Monthly Archives: May 2018

Miami-Dade’s taxable property values rise in 2017 at a slower pace to $289B

Four Seasons Residences at The Surf Club in Surfside

Miami-Dade County’s taxable property values rose 6 percent to $288.86 billion in 2017, despite the condo market slowdown.

The county’s property appraiser, Pedro J. Garcia, released the June 1 estimates, showing that property values are growing at a slower pace than in previous years. Garcia said in a release that the oversupply of condos put downward pressure on condo values, but that the short supply of mid-range single-family homes increased property values.

The largest project to be completed last year was the Four Seasons Residences at The Surf Club in Surfside with an assessed value of about $1 billion. The luxury condo development caused values to jump 43 percent — the highest increase countywide — in the town of Surfside to more than $3 billion.

Next door, in Bay Harbor Islands, taxable property values rose by 16.8 percent to $1.2 billion.

Garcia’s estimates show that values fell in Key Biscayne, by 1.5 percent to $8.5 billion; and in Sunny Isles Beach, by 0.4 percent to $11 billion, compared to the previous year.

Overall, the county saw more than $5 billion in new construction last year. More than $1.4 billion of new development was completed in the city of Miami, which includes 1010 Brickell, a 389-unit, 50-story condo tower with a projected sellout of more than $262 million. Cities like Doral, Aventura, North Miami Beach and Bal Harbour also saw a significant amount of new construction.

From 2014 to 2015, Miami-Dade property values jumped 9.4 percent to $230.4 billion, and from 2015 to 2016, they were up 9.1 percent to $251.3 billion. From 2016 to 2017, they rose 8.2 percent to $272 billion.

Garcia will release the 2017 assessment roll on July 1. Here’s a full list of the estimates:

Source:: The Real Deal

These are the top commercial sale brokerages across the country

The MetLife campus in Bridgewater, New Jersey, was part of the biggest portfolio sale of the last 12 months.

Sales of retail properties may be down compared to last year, but executives at the country’s top brokerages remained characteristically upbeat, confident that opportunities are out there for the right types of properties — and for brokers with the right kinds of talent.

“Knowledge about tenants, centers, trade area and industry makes a difference,” said Mark Bratt, CBRE senior managing director and head of its retail investment sales business.

CBRE took the second spot this year in The Real Deal‘s ranking of the top commercial sales brokerages across the country, with 608 transactions worth just over $6.5 billion. It came up behind Marcus & Millichap, which logged $11.3 billion in sales for 3,564 properties. In third place was Eastdil Secured, with $6 billion in deals for 208 properties. Fourth-ranked Cushman & Wakefield brokered almost $4.7 billion in deals across 287 properties.

To rank the firms, TRD analyzed retail sales transactions between April 1, 2017, AND March 31, 2018, as reported by Real Capital Analytics, accessed on April 18, 2018. Brokerages received full credit for the sale as either the seller’s or buyer’s representative. However, deals where the same brokerage represented both sides were only counted once. Franchises and affiliates were grouped together.

The dealmaking over the past year took place against a backdrop of lower overall volume and shrinking deal size as rising interest rates and uncertain tax and trade policies discouraged buyers. Adding to buyers’ reluctance, brokers said, was continuing bad news out of the retail sector — store closures, bankruptcies and fear of the continuing growth of e-commerce.

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But retail veterans are expecting property sales to trend upward over the next 12 months. While bad news is still coming out of the sector, it’s not at the same level as last year, said Bratt, predicting this “will cause investors to have [an] incrementally more positive approach to retail.”

For one thing, grocery-anchored centers are still hot. In 2017, they were one of the few retail sectors to see investment growth — 5.3 percent, according to JLL research. Property owners are also getting more realistic about pricing, which helps with transaction volume.

“We think there’s a lot of opportunity out here,” said Barry Brown, of fifth-place Holliday Fenoglio Fowler (HFF), adding that there’s been a steady flow of new deals this year. “We’re already seeing capital formation come in and start probing on some assets that are not trading,” he said.

Strategic moves

Anticipating a growing market, brokerages are continuing to hire, filling in geographic holes and building out their national platforms.

CBRE is hiring “selectively, looking for the right brokers in the right markets,” said Bratt. Meanwhile, Cushman & Wakefield is “actively recruiting more sales professionals,” according to Phoenix-based executive managing director Michael Hackett. JLL has added lots of leasing talent, as well as a four-person capital markets team in Los Angeles to chase retail institutional opportunities.

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“Los Angeles is almost recession-proof because of the diversity of private and institutional capital,” said Naveen Jaggi, JLL’s president of retail advisory services, leasing and capital markets for the Americas.

For their part, sales professionals are as likely as ever, if not more so, to move from shop to shop, especially in gateway cities, brokers said.

“There’s a general sense in the marketplace that the cost of talent is at a higher premium in major markets than we’ve seen in 10 years,” Jaggi said. “If you look at LA, Dallas, Houston, Atlanta, D.C., you still see a lot of brokers looking at opportunities to move and capitalize on their business.”

Firms are also doubling down on traditional strategies to compete for business and move properties. Barry Brown of HFF said that honesty about pricing is essential in a market where there have been fewer than normal sales to establish a bellwether.

“Generally, with sellers we’re being as candid as we’ve ever been or more candid about the reality of pricing,” Brown said. “Whenever anything trades, there are a lot of inbound calls trying to find the real pricing on those assets.”

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Similarly, Cushman & Wakefield’s Hackett said the focus these days is on owner expectations, especially in light of declining cap rates for big-box shopping centers around the country. “We do have to look very closely at the motivations of the sellers in setting their expectations correctly,” said Hackett. “It’s always part of the business, but even more so now.”

As for sales, Eastdil Secured gets credit for four of the five priciest deals of the year, including the sale of 1111 Lincoln Road in Miami Beach, a retail, office and event property bought last July by German investment fund Bayerische Versorgungskammer for $283 million. Eastdil also brokered the largest individual property sale in terms of square footage, the Village at Allen, an 836,000-square-foot upscale shopping center near Dallas that sold to Elmsford, New York, shopping center developer DLC Management for $170 million. It is reportedly DLC’s largest purchase ever.

CBRE brokered the largest portfolio sale of the year, a $1.3 billion transaction between seller Oak Street Real Estate Capital and buyer Stonemont Financial Group that included 6.6 million square feet of space across 95 properties. Cushman & Wakefield handled the second-largest portfolio transaction, the $1.28 billion sale of Forest City’s 51 percent interest in 13 New York City and New Jersey retail properties to Madison International Realty, making the real estate investment firm, which was a joint partner in the portfolio, a 100 percent owner of the properties. For Forest City, the sale was another step in its continuing exit from the retail property business.

Source:: The Real Deal

Trump’s latest steel tariffs to hit Mexico, Canada and EU

Donald Trump and a steel factory (Credit: Wikimedia Commons, Pexels)

President Donald Trump isn’t softening his stance on tariffs for steel and aluminum imports.

The Trump administration announced it would no longer exempt Mexico, Canada, and the European Union from tariffs on the imported metals, despite strong protests from the leaders of its closest trading partners. The exemptions were set to expire one minute past midnight on Friday morning, according to Bloomberg.

Trump previously exempted the North American and European countries from the 25 percent tariff on steel and 10 percent tariff on aluminum, when his administration first put them into effect in March.

Thursday’s decision was quickly met with promises of retaliation.

The EU said it would target $3.3 billion in American products, including iconic brands like Harley-Davidson motorcycles, Levi Strauss & Co jeans, and bourbon whiskey, Bloomberg reported.

Canada hasn’t yet laid out its response, but the United States imports more steel from Canada than any other country in the world — 5.8 million metric tons last year alone. That’s a million metric tons more than the United States’ second-leading exporter, Brazil.

The decision could weigh heavily on the real estate industry, which is already laboring under increased construction costs. Steel prices have risen this year in anticipation of the tariffs. Builders buy for projects a year or more down the road, so sellers taken into account future price fluctuations.

Trump imposed the tariffs in the name of national security, citing a 1960s-era law that allows the Commander in Chief to do so, according to Bloomberg. The Trump Administration argued the tariffs would give a boost to the domestic steel and aluminum industries, which have declined over the last few decades because of competition abroad.

Businesses in four states, including real estate developers, are expected to bear the brunt of the tariffs, which are estimated to yield around $9 billion this year. Texas companies would pay the government about $968 million, New York firms around $759 million, and firms in California and Florida about $525 million in each state. [Bloomberg] – Dennis Lynch

Source:: The Real Deal

Blackstone, Solus settle Hovnanian credit default swap dispute

From left to right: Jon Gray, Ara Hovnanian, Chris Pucillo (Credit: Pixabay, University of Miami, Getty Images, and Salt Conference)

A showdown between a lender and a gambler over a New Jersey and South Florida home-construction empire has ended.

Solus Alternative Asset Management withdrew its lawsuit against Blackstone Group subsidiary GSO Capital Partners on Wednesday, after reaching a settlement on claims that GSO engineered a debt default by struggling builder Hovnanian Enterprises.

In 2017, Hovnanian, which had not made a profit since 2014, borrowed money from Solus to pay off other debts nearing payment deadlines. But Solus sold a number of credit default swap contracts on that debt, including to GSO, which bought them in a bet that Hovnanian would default on its debts to Solus.

With Hovnanian in need of a refinancing, GSO stepped in as potential new lender, but with one major condition: GSO needed Hovnanian to default on some of its debt so it could reap millions in profits from its credit default swap contracts with Solus. This triggered Solus’ lawsuit in which it accused GSO of engaging in illegal market manipulation.

Both Blackstone and Solus released statements saying they were happy to have resolved the suit.

“We are pleased that Hovnanian CDS will now reflect the actual creditworthiness of the company,” said Solus CEO Chris Pucillo in a statement cited by Bloomberg.

The confrontation between GSO and Solus is just one example of what many money managers see as a growing problem of manipulation in the derivatives market.Some major hedge funds, like Elliott Capital Management and Apollo Global Management, have organized to push for more regulation of so-called “manufactured defaults.” [Bloomberg] — Will Parker

Source:: The Real Deal

Hotel development ramps up in South Florida amid rising demand

Hyatt Centric, Candlewood Suites, and Hyde Midtown

Hotel construction is up in South Florida with a number of properties slated to come online this year, amid heightened demand following last year’s hurricanes.

Nearly 4,200 new hotel rooms and 2.8 million square feet of space will be completed within the next two years in the tri-county area, according to Lodging Econometrics data analyzed by Colliers International South Florida. Of the total, 3,158 keys will be delivered in 22 new hotels totaling 2.1 million square feet, by the end of this year.

That’s a nearly 71 percent increase from 2017 to 2018.

“Generally, the new supply is being added in areas where there have been demand holes,” said John Wijtenburg of Colliers International South Florida, referring to markets like downtown Miami, Fort Lauderdale and West Palm Beach.

Wijtenburg pointed to the recent opening of Hyde Suites & Residences Midtown Miami, the first hotel to be built in the Midtown neighborhood. The 32-story development, built by the Related Group and Dezer Development, includes a boutique hotel “that’s not quite big enough to challenge Miami Beach,” he said.

“It’s 60 rooms, so it’s not going to be struggling to fill the rooms in low season. That kind of a property is what we’re seeing in these infill urban locations,” Wijtenburg added.

Related and Dezer sold the hotel for $21.8 million, or about $363,000 per key, before the building was completed.

Miami’s hotel market plummeted in 2016 and 2017, thanks in part to the strong U.S. dollar, the Zika outbreak and the rise of short-term rental platforms like Airbnb. But it’s been showing signs of recovery following the hurricanes that hit the Florida Keys and the Caribbean last year, with occupancy, revenue per available room and demand rising this year.

“It’s been a really great perfect storm over the past six months, which is the opposite of what we had two years ago,” Wijtenburg said.

Mauricio Bello, managing director of Waterstone Capital, recently completed the Candlewood Suites, a 130-key extended stay hotel near Miami International Airport at 5911 Northwest 36th Street, with plans for more in South Florida.

Waterstone also has approvals for a 144-key Holiday Inn near the Fort Lauderdale–Hollywood International Airport and another InterContinental Hotels Group-branded hotel adjacent to the Candlewood in Miami. The Bay Harbor Islands-based investment firm is spending nearly $70 million on the three properties, Bello said.

In Coral Gables, Sunview Companies and HES Group recently completed a seven-story, 137-room Aloft hotel at 2524 South Le Jeune Road with 34 extended-stay suites.

In Miami’s Brickell neighborhood, a joint venture between Aztec Group and Concord Hospitality recently opened the Hyatt Centric Brickell Miami, a full-service, 308-key hotel at Florida East Coast Realty’s Panorama Tower.

And in downtown Fort Lauderdale, a dual-branded Element and Tribute hotel is set to open Aug. 30, according to its website. The Wurzak Hotel Group and DoveHill closed $56.1 million in construction financing from Bank of the Ozarks for the 323-key development in 2016.

Among other hotels in the works, Driftwood Acquisitions & Development, a Coral Gables-based hospitality investment and development firm, is breaking ground in early June on another dual-branded property in Fort Lauderdale. The 19-story building with have a 106-keyHome2 Suites and a 112-room Tru by Hilton, at 315 Northwest First Avenue. The company is also building a 150-room Canopy by Hilton hotel in downtown West Palm Beach, which is slated to open early next year.

But not every hotel that’s being proposed will get built, experts say. In October, HES Group secured a $9.5 million loan for a mixed-use hotel development in Midtown Miami, about two years after the city of Miami first approved the project. Records show the developer has not yet broken ground on the project.

“There are a lot of projects that are proposed. In some cases it’s a dream,” Wijtenburg said. “One thing that we’ve seen is that the capital markets have been very cautious on new hotel construction.”

Source:: The Real Deal

More turmoil at Ocwen as company nears merger

Ocwen CFO Michael Bourque and Ocwen headquarters

A second top executive at the troubled mortgage service provider Ocwen Financial Corp. is leaving the company.

Ocwen’s CFO Michael Bourque plans to depart on June 22, according to a Securities and Exchange Commission filing. The news comes just a month after the West Palm Beach-based company’s top executive Ron Faris announced he would resign when the company completes its $360 million acquisition of PHH Corp. The former CEO of PHH Corp, Glen Messina, will become the CEO of Ocwen when the deal finalizes.

Bourque is leaving the company to accept a position with another financial services company, according to the SEC filing. He will accept a payment of $125,000 and will receive $50,000 in connection with his relocation from the U.S. Virgin Islands.

Ocwen Financial once had a market capitalization of more than $6 billion and made a fortune servicing subprime mortgages from banks after the financial crisis. U.S. Commerce Secretary Wilbur Ross was a member of its board of directors and its founder, Bill Erbey, was valued at $2.8 billion, according to Forbes.

In the last few years, however, the company has faced numerous financial and legal challenges. Regulators alleged that Ocwen mishandled consumers’ mortgage payments and illegally foreclosed on people’s homes. In 2013, Ocwen reached a $2.1 billion settlement with the federal government and 49 states to address such allegations of mortgage servicing misconduct.

These fines and heightened regulatory scrutiny caused Ocwen’s stock to plummet. The stock closed at at $4.42 on Wednesday, down from about $60 in 2013.

Ocwen has since settled most of its outstanding litigation with regulators, including 31 state attorney generals. But its past earnings paint a bleak financial picture.

The company exited the wholesale forward lending business last year, which was one of its biggest lines of business. Ocwen also reported a net loss of $128.5 million in 2017 and its mortgage portfolio declined 61.4 percent since 2013.

In February, Ocwen announced it would acquire PHH Corp., a New Jersey-based mortgage provider that is dealing with its own legal issues. In August 2017, the company agreed to pay $74.5 million to the U.S. Department of Justice to resolve allegations that it violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the federal government.

As part of the yet-to-be-completed acquisition, Ocwen agreed to assume $119 million of PHH’s outstanding corporate debt.

Source:: The Real Deal

Cushman planning to file for IPO in June: sources

Brett White, 1290 Sixth Avenue and Chicago office at 225 West Wacker Drive (Credit: Wikipedia Commons and 225 West Wacker)

Cushman & Wakefield is gearing up to file for an initial public offering with the U.S. Securities and Exchange Commission sometime in June, sources told The Real Deal.

The global commercial brokerage has seriously considered going public for at least the past two years. The firm’s top executives, including chairman and CEO Brett White, reportedly held informal negotiations with banks last year and, in March, interviewed advisers to help prepare for it.

The prospectus filing usually precedes the IPO launch by a couple of months. Sources said brokers at Cushman have been told the IPO is slated for the third quarter. The proposed size of the IPO is unclear.

A spokesperson for Cushman declined to comment on the possibility of an IPO.

DTZ, a European brokerage backed by private-equity giant TPG, acquired Cushman for $2 billion in 2015 from the Agnelli family. According to Cushman, the company generates $6 billion in annual revenue and has 45,000 employees across 70 countries.

The IPO would arrive on the heels of fellow commercial brokerage Newmark Knight Frank’s $615 million offering, which saw lukewarm results in December. Newmark’s stock price hit a high of $16.66 in late January. But as of Wednesday afternoon it was trading at $13.73, slightly below its opening price of $13.95 in mid-December.

That firm is also working to ramp up its New York presence, having recently poached Eastdil Secured’s hotels team and agreed to acquire Robert Futterman’s retail-centric brokerage RKF.

Cushman, meanwhile, significantly ramped up its investment-sales operation in New York with a flurry of trophy deals brokered by the team led by Doug Harmon and Adam Spies. At same time, the firm lost some key players from its team of Massey Knakal Realty Services alumni — James Nelson, who is growing a team at Avison Young, and former mayoral candidate Paul Massey, who is building his own brokerage.

Eddie Small contributed reporting.

Source:: The Real Deal

Louis Birdman, partners sell 127-acre Diplomat property in Hallandale for $43M

Louis Birdman Diplomat Golf & Tennis Club

A partnership led by Louis Birdman sold the 127-acre Diplomat Golf & Tennis Club in Hallandale Beach to a company controlled by Ari Pearl for $43.25 million, property records show.

Diplomat Golf Course Venture LLC, which includes Birdman, and Mike Meyers and Nate Sirang of California-based Concord Wilshire Companies, sold the property at 501 Diplomat Parkway to Maltese Diplomat Owner LLC, an entity led by Pearl.

Pearl is partnering with JDS Development and the Chetrit Group on mixed-use projects in Miami, Miami Beach and Pompano Beach. He could not be reached for comment.

The buyer financed the purchase with a $42 million mortgage from Kawa Capital Partners affiliate KCP 9 LLC, according to property records.

Birdman and his partners planned a $450 million redevelopment of the golf club, but acknowledged last year that they were receiving unsolicited offers for the property. In early 2016, the city approved their plans for four high-rise buildings ranging from 20 stories to 30 stories, and a maximum of 1,188 residential or hotel units.

About two years ago, the city’s vice mayor reportedly admitted to accepting favors from Meyers in exchange for his vote in approving the golf club’s redevelopment. Birdman, Meyers and Sirang disputed the allegation, and said that their interactions with the city were “100 percent above the board and by the book.”

The group paid $20 million for the golf course and club in 2014. The Hallandale Beach property is located east of the Intracoastal Waterway, near the recently renovated Diplomat Beach Resort in Hollywood.

Birdman is also an investor in One Thousand Museum, a 62-story luxury condo tower designed by the late Zaha Hadid. He could not immediately be reached for comment.

Source:: The Real Deal

Movers & Shakers: Pebb Enterprises taps new VP, Elliman names new team for Riva & more

Pete Crane, Melanie Kimpton and Jonathan Howard

Pete Crane joined Pebb Enterprises as vice president of acquisitions and dispositions.

Crane left Noble Properties, where he was vice president and director of acquisitions and dispositions. He also previously worked for Franklin Street.

Pebb, a Boca Raton-based real estate investment firm, has been working to rebuild its portfolio and team following a plane crash that killed several employees in 2015. The company is now selling some of its out-of-state retail properties with plans to acquire office and industrial assets in South Florida.

Douglas Elliman’s Melanie Kimpton and Jonathan Howard were tapped to lead sales at Riva in Fort Lauderdale. Elliman took over the remaining sales and marketing of the 100-unit, 15-story condo building at 1180 North Federal Highway earlier this month.

Bradley Deckelbaum’s Premier Developers completed the luxury condo project, which overlooks the Middle River in Fort Lauderdale, earlier this year. About 30 percent, or 30 units, remain. Kimpton is the sales director and Howard is an associate.

Elliman also promoted Jaime Drysdale to vice president of marketing for new developments in Broward and Palm Beach counties. She was previously senior marketing director handling developments that include VistaBlue Singer Island, 3550 South Ocean, Akoya Boca West, The Bristol and 2000 Ocean.

Dan Casey joined Florida Partners as a vice president of investment properties. Casey was previously with ReMax Advantage Plus, also based in Boca Raton.

Carlos M. Rodriguez joined AmTrust Title Insurance Company as Florida agency manager. Rodriguez will be responsible for developing, marketing and managing AmTrust’s operations statewide.

Source:: The Real Deal

The indestructible tenant?

It’s been called the “e-pocalypse”: the closing of so many brick-and-mortar stores because customers would rather get what they need with a click.

But not every retailer seems to be swept up in the destruction.

Discount retailers, which sell everything from spaghetti sauce and shampoo to sweatshirts — sometimes for as little as $1 — are not turning off the lights for good, like department stores and others. They’re actually exploding in growth countrywide, experts told The Real Deal.

Unlike pricier competitors, the stores seem to be successfully fending off the challenge from online vendors specializing in cheap products: namely, Amazon.

“So far, discount stores have been e-commerce-immune,” said Garrick Brown, a vice president of the brokerage Cushman & Wakefield who studies the retail sector. “That super-low price point on the goods they offer, I don’t think it will ever make sense on the economics for Amazon to compete with them.”

The discounters also typically have deep pockets: Dollar Tree and Dollar General are publicly traded Fortune 500 companies.

Financial stability is a central consideration, given that it’s a tough landscape in which to survive. In 2017 alone, 10,123 stores went dark across the country, and more than 8,000 of those locations were part of major chains such as Radio Shack, Payless ShoeSource, Sears and Kmart, according to Cushman. Chains are expected to experience more closings as 2018 progresses, the firm predicts.

That said, 2017 also saw the opening of 14,239 stores, for a net gain of more than 4,000, Cushman’s numbers show. Many of those new arrivals were dollar stores, with 1,700 opening last year. That marks the continuation of a years-long run of expansion in the subsector: According to Cushman, a new dollar store has opened in the country at a pace of once every four and a half hours for the last four years.

When it comes to market leaders in terms of store locations, Dollar Tree, which in 2015 bought most of the stores from rival Family Dollar and operates them under that brand, is on top — though only by one. The Virginia-based company — founded in 1953, though it adopted its current name in 1993 — had 14,610 stores in the U.S. at the end of 2017, according to public filings.

Right on Dollar Tree’s heels is Tennessee-based Dollar General, which had a total of 14,609 U.S. stores in 2017, or just one location shy of Dollar Tree, filings show.

Demand for these types of stores’ products, which have increasingly included groceries, cuts across different income brackets, which helps explain their success, said Mark Kaplan, the chief operating officer of Ripco Real Estate, a New York-area brokerage that represents Dollar Tree as well Five Below, a smaller but fast-moving rival. Based in Philadelphia, Five Below, which promises nothing pricier than $5, had 625 stores nationwide as of 2017.

According to Kaplan, the appeal of dollar stores during the Great Recession was fairly obvious: Shoppers were often jobless and cash-strapped, and so were desperate for bargains. But despite an improving economy, customer numbers haven’t really dropped off since and may have actually swelled.

Even though the employment rate has increased, Kaplan explained, most of the population still considers themselves in a precarious financial spot.

To wit: The 40 percent of the population with the lowest income is grappling with high medical and food costs, he said, and the middle 40 percent is dealing with stagnant wages.

“So 80 percent of U.S. consumers can’t really buy anything discretionary and are drawn to these kinds of stores,” Kaplan said. “For people who are price-sensitive, price is the No. 1 value.”

Yet affluent shoppers seem to flock, too, said Ami Ziff, the retail director of Time Equities, a landlord that has increasingly turned to discount stores to plug holes at its 113 retail properties across the country. Time Equities’ shopping centers and malls, which are located in 23 states, were in early May leasing space to 20 Dollar Tree and Family Dollar stores.

“There was a major change in psyche during the recession,” Ziff said. “People came to expect a discount on everything.”

What they look for

Discount stores don’t usually wind up in blue-chip locations. Despite the ability to tap reserves of capital that comes with being publicly traded, many of the stores nonetheless operate with thin profit margins, which depend on keeping overhead costs — like rent — low, brokers say.

Family Dollar stores, which sell goods for $10 or less, for instance, are almost nonexistent on the wealthy Westside of Los Angeles. There was just one in Manhattan as of 2017, according to research by the Center for an Urban Future, a group that puts out an annual New York-focused report, “State of the Chains.” That store was located in Inwood, in Upper Manhattan, where commercial rents are relatively affordable.

In contrast, Family Dollar had 23 locations in the lower-cost New York borough of the Bronx, the report said, and it was in fact the eighth most common chain there. Ahead of it were Dunkin’ Donuts, Subway and McDonald’s, though it beat out Burger King, according to the report.

While upper-crust districts may be out of reach, no-frills discount stores seem to have a notable degree of flexibility, especially compared with other chains, which can have strict rules about size and location, brokers said.

Dollar Tree, for example, is as willing to rent a standalone building in a sprawling strip mall as a commercial storefront squeezed among others in a much smaller retail property, brokers and landlords said.

“We locate our stores where Middle America lives and shops” is the company’s pitch to landlords, according to Dollar Tree’s website.

The company has certainly put down roots in rural areas. Brokers said the small-town shopping districts where its stores are often found had in many cases previously been veritable ghost towns after Walmart opened nearby locations, forcing local vendors to close. Because of its modest size requirements, Dollar Tree was able to capitalize on empty storefronts in the heart of those communities, thus offering a great convenience for residents, brokers said.

Similarly, Five Below, which prefers 8,000-square-foot spaces, according to its website, will consider “a variety of urban, suburban and semi-rural markets.”

From market to market, rents paid by discount stores vary widely, according to brokers who have worked with those kinds of companies, but annual rents usually range from about $12 a square foot in rural areas to $40 a square foot in cities.

Vacancy solvers

In a way, discount stores have picked the right moment to grow. Considered highly desirable “investment-grade” tenants, they are also arriving as a rash of vacancies is plaguing everything from strip malls to luxury-focused thoroughfares across the country.

In March, for example, Time Equities installed a Five Below at College Square Mall in Morristown, Tennessee, an enclosed 480,000-square-foot property that the company snapped up for $37 million last year from CBL Properties, a national mall owner.

The Five Below, which takes up about 9,000 square feet, was brought in to fill several storefronts left empty by the closure of local businesses, said Ziff, who declined to share the store’s rent but said that similar retail storefronts command about $21 per square foot annually in the region.

Other tenants at College Square include a T.J. Maxx, a discount clothing store that is part of the same corporate family as Marshalls and HomeGoods, which replaced a Sears in 2014.

Although T.J. Maxx and similar retailers also specialize in off-price merchandise, they have larger footprints — about 28,000 square feet on average — and sell clothes and furnishings at higher prices than dollar stores. Thus some brokers are loath to put them in the same category as the dollar stores of the world when analyzing impacts on retail real estate.

However, there is a common thread now that midmarket retailers are getting into the discount game. In 2016, in the face of declining sales, Aeropostale, a company focused on teen apparel like jeans and hoodies, created a brick-and-mortar discount chain called Aeropostale Factory. Its stores dot outlet malls owned by Simon Property Group.

Likewise, H&M, the already-low-cost clothing store, said this spring that it will unveil Afound, a discount chain with its own brick-and-mortar stores.

They join a marketplace that’s getting crowded with low-priced apparel. For example, the California-based Ross Dress for Less, a longtime discount clothing store, was among the fastest-growing national chains last year, according to Cushman & Wakefield. At end of 2017, it had 1,409 stores nationwide, plus 213 operating under the dd’s Discounts brand.

And paradoxically — or perhaps by design — Ross’s brick-and-mortar stores seem to be thriving by ignoring the e-tailing trend. Unlike many of its peers, Ross has shunned e-commerce: Shoppers can go to a website to look at oversized photos of shirts, sunglasses and handbags. But to buy them, they must visit an actual store.

Similarly, Five Below began selling items online only in summer 2016, and analysts say e-commerce represents a fraction of its business.

Some seem impressed with the offline-centric strategies. Avoiding e-commerce “keeps traffic flow strong, shopper frequency high and costs related to online delivery and fulfillment low,” according to a 2017 report from the firm CBRE titled “Is the Big Box Dead?”

It “validates their long-term viability both as retail brands and tenants,” the report stated. When big boxes do fail — Toys “R” Us shuttered all its stores in March, for instance — landlords are often forced to make over their cavernous spaces to allow for smaller discount stores.

Time Equities, for example, recently carved up a former Old Navy at the Colony Square Mall in Zanesville, Ohio, to make way for a T.J. Maxx, Ziff said. But that kind of slicing and dicing can be expensive, about $70 a square foot for an unenclosed shopping center, Ziff said. But getting a deep-pocketed national discount store in there could justify the outlay, he added.

A discount future?

If Amazon has not yet presented much of a threat to discount retailers, that could change, brokers said. This winter, the online juggernaut introduced a “$10 & under” feature that may appeal to discount-store shoppers.

And the sector does not seem totally immune to market forces. While 1,700 discount stores cut their ribbons in 2017, 40 also closed, according to Cushman, though that failure ratio might be normal.

“When times are good, it’s not uncommon for 5 to 10 percent of leases to expire or to not seek renewal,” Brown said.

Still, with perhaps 1,000 new discount stores planned for 2018, there may be a risk of oversupply, he added. “We will probably hit market saturation in the next year or two,” Brown added. “Sooner or later, there will be losers.”

Already, there are signs of weakness. In March, Dollar Tree announced that its Christmas sales were off, and as a result lowered its 2018 profit estimates.

But in the meantime, the stores seem to be doing their job in propping up an unsteady retail real estate market.

“Fortunately for us, they are one of the few sectors that’s growing in the face of a very, very challenging retail environment,” Ziff said.”

Source:: The Real Deal