The Biggest Commercial Real Estate Stories Of 2016
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From major mergers and capital constraints on apartments to the co-working revolution and the Fed finally making its move on interest rates, 2016 was not without its major commercial real estate stories. But, of course, the biggest one of all won the American presidency.
1. Enter Donald Trump
Despite being cast as a long shot, famed developer and reality television personality Donald Trump won the US presidential election. While there is a swirl of pundits pontificating just what a Trump administration will be like and how it will affect the Western world, there is little doubt that—as a developer—his impact on the industry as head of the most powerful nation in the world will be felt.
There's his plan to invest $1 trillion in the nation's infrastructure using a string of private-public partnerships. Then there's the wall he's vowed to build along the US border with Mexico that could cost untold millions as well. CRE experts have speculated with Bisnow recently on other impacts he could have. But it's not just the direct influence that Trump as a developer could have as president, it's also what he will bring to a public office after a career spent as a private entrepreneur. That can be good for business, but it also opens the door for potential conflicts of interest. He recently vowed that he'd do no deals while in office, but as many experts noted, that could be next to impossible.
2. Marriott International Grows With Starwood Merger
It was one of the biggest hospitality marriages in recent memory. Marriott International's $13.6B merger with Starwood Hotels & Resorts Worldwide finally cleared antitrust regulators and was approved by shareholders this year, creating the world's largest hotel company after Marriott's bidding war with China's Anbang Insurance.
The next steps for the new company appear to be brand preservation. The hotelier controls 30 brands, which Marriott global brand officer Tina Edmundson said will remain, including Ritz-Carlton, JW Marriott and Edition. Marriott plans to split its eight luxury brands into two categories—classic luxury and distinctive luxury, as well as incorporate Starwood's innovative experiments with technology.
3. Creation of ColonyNorthStar
How does a group of REITs get more competitive in today's real estate market? Create a merger that gives it $58B in assets under management. That's exactly what happened with Colony Capital's merger with NorthStar Asset Management and NorthStar Realty Finance, which created a new REIT called Colony NorthStar. That puts it fifth among global independent real estate managers, behind Brookfield, Blackstone, CBRE Global Investors and Invesco. Colony Capital founder Thomas Barrack told analysts the combined REIT will be “positioned for the next round of scrutiny to come from that institutional market, which wants scale, athletes, propriety deal sourcing and other verticals.”
4. China Becomes Major US Real Estate Investor
As the yuan weakens, the dollar strengthens, and a flood of Chinese capital has entered the American market in a chase for wealth shelter, with an average of $50B fleeing China every month since this past summer, according to a recent Fortune story. That has made China a rising presence in commercial real estate, displacing the perennial US foreign investor Canada as the world's most active here. “China is the leading foreign investment growth story," said Marcus & Millichap's John Chang (here), "with total volume from this country competing with Canada.”
Among its more high-profile deals are Anbang's $6.5B purchase of Strategic Hotels & Resorts from Blackstone Group earlier this year following its failed bid for Starwood Hotels & Resorts, and a new JV between Gemdale Properties and Investments—an affiliate of China's largest real estate developer, Gemdale Corp—with Toll Brothers to co-develop twin luxury condominium towers off Manhattan's Grammercy Park.
5. Banks Pull Back On Apartment Construction Lending
While the evidence has been anecdotal, many experts are saying US banks have scaled back their construction loan production for market-rate apartments across the country. Banks in some ways are being reined back by regulators, especially with Basel II rules putting the kibosh on lending proliferation.
Bisnow certainly heard about this during a variety of our events this year. “If you have a term sheet from a construction lender right now, don't question it, don't change it, don't send back a red line," Eden Multifamily's Jay Jacobson (here) said at a recent Miami event. "Sign it. Send your check and move toward closing, because if you try and change it, they're going to pull it. They really don't want to lend you money. I don't care who you are." Even officers at two of the country's largest banks told Bisnow construction lending for apartments was shrinking, including SunTrust Bank's head of CRE Kathy Farrell and Wells Fargo SVP Melissa Frawley.
6. Merger Mania In Dixie
There was a spirit of merger mania in the Southeast this year as well, as two of the region's largest developers grew assets through a couple of big mergers. Cousins Properties started the ball rolling with its October merger with Parkway Properties, in which Cousins purchased most of Parkway's assets outside of Texas, including commanding a dominant role in Atlanta's tony Buckhead submarket with some 3M SF. Parkway transformed into HoustonCo, and took control of Cousins' assets in the Texas market to become its own company.
Cousins—led by Larry Gellerstedt (here)—gets a dominant office role in the hot Buckhead office market in Metro Atlanta overnight, with five major assets, including 3344 Peachtree (here), Tower Place 200, Capital City Plaza, and One and Two Buckhead Plaza totaling some 3M SF.
And storied Atlanta apartment developer Post Properties was purchased this year by Mid-America Apartment Communities for nearly $4B, making Mid-America the largest publicly traded multifamily REIT in terms of unit size, with a market cap of $17B.
7. Hines REIT Liquidation
One of Hines Interests' first non-traded REITs got a shining spotlight this year as the major CRE owner liquidated its assets to a Blackstone affiliate for $1.162B this past November. But that was just the last of its liquidations, which saw the REIT selling some 22 directly owned properties for more than $2B throughout the year.
It also sold four properties in its Hines US Core Office Fund for more than $760M as it took advatage of favorable timing for the sale of its assets. Among the higher-profile sales were One Victory Park in Dallas to Clarion Partners and its 55-story Chase Tower in Dallas to Fortis Property Group.
8. Fed Makes Its Move. Finally.
After months of speculation, the Federal Reserve finally raised its benchmark interest rate by 25 basis points to 0.75% during this month's meeting. For most experts, the move was widely expected as data showed the economy's long recovery from the depths of the Great Recession were finally hitting all gears. “The shift in Fed policy is being driven by the surprising victory of Trump to the presidency. The markets see big deficit spending at the federal level—with tax cuts and spending increases heating up an economy that is already close to full employment. In short, the Fed sees an economy getting ready to move into a danger zone and is responding accordingly—by taking away the punch bowl before things get out of hand,” Beacon Economics principal Chris Thornberg recently told Bisnow.
What may be a larger story for 2017 could be how much more the Fed will push rates, with some experts predicting three hikes in the coming year.
9. The VTS/Hightower $300M Merger
Big real estate data got even bigger in November when VTS and Hightower announced an all-stock merger worth $300M. The new company will continue to use the VTS name and be led by VTS CEO Nick Romito (here). And the deal created one of the largest technology firms in the industry, providing asset management tools for more than 5.5B SF of commercial space across the US and UK.
Former Hightower CEO Brandon Weber will help merge the two companies' technologies to create a single platform and expand market tracking to include things like a neighborhood’s rents or lease expirations, and add forecasting and analytic services. Bisnow recently sat down with both Romito and Weber to discuss the transaction and the newly formed company.
10. Co-Working Takes The US By Storm
What began as a neat concept finally turned into a veritable revolution in the workplace this year, led in large part by the global expansion of WeWork. But it's not just WeWork and other co-working firms that are reshaping the American office landscape. Corporations are taking note, with many firms embracing elements of co-working in their corporate spaces, including more collaborative open floor plans and perks like cafés, shared meeting rooms and loft office features as companies compete more and more for talent, especially among the Millennial generation workforce. For instance, Verizon is embracing co-working and opened a co-working facility in Manhattan this past year in partnership with Grind. It is now looking to expand into other cities as it attempts to catch more of the tech startup world.
WeWork is by far the biggest independent player in the co-working field, and has gone on an expansion spree this year following going public in 2016. Most recent valuations have put WeWork at $16B, and the firm is eyeing international expansion into India in a partnership with that country's largest commercial property owners, Embassy Group. Next year could see WeWork take a next step in its transformation and begin to buy its own real estate. WeWork vice chair Michael Gross recently announced it planned to raise funds and establish an investment arm to buy properties.