We waited 14 months. We pounced on every little possible hint of what city would win the 8M SF, 50,000-job Amazon HQ2. We speculated on the transformation Amazon could have on a market looking to break into top-tier status. And then Amazon split its second headquarters between New York and D.C.
With the reduced head count (each market will get roughly 25,000 employees) and the existing strength of each market meaning Amazon’s campuses might not have that large of an impact on either market, the decision felt like a letdown to many, and there was immediate backlash. New Yorkers aren’t really keen on getting HQ2 in Long Island City, with critics saying economic incentives could have gone to better use (like improving public transit). D.C. isn’t pushing back as hard on the Arlington, Virginia, branch of HQ2, but since the market was largely considered a shoo-in from day one, grumblings across the country say the entire bid process was a sham to squeeze more out of the markets Amazon had already selected. Still, the decision is made, and both cities are plowing ahead with staggered plans to open offices and relocate employees.
Meanwhile, the rest of the country didn’t entirely lose out — Nashville, Tennessee, is getting a 5,000-person operations center, and Amazon has announced bulked-up offices and warehouses in some other cities, and has said more of that is to come.
The Opportunity Zone program, created with the passing of the tax reform bill at the end of 2017, allows investors to place unrealized capital gains into Qualified Opportunity Funds that then must be deployed into one of 8,700 designated opportunity zones. The program gives investors a tax break similar to a 1031 exchange and is intended to spur development in low-income neighborhoods and incentivize holding properties long-term. Initially there was little information on how it would work in practice. New guidelines were released by the Department of the Treasury in October, and more are expected soon, but even with questions remaining, many CRE investors have leapt headfirst into the program.
Billions of dollars have already been placed into opportunity funds. The number of sales in opportunity zones jumped 80% in the first three quarters of 2018, according to the Wall Street Journal. Amazon’s Long Island City HQ2 is in an opportunity zone. President Donald Trump signed an executive order in December to push more federal funds into the program, much to the delight of the CRE industry.
But is the program working as intended? Critics contend the lion’s share of deals will be in areas that already were appealing to investors, and it won’t drive deals in economically disadvantaged areas. Others worry those areas will get too much development, leading to dramatic gentrification.
Everything is still looking really rosy in commercial real estate, and that is making a lot of people very nervous. The industry remembers 2007, when it felt like growth would never slow, and the intense pain that lingered for years after the bubble burst 10 years ago. And this high is even higher than 2007 — at 116 months and counting of economic expansion, the U.S. is only four months away from setting a new record for upward longevity. Unemployment was 3.7% in November, remaining at a 49-year low. Gross domestic product is still expanding steadily. That is all good news for commercial real estate, though fundamentals in some sectors have started to soften slightly after almost a decade of strengthening.
Many economists are predicting a market correction will hit in 2020, though whether it will be that painful for CRE is up for debate. Some CRE experts have decided to slow down already in preparation for that inevitable and yet surprisingly elusive downturn, while others are saying they are keeping an extra close eye on fundamentals but are going to keep building and trading until the downturn actually happens.
The various arms of Brookfield Asset Management hit the M&A game hard in 2018. The company took over full ownership of mall owner GGP for $9.25B in cash in March. From that it created BPY U.S. REIT, instantly one of the country’s biggest publicly traded owners of retail. Brookfield got right to work overhauling the mall portfolio, and had sold $4B in equity from GGP by August to bring in partners for renovations. The goal: Turn malls into mini cities.
M&A wasn’t the extent of its big-money activity. Brookfield Ventures — formed last year to invest in startups in real estate, infrastructure, power and private equity — made its first investment, giving $15M in April to BuildingConnected, a bid-procurement platform for the construction industry. It closed its Brookfield Strategic Real Estate Partners III fund in March with $9B in capital (and expected it to top $10B by the end of the year) and a $1B multifamily value-add fund in September. And all the while, it continued being a dominant developer and investor (particularly in the office sector) in major metros around the country — especially New York City.
There was one rain cloud: Brookfield also tried to buy IWG, the flexible office giant previously known as Regus, but was rejected.
After two years of “will they or won’t they?” Cushman & Wakefield filed an initial public offering in June. It was seeking about $1B and a market valuation of $5B. It landed at about $765M and a $3.1B valuation. Share prices didn’t climb much over the next few months, but analysts gave the company’s IPO and general performance high marks.
Well this feels familiar. California was devastated by wildfires, and hurricanes ravaged the East Coast … again.
Hurricane Florence was a Category 1 hurricane when it made landfall in September, but its wide radius and heavy rainfall put more than $33B worth of commercial property in its path through the Carolinas. Property managers and business owners scrambled to meet the storm, preparing as best they could with some staying put on their property and others weighing evacuation. Evacuees filled up hotels, schools and other shelters. The storm left varying levels of devastation in its wake and highlighted the ongoing debate about sea-level rise and coastal development. A month later, Hurricane Michael hit the Florida Panhandle as a Category 4 hurricane that put more than $1B of commercial property at risk.
In Northern California, the Camp Fire that destroyed the city of Paradise in November became the most destructive and deadly in the state's history. It damaged or destroyed about 14,000 homes, 600 commercial buildings and more than 4,000 structures and killed at least 85 people. In Southern California, the largest of the fires to break out was the Woolsey Fire that tore across Ventura and Los Angeles counties and damaged or destroyed more than 1,800 structures. The Woolsey Fire surpassed last year's Thomas Fire in the level of destruction. These fires served as a reminder that wildfire is now an ever-present danger in the state. Areas that burned in the 2017 Wine Country fires are still recovering, and this year's fires will add to the burden on an already strained construction industry.
Last year, the Chinese government tightened restrictions on global real estate investment, and we saw that start to play out in the second quarter of this year as the biggest Chinese investors, which had been incredibly active in the U.S. and U.K., did an about-face and started selling property in big swaths. Q2 2018 was the first time Chinese investors were net sellers since 2008.
HNA announced it would put $16B of property on the market and sold at least $1.5B in assets, including 30 South Colonnade and 17 Columbus Courtyard in Canary Wharf in London, and stakes in Tishman Speyer development projects The Spiral and The Wheeler in New York.
Anbang, one of the top investors in U.S. real estate in 2016, put Strategic Hotels & Resorts up for sale in November.
But that wasn’t the only Chinese story of CRE in 2018. The U.S. put tariffs into effect on Chinese products. The trade war for global dominance has reportedly made Chinese investors less likely to place their money in the U.S.
The tariffs also impacted construction materials, putting further strain on construction costs. The 25% tariff on foreign steel, a material that accounts for an average of 14% of a building's cost, is expected to limit development in office, retail, industrial and multifamily construction.
2018 is the year rapper Kanye West decided he wants to become a big-time CRE developer.
“I’m going to be one of the biggest real estate developers of all time, like what Howard Hughes is to aircraft and what Henry Ford was to cars,” West said to hip-hop personality Charlamagne in a YouTube interview in May.
He owns 300 acres in Calabasas, Los Angeles, where he intends to build five properties. He expanded his Yeezy brand in May with the opening of Yeezy home, a residential architecture arm that he said was seeking architects and industrial designers. He committed to fund the restoration and reopening of Chicago’s historic Avalon Regal Theatre and said he would like to get involved in other CRE projects in the South Shore neighborhood.
PropTech is no longer the nascent concept it was a few years back. Commercial real estate firms have embraced real estate tech innovations with open arms this year. Demand for tech solutions to help make it more efficient for brokers to find and conduct deals, for landlords to manage properties and for investors to raise funds to bet on assets is expected to accelerate in the new year.
Renewed demand for CRE tech solutions has piqued the interest of venture capitalists that are betting on the segment more than ever before. In November alone, VCs poured a whopping $3.3B into PropTech companies across the globe, up substantially from the $661.4M invested in real estate tech companies in October, according to recent data from RETech.net.
Zak Schwarzman, a principal in commercial real estate technology nexus and accelerator MetaProp NYC, told Bisnow in November that several factors have converged to create worthwhile investment opportunities for VC firms in the real estate tech space.
“The largest firms in the venture capital industry are interested in this space. [PropTech] went from being next to nobody and a very niche category to being seen as a destination for the deepest pockets of investors in the asset class,” Schwarzman said.
This was another rough year for store closures — Q1 saw a record number of retail defaults. Two victims of 2018 were long-embattled Toys R Us and Sears. Both companies have been in and out of bankruptcy before, but this seems to be the true end of both. Sears announced two rounds of store closures — 46 in August and 142 in October, bringing it to nearly 750 stores closed in the last 18 months — and then filed for Chapter 11 bankruptcy protection in October. Cyrus Capital Partners swooped in in December to keep some stores alive through the holiday season to try to earn off some of Sears’ debts.
Toys R Us isn’t entirely calling it quits, either. It announced the closure of all of its stores (700 in the U.S. and 100 in the U.K.) in March. Toymaker MGA Entertainment CEO Isaac Larian bid $890M to purchase the chain and keep hundreds of stores alive, an offer that was rejected. We got some clarity on the refusal in June, when it was leaked that the CEO was in talks with investors to revive the brand down the road by selling its real estate but holding onto its intellectual property.
The Supreme Court overturned a law that made sports gambling illegal in the U.S. in May, a move that could open up CRE opportunities. States now can determine for themselves if they will allow sports betting and in what capacity, so the footprint of gambling will look different across the country. New Jersey and Mississippi leapt right on the ruling, both legalizing sports betting but restricting it to casinos and racetracks. Massachusetts casino operators are pushing for a similar policy.
So far there isn’t indication if any U.S. retail centers will become dotted with stand-alone betting shops, like exist in the U.K. and once were in New York City, but it is a possibility down the road.
Gambling in general is being discussed in state legislatures, with many (such as Georgia) considering legalizing betting and courting casinos as a revenue boost to state coffers. But how many casinos do we really need?
Last year had Steve, the suicidal robot. This year, the robots got even edgier.
KinkySDollS, a Toronto-based retailer that allows patrons to rent or buy human-like sex dolls, attempted to build its first location in the U.S. (and second in the world) in Houston, causing an uproar. Construction of the 2,500 SF “robot brothel” was announced in late September and then first halted a week later by the city, which said the company hadn’t secured necessary permits for demolition and construction.
In early October, the city passed a law prohibiting sexual contact with anthropomorphic devices within business premises. Sex doll retailers will be allowed to sell their products in Houston — customers just won't be able to use them on-site. But the one-two punch sent KinkySDollS reeling, and there hasn’t been an update on when or if the store will open.
WeWork’s world domination is starting to really ruffle feathers in the commercial real estate world. In July it opened WeWork Space Services, a brokerage arm.
"We will now be able to offer holistic real estate solutions — both within and outside of WeWork," WeWork Chief Growth Officer Dave Fano said. "We will help them find office space best suited to their requirements, giving them access to inventory they would not otherwise have."
In December it opened ARK, an investment fund to purchase buildings. WeWork had already dipped its toe into property ownership, starting with the Lord & Taylor building on NYC’s Fifth Avenue in 2017. ARK, done with Rhône Capital, closed in May with $400M. WeWork also is dabbling in development, partnering on the Dock72 project nearing completion in the Brooklyn Navy Yard. Its HQ by WeWork arm, launched in August, levies WeWork as a property manager and strips away the coworking aspect WeWork built its name on by leasing space to one company.
The company has downplayed its potential threat to brokers and investors it had previously worked hand in hand with, and earlier in the year negotiated higher commissions for brokers with Cushman & Wakefield, JLL and CBRE.
“Don’t kid yourself, these are disrupters, they are seeking to disrupt the relationship of the landlord to the tenant. They are seeking to disrupt the relationship of the landlord to the broker,” Empire State Realty Trust CEO Tony Malkin said at Bisnow’s New York State of the Market event in late November.
Both landlords and brokerages have taken notice, and responded by launching their own coworking arms. CBRE launched a flexible office platform called Hana in October — and even poached a former WeWork exec to serve as chief operating officer of the platform — and Tishman Speyer has included its coworking offering, Studio, in its office building within Rockefeller Plaza.
The top two most expensive office acquisitions in the U.S. this year both went to the same hungry buyer — Google. In a year full of massive moves from tech firms (HQ2, Apple’s $1B Austin campus), Google made some high-dollar moves.
Its $2.4B purchase of Chelsea Market Square in New York City was the year’s most expensive acquisition, and the $1B purchase of a site near its Googleplex headquarters in Mountain View, California, took the second spot.