Amazon issued an RFP for a second North American headquarters Sept. 7, and the continent spoke of little else for the rest of the year. HQ2, as it has been dubbed, will cost $5B to build and will employ 50,000 high-paid workers. More than 50 cities in the U.S. and Canada submitted bids. Industry experts and media outlets have batted around analysis on which city will most likely be selected (and you can even bet on the outcome), with many pegging Austin and Atlanta as front-runners. Amazon has stayed mum so far, although rumor is it might announce finalists soon. The tech giant will name the winner sometime in 2018.
President Donald Trump took office Jan. 20, largely with optimism from his fellow developers, many of whom spoke about his likelihood to benefit CRE and spur economic growth. The growth of U.S. gross domestic product was strong in Q2 and Q3 (beating 2016 levels), but Trump’s presidency has been plagued by accusations of conflicts of interest because he retains access to his real estate assets. His proposed $1 trillion infrastructure plan stalled (reportedly it will be released in January), but industry-beloved programs under fire like EB-5, 1031 exchanges and carried interest have survived, and bank regulations are being eased, which will likely increase capital for CRE.
One of Trump’s signature campaign promises — a border wall between the U.S. and Mexico — has been moving along, and prototypes are being tested. His strict view on immigration has been one of the most controversial aspects of his presidency, as the industry is torn between people who view it as important for national security and those who worry it could exacerbate the labor shortage, limit trade or decrease travel and investment in the U.S.
Reports of retail’s death may have been exaggerated, but the industry is evolving dramatically and often painfully. Store closures are at a 20-year peak — nearly 6,500 were announced in the first three quarters — and more than a dozen big names like Toys R Us, Gymboree and Payless filed for Chapter 11 bankruptcy protection. Small towns are bearing the brunt. Even Black Friday is not safe. President Donald Trump in August put the blame on Amazon, but experts say America has far too much retail space, and retailers are overextended in debt. Federal Realty Investment Trust CEO Don Wood said retail “absolutely sucks right now,” and ratings agencies agreed, naming retail America’s most distressed industry.
But more stores opened than closed this year. Payless has already re-emerged from bankruptcy. Warren Buffett dropped $377M into a retail REIT. Experts say retail is redefining itself to be a healthy blend of clicks and bricks. Amazon and Walmart spent billions to become more omnichannel, the same reason PetSmart spent a historic $3.35B this year to acquire Chewy.com. The new retail model emphasizes experiences, an Instagrammable atmosphere for shoppers and shorter-term leases for retailers. Landlords got more creative with pop-up shops and a heavier focus on dining, fitness and entertainment.
May 22: The bombing of an Ariana Grande concert in Manchester Arena, England, killed 23 people and injured more than 500.
June 3: Eight people were killed and 48 injured when a van drove into pedestrians on London Bridge and then its three occupants stabbed diners in nearby restaurants.
Oct. 1: A gunman perched high in the Mandalay Bay Hotel in Las Vegas, killing 58 people and wounding nearly 550 more.
Oct. 31: A rental truck rammed into cyclists and pedestrians near the World Trade Center in New York, killing eight people and injuring a dozen more.
Attacks in commercial properties were common in 2017, putting pressure on property owners and architects to re-evaluate security protocols and design features to keep people safe. Australia published detailed guidelines in August for its commercial real estate owners on how to counter terrorism. Costs may be limiting preventive measures, but the task is also becoming more difficult as walkability and open design are leading to more crowded and harder-to-defend spaces. The mass shooting in Las Vegas highlighted hotels’ low security, which could become a legal liability: Hundreds of Vegas victims have filed lawsuits against the property manager for not preventing the attack.
Hurricanes Harvey, Irma and Maria collectively caused $400B in damage between Aug. 17 and Oct. 3. Some investors wrote off Florida after Irma. Houston’s entire land use strategy came under fire after 27 trillion gallons of water flooded the streets in four days. Maria completely devastated Puerto Rico. The hurricanes’ impact exceeded the markets that battled the winds and rain. Construction labor shifting to those markets for recovery strained workforces around the country. U.S. national retail sales and industrial output dove steeply in the immediate wake of Harvey and Irma. Insurance providers may change premiums and availability because of increased storm activity.
A few silver linings emerged: Houston’s still embryonic co-working sector got a boost, as did its multifamily product, and some hotel owners took damage to their properties as an opportunity to upgrade. But Texas, Florida and the Caribbean will be rebuilding for years, and perceptions of them may be even slower to recover.
Mattress Firm in late October sued Colliers Atlanta, Colliers Senior Vice President Alexander Deitch and two of its former in-house real estate execs — Bruce Levy and Ryan Vinson. The accusations are sweeping and dramatic: inflated store rents, bribes and providing developers with kickbacks to sign or manipulate deals. Mattress Firm also sued a group of developers it says conspired with Deitch, Levy and Vinson to defraud the retailer into signing above-market leases. The retailer claims the multiyear scheme could have affected more than 800 stores nationwide and cost the company tens of millions of dollars. Mattress Firm is the nation’s largest mattress company, and the suit has highlighted how quickly (and often confusingly) it has expanded throughout the U.S.
The spring and summer of 2017 were dotted with major blazes in large apartment buildings, most notably in London’s Grenfell Tower on June 14, which resulted in 71 deaths. A fire at Honolulu’s Marco Polo apartments on July 14 killed three people. One week before that, a four-alarm fire destroyed a project under construction in Downtown Oakland. A five-alarm fire in a complex outside of the University of Maryland in April inflicted $39M in damages. Similar fires happened in Raleigh in March, Tribeca in September and two in the Boston area in July.
The fires raised concerns about sprinklers and escape routes (although a new type of elevator, first installed in the U.S. in San Francisco in September, can maintain operations during a fire), and fire-safety experts have said the combustible-core panels often used to cover multistory buildings are susceptible to catching fire. Still, wood-frame construction is gaining popularity in multifamily because it is significantly cheaper than using concrete, and many of the incidents happened in projects still under construction, when safety systems were not yet fully in place.
Labor shortages dominated the nightmares of construction and development executives this year. Some of the issues were temporary — the U.S. was in a protracted building boom, but this year's natural disasters, particularly Hurricane Harvey, pulled workers away from job sites. Other causes remain systemic. President Donald Trump’s stance toward immigration is widely considered problematic for construction labor, as is an aging workforce as construction fails to appeal to millennials. Weakened unions and underfunded education are limiting the number of people entering construction. Some potential solutions: greater reliance on technology and prefabricated building, more women in construction and higher wages.
Harvey Weinstein. Al Franken. Bill O'Reilly. #MeToo. Women in 2017 increasingly found their voices to speak out about sexual assault. A few accusations emerged in the commercial real estate industry, most notably a harassment and discrimination lawsuit against executives in NKF’s West Los Angeles office. Multiple women in Bisnow’s "What It’s Really Like To Be A Woman In CRE" package shared stories of assault and discrimination on the job. Hotel employees are particularly vulnerable, and some cities are looking to mandate panic buttons for them.
By many accounts, the industry is still a bit of an old boys’ club, but women are becoming more visible and powerful. Their increased presence on job sites, particularly in Massachusetts, and at the helm of construction companies, is helping assuage workforce issues. Diversity on project teams and in corporate leadership is proving to be a business advantage. Some solutions proposed to battle inequality include increased metrics and a focus on equity in networking, benefits and C-suite positions. A European group is working to increase the number of female speakers at real estate events. The U.K. is tackling wage inequality in a big way, mandating that larger companies publish information on their gender pay gap by April. Lendlease was the first real estate company to do so.
Amazon announced its $13.7B acquisition of Whole Foods on June 16, in the biggest marriage of brick-and-mortar and e-commerce all year (if not ever). It sent aftershocks through retail — grocers’ stocks took a hard hit, and Target in particular has fought to keep its foothold by enforcing co-tenancy lease clauses that limit what Amazon can do at Whole Foods locations. The transaction gave Amazon access to storefronts and a large distribution network, but the deal has been a mixed bag for Whole Foods — its stock price soared, lower product prices boosted its clientele 25% by September and experts predict its property valuations may increase under Amazon. But a Barclays report in December (and social media posts) criticized Whole Foods’ quality control and organization since the acquisition.
WeWork said in May it intended to triple its real estate activity in 2017, and boy did it.
Besides launching in new markets like Charlotte and Rio de Janeiro, becoming one of the biggest tenants in London and preparing to launch in Japan, WeWork revived its WeLive co-living concept with a new project in Seattle, created a wellness brand called Rise by We and purchased a construction management app. It launched a property fund in May in partnership with private equity firm Rhone Group, and used it in October to purchase Lord & Taylor's Manhattan flagship for $850M. The property will be its new HQ and came with an agreement with Hudson’s Bay to build WeWork locations above several department stores around the world. WeWork also announced partnerships with Airbnb, Samsung and news organization Cheddar, acquired coding academy The Flatiron School and launched a pilot program for an entrepreneur-style elementary school called WeGrow. The company, now valued at $20B, may be considering an initial public offering.
California got less than two months’ reprieve between devastating wildfires. Between Oct. 8 and Oct. 23, much of the Wine Country was decimated: nearly 250,000 acres burned and 8,900 buildings were lost. On Dec. 4, Southern California was struck. As of Dec. 20 press time, the fires near Los Angeles were still burning. The Thomas Fire in Ventura and Santa Barbara counties threatens to become the state's largest-ever wildfire. Both regions already had insufficient housing and expect the fires to exacerbate the shortage and affordability issues. Tourism, a significant economic driver in both areas, is also taking a hit. It will likely take years (and tens of billions of dollars) to rebuild.
Between Dec. 14, 2016, and Dec. 14, 2017, a vicious battle waged over commercial real estate data.
CoStar sued Xceligent last December, accusing it of stealing and reselling its data. Xceligent filed a countersuit in June alleging monopolistic behavior from CoStar. The suits had the potential to determine how information on commercial property is shared by tackling what data is proprietary.
Xceligent suffered a major setback in the case in October when a Pennsylvania judge ruled in favor of CoStar in a suit against one of Xceligent’s contractors, which said Xceligent directed it to steal CoStar’s data. Xceligent ousted its founder on Oct. 24. Consumers got sick of the whole thing.
Xceligent’s parent company DMGT wrote its value down to zero Nov. 30. On Dec. 14, Xceligent abruptly shuttered, laying off all of its employees, filing for Chapter 7 liquidation and leaving CoStar the last man standing.
RIP, Steve. The world mourned (and laughed) on July 17 when a Knightscope K5 Autonomous Data Machine — essentially a robot security guard — rolled to his robot death in a fountain in the Washington Harbour project in Georgetown, Washington, D.C. It was Steve’s first day on the job as the second security robot on the East Coast, and his untimely end got him dubbed “the suicide robot.” Workers set up a memorial for him, but the world moved on pretty quickly — Knightscope sent Washington Harbour a replacement robot, and more security robots have been rolled out around the country since, sometimes to the terror of visitors.
Most tier one markets around the globe are facing major housing issues as populations boom and jobs centralize. London is one of the most dramatic examples: Data from Savills this year estimates London needs to build 90,000 to 100,000 units a year to meet demand. The city set a target of 66,000 homes a year, but only 47,000 were built in 2017. ULI estimates the U.S. has a deficit of 2.6 million single-family units. In addition, the National Multifamily Housing Council and the National Apartment Association estimate the U.S. must build 4.6 million apartment units by 2030 to keep pace with demand. Affordability is a major concern — true affordable housing is lacking and often difficult to build, but even the middle class is struggling to afford housing in cities like New York, London and San Francisco. California’s biggest cities are in danger of squeezing out their middle class altogether. Roughly half of American renters are cost-burdened, meaning at least 30% of their income is allocated for rent.
Lack of land is a significant factor, and developers are looking to overcome it by repurposing old shopping centers, car dealerships and corporate campuses. Cost issues are being tackled with prefab construction. But nothing is more effective than public financing.
The U.K. has had a tense and uncertain year. As the government has negotiated Brexit, the value of the pound has dropped, and major financial services companies have set up contingency plans to lessen their footprint in London. Twenty-six financial services firms — including Goldman Sachs and JPMorgan Chase — plan to move people out of the U.K. The number of jobs in jeopardy decreased through the year from 12,500 to 10,500 as concerns over a potential no-deal Brexit alleviated, but that still could put more than 1M SF back on the market.
The biggest boost to confidence came on Dec. 8 when Prime Minister Theresa May came to a temporary agreement over the Irish border, a financial settlement and E.U. citizens’ rights. Negotiations are moving forward, but a no-deal Brexit (which would mean the U.K. immediately exited the Single Market and Customs Union) and an office exodus are still possibilities.
Deals have still been flowing, from hotels to trophy office (but not really retail), with Asian investors leading the way. The office market could even have a record year. Some experts think Brexit will have a positive effect on property, including deregulation and rebalancing the economy.
Experts expected 2017 to be flush with CRE IPOs, but that has largely not come to pass. Sources said Cushman & Wakefield was considering an IPO earlier in the year, but there has been no update since.
Newmark Group was the highest-profile CRE company to go public in 2017 — it launched its IPO Dec. 15 at $14/share with a goal of $290M, well below the $615M it proposed earlier in the year. It closed Dec. 19. Data center provider Switch Inc. went public in October with a $500M IPO that blew away expectations and traded about $5/share higher than its goal. The most eye-catching IPO of the year was not a real estate company but had a real estate hook: Snap’s dispersed offices worried investors in the lead-up to the IPO. It closed strong anyway, but its stock prices have been sinking since. Other IPOs this year include KKR Real Estate Finance Trust, Five Point and Redfin.
Gun violence in Chicago caught the attention of President Donald Trump, who at the beginning of the year called it a war zone worse than Afghanistan, with “people being shot left and right.” But while hundreds of people are being murdered every year in Chicago, it is leading the nation in some metrics, including bringing in $12.5B of foreign investment to CRE in the last five years. It is a tale of two Chicagos — dangerous suburbs losing population versus a booming central business district. And while shootings persist, The Economist Intelligence Unit ranked Chicago one of the safest cities in the world this year, largely thanks to its digital safety. Chicago launched a cybersecurity initiative this year to provide security training.
Millennium Tower’s problems began in August 2016, when residents of the 645-foot-tall residential property in Downtown San Francisco discovered it had sunk 16 inches since opening in 2009 and was tilting two inches. It was only expected to sink 12 inches over its lifetime. The tizzy intensified this year as the sinking has continued (it is down at least another inch this year) and lawsuits have picked up steam. The Millennium Tower Homeowners Association in February hired Dan Petrocelli, Donald Trump’s lawyer and the prosecutor in O.J. Simpson’s wrongful death trial. Its legal activity will accelerate in 2018. Issues with settling and the building's foundation have created a new emphasis on the stability of the foundations of other high-rises going up in Downtown San Francisco, but engineers say Millennium Tower could safely survive a magnitude 8.0 earthquake. Arup and LERA in July suggested a fix that would cost $100M to $150M.
President Donald Trump declared opioid use a national health emergency on Oct. 26, calling it the worst drug crisis in American history. The construction industry has been hit harder than almost any other sector of the economy. But support for addicts — and even recognition of the severity and pervasiveness of the problem — is lacking, as construction companies do not want to be seen as running “dirty” or unsafe sites. More than 100 Americans die daily from overdose, and construction workers are vulnerable because of their physical and injury-prone jobs, and because the workforce is predominantly young and male — groups that are more at-risk for opioid abuse.
Discrimination was under fire this year on many fronts. Bathroom bills, which restrict people to using the bathroom of their birth gender, were considered in 16 states. North Carolina’s year-old HB2 was repealed, but new legislation emerged in Texas and Tennessee. (No states passed one into law this year, although Texas’ Senate approved SB3.) Commercial real estate executives who oppose bathroom bills say they hurt a region’s ability to recruit companies and talent, and some major events refused to come to places with bathroom bills in place. It was estimated North Carolina’s HB2 could cost the state $3.8B over a decade. Meanwhile, San Francisco is working on the nation’s first transgender cultural district.
Commercial real estate seems to be lagging in its support for LGBT professionals — only three companies received a perfect ranking from the Human Rights Campaign’s Corporate Equality Index.
“I sometimes think commercial real estate and professional sports are the last bastions of homophobia in America,” Evolve Real Estate founder Christopher Fraley said to Bisnow in July.
Racial discrimination and disparity are still an issue in CRE — minorities are underrepresented in the industry, particularly in leadership roles. An African-American employee of Bay Area-based Southland Construction sued the company in June for racial discrimination after her employers gave her a Confederate flag purse and made racially insensitive comments.
About a dozen multibillion-dollar commercial real estate mergers and acquisitions were announced in 2017, led by Unibail-Rodamco’s $25B deal to buy mall owner Westfield and become the largest owner of shopping centers in the world. China’s sovereign fund CIC purchased Logicor from Blackstone in June for about $14.4B, the largest property deal ever in Europe. The next month CIC purchased a 16% stake in TPG RE Finance and a Chinese consortium acquired Global Logistics Properties for $10B. Greystar purchased Monogram Residential Trust for $3B, and Cushman & Wakefield purchased two NorthMarq branches in August, instantly adding 200 brokers to its ranks. Kennedy Wilson merged with its European offshoot in August for $8B, over the objections of billionaire investor George Soros.
The CRE tech and data services industry had a number of M&A deals this year, including Thomas H. Lee buying a controlling stake in Ten-X for $1B in August, CoStar’s purchase of ForRent for $385M and four acquisitions by RealPage as it targets $1B in revenue. CBRE queued PropTech up for a big year with its acquisition of Floored in January.
Two massive mergers have been discussed but not closed: Equity Commonwealth and Forest City Realty Trust could create a $10B REIT, and negotiations continue between General Growth Properties and Brookfield after GGP rejected Brookfield’s $14.8B buyout offer in December.
Chinese investors were some of the most active players in U.S. and European real estate (tripling every year since the global financial crisis) until the Chinese government hit the brakes, first in January by imposing new controls forcing citizens to disclose why they are moving money abroad. In August, it tightened restrictions on investment in global real estate, expanding beyond its previous scrutiny of deals larger than $1B to include all foreign transactions. Anbang, Fosun, Dalian Wanda and HNA are particularly under the microscope. The move is intended to minimize China’s risk in its financial sector and support its currency.
Experts say Chinese investment into the U.S. and U.K. will not cease, but investors may have shifted focus to invest closer to home anyway as yuan depreciation has slowed and President Donald Trump’s protectionism made some wary. Canadian investors stepped up to overtake Chinese ones as the most active foreign players in the U.S.
The investigation by special counsel Robert Mueller into President Donald Trump’s ties to Russia grabbed the nation’s attention over the second half of the year. Although Trump’s own real estate dealings with Russian groups have been looked into, including a project in Moscow during the campaign, much of the focus has been on those close to him. Trump’s son-in-law, former Kushner Cos. CEO Jared Kushner, is being investigated for his relationship with the chairman of Russia’s state-run bank, VEB, which financed a deal for the Trump International Hotel and Tower in Toronto in 2010. A deal with Deutsche Bank for the New York Times Building is also under review, as is the possibility Kushner turned to VEB for financing of its debt-plagued property at 666 Fifth St. in Manhattan.
Trump’s former campaign chairman, Paul Manafort Jr., who is facing federal charges including conspiracy against the U.S. and laundering from a pro-Russia party, is also under investigation for allegedly defrauding investors of millions in real estate deals. He and longtime business partner Rick Gates have pleaded not guilty, and Manafort put up real estate as collateral for bail, but Gates was fired from his leadership role at global real estate firm Colony NorthStar.