George Floyd’s death at the hands of police on May 25 turned the nation upside down. Protests erupted in major cities around the globe, and many of them turned violent and destructive. Many property owners said they tolerated or even understood the anguish that resulted in damage to their buildings when protests turned to rioting and looting, but others were frustrated as windows were smashed and products stolen, and many businesses in urban cores were boarded up for weeks to minimize damage. The insurance industry, already slammed by business interruption claims from the coronavirus pandemic and gearing up for what turned out to be an active hurricane season, processed claims for riot coverage but warned rates are likely to go up significantly in future years.
The protests have stopped, but the problems that fueled them have not, and the conversation shifted from police brutality to racial inequality at large. Huge swaths of companies across industries spoke out this year in support of racial equity, and announcements of the creation of new chief diversity and inclusion officer positions became a fairly regular occurrence in real estate. But as of yet, few goals have been set toward diversifying the ranks — and especially the leadership — of commercial real estate’s biggest companies.
Special purpose acquisition companies took commercial real estate by storm in 2020. A SPAC is a shell company that is set up to go public, even though it doesn’t have any operations. Money poured into these "blank check companies” by shareholders is used to acquire another company, thus taking it public in a reverse merger. After the acquisition, the company is usually listed on one of the major stock exchanges.
SPACs were popular in other sectors in 2019, but their use quadrupled in 2020 — from 59 last year to 237 so far this year — and this was the first year CRE really got into the game. SoftBank-backed View Inc. is going public at a $1.6B valuation via a SPAC sponsored by Howard Lutnick’s Cantor Fitzgerald. A Barry Sternlicht-backed SPAC purchased Cano Health for $4.4B. Tishman Speyer formed a $300M SPAC to buy proptech companies, and CBRE launched a $350M SPAC of its own. A recreational cannabis REIT got into the game. The list goes on.
The balance of power among cities seems to have shifted in 2020 as corporate relocations out of traditional headquarters hubs picked up steam. An exodus of HQs from Silicon Valley was the most notable, with big tech names including Oracle, Hewlett Packard Enterprise and Palantir ditching the area, most for Texas. Even CBRE got into the California-to-Texas trend, moving its HQ from Los Angeles to Dallas this year.
New York City seems to be losing its stranglehold on financial companies — though there have been few true HQ relocations out of the city, financial firms including Goldman Sachs have been moving employees and departments out. The biggest beneficiary there is Miami and Palm Beach, which some have dubbed “Wall Street South.”
This trend isn’t new — in particular, Texas has been steadily poaching California businesses for years — but like many trends this year, the pandemic accelerated it. Untethered to a particular location as they worked from home, workers fled dense gateway cities that had early spikes in coronavirus cases and where the cost of living is higher. Businesses, likewise, have been drawn to states that are seen as more pro-business and where restrictions have been lower during the pandemic. Time will tell how much of the migration is permanent or a 2020 phenomenon.
We’re really sounding like a broken record on this one, but for the third straight year, retail bankruptcies hit new highs. Forty major retailers filed for bankruptcy in 2020 and more than 11,000 stores were shuttered, putting nearly 150M SF on the market, according to CoStar. That far exceeds the 17 brands that went bankrupt last year and the 9,300 locations closed, but at least it’s below the 25,000 store closures Coresight Research predicted in June.
Big names were in the batch, including JCPenney, J. Crew, Pier 1, Guitar Center, Neiman Marcus, Brooks Brothers and GNC. It’s easy to blame the coronavirus — and certainly, the shutdowns and reduced occupancy to slow the spread of the virus were the death knell for many — but some of the bankruptcies (including Pier 1) happened before the pandemic hit the economy and all were struggling in some way with the shift toward online shopping over the past few years.
JCPenney had a particularly interesting saga over the year. The department store has been in trouble for years, so no one was surprised when it filed for Chapter 11 in May. It closed 152 stores and cut 1,000 jobs, but analysts expected a buyer would emerge for the company, drawn if nothing else to the value of the real estate Penney’s owns. Sure enough, Simon Property Group and Brookfield Property Group, two of the retailer’s biggest landlords, teamed up to purchase the company for $1.75B and said they will spin the real estate off into a holding company. There was immediate drama — Penney’s shareholders tried to block the sale, and a competing mall landlord sued Simon, alleging its acquisition of Penney’s and other bankrupt retailers is anticompetitive behavior that would give the mall owner too much control over the retail space.
It only took two weeks into the year before U.S. CRE got its first major portfolio sale, and it was one for the record books. Affiliates of Harbor Group International snapped up 36 U.S. apartment communities for $1.85B, which HGI said was the fifth-largest multifamily transaction in U.S. history. HGI set aside $90M to renovate the 13,000 units in the deal, or about $7K per apartment. Most of the units are in the Sun Belt, continuing that region’s dominant appeal for multifamily investment in recent years.
Then Starlight Investments and KingSett Capital teamed up to buy Northview Apartment REIT for $4.8B in February, bringing three Canadian real estate powerhouses together. Northview had multifamily buildings in 60 Canadian metros before it was folded under private equity firm KingSett, which had a $15B portfolio, and Starlight, whose $14B portfolio included more than 43,000 multifamily units and 7.3M SF of other commercial real estate at time of sale.
And then in a smaller but still eye-catching deal, Greystar Real Estate Partners bought Alliance Residential’s property management arm in June for $200M. Alliance was the U.S.’ fourth-largest apartment management company, and the deal added 130,000 multifamily units across 21 states to Greystar’s portfolio, expanding its footprint 25%.
Commercial real estate finance and investment company Greystone expanded its special servicing footprint with its purchase of C-III Asset Management and its $20.7B portfolio in January, a fortuitous move with the pain in the industry that followed later in the year and is surely still to come. The number of delinquencies is already at Great Recession levels, and CMBS deals are going to special servicing faster than ever before. More than one-quarter of all hotel CMBS loans were in special servicing in October. Some of the defaults have been truly eye-boggling, like Colony Capital’s default on $3.2B in loans in May.
Graystone originates more than $14B in loans annually and has a loan servicing portfolio of over $60B. C-III Asset Management had operated as a wholly owned subsidiary of C-III Capital Partners prior to the acquisition.
Nearly 4.3 million acres have burned in California this year — nearly 4% of the state — breaking 2018’s record and making this the most devastating fire season yet, and fires are still burning. Two of the top 10 most destructive California wildfires ever were in 2020 — the North Complex fire that began in August, which destroyed 1,955 structures and took 15 lives as it burned 319,000 acres, sits at No. 5 of all time for both deadliness and destruction.
Wildfires have been worsening in California overall; the 10 largest fires since records began in 1932 have all been since 2000.
Soon, millions of Americans will know the name of a CBRE associate. Matthew James, an associate broker in CBRE’s Downtown Manhattan office, is the star of the reality TV show The Bachelor’s 25th season, which was filmed this fall and begins airing on Jan. 4. James is the first Black man to be chosen as The Bachelor. He had a short stint in the National Football League and also owns and operates ABC Food Tours, which gives tourists tours of some of the signature eateries of Lower Manhattan. We can only hope he’ll educate America on cap rates while he’s winning their hearts.
Amazon dominated the industrial leasing space in 2020. The firm said it was likely to increase its distribution space by 50% in 2020, and that made it the most active industrial tenant in cities around the globe. It leased 59.7M SF in the U.S. this year through October, more than 10 times the volume of the second-most-active tenant. It leased 14M SF in the U.K. this year up to the end of November, 82% of all e-commerce leasing in the country and 30% of its total logistics market.
Amazon has been growing rapidly for years, but the pandemic was a significant factor in its addition of hundreds of new industrial facilities in 2020. As brick-and-mortar retailers closed during shutdowns and wary shoppers stayed home, e-commerce stepped more firmly into the fray, and today about 20% of retail purchases in the U.S. are being done online. More growth is to come for Amazon — it announced in September it intends to build 1,500 smaller-format last-mile warehouses in the near future. It has 139M SF in its global pipeline, a huge increase over its 322M SF existing portfolio, and that doesn’t include future space possibly in traditional malls. The e-commerce giant is reportedly in talks with Simon Property Group to turn some vacant department stores into distribution centers.
Though industrial is the bulk of Amazon’s real estate footprint, it’s also buying up billions of dollars of data centers around the world and announced in August it will spend $1.4B to add office space across six U.S. cities: New York, Dallas, Phoenix, San Diego, Denver and Detroit.
Amazon’s growth has come at a cost: Beyond the hit to Amazon’s bottom line from the expense of rapid expansion — it spent $9B on capital projects from April to June alone — workers at its warehouses have been accusing the company of treating its employees unfairly and jeopardizing their health during the pandemic.
Cushman & Wakefield appeared to be shopping for a buyer this year. It reportedly approached Newmark Group about a takeover but was rejected, and Bisnow heard chatter coast to coast for months that Cushman and JLL were discussing a merger. Neither firm has addressed the rumors publicly, but analysts say Cushman’s smaller size, heavy debt load and weaker financial performance compared to other brokerages could be driving it to seek a new parent company. The timing could also be opportune; weaker economic conditions often lead to a rise in M&A activity.
When the Commercial Real Estate Women Network published its benchmark study in September on wages in commercial real estate, most people expected to see improvement over the last benchmark in 2015. Quite the opposite happened. The report surveyed almost 3,000 CRE professionals across the U.S. and found women in CRE on aggregate make 34% less than men, a gap of nearly 11 percentage points wider than it was five years ago. Most of that gap came from commissions and bonuses, where women reported earning 56% less than men, while there was a 10% disparity between base salaries. Bisnow reporting found commissions are almost never standardized and instead are often negotiated within a brokerage team with little to no oversight by HR, which some brokers said can lead to unfair splits.
The CREW survey also found no change in the number of women in C-suite positions compared to 2015: 9%. The CREW report called the findings of its 2020 benchmark “a sobering picture of stagnation.”
Blackstone Group closed two massive life sciences deals in 2020 that underscore the increased appeal of the sector. It recapitalized its ownership of BioMed Realty Trust, the largest private owner of life sciences real estate in the country. The deal, announced in October, involved one of Blackstone’s funds selling BioMed to a new, permanent fund managed by Blackstone for $14.6B.
In December, Blackstone paid $3.5B through that fund to buy a 2.3M SF portfolio of lab space in Cambridge, Massachusetts, from Brookfield. The deal pushed BioMed’s portfolio to 11.3M SF and a value of $20B.
The pandemic drew attention — and venture capital — to the life sciences sector and helped accelerate deals in multiple markets. Though some capital was specifically for COVID-19 testing and vaccine research and development, activity spread far beyond that. Other major deals in the life sciences sector this year include Ventas spending $1B to buy a life sciences portfolio in South San Francisco, a JV between Tishman Speyer and Bellco Capital raising $1B to spend on U.S. life sciences properties, and life sciences-focused developer IQHQ raising $2.5B to spend in the U.S. and U.K. Many markets have insufficient life sciences space to meet this burgeoning demand, but don’t expect retrofits to solve that problem quickly — lab space has specific design requirements, and conversions are hard to pull off.
In a terrible year for most brick-and-mortar retail, especially malls, Simon Property Group has held up better than most, and it has taken advantage of dislocation in the market to snap up competitor and client alike. Simon, the largest mall owner in the U.S., inked a $3.6B deal in February, a few weeks before the coronavirus started affecting the U.S. economy, to buy competitor Taubman Centers for $52.50 per share. In June, it filed a legal action to get out of the deal, saying the pandemic disproportionately affected Taubman because the firm didn’t take sufficient steps to mitigate its impact. But the two came to terms in November at a lower price: $43 per share, or about $2.8B. Simon will have the controlling interest of Taubman, and the Taubman family will retain 20% ownership.
Meanwhile, Simon has bought up multiple of its tenants out of bankruptcy. It partnered up with Brookfield and Authentic Brands in February to purchase Forever 21 for $81M. Simon and Brookfield bought JCPenney for $1.75B, and Simon and Authentic teamed up to buy Brooks Brothers for $325M and Lucky Brands for $140M. A competitor filed a lawsuit against Simon in November, saying the purchase of so many significant tenants is anticompetitive behavior that will give Simon too much power in the retail space.
Simon, which had furloughed 30% of its staff in March and reduced executive salaries, brought its C-suite back to full pay in December, reimbursed them for wages lost during the pandemic and reinstated retainer fees for its board of directors. It hasn’t said if it hired back furloughed employees. It isn’t all sunshine and roses for the REIT. Simon handed four malls over to lenders in November, and Fitch Ratings downgraded it from an A investment to an A-minus. The company has lost 39% of its value since the pandemic began, according to Green Street, a startling stat but better than many other mall landlords.
In late May, residents began moving into Society Las Olas, a 34-story, 639-unit development on the Fort Lauderdale Riverfront that is now the largest co-living project in the U.S. With a planned Phase 2 by developer Property Markets Group, the community would have more than 1,200 units.
The timing could be a challenge for PMG. Some co-living companies were driven to bankruptcy this year as the coronavirus pandemic hampered one of the sector’s main appeals, shared common spaces that foster community connections. But others are faring better, like Starcity, which agreed in early December to buy competitor Ollie and its 12-project portfolio for an undisclosed sum.
Blackstone Group purchased a 49% interest in Hudson Pacific Properties’ 2.2M SF Southern California television and movie production facility portfolio in June. Beyond that existing portfolio, which is valued at $1.6B, the deal includes rights to build 1.1M SF of film-related office and production space in SoCal, and the JV may identify other development opportunities. Blackstone became particularly enthused about studio space because of the boom in streaming services during the pandemic, and in June it said it is leaning into investments in facilities serving fast-growing and resilient industries like “online content creation,” logistics, life sciences and cloud migration.
Film studios have come into their own as an asset class. Large deals, including Hackman Capital Partners’ $500M September acquisition of Silvercup Studios, where The Sopranos was filmed, show they have gotten the attention of institutional investors. The heightened interest may benefit Y’allywood, the fast-growing film and television production industry centered around Atlanta. A rush on studio space to satiate viewers who tore through shows during the pandemic is spurring developers and operators to build out new production space in Georgia. One example is Blackhall Studios, whose Atlanta studio was booked 18 months out and which now has a $1B expansion pipeline in Atlanta, London and Los Angeles.
This year was the most active Atlantic hurricane season ever, and Louisiana bore the brunt. There were 30 named storms, the most ever, forcing The National Hurricane Center into the Greek alphabet for names; 13 hurricanes, the second-most ever; and six major hurricanes, tied for second-most ever. Twelve of those storms made landfall on the U.S., an unheard-of number — the previous record was nine in 1916 — and five of those hit Louisiana. The worst was Hurricane Laura, which hit near the border of Louisiana and Texas as a Category 4 hurricane with 150 mph winds and caused an estimated $16B of economic loss, according to Aon. Because most of the storms hit more sparsely populated areas with fewer commercial structures, the 2020 hurricane season caused less damage than you would expect from such an active year. The estimated $35B to $40B in total economic damage nationwide is far below the $200B in 2017.