot. GT Inova LLC paid $16.1 million for Inova Flex, a 71,172-sf building at 7304 S. Joliet St. that developer United Properties completed last year. It was the first true flex building developed in more than a decade in southeast suburban Denver and the first in about 18 years that was built on a speculative basis, according to David Lee of Newmark Knight Frank, who, along with NKF’s Jason Addlesperger, represented United Properties in the sale. “It represents far and away the highest price paid in the market for a single story flex-type building, but it’s a reflection of the higher costs of construction and where the market is going these days,” said Lee. Inova Flex is a “first-class” building in an “irreplaceable location” just east of Interstate 25 at East Dry Creek Road and South Havana Street, he said. “Inova is unique. It’s a mixed-use business park, very high-image, very close to I-25 and Dry Creek, shuttle service – we have amenities all over the place. It’s a setting that fresh and new … and you don’t get that in other locations,” said Lee. “The future flex development sites are in locations that wouldn’t be nearly as prominent as this.” Inova Flex is about 80 percent occupied by Montreal based Inocucor, a company focused on biological products that naturally improve agricultural crop yields, and Power Home Remodeling’s Western regional headquarters. The buyer plans to make a significant investment in and occupy the available space, which is in shell condition, said Lee. He didn’t disclose the name of the user, which was represented by Doug Wulf of Cushman & Wakefield. However, public records indicate the buyer is affiliated with Denver-based global company Gulftech International Inc. Gulftech is a family of companies focused primarily around industrial equipment for food production and processing. About 70 percent of the space in Inova Flex is built out as offices, with lab and warehouse space comprising the remaining square footage. “You won’t see another project like this,” said Lee, who said the best sites for new flex product in southeast Denver already have been developed. “It’s just very difficult to find a decent location, to find a developer with the wherewithal to build on spec and to underwrite the rents that you need to justify doing this,” he said. “So, it was an aggressive move by United Properties but one that paid off very well for them – and the buyer is going to get a fantastic property. It was a good result for everyone all the way around.” Inova Dry Creek also includes two Class A office buildings: a 121,000-sf building bought and occupied by Comcast, and a 222,000-sf multitenant building. There also are sites for another flex building and hotel or entertainment use. (Colorado Real Estate Journal)

 

 

 

 

 

CURRENT

1 MONTH PRIOR

1 YEAR PRIOR

FED TARGET RATE

2.25

2.25

1.25

3 MONTH LIBOR

2.59

2.42

1.40

PRIME RATE

5.25

5.25

4.25

10 YEAR TREASURY

3.19

3.16

2.35

30 YEAR TREASURY

3.40

3.34

2.82