BPM Real Estate Insights: Spring 2018 Volume 01 | Page 9

BPM Real Estate Insights
9
Residential real estate continues its strong march with
demand outpacing supply in many markets and rents in a
seemingly inexorable upward spiral. Some markets, however,
are becoming oversupplied and residential rents are less
elastic than, say, office rents because they are tied to wages
which have been somewhat stagnant until recently. will survive and thrive are the urban centers like Westfield’s
San Francisco Center and strong suburban centers like at
Stanford and Broadway Plaza in Walnut Creek. These malls
are buoyed by strong, supply constrained locations in affluent
trade areas with top notch merchants and restaurants. “A”
Malls have a bright future.
Speaking of office space, I see some vulnerability here. There
seems to be a structural oversupply in the U.S. with national
vacancy rates hovering near 16%, where they have been for
some time. This issue is magnified by ever-lessening need for
space by office workers. Shared workspace is becoming more
common and there is less need for physical storage space. “B” malls may not be long for this world unless they are
reconstituted and/or redeveloped with additional/alternative
uses. Sun Valley Mall in Concord is an example. The mall
is getting somewhat—maybe very—long in the tooth and
probably needs to be de-malled (i.e. opened up and maybe
downsized by half with the balance of the land used for high
density residential). The real estate is excellent. The current
use is not.
Retail, the sector I am in, may be the most vulnerable but
perhaps not for the reasons you would think. Many, both
inside and outside the real estate business, think Amazon
and other e-commerce purveyors are killing bricks and
mortar retail. No one in their right mind would deny the
impact. But, I am one who believes that even if we had no
internet, there would be pain and suffering in the retail real
estate sector. Why? Two reasons. One, we have too much
physical retail space in America. I am of a mind that we need
roughly 30% less of it in the U.S. today. Much retail space
needs to be plowed under or put to other uses (and I hope I
don’t own any of it!). By some measures, we have six times
the amount of retail space per capita in the U.S. compared
to the per capita amount in the UK and 10 times more than
elsewhere in the western world. The other reason I think
retail is suffering is because some retailers fail to keep up
with the constant and very rapid change in co nsumer tastes,
desires and needs. For an example here, think Sears.
That said, I like retail as an investment sector. Perhaps I have
to think this to justify our investment thesis and platform
but truly, brinks and mortar retail will not be departing
this earth. The best is evolving and the best investments are
those that have evolved (or that you can cause to evolve).
Moreover, being somewhat of a contrarian in our investment
philosophy, we have found opportunity amidst this adversity
in retail and expect to continue to do so.
“C” malls need to be transitioned. Many will, or should be,
literally plowed under and the land put to other uses. Some
mall properties in the hinterlands may need to return to the
use from whence they came—cornfields.
Do You See Interest Rates Rising in
2018 and What Impact Will That Have
on Real Estate?
I do see interest rates going up in 2018 and this will have
some effects on cap rates, obviously, as spreads between cap
rates and treasury rates narrow a bit. But, overall I don’t see
this as having a major impact in the near term, especially
here in the Bay Area.
Do You See the New Tax Law
Impacting Real Estate?
What is interesting is that late last year, deal velocity slowed
down as I think people were wondering what would be in
the new tax law. Now that the law has been enacted, deal
velocity has clearly picked up. For now, I don’t think the new
law will have a significant impact on the industry… certainly
not like in 1986.
What Is the Future of the Shopping
Malls? Have You Been Seeing Any New
Investors Coming into the Market?
Malls today fall into three basic categories, “A”, “B” and “C.”
“A” malls are thriving and will continue to do so if owners/
managers keep up with the times. Examples of those that Generally, I have not noticed any significant new investors
coming into the market. Mostly, I see the usual players
looking to invest more capital in the U.S. As it has been the
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