Matthews™ Fall/Winter 2022 Publication

FALL/ WINT E R 2022 TM

breaking the bull:

inflation’s effect on cre WHY INVEST IN MULTIFAMILY DURING INFLATIONARY PERIODS?

LIVE. WORK. PLAY: THE RETAIL SPACE TENANTS WANT

UNDERSTANDING INFLATION: THE PROS & CONS FOR CRE

SPREAD AD

*CHANGE FROM LAST ISSUE*

r u o o t Letter s t n e i l C

ADOF THIS CHANGESPREAD THE DESIGN

To long-term clients, whose history and sup-

port go back many years, and to our new and future clients, who we look forward to working

*CHANGE FROM LAST ISSUE* with and getting to know in the years to come.

Thank you for believing in Matthews™, we feel privileged to do what we do, to do it how we do it, and to do it where we do it. Without you, none of this would be possible.

! u o y Thank

TA BLE O F C ON T E N TS M AT T HEWS™ P U B L I CAT I O N | FA L L / W IN TE R 2 02 2

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Tried-and-True:

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Why Invest in Multifamily During Inflationary Periods

Why Invest in Multifamily During Inflationary Periods

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TABLE OF CONTENTS

Why Invest in Multifamily During Inflationary Periods

Live.Work.Play.

The Retail Property Tenants Want

Understanding Inflation:

The Pros & Cons for Commercial Real Estate

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Why Invest in Multifamily During Inflationary Periods

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Why Invest in Multifamily During Inflationary Periods

Why Invest in Multifamily During Inflationary Periods

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MATTHE W S ™ P U BL ICATION

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4 110 N . S co tts da l e Rd. , S ui te 10 0 | S co tts da l e, AZ 8 5 2 5 1

Why Invest in Multifamily During Inflationary Periods

Why Invest in Multifamily During Inflationary Periods

Why Invest in Multifamily During Inflationary Periods

Why Invest in Multifamily During Inflationary Periods

Why Invest in Multifamily During Inflationary Periods

Why Invest in Multifamily During Inflationary Periods

Why Invest in Multifamily During Inflationary Periods

p ubl i ca ti o ns @m a tth e w s .co m | m a tth e w s .co m/ i ns i g h ts / p ubl i ca ti o n / P R I N TE D I N THE USA

LETTER FROM THE CEO

The Recession? We Choose Not to Participate

AD

As of September, the Federal Reserve has raised interest rates an additional 75 basis points to 3%-3.25%, marking the third quarterpoint increase in four months. GDP growth is slowing, decreasing 0.6% in Q2 22 and inflation has quickly become the most dangerous threat to the U.S., reaching 8.3% in August, after previously hitting a record high of 9.1% in June. As I’m writing this, the Fed has made it clear that their main priority and responsibility is to get inflation under control, no matter the consequences. Chair Powell stated during a press conference that although there are unfortunate costs that come with reducing inflation and, in turn, a forced recession, the failure to restore price stability would be a much greater pain. Interest rates are expected to reach 4.6% by the start of the new year.

Overall, transaction activity has not stalled as it has historically in tumultuous economic times.

Operating fundamentals are strong, pushed up by low unemployment and stable wage growth.

Buyers aren’t as worried about the increase in start-up capital, confident strong rent growth will continue and make up cash flow. After several years of cheap debt, owners will need to adjust, but financing will move where it needs to, just as borrowers will.

So how does this volatile market affect us at Matthews™? It doesn’t. The boats have been burned, and there is only one way forward.

Every day we wake up and work harder than the competition to ensure that when the market is down, Matthews™ does not go down with it.

The overall message a recession sends businesses is that they can’t be successful, so why try? But that’s not true. You are the decider of your success, not the U.S. government. Our brokers will continue to execute, continue to pick up the ax, and keep swinging. The market moves. We don’t.

LETTER FROM THE CEO

The U.S. is at an inflection point in history.

I personally don’t think we will see an impact like the great financial crisis of 2008, but we can definitely expect a slowdown. As interest rates increase, cap rates will rise, making it more difficult for investors to make a profit.

It’s like the saying goes, “the days are long, the years are short.” I personally look at business and life with a long-term outlook, and I have embedded that into the Matthews™ mindset. As a company, you must have the capacity to look past the current state of the market and look at the opportunities that lie ahead. So, you say there’s a recession happening, well thank you, but we choose not to participate.

K Y L E M AT T H E W S CHAIRMAN & CEO

A one percent increase in inflation indicates a 1.2% upswing in private commercial real estate excess returns. Yet, during the same period, a one percent increase in the inflation rate can reduce bond prices by 1.5% and a drop in stock prices by 4.2%.

Source: Global Financial Crisis

Source: Middleburg Communities

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When Inflation > 3.0%/yr

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Intrinsic Value Appreciating Value Increase in Income/Rents Depreciating Debt

Multifamily properties also show an impressively higher result for average risk-adjusted returns compared to stocks and bonds.

36%

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in real estate

62%

90%

68% 73%

100%

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Core reasons to invest

3.

Apartments Have Provided Dependable Inflation Protection Since 1993

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Inflation has become a near-constant topic of conversation. Surging gas, food, and rent prices catapulted U.S. inflation to a four-decade high in 2022. Inflation reached a record-breaking 9.1 percent in June, before dropping to 8.3 percent in August. This pressured households and sealed another hefty interest rate hike by the Federal Reserve, with higher borrowing costs following suit. As the stock market is impacted, investors are wondering where the best place is to distribute their money to receive stability as inflation rages and a recession looms. Real estate, especially multifamily, has always been a tried-and-true inflationary hedge. Investors are leaning more towards this asset class to plant capital and stay ahead of financial perils.

Real estate has long been considered one of the most stable and attractive investment classes. Inflation weakens the purchasing power of consumers, and the value of fixed returns is reduced. Therefore, to hedge against inflationary impacts, investors seek assets that can grow in value, such as real estate, that build a stable path towards cash flow and capital appreciation.

Historically, in high inflationary periods multifamily operators see increases in rental rates which has been a great safeguard against inflation.

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BY DANIEL WITHERS

King During Inflation?

Ap a

Why Invest in Multifamily During Inflationary Periods

Is Cash or Real Estate

% of Investment Protection from Inflation

Tried-and-True

There are four core differences between real estate, specifically multifamily investments, and other investments, such as stocks or bonds.

First, real estate is a physical asset with intrinsic value. As a tangible asset, it derives its value from the physical property and improvements.

Second, real estate, specifically multifamily investments generate returns in the form of rent and appreciation of value, which helps fend off the erosion of current value from inflation. Third, the inflationary pressures can be passed on to the tenant in the form of increased rents, thus income. Finally, through cost segregation, an investor can allocate the asset’s cost over its useful life to account for declines in value over time. Investors can use some tax incentives to write off depreciation, mortgage interest, property taxes, operating expenses, and invested capital to repair or maintain the property.

When Inflation > 4.9%/yr

Multifamily Performance During High Inflation

The most important thing to remember about multifamily is the resilience related to rental demand; even during an extreme recession or financial turbulence, people will always need a

Source: U.S. Census Bureau $1,300 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400

2001

2005

2009

Recession

2013

2017

2022

Median Asking Rent

Within certain municipalities, multifamily owners can rewrite leases to align with the Consumer Price Index (CPI). These revisions highlight that annual rent raises will be equal to or higher than the annual adjustment to the CPI. Rental Vacancy Rate

Source: U.S. Census Bureau 12% 10% 8% 6% 4% 1960 1970 1980 Recession

Multifamily boasts one of the lowest vacancy rates across the industry, recording an average vacancy rate of 5.8%.

Additionally, multifamily properties are often financed with fixed-rate, long-term loans for as long as ten years, keeping debt payments stable during rising inflation. These building owners borrow as much as 60 to 70 percent of the property’s value which serves as an inflationary hedge. When a period of high inflation occurs and the owner has a long-term loan with fixed monthly interest, they are not impacted by rapid interest rate spikes and can take advantage of rent and property value growth. On the other hand, any owner that has a property loan with variable rates is at greater risk of interest rate hikes during times of inflation. Multifamily offers investors an incredible opportunity for faster portfolio growth, significantly higher potential to profit from economies of scale, excellent cash flow and appreciation value potential, and stable control over income and asset value.

Source: RCA

2000

2010

Vacancy Rate

2020

Inherent Value, Incoming-Generating Asset Increase in demand for apartments, increase occupancy Ability to Adjust Rent Rate More Frequently Appreciation Along with CPI More Control Over the Investment Long-Term, Fixed-Rate Loans Low Supply and High Demand

Like all investments, not all provide the same returns. Each investment carries different opportunities and challenges.

Risks of Investing in Multifamily

An Upswing in Construction Costs & Decrease in Inventory

$400

Maintenance Cost Increase (Note, that during high inflationary periods, owners can renegotiate existing contracts with vendors to lock in prices for one to three years, and sometimes more)

$300 $200 $100 $0

1990

Benefits of Investing in Multifamily

Tenants May Fall Behind on Rent

U.S. Apartment Sales Volume

Sales Volume ($B)

place to live.

Additionally, when interest rates increase along with the prices of goods and services, fewer people can afford to purchase a home, which leads to elevated rental demand. As the demand for rental units rises, multifamily owners can increase asking rents to adjust for inflation and match local market rates. Also, compared to retail or industrial real estate, these leases are much shorter, allowing the owner to adjust rents more frequently. Naturally, rent is expected to increase by two to three percent year-over-year to match inflation, but with current increases in rental income it would likely exceed the inflationary growth in building operating costs and expenses.

Median Asking Rent for Vacant Units

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2006

2010

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2018

2022

Real Estate Investing Strategies PERFORM DUE DILIGENCE Choosing a market with a strong MSA, high demand, and strong fundamentals (low vacancy and market rate rent) proves beneficial to investors. It’s essential to perform due diligence on the economy and rental patterns of any local market in which there’s interest in making property investment or development.

It’s recommended to locate assets with cash flow and current tenant leases that can be adjusted in alignment with inflation.

LOOK INTO VALUE-ADD OPPORTUNITIES & 1031 EXCHANGES With rising real estate property prices in primary markets across the U.S., secondary and tertiary markets have grown in popularity among investors looking to maximize their returns. These markets present excellent value-add opportunities for attractive returns and often receive less bidding competition.

CONSIDER PROPERTY RENOVATIONS Property renovations are important and not only increase the overall property value and create future potential capital gains but serve as an excellent hedge against rising prices by outpacing the rising inflation.

AD Take Away Multifamily provides a unique combination of benefits to real estate investors, encompassing passive income, scalability, appreciation, leverage, and incredible tax benefits. To put this into perspective, net demand for market-rate apartments in 2021 reached record highs at 673,000 units; this was the highest in three decades and blew away the previous record from 2000 by 66 percent. In addition, nearly 360,000 market-rate apartment units were completed in 2021. That milestone has been the highest addition in over three decades on the supply side. Another 682,000 units are under construction, and roughly 426,000 are scheduled to be completed by the end of 2022. This is the first-time supply deliveries will reach the 400,000-unit market since 1987. However, the U.S. still needs 4.3 million new apartment units between now (2022) and 2035

in order to mitigate issues related to apartment demand and the shrinking supply of affordable priced housing, according to research commissioned by the National Multifamily Housing Council and National Apartment Association. These favorable fundamentals, combined with shifting market preferences, have led to an explosion in multifamily demand, presenting investors with additional cash flow and capital appreciation despite the short-term headwinds from inflation and monetary tightening.

providing you with professional insight on the latest news, trends, and topics impacting the commercial real estate industry. listen now!

DANIEL WITHERS daniel.withers@matthews.com (818) 923-6107

W W W. M AT T H E W S . C O M

™

The popularity of electric vehicles (EVs) continues to gain ubiquity across the country and is pushing many businesses to add property value through EV-integrated solutions.

Development in EVs will create multiple opportunities for the real estate sector as multifamily, office, and retail adapt properties to cater to EV users. CRE owners can lead the e-mobility future by adding EV charging stations to their properties and gain a revenue-generating investment that is also an asset to the community. These stations add tremendous convenience for tenants, shopping centers, and other retail properties.

effect of EV on Real estate

ELECTRIC VEHICLE SALES ARE PROJECTED TO GROW FROM

$163 BILLION IN 2020 TO $823 BILLION BY 2030,

Source: AutoPacific

20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

FORECAST

$3,000 $2,500 $2,000 $1,500 $1,000 $500 $0

‘18 ‘19 ‘20 ‘21 ‘22 ‘23 ‘24 ‘25 ‘26 ‘27 EV Consumer Intention

Annual EV Sales

ACCORDING TO GLOBE NEWSWIRE.

effect of EV on Real estate

EV Sales (Thousands)

BY CONRAD SARREAL

ANNUAL U.S. LIGHT VEHICLE EV SALES VS CONSUMERS PURCHASE INTENTION

% Consumer Intent

EVS ELECTRIFY THE CRE SPACE

President Biden has set an ambitious goal for half of the new car sales to be electric, fuel cell, or hybrid electric by 2030. If half of all cars sold by 2030 were electric, EVs could make up between 60 to 70 percent of vehicles on the road by 2050.

IMPACT OF EV CHARGING ON EXISTING PROPERTIES First off, increasing EV adoption means a concurrent rise in electric charging system demand. The pressure is on property owners and developers to provide charging stations for tenants and offer a handful of charging ports in parking lots where people already go to work and shop. Commercial real estate investors can monetize and drive more revenue to their assets by implementing charging stations. Product types such as offices, multifamily, gas stations, and more can take advantage of the increasing demand.

EV COST FUNDAMENTALS Those looking to venture into the EV market may not know about charging stations’ costs.

There are three different charging technologies used today:

CONSUMER STANDARDS

People prefer to charge up where they can multitask – have a meal, get some shopping done, or access other services. Business owners offering charging incentives in areas with higher EV drivers will attract more customers and increase the amount of time people spend in a store or restaurant. As a result of the growing popularity of electric vehicles, commercial owners who provide charging stations are likely to see increased property values. The same goes for multifamily communities and office buildings, as on-site chargers are a major desire for many apartment residents and employees. EV drivers are often willing to pay more rent for access to these charging stations and tenants are more likely to agree to long-term leases.

SO FAR, 14 STATES AND WASHINGTON, D.C., HAVE ADOPTED CALIFORNIA’S REGULATIONS THAT REQUIRE THE SALES OF A CERTAIN NUMBER OF ZERO-EMISSIONS VEHICLES PER YEAR AND FOR ALL

CARS SOLD TO BE ZERO EMISSION BY 2035.

WHERE CALIFORNIA’S EMISSIONS STANDARDS ARE ADOPTED Source: National Conference of State Legislatures

LEVEL 1 CHARGER

Charges at five miles of range per hour (5RPH).

Chargers come with the EV purchased, and replacements cost an average of $300.

LEVEL 2 CHARGER Charges 16-25RPH with a standardized port. Charging stations costs between $300 to $1,200 on average.

Currently, the majority of commercial real estate properties use Level 2 chargers. Although some models may cost a bit more, they provide a shorter charging time which is attractive to consumers and can be used by all EVs, widening the customer base.

In addition, property owners can utilize charging companies that offer monthly subscriptions, producing customer loyalty.

LEVEL 3 CHARGER Also called ‘DC fast chargers,” provides 100-200RPH. There is no single standardized port, and not all models of EVs can use them.

Most EV drivers don’t want to get tied down by monthly subscriptions or membership fees, however, it can be worthwhile as a membership provides drivers with discounts and easy access to public stations. For example, Electrify America's, a DC fast charging station network, membership program saves California residents $.012 per kWh.

OPPORTUNITIES FOR REDEVELOPMENT The industry must develop updated technologies to meet the growing demands of EV drivers and to support the charging infrastructure. Design, infrastructure, and IT will all be significantly impacted by the implementation of EV charging stations, increasing redevelopment costs. On the other hand, charging stations bring in their own form of revenue and have proven to have a return on investment.

One multinational hotel chain that offers EV charging capabilities at over 3,000 locations has seen indirect revenue increases by installing EV chargers, including one Southern California location. The hotel owners said the new EV charging capabilities had driven a new stream of overnight guests, along with those who stay in the lounge and restaurant long enough to charge their vehicles and enjoy a meal.

A few major retailers have already begun providing EV chargers at their stores:

HOW PROPERTY OWNERS CAN PREPARE FOR EVS

KROGER

Struck deals with EVgo, Blink, Electrify America, and Tesla to implement more than 350 chargers across their locations to ensure customers could charge while running necessary errands like grocery shopping.

WHOLE FOODS

Installed its first fast charger in 2013, which can charge in less than an hour. By 2019, 200 of Whole Foods’ 504 stores had traditional chargers and more than 50, mostly in California, had fast chargers.

TARGET

Announced the installation of EV charging stations to a goal of 600 parking spaces in over 20 states over the next two years and partnered with Electrify America to provide DC fast charging stations.

Due to the high demand for electric vehicles, there is an increasing need for more EV infrastructure as most existing buildings are not equipped with EV-ready parking spaces. Early last year, the approved version of the International Energy Conservation Code (IECC) will require new commercial properties with two or more parking spaces to include at least two EV-ready spaces. The IECC defines an EV-ready space as one that has a 40-ampere, 208/240-volt dedicated branch circuit to support a Level 2 charger.

Core requirements of the 2021 IECC model code for new multifamily buildings are as follows: Source: International Energy Conservation Code (IECC) TOTAL NUMBER OF PARKING SPACES

MINIMUM NUMBER OF SPACES WITH EVSE INSTALLED *

MINIMUM NUMBER OF EV-READY SPACES

MINIMUM NUMBRE OF EV-CAPABLE SPACES

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5% of total parking spaces

10% of total parking spaces

10% of total parking spaces

*Spaces that terminate with a Level 2 EVSE are considered EV-Ready Spaces and count towards the minimum number of EV-Ready Spaces.

Today, preparing a building for EV charging is imperative — especially if planning to install charging stations right off the bat. In fact, according to CalMatters, “installing EV infrastructure at a time of new construction is the least expensive way to create EV charging access. Retrofitting can be four to 10 times more expensive.”

THE STATE OF CALIFORNIA WILL SAVE $1.4 BILLION

BY INSTALLING EV CHARGING TECHNOLOGY UPFRONT, RATHER THAN THROUGH REDEVELOPMENT.

Property owners will need to think about the long-term viability of the chargers they choose.

Depending on the size of the building, owners should be strategic when offering residents or customers options in how they decide to charge EVs. Installing the right type of charger at the right location will be crucial. For multifamily properties or offices where occupants spend long hours, Level 2 chargers

work well. At retail locations, industrial facilities, bus depots, roadside stops, and other places where getting in and out efficiently is key, faster charging will be needed. Fully understanding a property’s clientele and the costs associated with installation will ensure the chargers will actually be used on-site.

HOW PROFITABLE ARE EV CHARGING STATIONS? The installation of EV charging stations can pose several benefits beyond an additional revenue stream for businesses. Billing customers for their use is the easiest way to maximize revenue, especially in areas where chargers are in high demand. A survey from E Source found that 18 percent of EV owners were willing to pay up to $3 per hour for charging, and 12 percent were willing to pay $4 per hour.

Implementing EV charging infrastructure increases the following for a CRE owner:

CONVENIENCE FOR CONSUMERS

SUSTAINABILITY AND VISIBILITY

INCREASE IN PROPERTY VALUE

GAIN TAX ADVANTAGES

To see a rapid ROI on charging stations, owners should consider subsidies. Bishop Ranch, a commercial business center located in San Ramon, CA, with over 500 businesses, including retail and office space, took advantage of a grant from Pacific Gas & Electric (PG&E) utility company and partnered with a local bank to subsidize the costs of installation. The bank had its branding on the EV chargers, which helped showcase the bank’s sustainability support and added visibility for the brand. Between the grant, local and federal incentives, and subsidies, Bishop Ranch paid very little for the charging infrastructure and estimated their EV chargers would become profitable within five years.

THE COST OF ELECTRICITY GETS PASSED DIRECTLY THROUGH THE CHARGER. OWNERS CAN CHOOSE TO SUBSIDIZE THE ELECTRICITY COSTS AS A PERK TO WORKERS OR

effect of EV on Real estate

matthews

™

PropTech ad

REVOLUTIONIZING CRE TECHNOLOGY EXCLUSIVE ECOSYSTEM OF PRODUCTIVITY TOOLS

REQUIRE TENANTS TO PAY FOR CHARGING.

THE LONG ROAD AHEAD

INNOVATIVE AND CLIENT-FOCUSED APPROACH

Since the upcoming years are critical for properties in areas with high EV adoption, simplifying the setup and management of charging stations, from installation to driver support, can aid other properties in modeling the expansion of EV infrastructure.

Those looking to implement an affordable, profitable, and scalable EV infrastructure will have the most success and impact the industry for decades.

DELIVERING ACTIONABLE LEADS AND MARKET INTELLIGENCE

CONRAD SARREAL

conrad.sarreal@matthews.com (214) 692-2847

W W W. M AT T H E W S . C O M

™

"The state’s Tax Cuts and Jobs Act established 42 designated opportunity zones for investors and developers in growing submarkets across Phoenix, OFFERING DEFERRED CAPITAL GAINS

TAX AND REDUCED TAX PERCENTAGES BASED ON THE AMOUNT OF TIME A PROPERTY IS HELD.''

2020 spurred historical growth for Phoenix's multifamily market that continued into 2021 and early 2022. The influx of movers into Phoenix caused a massive shift in demand for multi-housing properties, forcing developers to ramp up new supply quickly. But now, in late 2022, the absorption rate is moderating, and supply is still accelerating, causing the metro's vacancy rate to reach 7.9 percent, a two percent increase from Q1 2022.

Around the summer of 2021, Phoenix averaged 15 to 20 transactions per week, with fewer properties available. As of September 2022, Phoenix is averaging one to four transactions and five to 10 new properties entering the market per week. The development pipeline, specifically for luxury units, is heavily outpacing demand, as renters seek more affordable, smaller units to combat rising living costs.

Although still impressive, the market’s current rent growth of 12 percent is much lower than the market's rate of 27 percent in early 2022; most likely a result of slowing demand and lower lease renewal rates.

SALE PRICE PER UNIT Source: CoStar $550K $450K $350K

Lastly, the Valley offers sprawling submarkets at reasonable prices. Suburbs like Buckeye grew 80 percent in ten years and provide development opportunities not seen in dense coastal markets. In all, Phoenix has become a treasure for commercial real estate investors, but with great success comes great challenges. As the aftereffects of COVID-19 become clear and sectors begin to shift, investors will need to evaluate where in the Valley to plant capital, what type of products best suit their needs, and what economic and consumer trends Phoenix is experiencing.

$250K $150K $50K

2017

2018

Phoenix 3 Star Phoenix

2019

2020

2021

Phoenix 4-5 Star United States

2022

t

y

p Known as the Valley of the Sun, Phoenix, AZ, is one of commercial real estate's hottest markets. With a current population of over 4.6 million, a 1.48 percent increase from 2021, the Phoenix metro is packed with abundant job growth, consumer spending, and investment opportunities. Throughout the U.S., Phoenix had the largest absolute increase in population growth between 2010 and 2020 and reported the fastest growth rate among America's biggest cities, according to the New York Times. Beyond impressive population stats, Phoenix also boasts a business-friendly environment with limited government interference and low taxes.

FUNDAMENTALS

U N I T S U N D E R WAY 28,237

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A L E X D E S OTO, K Y L E I N M A N , J O H N S T R O U D, & B E N T R ACY

C A P R AT E 3.9%

KYLE INMAN

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feeling the heAt PHOENIX CRE REPORT

The MulTIfaMIly Market

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AV E R AG E R E N T / U N I T $1,594

Investment Opportunities With high vacancy rates, slowing rent growth, and overwhelming supply, Phoenix multifamily investors may be looking at a game of "hot potato." Certain assets could hold dangerous consequences and cause trouble for owners as demand stalls, and renter expectations change.

Investors are striving to find first-generation valueadd deals which are few and far between, as 1,361 properties have traded over the last five years, representing 36 percent of the market. The biggest opportunity for investors will be re-strategizing and adding value to operations rather than adding extensive interior and exterior renovations.

Investors should focus on improving the bottomline net operating income, whether that be turning the rent roll or re-capturing market rents.

Other ways to increase the bottom line include adding other income-producing initiatives such as parking, pet rent, or laundry while simultaneously focusing on cutting down ownership expenses.

Overall, improving during an uncertain interest rate market will ultimately create the most value for multifamily investors.

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The IndustrIal Market C A P R AT E 5.5%

FUNDAMENTALS

JOHN STROUD VAC A N C Y R AT E 4.0%

Two main components can be attributed to Phoenix industrial's monumental performance over the last two years, rent growth and low supply. With outof-state investors flooding the Valley and delayed development timelines, buyers and tenants are being forced to pay premium pricing on industrial properties. As of August 2022, the asset class's annual rent growth rate was 16.5 percent, much higher than the national average. Market sale price per square foot also accelerated, reaching $168, a 19 percent increase year-over-year.

AV E R AG E R E N T / S F $11.15

Another attribute of industrial's performance is its diversification of property types and reach across industries. Warehouse and manufacturing space proved to be pivotal during the pandemic, but the lack of supply caused almost all industrial properties to increase in value. Tenants began adapting to the market, leasing spaces previously deemed unsuitable because the options were limited.

MARKET RENT GROWTH Source: CoStar 20% 15% 10% 5% 0% -5%

F O R EC A S T 2012

2013

2014

2015 Specialized

2016 Logistics

2017 Flex

2018 Phoenix

2019 United States

2020

2021

2022

Rising construction costs, labor shortages, and increasing interest rates are all affecting commercial real estate development, but Phoenix industrial is still strong, and outlook remains positive.

"THE PHOENIX MARKET IS ONE OF ONLY FIVE U.S. MARKETS THAT HAS MORE THAN 30 MILLION SQUARE FEET OF INDUSTRIAL SPACE UNDER CONSTRUCTION." Source: The Phoenix Business Journal

As more facilities are built around the Valley, land constraints have appeared. In-demand neighborhoods like Scottsdale Airpark, an 8.6 square mile area with over 2,900 businesses, have little land left to develop. Phoenix also saw a shift in building sizes as large Fortune 500 companies started moving into the market. To accommodate the influx, developers focused on producing large industrial properties and scaling back on smaller facilities. Once again, the lack of availability has pushed pricing up, and small industrial properties are going for top dollar. In addition, land constraints have spurred developers to look into repurposing existing structures as new builds become more expensive and regulated.

Investment Opportunities The biggest obstacle facing Phoenix industrial investors is rising prices and the rat race of competitive offers coming in across all product types. Arizona gained popularity due to its affordability compared to nearby coastal markets, but with the current lack of supply and unbalanced demand, that pricing gap is narrowing. Investors should consider growing submarkets like North Phoenix, and the East and West Valley to obtain assets at a lower price per square foot with a potential upside. However, the further out, the greater risk as some regions bring fluctuating vacancy and less leasing demand. Another point to keep in mind while investing in Phoenix industrial is the amount of supply waiting to enter the market is higher than the majority of the country, which could limit an owner’s leverage to raise rents once vacancy heightens.

AV E R AG E U N I T R E N T $138

The self-storage asset class climbed the ranks rapidly at the start of the pandemic and has continued its dominance throughout the U.S. Phoenix boasts one of the most vigorous selfstorage pipelines in the nation, ranking in the top five for development with 13.3 percent of existing inventory underway. Self-storage rates have remained high, although operators are predicting an increase in move-outs in the second half of 2022 as workers return to offices and the Phoenix housing market slows. However, the average length of stay for renters has increased, helping owners secure stable and lucrative income. According to Yardi Matrix, total revenue for self-storage products is increasing by double-digit percentages nationally.

I N V E N TO R Y U N D E R WAY 13.3%

SALES VOLUME & MARKET SALE PRICE PER SF Source: CoStar $260

Investment Opportunities As with any real estate, the most crucial factor self-storage investors should consider is location, location, location. Phoenix is seeing a slight shift in consumer trends but still offers plenty of valuable opportunities within the storage market. Singlestory facilities with larger units see longer-term tenancy and strong demand throughout the Valley.

These types of properties are comparable in strength to three-story Class A climate-controlled facilities. Phoenix is also a thriving market for boat and RV storage facilities. With most of the new housing being in HOA communities, homeowners need a place to store recreational vehicles and boats due to the strict storage and parking policies in regulated communities.

“Recently, Matthews™ completed the sale of a 35-acre, 1,200+ vehicle storage lot in the growing West Valley of Phoenix. Since rent rates continue to increase in the area, the deal was completed at a very aggressive cap rate. EVEN WITH THE LARGE SPACE

COUNT, THE PROPERTY WAS 98% FULL AT THE TIME OF SALE."

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The thriving local job economy combined with the market's population growth has helped Phoenix's retail sector quickly recover from the impact of COVID-19 and increase its popularity among investors. Leasing volume is substantial, with 4.4 million square feet absorbed within the last 12 months, according to CoStar. Smaller, niche tenants are performing well and rapidly growing. Boutique gyms such as F45 or popular local coffee joints like Dutch Bros and Black Rock Coffee are storming the Valley and offer investors a smaller retail footprint solution. Rents are steadily increasing and are above the national average, as Phoenix's same-store asking rents increased 7.1 percent year-over-year while the U.S. averaged 4.3 percent.

Market Sale Price/SF

FUNDAMENTALS

B E N T R ACY

VAC A N C Y R AT E 5.6%

F O R EC A S T

$1.2B

$240

$1B

$220

$800M

$200

$600M

$180

$400M

$160

$200M

$140

'12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22

Sales Volume

Price/SF

Sales Volume

ge

ph

The Self-Storage Market

C A P R AT E 6.6%

$0

United States Price/SF

Investors are entering the market as new development and redevelopment projects pop up across the region, especially in growing submarkets.

One of the largest retail redevelopments, PV, a mixed-use complex set to complete its first phase by 2024, is in North Phoenix and will offer a 400unit multifamily building in addition to various retail fronts, hospitality, and entertainment venues. With growing opportunities and increased competition, pricing has increased, reaching an average of $250 per square foot.

AV E R AG E R E N T / S F $21.74

Investment Opportunities e

ta i l

Phoenix’s tremendous rent growth has driven values well beyond what most experts had predicted.

Fortunately, continued growth is expected as the population and retail demand continue to increase, meaning investors should look to take advantage of the market conditions.

It's important to keep in mind the majority of tenants in Phoenix are food and beverage, meaning the product type is performing well but could become oversaturated. Overall, consumers are craving a more personal and experiential shopping, dining, and workout experience, which means some brands will cater to new generations better than others.

Boutique fitness facilities, quick-service restaurants, and technology-savvy retailers will continue to gain popularity and offer a secure and profitable business model for investors.

Phoenix commercial real estate is healthy and bountiful but is shifting as it nears late 2022 and prepares for 2023. It is essential that investors work with a specialized and knowledgeable agent to understand what product types fit long-term financial, management, and portfolio goals, in addition to what parts of the Valley present thriving opportunities. john.stroud@matthews.com

JOHN STROUD (602) 975-0807

kyle.inman@matthews.com

KYLE INMAN (602) 975-0805

ben.tracy@matthews.com

BEN TRACY (602) 975-0820

alex.desoto@matthews.com

ALEX DESOTO (949) 662-2257

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A L E X D E S OTO

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FUNDAMENTALS

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The RetaIl Market

e n ix,

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ad

ad

THE UPS AND DOWNS OF RETAIL

THE POWER OF A DOLLAR

IS INFLAT I O N

OU TPAC ING RENTS?

BY SIMON ASSAF

All investors chase one thing — high yields. But with cap rates low and the cost of debt up, many investors are struggling to find these yields. One strategy investors are implementing to make up for increased costs is rising rent rates, burdening the tenant rather than themselves. But what if an owner is stuck in a long-term lease, limiting the percentage of rent increases? Shorter-term leases typically obtained in industrial, multifamily, and self-storage investments allow owners to increase rent rates more often and have a better chance of keeping pace with the current market. New developments also

have an advantage regarding rent rates as owners can evaluate the current market’s rapid growth and negotiate more favorable terms than older existing leases allow. As the market and economy continue to fluctuate, single tenant net lease (STNL) retail developers and owners will need to take a hard stance with tenants to include higher percentage increases to match industry averages. STNL’s passivity is a golden opportunity for passive investors and builders, but what is the trade-off of these longterm leases, and how can they be repositioned to better fulfill investment goals?

Retail had a sturdy and quick recovery from the aftermath of COVID-19. Consumers are active across many STNL product types, with quick service restaurants leading the way. The strong performance has been positive for STNL investors and has helped recover profits lost over the past two years, but with high inflation, that high-profit margin is at risk. As STNL businesses continue to thrive, the appreciation for these properties should increase. However, if the lease agreement hinders rent growth, appreciation slows. In most cases, contracts include an annual rent increase of one to two percent, which is much lower than the current market projections needed to combat inflation.

Although long-term leases are cause for concern for some investors during periods of high inflation, single tenant net lease investments offer plenty of value and benefits. Since the average lease term is over 10 years, the chance of vacancy and not collecting steady rent significantly goes down, providing security and a much more stable income source compared to other real estate investments. STNL assets are also an excellent option for owners looking for a more passive investment. Typically, the tenant oversees property upkeep and is responsible for the day-today operations of the space, taking the burden of everyday management away from the owner. The sector is great for investors looking for passive income without the worry of maintenance and management.

COMMON TYPES OF STNL LEASES

ABSOLUTE NET LEASE (NNN)

DOUBLE NET LEASE

MODIFIED GROSS LEASE

FULL-SERVICE LEASE

Tenant is responsible for entire property including insurance, taxes, daily business operations, and maintenance.

Tenant is responsible for insurance, property taxes, and day-to-day upkeep.

Owner is responsible for maintenance on major components of the building.

Owner is responsible for expenses including insurance, taxes, and exterior maintenance.

Tenant is responsible for interior upkeep.

Monthly rates are higher.

Owner takes on majority of expenses besides telephone/ data costs of the tenant. Monthly rates are higher. Owner has control over property appearance.

10-25 YEARS

10-25 YEARS

5-10 YEARS

3-10 YEARS

Average lease term

Average lease term

Average lease term

Average lease term

Because common STNL leases are long-term, it’s imperative developers and investors negotiate aggressive terms when signing a lease with a new tenant. While tenants are free to increase prices to combat increasing costs, their existing lease agreements often contain flat rates and small annual percentage increases that are difficult to renegotiate after the contract is sealed. Over the past five years, STNL daily rent has increased 22 percent in the United States, but most existing leases do not reflect that type of prosperity. Knowing this national average increase, developers and owners can go to tenants and ask for significantly more than in previous markets.

Instead of asking for 10 percent increases on a new development or sale leaseback, investors should ask for 15 percent and state the national average data that clearly shows the lease structure is on par with comparable investments. When lease terms come due, and negotiation occurs between landlord and tenant, the landlord should not be so quick to keep rents flat or reduce rents. The lease agreement should always favor the owner, with the tenant taking the brunt of inflation since they are able to adjust more than a longterm lease allows the landlord to.

WANING PURCHASING POWER

Inflation hit a record high in the summer of 2022, reaching 8.3 percent in August. As inflation continues and consumers are forced to pay more, the purchasing power of the U.S. dollar decreases, and profits on goods, services, and investments are affected. Commercial real estate owners are increasing rents to make up for these higher costs, but the challenge arises when contracts don’t meet market standards.

Single tenant net leases average 10 to 25 years, meaning the owner gives up control of rental increases to fight inflation for passivity. In high inflationary markets, this loss of rent control may affect the feasibility of these investments. It is important to try and find different ways to regain power as an owner or developer.

$100,000 IN 2002 IS EQUIVALENT IN PURCHASING POWER TO ABOUT $164,689.27 TODAY, AN INCREASE OF $64,689.27 OVER 20 YEARS. Source: Official Data Foundation

$100,000 ADJUSTED FOR INFLATION Source: Official Data Foundation

$180,000

$160,000

$140,000

$120,000

$100,000

$80,000 2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

IF AN INVESTOR BOUGHT AN STNL PROPERTY IN 2002 WITH A 20-YEAR LEASE, CHANCES ARE IT WOULD’VE HAD 10% INCREASES EVERY 5 YEARS. THE INVESTOR WOULD’VE GOTTEN A 105% INCREASE IN 2007, 2012, AND 2017. NOW AT THE EXPIRATION OF THE LEASE, THE RENT IS ONLY $133,100 WHEN $164,689.27 WAS NEEDED TO KEEP UP WITH INFLATION. THE RENT HAS LOST 20% OF ITS PURCHASING POWER.

STNL RENT GROWTH COMPARED

Over time, commercial real estate sectors have earned the reputation of being a trophy investment, increasing in value and holding steady during financial and economic uncertainty. Rent growth is a primary indicator of a sector’s resilience and fruitfulness and is heavily considered by investors looking to plant capital.

AVERAGE RENT GROWTH 2021-2022

AVERAGE U.S. RENT GROWTH 2018-2022

STNL: $0.97/SF, 4.4%

STNL: 22% increase

Industrial: $1.12/SF, 11.6%

Industrial: 49% increase

Multifamily: $109/unit, 9.4%

Multifamily: 26% increase

MULTIFAMILY RENT GROWTH Source: CoStar

$2,000

FORECAST

Rent Per Unit

$1,900 $1,800 $1,700 $1,600 $1,500 $1,400 $1,300 $1,200

2017

2018

2019

2020

U.S. Asking Rent Growth (YOY) U.S. Asking Rent

2021

2022

U.S. Effective Rent

Unfortunately, declining purchasing power is expected to stay at least for the short term. This will affect all commercial real estate sectors, with some prevailing more advantageous than others. STNL buyers should ask themselves what the true cost of passivity is. Is the loss of control over rent increases worth the stability STNL offers? Moving forward, investment portfolios may transform as typical retail investors transition into assets with short-term leases.

On the other hand, investors looking to stay in the STNL space could combat inflation with higher annual increases written into new lease structures.

All in all, precarious markets come and go, and real estate fundamentals are ever-changing. The key for investors is staying up to date on market indicators to make the best long-term decision possible.

In 2022:

Over 1M readers of our award-winning journalism.

ad 8,000+ attendees at multifamily events.

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Join the conversation.

SIMON ASSAF

simon.assaf@matthews.com (949) 873-0275

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™

Exploring & Storing

ad BOAT A LOOK INTO AND RV STORAGE

BY AUSTIN MCLEOD & BRAD FINA The onset of COVID-19 prompted many to reevaluate previous choices of travel and recreational activities, searching for destinations and activities that were both drivable and outdoors. As a result, the sale of recreational vehicles (RVs) and boats reached record highs, leading to the need to store these vehicles skyrocketing. In 2021, a record number of RV and boat storage facilities were sold, totaling $285.4 million in sales volume, nearly tripling the previous high in 2020, according to YardiMatrix. Continued growth is anticipated in the United States’ RV market, which is currently valued at $55.90 billion and is expected to reach $87.98 billion by 2028, according to Global News Wire. Boat and RV sales are expected to continue to reach record highs, reflecting the surge in RV registries and boating licenses. In the past five years, more than 2.5 million RVs and 1.6 million motorboats have been registered in the U.S.

BOAT SALES INCREASED BY 40% SINCE THE PANDEMIC, WITH 37% BEING FIRST-TIME BOAT BUYERS. Source: QuickNav

RV/BOAT STORAGE SALES

Benef its

$300

$700,000

$250

$600,000 $500,000

$200

$400,000

$150

$300,000

$100

$200,000

$50 $0

Avg. Price Per Acre

Sales Volume ($M)

Source: Yardi Matrix

$100,000 2012

2013

2014

2015

2016

2017

Sales Volume

WHY INVEST IN BOAT & RV STORAGE With the influx of large water and recreational vehicle sales came the need for somewhere to store them.

Many homeowners associations (HOAs) forbid boats and RVs to be parked in driveways in front of homes or on the street for extended periods, pushing owners to find alternative storage options outside of neighborhoods. In fact, less than 14 percent of existing HOAs offer storage or parking for recreational vehicles and watercrafts in their communities, according to Mini Storage Messenger.

Therefore, owners are forced to find storage facilities that house their large “toys” in close proximity.

2018

2019

2020

2021

1H22

$0

Avg. Price Per Acre

On average, RV owners use their vehicles 25 days out of the year, and boat owners operate their boats 54 days per year, leaving the remaining time in storage facilities, according to the RV Industry Association.

BOAT/RV STORAGE VS. SELF-STORAGE There are many differences between boat & RV storage and self-storage facilities. Each has a specific clientele, infrastructure, cost, location, and land requirement. When owning a boat/RV storage facility, many benefits and considerations come into play.

HIGH DEMAND AND LOW COMPETITION: Owning an RV and boat storage facility benefits investors looking to enter the sector because demand outweighs the current supply. This market offers multiple routes of opportunity including acquiring land to re-structure mom-and-pop owned properties and building facilities in areas of increased demand. Boat and RV storage facilities do not come by as often as self-storage facilities and are usually close to a lake, ocean, national park, or campground. On average, customers will travel between 20 to 50 miles to store these assets properly. Although this number may seem jarring at first, boat and RV storage owners work with higher-net-worth customers with disposable incomes. These individuals are looking to store their hobby vehicles safely and travel the extra lengths to do so.

LONG-TERM TENANTS: Consumers will leave their vehicle in storage for an average period of six to eight months before taking it out, creating a long-standing loyal customer base and high occupancy rates.

LOW OVERHEAD: According to ToyStorageNation, a facility with 600 to 800 spaces may need about 15 to 20 acres of land, making densely populated areas less feasible markets for a storage facility. Although boat and RV storage facilities may require more land than traditional self-storage, they typically require a lesser expense load and boast a lower delinquency rate than self-storage. Unlike most self-storage renters, boats and RVs are of considerable value, sometimes reaching $500,000 depending on the vehicle. This often leads to less accounts receivable, since owners do not want to lose their asset.

IF A CUSTOMER AT A BOAT AND RV STORAGE FACILITY BECOMES DELINQUENT AND DOES NOT PAY THEIR RENT, THE FACILITY CAN AUCTION OFF THEIR UNIT

AND ALL OF ITS CONTENTS.

INCREASING RENT OPPORTUNITY: Boat and RV facility customers are looking for additional features to ensure vehicle safety, accessibility, and an enjoyable experience when using their vehicles. To enhance profitability and customer experiences, owners can tap into income-producing supplementary services such as dump stations, wash stations, in-house convenience stores, and 24/7 security personnel. These additional amenities allow owners to increase rents.

Although these additions may have more costs on the front end, the return on investment is plentiful. As of 2022, the boat and RV storage facilities’ average price per acre sold is $624,000, a large jump from 2021’s record level of $447,000, according to Yardi Matrix.

THE FIRST-EVER CLASS-A TOY STORAGE FACILITY IN RENO SCALES 6.4 ACRES. THE FACILITY OFFERS COVERED UNITS WITH 530 SPACES TOTAL, TWO

DUMP STATIONS WITH RINSE RACKS, SITE-WIDE WI-FI, 20 AMP ELECTRICAL, A BUSINESS CENTER, AND A DOG PARK. Source: Yardi Matrix

Considerations

TYPE OF STORAGE: As an investor, there are a few options to choose from regarding boat and RV storage properties. There are fully enclosed structures that offer the most protection, overhead canopy units that offer fair protection, or just large parking spaces with zero protection. Each unit type comes with its own set of pros and cons in relation to rent rate and operating costs. It is essential to keep lot size, budget, and target audience in mind when deciding which type of storage facility to invest in.

SPACE: The minimum driveway width for boat and RV storage is about 50 feet wide, compared to selfstorage, which is about 25 feet wide. Additionally, properties are most likely located in rural, isolated areas with more land.

RENT: The average rent per square foot of boat and RV units is typically less than traditional self-storage.

Therefore, boat and RV facilities usually sell for a lower price per square foot than self-storage facilities.

OVERHEAD CANOPY STORAGE UNITS IN THE WESTERN UNITED STATES AVERAGE $400 PER MONTH, LARGE

PARKING SPACES AVERAGE $200 PER MONTH, AND FULLY ENCLOSED STRUCTURES START AT $700 PER MONTH.

Source: ToyStorageNation

HOT-SPOTS Boat and RV storage facilities are not necessities for the average consumer. As a result of their niche clientele, these facilities are in specific areas, typically nearby national parks, campgrounds, and lakes.

Here are the largest markets for boat and RV storage facilities:

ACRES OF LAND DEDICATED TO BOAT AND RV STORAGE

LOOKING TO THE FUTURE

Denver, CO

Dallas, T X

Saraso ta, FL

Phoenix, AZ

651.6 ACRES

202.9 ACRES

591.9 ACRES

387.4 ACRES

The future for boat and RV storage is filled with immense opportunity. There are currently 786 completed boat and RV storage properties in the United States, totaling 6,850 acres of land and another 35 facilities in the pipeline, according to Yardi Matrix’s database. Since traditional self-storage facilities do not have the space or need in some cases to implement large vehicular storage, there is a gap in the market where boat and RV storage comes into play. More and more investors are starting to recognize the opportunity as demand and prices for these investment properties have increased. Overall, the pandemic resulted in a significant increase in boats and RVs purchased, causing most of the boat and RV storage facilities to be close to fully occupancy.

Due to increased demand caused by high occupancy, boat and RV storage development will continue to become more popular, and demand on the acquisition side will grow.

AUSTIN MCLEOD

austin.mcleod@matthews.com (404) 445-1093

BRAD FINA

brad.fina@matthews.com (512) 535-5787

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W W W. M AT T H E W S . C O M

UNDERSTANDING

LONGEST ECONOMIC EXPANSION ON RECORD ENDED BY COVID-19 Source: National Bureau of Economic Research 2020-*

Length of Expansions in Months

THE PROS & CONS FOR COMMERCIAL REAL ESTATE

BY MATT LOPICCOLO

72

1991-’01

120

1982-’90 1980-’81

93 12

1975-’80

60

1970-’73

36

1961-’69 1958-’60 1954-’57 1945-’48

105 24 39 42 36

* Through April 2022

understanding inflation

Moving forward, investors must consider whether their portfolios are positioned for persistent inflationary pressures, higher interest rates, and market volatility.

128

2001-’07

1949-’53

Inflation remains elevated due to many factors, mainly a result of the COVID-19 pandemic, including increases in household demand, stubborn supply chain bottlenecks, energy shortages, geopolitical affairs, and rising commodity costs. In the U.S., the sticky components of inflation continue to accelerate, including rents and wages. Given the economy’s strength and the likelihood of persistent inflation, the Fed continues tightening monetary policy. To counter the prevailing headwinds challenging market returns, investors are considering the potential benefits of shorterduration assets, industries with cyclical growth, and thematic investing.

24*

2009-’20

understanding inflation INFLATION 101

The current rate of inflation in the United States is 8.26 percent (for the 12 months ending on Aug 31, 2022, down from 8.52 percent in July) Source: MPA

Inflation is the increase in the prices of goods and services in a given economy over a period of time.

It is measured by the consumer price index (CPI) and the producer price index (PPI). The CPI tracks the average price of a basket of goods, including basic food, housing, clothing, healthcare, and recreational items. However, there are many flaws and inaccuracies when calculating – it does not account for qualitative changes and places less emphasis on the costs for people in rural areas.

While some economists expected a CPI decline in August 2022, CPI rose 0.1 percent. Wages and rents remain the most important long-term drivers of inflation and account for a significant share of the CPI basket. Rents, food, and healthcare continue to increase, giving the Federal Reserve the ammunition to deliver the third 75 basis points interest rate hike in September 2022.

WHERE ARE RATES EXPECTED TO LAND? In September, the Fed fired off another 75 basis point rate hike and released quarterly forecasts for inflation, the economy, and the future path of interest rates. These new forecasts come as the central bank moves into a rate hiking zone that some economists expected will be more restrictive and could seriously impact the economy.

THE FEDERAL FUNDS TARGET RATE

•

MORTAGAGE RATES SURGE AS THE FED TIGHTENS

Source: Federal Reserve

Source: CoStar

20% 18%

•

7%

16%

6%

14%

•

5%

12% 10%

understanding inflation 3%

6% 4%

1%

0% ‘70

‘75

‘80

‘85

‘90

‘95

‘00 ‘05

‘10

‘15

‘20

Recessions

The Fed is moving to aggressively fight the fourdecade high inflation rate. The surprisingly firm inflation readings reported by the Labor Department were delivered despite an easing in global supply chains, contributing to a surge in prices earlier in the year. With a resilient labor market supporting strong wage growth, it’s predicted that inflation has not peaked, keeping the Fed on an aggressive policy path.

The impact of inflation and thus the raising federal funds rate is channeled almost directly into mortgage loan rates, as those are generally based on the 10Year Treasury yield. The rate on conventional 30-year mortgages was rising even before the Fed started its tightening cycle in March but has now been flirting with seven percent, more than double the record-low rates of 2.65 percent in January 2021 and almost twice the three percent rates of a year ago.

‘06

‘08

‘10

‘12

‘14

Effective Federal Funds Rate

‘16

‘18

Fed officials expected to raise rents by another 1.25 percentage points this year, bringing the benchmark rate to 4.4%.

The residential housing market will have to go through a “correction” to align supply and demand.

2%

2%

Fed officials signaled the intention of continuing to hike until the funds level hits a terminal rate of 4.6% in 2023.

understanding• inflation

4%

8%

A jump in the unemployment rate is expected to be above 5% by the end of the year, decreasing to 3.9% in 2023 and up to 4.1% by 2024.

‘20

‘22

10-Year Treasury Yield

30-Year Fixed Rate Mortgage

With 75 basis point increases in back-to-back-to-back Federal Open Market Committee (FOMC) meetings, as of October 2022 the Federal Funds rate stood at 3.00 to 3.25 percent, the highest it has been since early 2008. While the rate itself should not disrupt the market, the record speed at which the Fed has played catch up to fight inflation is disruptive.

According to Diane Swonk, Chief Economist at KPMG, “We [the U.S.] actually haven’t tightened policy to fight inflation since the early 1980s. Their goal is for a prolonged slowdown that grinds inflation slowly down and only gradually increases the unemployment rate.”

NPI CAP RATES HAVE REMAINED FLAT THROUGH THE CURRENT CYCLE

Source: NCREIF 16% 14% 12% 10% 8% 6% 4% 2% 0%

‘80 ‘85 ‘90 ‘95 ‘00 ‘05

‘10

10-Year U.S. Treasury Yield

NPI All Property Cap Rate

Recession

‘15

‘20

‘21

‘22

COMMERCIAL COMMERCIAL REAL REAL ESTATE ESTATE RECALIBRATION RECALIBRATION

Naturally, inflation is expected to increase at two to three percent annually. As of August 2022, inflation was recorded at 8.26 percent.

There is an open debate about when the next There is anwill open about when the next recession be. debate Within two years, within one year, recession will be.

Within two years, within within six months, or are we already in oneone andyear, don’t within itsix months, or aretowe already inbecause one anda don’t know yet?

It’s difficult determine wide know it yet?

It’s difficult to determine because a wide range of economic crosscurrents are at play. Inflation range economic are combination at play. Inflation is high,ofbut rents arecrosscurrents increasing. The of is high, but rents are increasing.

The combination of higher mortgage rates and home prices has caused higher mortgage ratestoand home prices has caused affordability to crater its lowest level since the affordability to crater to its lowest level since the Housing Crash.

Housing Crash.

Commercial real estate is positioned exceptionally Commercial real estate is positioned exceptionally well as a long-term, alternative investment thanks to well asan a long-term, alternative thanks to being inflation hedge, lack ofinvestment general overbuilding, being an inflation hedge, lack of general overbuilding, and strong space demand across most property and strong demand property types.

It is aspace tangible asset across that willmost appreciate due to types.

It is a tangible asset that will appreciate due to inflation, usually placing investors in a good position inflation, usually placing investors good position during these transitionary periods.inAtathe same time, during these transitionary periods.

At the same real estate deals are not immune to the volatilitytime, and real estate deals are not immune thereversal volatilityinand pricing challenges caused by the to rapid pricing caused by the rapid reversal in interestchallenges rates. For the foreseeable future, the Fed interest Foronthe foreseeable the Fed will haverates. to stay course for morefuture, rate hikes which will have to stay on course for more rate hikes which may further pressure valuations in some segments may markets. further pressure valuations in some segments and As in past cycles, astute investors will and markets.

As in past cycles, astute investors will navigate the short-term disconnect as sellers and navigate the short-term disconnect as sellers and buyers will have to recalibrate and benefit from buyers will have to recalibrate and benefit from favorable commercial real estate’s long-term yield favorable commercial real estate’s long-term yield generation and value creation. generation and value creation.

Inflation resiliency can vary depending upon the asset Inflation can vary upon the asset class andresiliency largely hinges on depending how fast and frequently class and largely how fastshorter and frequently the owner adjustshinges rental on rates.

The the lease, the owner adjusts rental rates.

The shorter the lease, the quicker an owner can change rents to keep pace the quicker an owner can change rents to multifamily, keep pace with rising inflation – in theory, hospitality, with rising inflation – intotheory, hospitality, and self-storage tend have the shortest multifamily, relative and self-storage tend to have shortest relative lease terms. On the other end,the a triple net lease asset lease terms.

On the other end, a triple net lease asset that is fully leased and has a longer-term lease with that is fully leased has a longer-term lease predetermined rentand increase percentages, lockswith the predetermined rent increase percentages, locks the investment in a rigid rent collection schedule, leaving investment in a rigid rent collection schedule, leaving little opportunity to increase NOI and offset inflation. little opportunity to increase NOI and offset inflation.

Adjusting NOI can increase a property’s cash flow to Adjusting NOI can cash flow be comparable withincrease the riseainproperty’s inflation, helping to to be comparable with the rise in inflation, helping to protect investor returns. protect investor returns.

Today, real estate trades at a premium to the 10-Year Today, real estate tradessectors’ at a premium to the 10-Year Treasury, with the major cap rate spread Treasury, with the major sectors’ cap average. rate spread significantly wider than the historical significantly wider than the historical average.

In practice, interest rate increases have often

understanding inflation As explained “As explainedby byaaForbes Forbes Advisor, “in in dense densereal realestate estate markets and commercial centers, high demand and limited supply contribute to the appreciation of prices for real estate. So, if the price increases are more than the inflation rate, the relative return stays mostly positive.”

corresponded with rising inflation, which puts

Private vs. Public – Private CRE will have less liquidity and be better protected during inflation and economic crisis.

REITs will have more liquidity and produce a better return when the market increases.

In practice, interest have often upward pressure onrate realincreases estate rents and property corresponded with inflation, whichseems puts upward values.

Now that therising market consensus to pressure real estate and property values. be shiftingontowards this rents inflationary period being Now that the seems to bebe shifting transitory, realmarket estateconsensus price appreciation will towards this inflationary beingoftransitory, approximately flat for theperiod remainder 2022, real estate price will be approximately according toappreciation MetLife Investment Management. flat for the remainder of 2022, according to MetLife Investment Management.

CONSIDERATIONS FOR CRE INVESTORS IMPORTANT Assets that rely on disposable income may CONSIDERATIONS FOR suffer during a recession CRE INVESTORS

• •• • •• •

There will be less competition for properties Assets that rely on disposable income may Developers likely to pause or adjust suffer duringare a recession new projects There will be less competition for properties Prepare for impact on operation costs of Developers are likely to pause or adjust property value new projects In an inflationary environment, limited supply Prepare for impact on operation costs of in generally supports valuations.

The increases value and labor cost are likely to make land,property construction, new supply less financially feasible, which supports In an inflationary environment, limited supply higher occupancies and stronger pricing power for generally supports valuations. The increases in land, existing assets. construction, and labor cost are likely to make new supply less financially feasible, which supports higher occupancies and stronger pricing power for existing assets.

This period of inflation is relatively rare compared to other periods of high inflation. On the one hand, commercial real estate investments are viewed as an inflation hedge as values appreciate at the same rate of inflation. On the other hand, This period of inflation is relatively rare cap rates are affected by changes in values, supply compared to other periods of high inflation. On the and demand fundamentals, and inputs such as one hand, commercial real estate investments are commodities, labor costs, and financing availability. viewed as an inflation hedge as values appreciate Developers, owners, and tenants must consider ways at the same rate of inflation. On the other hand, to lock in the cost where they can buy materials, cap rates are affected by changes in values, supply negotiate lease terms, and amend contracts where and demand fundamentals, and inputs such as needed. Many variables can influence property commodities, labor costs, and financing availability. valuations; as such, it’s worth considering each Developers, owners, and tenants must consider ways separately, selecting a property that will be to lock in the cost where they can buy materials, profitable and located in a good market. negotiate lease terms, and amend contracts where needed. Many variables can influence property valuations; as such, it’s worth considering each separately, selecting a property that will be matt.lopiccolo@matthews.com profitable and located in a good market.

(858) 289-3957

•

understanding inflation PARTING WORDS PARTING WORDS MATTHEW LOPICCOLO (858) 289-3957 matt.lopiccolo@matthews.com

MATT LOPICCOLO

lo ca los an 5 Reasons Why

LOS ANGELES MULTIFAMILY IS STILL A TOP INVESTMENT PICK

BY LUC WHITLOCK & NABIL AWADA

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Los Angeles has been painted in a bad light for a couple of years – from the eviction moratorium to continuous COVID-19 restrictions, homelessness issues, development costs, California exodus, and more, the market has received its fair share of bad press. Despite the news, Los Angeles continues to attract investors seeking opportunities. To illustrate this, the Los Angeles multifamily market achieved $14.4 billion in sales in the last 12 months; this compares to $3.7 billion in Austin, TX, $4.6 billion in San Diego, and $5.4 billion in Las Vegas. The most comparable market is Phoenix which recorded a whopping $16.9 billion in sales over the last 12-month period, but the vacancy rate stands at 7.9 percent, compared to Los Angeles’ 3.4 percent. Here are five fundamentals that drive the Los Angeles multifamily market and why it is still a top market to invest capital in.

KEY POINTS to know

FOR RENT-CONTROLLED UNITS SPECIFIC TO THE CITY OF LOS ANGELES

Los Angeles rents are subject to a lower rent cap (8% maximum) than rent-controlled buildings in other parts of the state under most circumstances (5% plus up to 5% inflation).

Landlords can only raise the rent once every 12 months.

DEMAND IS PRESENT, AND #1 – RENTER INVESTORS ARE CHASING THIS DEMAND

When the rent increases, the landlord can raise the security deposit by the same amount.

According to Zillow, home buyers are being priced out of the housing market as prices reach, on average, $991,551 (seasonally adjusted and only includes the middle price tier of homes), an 11.8 percent year-over-year increase. This price range is out of the question for many households, resulting in people relying on multifamily for their housing needs. The average asking rent per unit in Los Angeles is $2,187, with an average annual rent growth of 5.4 percent, and as costly as it is, renting in Los Angeles is still a more accessible option than buying a home in the current market.

MARKET RENT PER UNIT & RENT GROWTH

For every additional tenant (a roommate not on the original lease, for example) that moves in, the landlord can raise the rent 10%. The same amount must be reduced if the tenant moves out.

The rent can be increased by 1% each year for utilities that the landlord pays.

Source: Costar

10%

$2,600 FORECAST

$2,200

6%

$2,000

4%

$1,800

2%

$1,600

0%

$1,400

-2%

$1,200

2017

2018

2019

2020

U.S. Market Rent Per Unit

Los Angeles’ 2022 realty strongly favors the renter, and investors and landlords know this. According to the 2019 U.S. Census Survey, 54.58 percent of households were renters. That percentage has now increased to 62.20 percent, according to Claritas data. These data points help landlords enact aggressive rent hikes amid a hot real estate market.

2021

2022

LA Market Rent Per Unit

2023

At least 30 days’ notice is required for rent increases.

8%

2024

2025

2026

Annual Rent Growth

Rent Per Unit

$2,400

-4%

Market Rent Growth YoY

Although some cities in the Los Angeles metro are rent-controlled, Los Angeles, Santa Monica, Beverly Hills, and West Hollywood, other nearby cities such as Glendale, Burbank, Torrance, Pasadena, and Downey are not. Rent control laws vary by municipality, and generally put a limit on annual rent increases and protect tenants from eviction without cause.

For “no-fault” evictions (where the tenant did nothing wrong), the landlord must notify the city and pay a relocation assistance payment based on the tenant’s income, length of tenancy, and reason for eviction.

Buildings that are rent controlled have very minimal tenant turnover; although an average rent-controlled tenant pays approximately $3,240 less per year than the average renters’ market rates, vacancy rates are healthy. As such, rent-controlled apartments are often hard to come by for the traditional renter.

As of September 2022, eviction bans, and moratoriums are still in effect within the City of Los Angeles until the COVID-19 emergency period ends. However, it is unclear when that will happen. Once current bans are lifted, though, there will still be restrictions. Landlords may only evict a tenant who fails to make rent payments in the months after the emergency period ends. Compared to New York City, once the city lifted COVID-19 restrictions, rents increased by 15 percent, and it’s anticipated that the same thing will happen in Los Angeles.

#2 -

IS GEN Z MAKING LOS ANGELES TRENDY?

Sunny weather, expansive mountains and beaches, and an endless trove of career opportunities have always drawn young people to Los Angeles. But members of Gen Z are claiming a growing share of apartments in California compared to other generations. They represent more than one-quarter of active renters in Los Angeles. Many of them seek to live out their Hollywood dreams. In fact, 30 percent of Los Angeles Gen Zers are drawn to online fame. Resources also say that Los Angeles is one of the healthiest cities in America in terms of lifestyle.

After two years of a pandemic-related stint in health, Gen Z has made healthy living a top priority, making Los Angeles a prime city for the healthconscious generation.

The roughly 67 million Americans born between 1997 and 2012 just entering the workforce, starting college, or graduating high school – have impacted the market. Experts have predicted that Gen Z will become the economy’s main drivers for budding entrepreneurs, advocates, artists, and tech experts.

It’s fair to say the cities to which Gen Z flock will benefit not only from the influx of new residents but also set that city up for long-term success.

A study conducted by Sunclet.com, owned by NestPick Inc, ranked 110 global cities based on 22 indicators spanning four major categories: digital, principles, leisure, and business. Los Angeles was

ranked first due to meeting the following needs – government digitization, access to healthcare, right to protest, LGBTQ+ equality, and internationalism. The influence of this generation is vast. According to Rent Café, the year-over-year change in the share of Gen Z renters in Los Angeles was a positive 45 percent between 2020 and 2021.

#3 - LIMITED BUILDABLE LAND The biggest Achilles heel for Los Angeles is land availability and, thus, the housing shortage. With the ocean on one side, the desert on the other, and steep hills in between, there isn’t a lot of land left to develop. The land is more valuable than any other market in the United States and is therefore priced at a premium. As of 2021, Los Angeles is ranked as the third hottest market for increasing land values. Even small parcels of land in Los Angeles nowadays cost a pretty penny, according to a recent Realtor.com report which analyzed how underdeveloped property prices have risen since the onset of COVID-19.

In Los Angeles, the average price per square foot soared 67 percent year-over-year, most notably in the city’s outer regions, which were once considered relatively affordable. The current price per square foot of a multifamily building in Los Angeles is $457.42.

Faced with a severe housing shortage and geography challenges, land value in Los Angeles isn’t expected to fall. Last costs account for nearly 17 percent of a multifamily development, compared to two percent in other markets. As Mark Twain once said, “buy land; they’re not making it anymore.”

Despite these obstacles, the development pipeline in Los Angeles is robust as developers target infill locations and redevelopment opportunities.

The percentage of properties under construction represents 2.6 percent of existing inventory as of September 2022. Looking at construction levels, Downtown Los Angeles, Burbank, Greater Inglewood, and Woodland Hills have the most apartment units under construction. Multifamily construction projects are typically Class A properties as they are the only developments that pencil out in current market conditions. Developers find it increasingly hard to build in Los Angeles due to high costs of land, expensive rent, the ongoing threat of rent control, eviction moratoriums, local zoning ordinances and restrictions, and difficulty acquiring permits, labor, and materials.

The lack of adequate land has led to the chronic housing shortage, and investors are drawn to the increasingly valuable opportunities in the market.

#4 -

HIGH POPULATION, HIGH INCOME, AND HIGH DESIRABILITY

Approximately four million people call Los Angeles home, making it the second-largest city in the United States. When adding together the small surrounding cities that makeup Los Angeles County, the urban area totals more than 10 million people. Approximately five million people (62.2 percent of LA residents) identify as renters in the Los Angeles multifamily market. Coupled with the large renter pool, the

gentrifying neighborhoods, value-add deals, and asset appreciation have helped Los Angeles keep a steady stream of investment opportunities for years.

“Los Angeles is an enormous world-famous city, 10 times the size of a traditional city, and that concentration of economic opportunity, industry, and activity mean the land comes with a significant cost premium,” – Hoyu Chong, lead researcher for the UCR School of Business Center for Economic Forecasting and Development.

The good news, Los Angeles has one of the highestranking average and median incomes in the United States. The average household income in Los Angeles is $101,066, a positive 4.8 percent year-over-year change, and the median household income is $65,290, a positive 5.1 percent year-over-year change.

Despite reports of a departure from California and population decline in the metro, apartment rental demand is seeing an all-time high, with net absorption of units running at its highest level in decades. The vacancy is at a low of 3.4 percent, lower than the pre-COVID-19 level of 4.4 percent. Fortunately, Los Angeles is a lifestyle metro that has lured higher wage earners than it has lost over the last few years.

los angel californ ngeles #5 - RESILIENCE IS KING

Cities like Los Angeles have a history of overcoming various challenges and reinventing themselves, so the market contains some of the country’s best and safest rental properties. The demand for apartments has translated to strong recent price appreciation in 2022. The average market pricing records $420,00 per unit, well above the national average of $260,000 per unit. The average market cap rate is 3.9 percent, well below the U.S. average of 5.0 percent.

A multifamily seller in 2021 and 2022 witnessed resale values of value-add deals multiply in some cases after a short threeto-five-year hold period. Investors in Los Angeles are willing to stomach some of the highest prices in the nation to take advantage of the low cap rates and price appreciation. Key drivers of the market’s elevated prices include the metro’s position as the second-largest city in the nation, diverse economic drivers, land-constrained coastal location, and of course, the market’s resilience to challenges.

It’s advised not to wait for prices to drop as they did in 2008 and 2009. If the past indicates where Los Angeles multifamily is heading, invest in the market now before interest rates and inflation take their toll.

SALES VOLUME & MARKET SALE PRICE PER UNIT Source: Costar $550,000

Market Sale Price/Unit

$5.00

FORECAST

$4.50

$500,000

$4.00

$450,000

$3.50

$400,000

$3.00

$350,000

$2.50

$300,000

$2.00

$250,000

$1.50

$200,000

$1.00

$150,000

‘16

‘17

‘18

U.S. Market Price/Unit

‘19

‘20

‘21

LA Price/Unit

‘22

‘23

$0.50

Sales Volume

Sales Volume ($B)

$600,000

These five fundamentals highlight the opportunity available for multifamily performance in Los Angeles.

Although investors are seen exiting the market and moving capital to markets such as Arizona and Texas.

The reasons mainly include regulatory and legislative challenges – investors aren’t exiting Los Angeles due to better returns and opportunities. From rent control policies restricting price appreciation to the recent eviction moratorium that prevents landlords from rectifying unpaid rent and continues COVID-19 protocols, apartment owners feel they have few options to improve their investment positions in California. However, buyers are still purchasing in Los Angeles due to the wealth preservation and limited land availability, giving investors an advantage.

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LUC WHITLOCK luc.whitlock@matthews.com (310) 844-9371

NABIL AWADA nabil.awada@matthews.com (310) 844-9362

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starters vs bench E VA L U AT I N G P E R F O R M A N C E P E R R E TA I L S E C T O R

matthew wallace

The United States retail market has made steady progress in its recovery from the pandemic, with nationwide net absorption reaching its highest level in six years. The increased demand has filled vacant spaces across the market, even though malls and regional centers still struggle to fill storefronts. Developers and lenders are shying away from speculative retail projects, including indoor shopping malls. On the other hand, multi-tenant retail and open-air shopping centers have emerged and are on investors' near-term watch list. As retail development continues to shift and consumers change up buying habits, tenants are battling to be placed on investor and developer rosters. Some are strong contenders, making the first cut as "starters", while others are falling behind and are in danger of being “benched.”

Strip Malls

SMALLER /INLINE RETAIL SHOPS Strip malls remain a viable asset class for investors largely due to requiring less start-up capital, shortterm lease structures, and positive rent adjustments which typically give the tenant less bargaining power. Suburban strip malls are often plagued by vacancy and packed with unmet potential due to the high level of capital and expertise needed to redevelop. However, the pandemic accelerated many challenges as consumers shifted to online shopping, shrinking foot traffic, and forcing retailers (specifically mom-and-pop shops) to adjust with the rapidly changing retail landscape.

STRIP MALLS E ARN HIGHER DEMAND THAN TR ADITIONAL MALLS, IN PART FOR BUY ONLINE , PICK UP IN -STORE CONVENIENCE .

The pandemic, along with the growth of online stores has limited a few players in strip malls to reach their growth potential. However, other smaller stores are spearheading the race in 2022. Ulta continues to post strong quarterly results with increased profitability and thoughtful growth. Bath & Body Works has been executing well on the mall-toopen-air strategy and providing robust competition to Ulta, offering strong margins and is relatively recession resilient.

starters vs bench

Mall vacancy rate Source: REIS 12%

Starting players

10%

big box retail

Big-Box Retail

Some of the nation’s largest retailers have been holding strong against issues in the supply chain, high operating costs, inflation, and e-commerce.

When consumers tighten their budgets, essentialbased retailers such as grocers tend to outperform retailers that rely on discretionary spending. That dynamic could put pressure on companies like Bed Bath & Beyond Inc., a company that heavily relies on the sale of niche gadgets, products not purchased as often during high inflationary periods. However, in times of recession, big-box retail will remain a popular investment even when the sector is hit with issues like inflation and high cap rates. Since most tenants are backed by an investment-grade credit tenant, there's a higher likelihood of them fulfilling responsibilities and payments.

The general retail segment has benefited from bigbox retailers in the department store, home goods and decor, and home improvement categories, making them the starting players of big-box retail.

Stores like Joann’s operates in a difficult arts and crafts space that faces increasing pressure from e-commerce and competes with two dominant players in Michaels and Hobby Lobby.

starters vs bench

Starting players

share of visits per month Source: Placer.ai

8%

Nov 2021 6%

Dec 2021 Jan 2022

4%

'01

'03 '05 '07 '09 Recession

'11

Strip Mall

'13

'15

'17

'19

'21

Feb 2022

'23

Mar 2022

Regional Malls

It's expected that owners will continue to struggle if they don't find new ways to adaptively reuse these vacant and stale spaces. A popular repurposing trend is a multifamily concept – changing a building's use from retail to mixed-use. As a result, the prevailing areas with ample parking spaces could change into a shared lawn with the potential to include a garden pavilion that would serve as a communal space for tenants.

Bench

Apr 2022

players

May 2022

Bench players

June 2022 July 2022 Aug 2022 Sept 2022 0% Hobby Lobby

25%

50%

Jo-Ann Fabric and Craft

75%

100% Michaels

pad site tenants pad site tenants

grocery Groceryanchored Anchored

Commercial pad sites have opened the eyes of many investors looking to transform an underutilized commercial space into something much more functional and profitable. Retail pads like Starbucks and Chipotle are bringing more traffic and overall sales to retailers. Quick service restaurants who adopt more efficient online and drive-thru concepts are currently having the most success. Throughout the pandemic, drive-thrus remained profitable because they were able to continue serving customers even when dining rooms were closed.

These models are most flexible to deliver products how the customer demands and will always thrive.

Grocery-anchored centers remain one of the hottest asset types in the multi-tenant retail space. Investors show strong demand for high-performing grocery anchor tenants in desirable locations. During the pandemic, major retailers repurposed brickand-mortar locations as dark stores to meet the increasing demand of e-commerce orders. Open-air retail sectors are racing to acquire portfolios of their competitors, aiming for shopping centers and strip malls built around neighborhood groceries. Amid inflation, value-based grocers like Aldi and Walmart who operate at razor-thin margins will see the most increase in volume and traffic.

starters vs bench

Starting players

share of respondents reporting at least 1 weekly restaurant visit by revenue center 80% 73%

70%

60%

73%

66%

64%

61%

63%

52% 40%

Nov 2020

Drive-Thru

Source: GlobeSt

Bench

50%

Feb 2021

May 2021 Dine-In

Sept 2021 Delivery

49% Nov 2021 Takeout

Sit-down restaurant concepts like Denny’s will likely be the most impacted by rising food costs in an inflationary environment. Table service and drinks are an easy expense to cut when belts start to tighten, causing more challenges for these retailers.

players

Source: Bloomberg | July 2021 to July 2022 Ahold Delhaize Aldi H-E-B Publix

starters vs bench

GROCERY-ANCHORED CENTERS RECORDED THE IR SECOND - MOST ACTIVE QUARTER IN A DECADE FOR Q4 22 , AND PROPERT Y TR ANSACTIONS HIT THE HIGHEST NUMBER AT 735 TOTAL TR ADES.

Source: Revenure Management Solutions

grocery companies yoy u.s. sales growth

Grocery stores like Whole Foods and Walmart have remained major players in adapting to newer shopping preferences, which include online ordering and curbside pickup options. Another ongoing challenge grocers will face is rising inflation, however, numbers have remarkably increased suggesting consumers will always come back to a physical store, highlighting the importance of location.

Trader Joe's

The Kroger Company

Albertsons Companies, Inc

0%

3%

6%

9%

12% 15% 18%

As more people seek cheaper alternatives for groceries, higher-cost grocers like Whole Foods and Trader Joe’s hold a customer base that is less sensitive to prices but will likely see a shift of customers switching to lower-priced substitutes.

Although high inflationary pressures are going to squeeze margins in an industry that already has tight margins to begin with, there is no real risk for grocery stores. Additionally, the credit and traffic driven by grocery-anchored deals will help the nonanchor retailers survive any upcoming headwinds.

Starting players

Follow us for daily cre news & updates Despite concerns about retail sub-sectors going out of business, the need for convenience will truly be the saving grace that prevents them from disappearing off the grid. More significant improvements are needed if these complexes are meant to thrive and not just survive. As consumer spending shifts, it's clear retail owners will need to evaluate how to keep the shopping experience valuable and profitable. Investors who are recognizing and capitalizing on this relationship can create exceptional customer experiences and deliver value to various retail sectors.

starters vs bench

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matthew wallace matthew.wallace@matthews.com (216) 220-8860

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4

Investing in Florida

florida market report

Retail 101

The Florida retail market is thriving thanks to its growing population, exceptional weather conditions, and strong tourism.

More than 404,000 people migrated to Florida in 2020, and the state is set to reach 25 million in total population, according to Demographic Estimating Conference. There are currently 22 million residents in the state, with over two-thirds born out of state. Increased foot traffic in the state’s core retail centers helped the Florida markets recover faster than others after the COVID-19 pandemic. Florida’s top retail tenants include grocers, discount retailers, and fitness facilities. According to World Population Review, Florida holds 353 people per square mile, making the state the eighth most densely populated in the U.S.

2

3

florida market report 5

THE TOP RETAIL MARKETS IN FLORIDA ARE:

1

Miami

3

tampa

2

Orlando

4

jacksonville

BY T R IP P B R OW N

Florida’s largest city is Jacksonville, which

houses 900,000 residents.

FLORIDA’S largest county is MIAMI-Dade County which holds

over 2 million residents.

5

naples

1

i m a i M

o d n a l r O Orlando has seen 700 retail sales totaling

$1.9B in transactional volume over

Miami boasts the most active retail supply pipeline in the country, with

the trailing 12-month period, a rise of

3.7 million square feet underway.

60% from the previous year’s activity.

Source: CoStar

Source: CoStar

$3.2 Billion

12-Month Sales Volume

florida market report

SALES VOLUME & MARKET SALE PRICE PER SF Source: CoStar

$1.40

FORECAST

$450

$1.20

$400

$1.00

$350

$0.80

$300

$0.60

$250

$0.40

$200

$0.20

$150

‘17 ‘18 ‘19 ‘20 ‘21 ‘22 ‘23 ‘24 ‘25 ‘26

Sales Volume

Miami Price/SF

$0.00

U.S. Price/SF

1.3M Sf

5.4%

$420

12-Month Net Absorption

Average Cap Rate

Average sale price per Sf

SALES VOLUME ($B)

MARKET SALE PRICE/SF

$500

Retail demand has tremendously improved across Orlando due to rent growth being driven by steady foot traffic and increased in-store sales. Rent growth increased by 7.4 percent in the past 12 months, according to CoStar, which can be attributed to the market’s dynamic economy fueled by the technology, finance, and growing defense sector, in addition to world-renowned theme parks. Orlando is seeing jumps in new development and consumer spending due to the pandemic triggering household formation and increased in-migration. While retailers such as fast casual and drugstores have over-performed, indoor shopping malls have declined in popularity as consumer preferences shift to open-air centers.

Because of this, many malls in Orlando are being converted into adaptive reuse projects. Many unused mall buildings can transform to include a mix of trending businesses, such as restaurants, cafés,

$1.8 Billion

12-Month Sales Volume

retail, and fitness, in addition to multifamily. Most retail, especially mixed-use are in highly desirable locations, often near neighborhoods. Orlando’s retail darling is grocery-anchored shopping centers which increase foot traffic to smaller brick-and-mortar shops nearby. Publix is one of Florida’s largest and most popular grocers, reporting a 9.3 percent revenue increase in Q2 22.

DELIVERIES & DEMOLITIONS Source: CoStar

SF (K)

florida market report

The retail market in Miami is highly dependent on tourism, as spending from domestic and international travelers is what keeps this market alive. In 2021, Miami hosted approximately 24.2 million visitors, matching its pre-pandemic levels, according to The Florida Review. Miami’s current retail vacancy is experiencing a record low of 3.1 percent, a level that is approximately 70 basis points below the pre-pandemic rate. In the past 12 months, the metro reached a retail sales volume of $3.2 billion, showcasing its quick recovery from COVID-19. Retail rent in Miami is one of the highest in the nation, averaging $420 per square foot. The market’s abundance of capital, limited product, significant 1031 Exchange rollover, and high NOI growth forecasts have pulled investors’ interest. Additionally, the influx of tourists and high-income residents aids owners in rationalizing high asking rents.

Tenants are also willing to pay more for luxe submarkets in Miami, including Brickell, Aventura, Coconut Grove, and Wynwood-Design District.

1,200 1,000 800 600 400 200 0 -200 -400

FORECAST

‘17

‘18

Sales Volume

‘19

‘20 ‘21 ‘22 ‘23 ‘24 ‘25 ‘26 Demolished

Net Deliveries

1.5M Sf

6.0%

$250

12-Month Net Absorption

Average Cap Rate

Average sale price per Sf

e ll i v n o s k c a J

a p m a T Nearly every submarket in Tampa has achieved

Jacksonville’s total investment volume

over the trailing 12-month period.

taking place in the past year.

sits at $859M with 510 retail trades

year-over-year rent growth above 6%

Source: CoStar

Source: CoStar

florida market report

The retail market in Tampa is thriving, totaling over $2 billion in transactional volume over the past 12 months. Increased job and population growth have been the market’s biggest success stories in the past decade. The market boasts a 2.9 percent unemployment rate, much lower than the U.S. average of 3.7 percent. In addition, since the start of the pandemic, Tampa has seen an influx of over 40,000 new residents. With such population growth comes an immense development pipeline in Tampa and the surrounding markets. Wesley Chapel has proven to be one such growth market with extensive retail and housing builds. According to CoStar, about 20 retail leases north of 20,000 square feet have been signed in the past year, major occupiers being furniture stores, discount retailers, and fitness centers. Retail owners are ecstatic about Tampa’s performance coming out of the pandemic, which is

$2 Billion

12-Month Sales Volume

operating the opposite of how it did after the global financial crisis in 2008. Tampa vacancies rose to eight percent in 2008, compared to today’s 3.3 percent. As Tampa continues its aggressive growth trajectory, retail assets in the MSA can be expected to outperform in the years to come.

MARKET RENT PER SF Source: CoStar $40

FORECAST

$35 $30 $25 $20 $15

‘17

‘18

‘19

‘20

‘21

‘22

‘23

‘24

‘25

‘26

Mall Neighborhood Center General Retail Tampa Other Retail U.S. Power Center Strip Center

1.8M SF

6.0%

$241

12-Month Net Absorption

Average Cap Rate

Average sale price per SF

florida market report

The demand for retail construction in Jacksonville is exceptionally high, specifically in residential and suburban communities with increased populations over the past few years. Thanks to increased population and multifamily development, Jacksonville sees heavy foot traffic in retail locations throughout the market. Neighborhood centers are popular among consumers as they are often nearby homes and sell general convenience items. These centers typically span less square footage than a traditional community center but offer the benefits of a strong anchor tenant such as a supermarket or drugstore.

At the close of Q1 22, Jacksonville ranked fourth in the nation for total net absorption of retail space, according to CoStar. Because of its thriving economic conditions, asking rent has grown 11.4 percent in the past year, outpacing the national average of 4.3 percent. By the end of the year, 800,000 square

$892 Million 12-Month Sales Volume

feet of development is anticipated to be completed to match the overwhelming demand. Drugstore retailers, including CVS and Walgreens, are among the market’s most popular net lease retailers.

MARKET CAP RATE Source: CoStar 7.8%

FORECAST

7.6% 7.4% 7.2% 7.0% 6.8% 6.6% 6.4% 6.2%

‘17

‘18

‘19

‘20

‘21

‘22

‘23

‘24

‘25

‘26

U.S. Mall Neighborhood Center General Retail Other Retail Power Center Strip Center Jacksonville

1.1M SF

6.2%

$221

12-Month Net Absorption

Average Cap Rate

Average sale price per SF

s e l p a N Annual sales volume has averaged

$264 million over the past five years.

and the 12-month high in investment volume

hit $522 million over that stretch.

florida market report

$498 million 12-Month Sales Volume

florida market report

Source: CoStar

FORECAST

$340

$220 $200

$320

$180

$300

$160

$280

$140

$260

$120

$240

$100

$220

$80

$200

$60

$180

$40

$160

‘17 ‘18 ‘19 ‘20 ‘21 ‘22 ‘23 ‘24 ‘25 ‘26

Sales Volume

Naples Price/SF

$20

U.S. Price/SF

433,300 SF

4.7%

$301

12-Month Net Absorption

Average Cap Rate

Average sale price per SF

SALES VOLUME ($M)

$360

MARKET SALE PRICE/SF

Naples’s economy relies heavily on tourism bringing in an influx of foot traffic to its retail destinations. Naples houses just under 20,000 full-time residents, according to World Population Review, leaving most of its occupants as part-time residents or visitors. In 2021, more than 1.5 million tourists vacationed in Collier County, home to Naples.

In addition to its high volume of annual visitors, Naples’ population consists mostly of retirees, as it is one of the top retirement destinations in the country. Since tourists and retirees have more time for leisure activities, retail in Naples is a booming sector. In the past 12 months, the market closed $485 million in sales volume with over 120 retail closings, according to CoStar. Additionally, the employment rate in Naples is increasing by about 4.1 percent annually, or approximately 6,300 jobs, to keep up with growing consumer demands.

SALES VOLUME & MARKET SALE PRICE PER SF

Florida’s retail market is heavily driven by tourism and new residents in search of sunshine, opportunity, and fewer restrictions. The market’s commercial real estate industry is booming, specifically in the net lease retail sector, including grocers, discount retailers, fitness centers, and furniture stores. Increased employment rates and housing development is attracting investors and developers, making Florida one of the topperforming states in the country.

TRIPP BROWN tripp.brown@matthews.com (615) 667-0157

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THE CHALLENGE AHEAD Industrial real estate throughout the U.S. performed strongly in 2021 and continued that success in 2022.

Year-over-year rent growth is 11.6 percent, and vacancy is 4.0 percent as of September 2022. Demand for properties is still healthy and developers are keeping pace with demand in most major markets.

SALES VOLUME

Source: RCA $200

($M)

$150

This consumer shift caused a decline in the expansion of warehouse and fulfillment facilities.

Another reason investors are wary is the threat of a hard-landing recession as inflation continues, and the stock market witnesses volatility. Lastly, purchasing power is down making it more difficult to buy and lease since sale and rent prices are at record-levels for industrial properties.

$100 $50

BY MATT KOVESDY & JONAH YULISH

The concerns of some investors sprout from a shift of consumers pulling back from e-commerce and returning to brick-and-mortar retail. Online retailers dominated the retail space in 2020 and 2021, but shoppers are excited to be back in person, craving a more personal experience after long periods of seclusion.

$0

‘12

‘14 ‘16 Rolling 4-Quarters

‘18 ‘20 ‘22 Quarterly Volume

“MILLIONS OF SQUARE FEET OF INDUSTRIAL REAL ESTATE ARE ON THE CHOPPING BLOCK AMID PLANS

BY AMAZON TO CANCEL OR POSTPONE THE OPENING OF 49 WAREHOUSES.” Source: Bisnow

VOLUME YOY CHANGE Over the past two years, investors have flocked to industrial real estate. Urgent demand, high rents, and low vacancy proved to be a recipe for success for the commercial real estate asset class, recording historical growth, and sales numbers. Now, as the world moves forward into a post-COVID-19 era, the sector still looks to be top dog, but will that change? As markets across the country ramped up development, consumer trends started to deviate. E-commerce dominance slowed, pre-leasing stalled, and big-box tenants abandoned expansion plans. What does this all mean for industrial real estate, and what should investors look out for?

HIGH-LEVEL LEASING

Source: RCA 150% 100% 50% 0% -50%

-100%

‘17

‘18

‘19

‘20

‘21

‘22

Lease rates are more expensive than ever. As of late August 2022, new industrial leases were $1.45 more per square foot than leases already in place.

The gap between the average lease, market rate, and leases signed within the last 12 months is also higher than ever. The current average lease rate for the past 12 months is $8.05 per square foot, whereas the average was $6 in July 2022.

MARKET HIGHLIGHT - THE MIDWEST “THE GAP BETWEEN THE AVERAGE LEASE RATE AND LEASES SIGNED CREATES A HEFTY PREMIUM FOR NEW LEASES AND SIGNALS THAT AVERAGE RENTS WILL LIKELY CONTINUE TO GROW AT A FAST CLIP OVER THE COMING YEARS.” Source: GlobeSt.

The markets seeing the most leasing activity and year-over-year rent growth are port cities, as they offer proximity to major coastal shipping terminals.

The top five metros are the Inland Empire with 8.7 percent, Boston with 8.0 percent, New Jersey with 7.8 percent, Los Angeles with 7.0 percent, and Orange County with 6.8 percent.

MARKET RENT PER SF Source: CoStar $24 $22 $20 $18 $16 $14 $12 $10 $8 $6 $4

FORECAST

‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ‘20 ‘21 ‘22 ‘23 ‘24 Logistics

Specialized

Flex

United States

Midwest investors are experiencing high yields and vast opportunities due to the market’s strong fundamentals and stretching land at relatively affordable prices.

BUILDING FOR THE FUTURE Due to deeply constricted supply, industrial projects couldn’t be built fast enough throughout 2021, leading to a robust pipeline in 2022 and the following years. There are currently 844 million square feet underway across the United States, 70 percent higher than development numbers prior to the pandemic.

Although demand for industrial has sustained and even strengthened in specific markets, some real estate experts predict that up to 90 million square feet built will not be leased within a year of completion. As of late 2022, 62 percent of properties under construction have not been leased.

But as others raise concerns about overbuilding, others say that it is almost impossible to overbuild industrial assets because the market is so tight for supply, and the need is not going away. Construction is only getting more expensive and complex, meaning it would be difficult to continue the level of development long-term. The industrial pipeline needs to stay stocked in a time of great demand and limited options.

NET ABSORPTION, NET DELIVERIES & VACANCY Source: GlobeSt.

10%

FORECAST

250

9%

200

8%

150

7%

100

6%

50

5%

0

4%

-50

3%

‘14

‘15

‘16 ‘17 Vacancy

‘18

‘19 ‘20 ‘21 Net Absorption

‘22 ‘23 ‘24 Net Deliveries

‘25

‘26

‘27

Vacancy Rate

Square Feet (M)

300

‘13

35.8M

12-MONTH NET ABSORPTION

34.7M

VACANCY RATE

4.6%

UNDER CONSTRUCTION SF

33.8M

12-MONTH NET ABSORPTION

12.2M

VACANCY RATE

2.9%

UNDER CONSTRUCTION SF

8.4M

12-MONTH NET ABSORPTION

6.6M

VACANCY RATE

3.6%

UNDER CONSTRUCTION SF

4.3M

12-MONTH NET ABSORPTION

1.8M

VACANCY RATE

4.1%

“INDUSTRIAL VACANCY RATES REMAIN HISTORICALLY LOW AS THE ABILITY TO SUPPLY NEW SPACE CONTINUES TO FACE PHYSICAL AND POLITICAL LIMITATIONS IN LAND-CONSTRAINED MARKETS.” Source: Bisnow

‘12

UNDER CONSTRUCTION SF

WHAT’S NEXT FOR INDUSTRIAL? There may be some skepticism surrounding the overwhelming construction of industrial facilities and climbing rent rates, but all in all, industrial is here to stay. Investors will continue to pour capital into the sector in hopes of lasting low vacancy and strong profits. Absorption rates are expected to moderate; however, vacancy will remain stable, securing industrial as a top investment.

MATT KOVESDY matthew.kovesdy@matthews.com (216) 260-0712

JONAH YULISH jonah.yulish@matthews.com (216) 503-3610

WHAT ARE

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DELAWARE STATUTORY TRUSTS AND WHY SHOULD INVESTORS USE THEM?

BY K YLE MIRRAFATI Rising interest rates, inflation, and worries of a recession have caused a reset in the multifamily market. Sellers are pulling back as buyers are not hitting price expectations, which in turn affects the deal flow and overall activity. In addition, weariness has made the buyer pool more shallow, as rising construction and borrowing costs hinder potential investors. However, the market is still active, with billions in capital needing to be places investors are still looking to buy, but with a more selective eye. The sector offers solid rent growth and high demand while offering long-term security, outweighing the negative impact of rising costs. While institutional buyers may be taking a step back, private clients, large family offices, and syndicators are stepping up, vying for investments others are missing.

In the search for new opportunities, sellers are utilizing Delaware Statutory Trusts (DSTs), a unique real estate strategy that allows proportionate ownership in various asset types.

When to Consider a DST A DST investment isn’t for everyone but can be a valuable solution for investors looking to make a change to their investment portfolio or financial responsibilities.

IF THE INVESTOR IS LOOKING FOR… } 1031 Exchange Tax Deferral: Since a DST qualifies as a 1031 Exchange, an investor can acquire the same tax benefits of a 1031 but with more flexibility and through a much simpler process. This is the single most significant reason to invest in a DST. The taxes due on the sale of highly appreciated real estate can run as high as 40 percent of the sales’ proceeds depending on someone’s state of residence.

What is a DST? A DST is a legal trust formed by qualified sponsors for a business purpose and incorporated in the state of Delaware. DSTs have gained popularity as a notable real estate tactic, as investors look for different ways to diversify portfolios and secure assets. The trust allows individual owners to possess proportional shares of an investment. Using a DST sponsor, a company creates the trust to hold the assets and takes care of the distributions of the shares to investors. The sponsor then pays a percentage return on the equity or capital the investor puts into the deal.

DST sponsors vary considerably in size and sophistication; investors may want to consider the strength and track record of the DST sponsor when choosing the investment avenue. Larger sponsors may have an advantage in gaining economies of scale in operations that can reduce costs for their investors and possibly obtain more favorable pricing on loans.

Lastly, only accredited investors or high-net-worth individuals qualify for Delaware Statutory Trusts.

THE QUALIFICATIONS INCLUDE THE FOLLOWING: An individual who has an income of more than $200,000 or joint income with his/her spouse of more than $300,000, in each of the two most recent years and has a reasonable expectation of reaching the same income level this year.

OR An individual who has a net worth, or joint net worth with his/her spouse, excluding their primary residence, but including home furnishings and personal automobiles of more than $1,000,000.

} Passive Investment: Owning a property can require an owner to deal with the day-to-day management and bear all the operating costs.

But investing in a DST relieves the owner of the regular landlord responsibilities—toilets, termites, tenants, and trash. A DST caters to an individual looking to leave a legacy, without all the work of a typical landlord. This type of investment is institutionally managed and relies on vetted, experienced managers to execute a business plan and operate the institutional quality properties. } Diversification: Using the trust, an investor can buy fractional ownerships in a variety of product types such as multifamily, retail, self-storage, industrial, and office. Having ownership in all types of commercial real estate will help diversify a portfolio and add depth to an investment roster.

Plus, since a DST sets no limit on the number of DSTs one can invest in, buyers can easily spread investments amongst different sponsors, asset classes, and geographical locations. } Institutional Grade Assets: Investing in or doing a 1031 Exchange into a DST allows clients to be a beneficiary of institutional-grade real estate that would ordinarily be out of financial reach. DST properties are worth tens and up to hundreds of millions of dollars. For example, with as little as $50,000, a buyer could 1031 Exchange into a professionally managed $100 million property.

Challenges to Consider

Although there are several benefits to exchanging into a DST investment, as with any investment, there are some challenges to consider before making a final decision.

Because an investor owns a portion of the asset within a regulated trust, decision-making power is withheld. A DST beneficiary will have no say in property management decisions. Instead, power lies in the hands of the sponsor, as does the financial risk. The sponsor bears 100 percent of the responsibility for paying back all loans or mortgages.

Another caveat is that once a DST deal has been completed, it is final; no additional capital can be added to the trust. Finally, there is no liquidity. An individual cannot take money out of a DST until the sponsor sells the asset, which typically takes five to 10 years. This can be difficult for investors that may need access to fast cash. However, investors that have access to liquidity and are willing to let go of the control can gain an institutional real estate partner that will outweigh some of DSTs' challenges.

Why DSTs are Great for Multifamily Investments A DST works for several types of commercial real estate but can be especially helpful for multifamily investments, specifically those in California. As momand-pop owners in California face tenant pushback and local government restrictions, it is getting more difficult for small owners to make a profit simultaneously, as maintenance and construction costs are also rising.

Long-term owners are finding creative ways to exit multifamily management and exchange into passive investments that alleviate the day-to-day responsibilities all while increasing cash flow, resetting depreciation, and gaining appreciation.

case studies SOLD BU I LT

PR I C E

PR I C E PE R U N IT

U N ITS

GRM

C A P R ATE

2016 7

The Benefits

$3,825,000 16.01

$546,429

PR I C E PE R S F

$421

4.15%

HIGHLIGHTS } Sold within 1% of list price

} A Strategic Exit and/or Retirement Strategy: Using a DST, an investor can take advantage of today’s highly appreciated real estate market and avoid capital gains taxes of 35 to 40 percent. Investors can unload the day-to-day management of apartment(s) and move into passively held $50M+ institutional apartment complexes that have experience, scale, and efficiencies to drive annual net operating income. These institutional managers pass along increased net operating income to investors.

} Generated multiple offers, no renegotiations in escrow } Negotiated multiple seller extensions, to provide ample time to find replacement property Y E A R LY A N N UA L C A S H FLOW

$72,987

} Preservation of Wealth: A DST offers all the same advantages of owning 100 percent of a single property, except with fractional ownership in an institutional asset, providing increased income, appreciation, and a tax shelter.

*After Yearly Debt Service Payments*

PURCHASED

} Estate Planning: As an investment vehicle, DSTs can be passed easily to beneficiaries upon death. In some cases, DST sponsors can assist in this transfer.

TOTA L N E T EQ U IT Y PROC E E DS

$1,755,618

COLUMBIA CENTER 51 COLUMBIA | ALISO VIEJO, CA 92656

HIGHLIGHTS } Two-Story, 34,299 square-foot Class A medical office building in south Orange County, CA

} Diversification (Sponsor, Geography, and Asset Type): There are 50 DST sponsors to choose from that all focus on different asset types in different parts of the country. DSTs offer a wide range of investment opportunities including industrial, multi-tenant net lease, hospitality, self-storage, singlefamily rentals, senior housing, student housing, and manufactured housing. } Long-Term Strategic Partnership: Although there is a loss of control for the stakeholder, investors gain strategic partnerships with some of the largest real estate companies nationwide that can provide knowledge, experience, scalability, and strategic execution to maximize returns for investors. For example, Ares, Cantor Fitzgerald, Inland, Passco, Nexpoint, and Exchange Right are a few top DST Sponsors. These sponsors manage well over $1B in assets, giving them a level of access that’s not available to an average retail investor. Institutional access leads to institutional returns.

6937 KNOWLTON PL LOS ANGELES, CA 90045

} 100% leased to NeoGenomics (NASDAQ: NEO) on a corporate guaranteed 15-year triple net lease offering 3% annual rental increases } Year 1 total return of 5.55% to investors

Courtesy of Kingsbarn Real Estate Capital

Purchased $1,755,618 shares with a yearly cash flow of $97,436

YEARLY CASH FLOW INCREASE OF $24, 249 WHICH EQUALS A

33% increase in returns.

SOLD

1216 N KENMORE AVE LOS ANGELES, CA 90029

BU I LT

PR I C E

PR I C E PE R U N IT

U N ITS

GRM

C A P R ATE

1927 8

$3,290,000

$411,250

14.01

PR I C E PE R S F

$416.67

4.98%

HIGHLIGHTS } Generated multiple offers, no renegotiations in escrow } One of the highest cost per unit sales in East Hollywood } Buyer sourced through Matthews™ centralized database Y E A R LY A N N UA L C A S H FLOW

$157,601

PURCHASED

TOTA L N E T EQ U IT Y PROC E E DS

$3,130,751

A real estate strategy like a DST provides prized opportunities if utilized correctly. The multifamily market is changing but is still full of capital, growth, and potential. By using a DST, mom-andpop owners can reallocate valuable capital into institutional-grade assets without the immense start-up costs and plan for retirement. Investors still looking to progress their portfolios can add various product types and form beneficial relationships with the industry’s top sponsors. Overall, there are plenty of different reasons DSTs are catching the eyes of today’s sellers and quickly becoming the go-to strategy for multifamily owners.

2 SEPAR ATE DSTs (MULTIFAMILY & OFFICE)

1ST PROPERT Y

2ND PROPERT Y

Stadium Crossing 2125 E Katella Ave | Anaheim, CA 92806

Rivergate Apartments 13175 Marina Way | Woodbridge, VA 22191

HIGHLIGHTS } Four-story, 106,068 square-foot Class A multi-tenant office building across from Angels Stadium in Anaheim, CA

HIGHLIGHTS } Luxury 402-unit resort style apartment community in prime Northern Virginia suburb

} 100% leased to high-quality tenants such as SunPower (NASDAQ: SPWR) and the County of Orange with 2% annual rental increases

} Offers a great unit mix of 1-, 2-, and 3-bedroom units with endless amenities for tenants } Year 1 total return of 5.15% to investors

} Year 1 total return of 6.25% to investors Purchased $1,750,000 shares with a yearly cash flow of $109,375

Purchased $1,380,751 shares with a yearly cash flow of $71,108

YEARLY CASH FLOW INCREASE OF $22,882 WHICH EQUALS

a 15% increase in returns

kyle mirrafati

kyle.mirrafati@matthews.com (310) 295-4269

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technology CO M BAT TI N G I N F L ATI O N W ITH TE C H N O LO GY

BY SEAN CLANCY

After more than a decade of sustained growth, many experts are warning that the economy is approaching a recession. Some even argue that the recession is already here. Either way, the rapid increase in inflation over the past year and subsequent interest rate hikes by the Federal Reserve has changed the landscape that the commercial real estate industry has enjoyed for over 12 years.

In addition to interest rate hikes and the ebb and flow of macroeconomic cycles, emerging trends in the technology space are contributing to the volatile situation. Chief among them is the continuation of technology-enabled hybrid work environments. Many employees who exclusively worked from company-owned space before the COVID-19 pandemic are demanding the option to continue working entirely from home or an option that includes a mix of in-office and remote work.

In the face of a tight labor market, employers have had little choice but to offer hybrid or full work-from-home options or else risk losing workers to those that do.

Another trend in the tech space is a slowing of venture capital (VC) flow into tech startups. VC funding dropped 23 percent from Q1 to Q2 of 2022, with Seed and Series A companies taking the biggest hit. This trend is expected to continue, with prominent startup accelerator Y Combinator advising companies planning to raise capital in the next six to 12 months, “We recommend you change your plan.” Industry experts blame a combination of the changes in monetary policy discussed above and lackluster returns on the glut of funding to the industry in 2021.

On the contrary, according to the Center for Real Estate Technology & Innovation (CRETI), VC money has been increasingly directed at PropTech startups.

According to CRETI’s PropTech Venture Capital Report for H1 of 2022, “Venture capital investments in private real estate technology companies outperformed the global venture capital market.

In H1 2022, $13.1 billion was invested in real estate technology companies, including commercial, construction, residential, industrial, and other real estate sectors.”

technology

The reduced demand for office space has and will continue to drive concerns about vacancy in the asset type. Interestingly, the opposite has been the case in the residential space, with the Federal Reserve Bank of San Francisco attributing 60 percent of U.S. housing price growth and rent increases to remote work, presumably tracking the increased time workers spend at home.

One reason investors are eager to back PropTech ventures is that the CRE space stands to benefit greatly from technology in a period of economic downturn. By recognizing the value of PropTech and using it effectively, owners can maximize value, mitigate risk, and emerge from uncertain economic conditions stronger than ever.

TECH INVESTMENTS IMPROVE TENANT EXPERIENCE & INCREASE VALUE

technology

In the immediate future, CRE investors can expect properties to trade less often and at higher cap rates. In areas and asset classes with a projected decline in potential tenant pool, keeping existing tenants and competing to replace those that leave are imperative. The most recommended approach is to drive towards an improved tenant experience.

According to Deloitte, “Leaders should adopt a Real Estate-as-a-Service (REaaS) approach, which combines strategy, technology, and data to deliver digital and physical services—not just space—to tenants and users.” In most cases, as the acronym implies, technology is the answer to successfully implementing this strategy by enhancing their property and including new, value-add services.

As with most strategic plans in CRE, industry subsectors vary in how they prioritize the services offered by owners. Residential occupants rank energy efficiency as their top priority, whereas the hospitality sector sees the most benefit in integrated

25,000

NEARLY 60%

87%

Americans took a McKinsey survey.

reported that they had the option to work from home at least one day a week.

of those chose to exercise that option.

mobile apps that increase and improve touchpoints with guests. Retail tenants want more configurable spaces, but office occupants are more interested in automated, integrated conference room scheduling.

Unfortunately, according to Deloitte’s 2022 Commercial Real Estate Outlook, 80 percent of CRE firms are still heavily reliant on legacy systems that are ill-equipped to integrate with those advanced technologies. The same survey found that most respondents in the industry ranked their top priority for investment over the next 12 to 18 months as upgrading their existing assets to improve their value proposition. Replacing or at least reducing the dependency on those legacy systems will be key for those investors trying to bridge the gap.

ALL THE NEWS, ALL THE DEALS Real estate is never just about real estate. It’s also government

policy, financial markets and new technologies that are changing the

BUSINESS INTELLIGENCE

way we do business. At The Real Deal, we cover it all so you can stay one step ahead to make smarter decisions.

technology

It is always important for owners to understand how their assets are performing, but it becomes particularly crucial in times of economic downturn to ensure that the assets in their portfolio are running at maximum effectiveness. This starts with understanding the key metrics that show the performance of an asset type and the benchmarks of how those indicators should be measured.

The CRE market is heading for a dramatic change after more than a decade of sustained growth. This is largely due to broad macroeconomic trends, but major shifts in the technology space are contributing, such as reduced demand for office space due to hybrid work environments and a concentration of venture capital in the PropTech space.

Strategy is just the first step, though. Data is the fuel of the business intelligence (BI) engine. Telemetry from internet of things (IoT) devices, specialty thirdparty data providers like foot traffic trackers, and data aggregators can all contribute to an owner’s toolkit for BI.

This shift to PropTech-focused capital investment implies that the market sees value in implementing real estate as a service (REaaS) tech as a mitigating factor against the market forces changing the CRE space. Improving tenant experience with technology focused on particular asset types is anticipated to be a major factor in retaining existing occupants and attracting new ones.

One particularly critical function of BI tooling is to understand a portfolio’s rollover risk. In times of economic downturn, there is an increased likelihood that a tenant may lose the ability to meet their lease obligations. Tenant rollover analysis models vary by asset type, size, location, etc. Likewise, they can be used with a variety of tools, from a simple spreadsheet to sophisticated data models and BI applications.

However an investor comes to find a tenant at risk of rollover, it gives the owner the option to be proactive with the situation. Depending on market dynamics, it may be advantageous to restructure lease terms rather than source a new tenant.

Advanced business intelligence and analytics will also be a significant factor in retaining tenants by providing investors with the insights they need to proactively identify rollover risks and analyze mutually beneficial adjustments to lease agreements.

sean.clancy@matthews.com (000) 000-0000

technology

many want the title Few want responsibility!

HOTSPOTS IN HEALTHCARE

MARKETS TO WATCH

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BY HANNAH LAURA JORDAN, RYAN BURKE, ANDREW RICHMOND, RAHUL CHHAJED, & MICHAEL MORENO

The U.S. has the largest healthcare industry in the world, and the strength of the sector has leveraged major players in the market.

With more Americans turning 65 every day, the need for care centers and medical office buildings (MOBs) will only expand. The longer people live, the more medical assistance is required to maintain a good quality of life. Therefore, markets will need to adapt to high rates of chronic health conditions, and costly expenses in technological adoption will continue to put the healthcare asset class on an upward trajectory.

BY 2034, THE 65-PLUS POPULATION WILL OUTNUMBER CHILDREN FOR THE FIRST TIME IN U.S. HISTORY. BY 2060, NEARLY ONE IN EVERY 4 PEOPLE IN THE U.S. WILL BE 65 YEARS OLD OR OLDER. U.S. POPULATION PREDICTIONS Source: U.S. Census Bureau 95 90

Population (M)

85

TOTAL NATIONAL HEALTH EXPENDITURES ARE EXPECTED TO REACH $5 BILLION BY 2025.

Source: U.S. Census Bureau

The states below are leading the healthcare industry’s ‘markets to watch’ list, with an influx of patients in need and offering bountiful investment opportunities.

NORTH CAROLINA North Carolina is seeing an average net arrival of 150 people per day. This is due to several factors, including the state’s relatively affordable housing, impressive hospital systems, and thriving local economy. North Carolina is especially attractive to outside investors because it is a certificate of need (CON) state, where providers must apply and pay fees to open new clinics. This requirement deters providers from exiting properties to avoid hefty upfront costs and fees, in turn securing long-term tenants. North Carolina also has a lower patient-toprimary care provider ratio (1,405 to 1) than both South Carolina and Georgia, meaning the population has access to more clinicians than most of its neighbors.

80 75

PATIENT TO PRIMARY CARE PHYSICIAN RATIO Source: Data USA

70

1,500 to 1 1,450 to 1

65

1,400 to 1

60

1,350 to 1

55

1,300 to 1

50 2020

2025

2030

2035

Over 65

2040

2045

2050

2055

2060

Under 18

The transition to outpatient care is an ongoing trend that accelerated during the COVID-19 crisis. Outpatient care helps reduce the strain on hospitals, allowing facilities to focus on treating patients who don’t require hospitalization. As a result, outpatient facilities present a lucrative opportunity for real estate developers and investors. In addition, consumers are more focused on behavioral and mental health than ever before, pushing the need for mental health services and facilities.

‘14

‘15

North Carolina

‘16

‘17

‘18

Tennessee

‘19

‘20 Virginia

‘21

Current development will bring more medical professionals to the area, making the state a hub for healthcare investments. Therefore, the state will offer opportunities for investors to diversify portfolios outside of just owning MOBs.

ACCORDING TO A RANKING BY CNBC, NORTH CAROLINA IS THE #1 STATE FOR BUSINESS IN 2022.

WakeMed Health & Hospitals proposed spending $351 million on facilities in Raleigh to serve the rising number of acute-care and psychiatric patients.

The 170,000-square-foot facility sits on 27 acres and will have 45 beds dedicated to meet the state’s need for additional acute-care beds. In addition, Atrium Health and Wexford Science & Technology plan to develop a healthcare campus in Charlotte, the second largest city in the Southeast, to include space for the Wake Forest University medical school and surgical training center.

MEDICAL OFFICE: TOP 10 METROS AVERAGE NNN RENTS Source: Revista Atlanta Boston Chicago

CALIFORNIA Due to the high cost of living and lack of affordable housing within California, the Golden State has taken multiple approaches in its effort to get a grip on high healthcare costs. California Governor Newsom issued an executive order released in January 2021 calling for the Master Plan for Aging, with efforts to increase healthcare access in lower-income communities, provide flexible housing for all ages, and increase work and volunteer opportunities for seniors. This order will add an array of services and facilities to the market, opening the door to a flood of investors.

LOS ANGELES CLAIMED THE TOP SPOT FOR MOST ACTIVE MARKETS FOR MEDICAL OFFICE ACQUISITIONS FROM JULY 21’ TO JUNE 22’.

TOP ACQUISITION MARKETS Source: MSCI Market

U.S. Average $22.61/SF

Dallas Houston Los Angeles Miami New York Philadelphia Washington, D.C.

Sales Volume ($M)

Los Angeles

$1,371

$0

$5

$10 $15 $20 $25 $30 $35 $40

At the end of 2021, both Los Angeles and Orange County saw significant sales activity within the medical office sector, and both counties have strong fundamentals that are continually attracting investors. The vacancy rate in Los Angeles fell below 10 percent for the first time since the pandemic, and Orange County’s vacancy is below nine percent. Net absorption was positive in both markets. Los Angeles net absorption totaled more than 102,000 square feet, helping to drive strong occupancy for the year.

The market in Orange County had more than 50,000 square feet of net absorption.

Furthermore, the state’s annual $308 billion budget addresses key priorities for the future of healthcare.

The provisions included in the final budget will give $300 million annually for public health departments across the state, as well as an additional one-time $75 million for public health workforce development.

The budget will also include: $1.3 billion for healthcare worker retention pay, which will provide a financial stipend for every individual working in eligible hospital settings, including physicians.

$845

Phoenix

$797

$700 million in equity and practice transformation payments to better meet the needs of the Medi-Cal population.

Portfolio & Entity

The approved budget will not only decrease the rising costs of healthcare services but will bring more consumers to the sector and meet the growing demand for MOB development.

$491

Chicago

$490 Individual

The number of seniors 65 and older in Texas is expected to diversify, doubling from 3.9 million in 2020 to 8.3 million by 2050. As one of the largest growing states in the country, cities in the area are beginning to position themselves to meet healthcare needs and demands. The sector is currently on investors’ radar as new capital is entering the market, and more people are flocking to the state to take advantage of the low cost of living and plentiful job openings.

Cost/SF Per Year

Dallas

Atlanta

Houston has topped the list as the leading market for medical office construction, majorly funded by hospital systems. However, this increased development has pushed vacancy rates as the excessive new supply makes older buildings harder to backfill. Its medical office sector has gained strong momentum since 2012, delivering more than 7.1 million square feet, with average total completions exceeding 602,000 square feet every 90 days.

International investors and REITs were big buyers of healthcare assets with net acquisitions registering $14 million and $43.3 million, respectively.

TEXAS

MEDICAL OFFICE: LEADNIG MARKETS FOR CONSTRUCTION Source: Revista Houston New York Chicago Orlando San Francisco Miami Los Angeles Baltimore Atlanta Columbus

0

0.5

1

1.5

2

2.5

Square Feet (Thousands)

Austin and Dallas-Fort Worth (DFW) have seen vacancy rates decrease because of the high demand for more healthcare real estate. Northwest San Antonio has far more medical real estate than any other portion of the city; development and growth in the north central and northeast San Antonio have increased.

SAN ANTONIO MEDICAL/OFFICE INVENTORY Source: Partners Northwest North Central Far North Central Northeast CBD South Far West Far Northwest 0

1

2

3

Square Feet (M) Leased

Available Space

4

5

6

ARIZONA Lower tax rates, warm weather, and comprehensive healthcare services attract an overwhelming amount of retirees to the state of Arizona. According to the United States Census and migration patterns, Arizona was ranked first in the nation for relocating retirees. Home to over 1.5 million citizens 65 and older, the senior population is projected to outpace the younger generation in the next decade. To make up for this growing demand, Governor Doug Ducey announced a $6.5 million investment to train 1,500 nursing professionals and caregivers who work in long-term care facilities.

More surgery centers, hospitals, and micro-hospitals are also being built in the West Valley, increasing the demand for rehabilitation. This type of bed space is a huge need, especially since the COVID-19 pandemic.

Recently, several rehabilitation hospitals have been announced in Avondale, and Reunion Hospitals currently have a 40-bed facility under construction in Peoria.

Submarkets like Tucson are poised for a boom in medical office building activity due to the many vacant spaces throughout the county. The further the state expands, and the population spreads, the more urgent cares, surgical centers, dentists, vets, etc. will be needed. According to Revista, only nineteen metros exceeded $250 million in MOB property sales in 2021, led by Los Angeles with $1 billion, followed

by Phoenix at $656 million.

$800

Sales Volume ($M)

GlobeSt. – Serving the CRE Industry for more than 70 years!

The heightened demand for healthcare services due to the pandemic, especially among seniors, has made health clinics and medical office buildings even more stable and attractive assets. The top markets within healthcare offering additional services at lower costs and increased health expenditures will see the most success as the population continues to grow.

Healthcare centers must focus on convenience and meeting people where they live, work, and play.

Multi-tenant assets that provide ample parking and proximity to hospital campuses, shopping centers, and transportation corridors have increased in value over the past two years. For many health clinics and other medical office buildings, this will shift the market dynamic.

ANDREW RICHMOND andrew.richmond@matthews.com (949) 432-4517

$600

$400

RAHUL CHHAJED rahul.chhajed@matthews.com (949) 432-4513

$200

Q1’16

Q1’17

Q1’18

Rolling 4-Quarters

Q1’19

Q1’20

Q1’21

Quarterly Volume

Q1’22

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HANNAH LAURA JORDAN hannahlaura.jordan@matthews.com (704) 208-4054 RYAN BURKE ryan.burke@matthews.com (470) 242-0547

PHOENIX MEDICAL OFFICE SALES VOLUME Source: RCA

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Gauging Gas Prices Depending on location, fuel supplier, and strength of contract, operators have varying profit margins. Costs for business owners are high when oil prices go up and most major oil companies have begun closing or not renewing leases at underperforming locations and have pivoted to opening more wholesale supply accounts to decrease rent overhead and the associated costs of running retail locations.

BY C H R I S S A N D S

Throughout past decades, consumers have relied on gas stations and convenience stores (c-stores) to replenish both drivers and their vehicles. However, with the rise of inflation, high gas prices, and an increasing number of drivers switching from gas vehicles to electric vehicles (EV), gas station operators are finding new ways to cater to the needs of their customers. Many operators are seeking alternative business channels outside of fuel and looking to transform the way gas stations operate.

Gas topped the list of consumer goods that saw

the biggest year-overyear bumps in 2022

Increases in gas prices are largely due to high inflation, supply chain issues, and geopolitical affairs. According to IBISWorld, gas stations make an average net margin of just 1.4 percent on fuel, which is lower than the 7.7 percent average across all industries and ranks beneath other notoriously low-margin businesses like grocery stores (2.5 percent) and car dealerships (3.2 percent). Station operators make a significant amount of their profits from in-store convenience sales: food and drinks, candy, tobacco products, lottery sales, and in some states where legal, alcoholic beverages.

TYPICAL GROSS PROFIT MARGINS OF CONVENIENCE STORE ITEMS

How Gas Stations Are Impacted Gas station operators are being hit by inflation just like many other businesses nationwide. Wholesale prices for c-store items have soared over the past several months, and labor prices and product shortages are climbing.

ANNUAL PRICE CHANGES (MARCH 2021 - MARCH 2022) Source: Bureau of Labor Statistics

48% Gasoline (all types) 35.3% Used Cars + Trucks

Source: Statista

Health & Beauty

53%

Candy

51%

General Merch

47%

Bottled Drinks

44%

Salty Snacks

39%

Milk

31%

Beer

23%

Cigarettes

15%

23.6% Airlines Fares 21.6% Piped Utility Gas Service 12.5% New Vehicles 11.1% Electricity

148,026

116,641

C-stores in the U.S.

of those sell fuel

An estimated 80 percent of the fuel purchased in the U.S. occurs at a local convenience store, and 55 percent of these locations are single-store operators. A challenge many operators face is finding the resources to brand their stores separately from the brand of fuel they sell and promote, which often leads to misperceptions that their business is owned and operated by a major oil company.

Franchise programs are the most common way for owner-operators to partner with a nationally recognized brand to help drive traffic to their location. Brands such as Circle K, On the Run, and ampm, have c-store-only programs that operators can join as franchisees so that their fuel and c-store are different brands (i.e. purchasing Shell fuel and having Circle K and Shell on the station’s signage).

8.5% ALL ITEMS

Is Your Convenience Store Still Convenient?

The demand for convenience is apparent in consumer shopping habits. C-stores are competing with quick service restaurants as more capital is placed into food service industries that cater to convenience. Additionally, as consumers return to their daily commutes for work and outsidethe-home activities, traffic at convenience stores grows. C-stores rely on impulse decisions and higher vehicle and pedestrian traffic increases the behavioral changes behind these decisions.

To stay ahead of the curve, store operators are implementing new initiatives that incentivize consumers and drive increased revenue. One example is food and beverage subscription programs. 7-Eleven is ramping up its 7NOW online delivery app with the introduction of the 7NOW Gold Pass which waives delivery fees for members. Additional offers and discounted services like prepared food and a more robust on-the-go selection tailored to local clientele are the keys to the future success and evolution of gas stations with convenience stores.

OWNERSHIP OF C-STORES SELLING FUEL Source: Statista

67% of shoppers

visit a c-store once a week or more

SINGLE STORE .......................... 54.6% 0

2-10 STORES .............................. 3.8% 11-50 STORES ............................. 7.8% 51-200 STORES.. .......................... 6.8% .. .. ....................... 4.9% 200-500 STORES

500+ STORES ........................... 22.2%

100

Source: EnsembleIQ

Buc-ee’s is a brand proving to be popular for long-haul travelers. These giant roadside retailers combine both convenience stores and gas stations to offer a one-stop shop to fuel up and purchase necessities, along with snacks, drinks, hot foods, and a gift shop that sells everything from kitchen serving platters to hunting knives and pet accessories. When it comes to driving non-electric vehicles and extended driving distances, consumers will always need to stop to refuel or recharge, so c-stores that offer a wide range of items and unique product additions will turn impulse buyers into repeat customers.

Adapting to the Future of Transportation Gas stations can make strategic moves to prepare for future changes in the industry but adapting will not be easy.

From the growing vehicle share of EVs to e-commerce prevalence and changing consumer preferences, there are challenges that operators need to consider.

GROWING EV PRESENCE

Gas stations planning to cater to the new generation of electric vehicles will face some challenges including high equipment and construction costs and potential disruptions during renovation. Although gas stations aren’t going away, it’s important to stay relevant and convenient as long-term policies are implemented in favor of EVs. In California, thousands of gas stations will be impacted by the 2035 deadline set by Governor Newsom, requiring all new cars and passenger trucks sold in California to be zero-emission vehicles. This news forces operators to consider redevelopment and renovation focused on serving more electric vehicles.

7-Eleven is increasing alternative fuel access for its customers by building

500 DC fast charging ports at end of 2022 at 250 u.s. and canadian stores Tapping into electric mobility means more than just attracting and retaining customers for gas stations. Supplying EV charging stations can provide additional upselling opportunities, commercial fleet charging deals, and improved public perception.

Installing EV charging stations also means that customers will likely be in c-stores longer, and in turn gives the opportunity to grab more share-ofwallet. Additionally, there are incentives and tax credits offered at federal, state, and local levels for gas station owners that implement EV charging stations.

One survey from E Source discovered that EV owners were willing to pay up to $3 per hour for charging, and 12 percent were willing to pay $4 per hour – even if it only costs them $0.75 per hour to charge at home.

CHANGING CONSUMER PREFERENCES With shifting consumer behavior, increasing mobile population, and newer technology, younger generations are searching for a no-hassle quick fix for all their needs. Consumption methods have evolved to offer just about everything online.

Fortunately, this major shift in consumer habits is an opportunity for convenience stores, as consumers will now find c-stores more convenient for their immediate needs or mid-week shopping trips (especially if they are charging their cars at these locations).

While fuel is what brings most consumers to gas stations, c-store sales represent a large percentage of an operator’s profitability. There are many paths forward for the future of gas stations, that largely center on the idea of a refreshed array of unique and modern services. With millennials on the brink of being the greatest percentage of the U.S. population, c-stores are learning to adapt and cater to their habits over other generations.

FEATURES FOR THE GAS STATION OF THE FUTURE 1

2

3

4

DIGITAL IMPLEMENTATION contactless app-based fueling and payment options DIVERSITY IN OPTIONS gas offerings for conventional cars and charging stations for electric vehicles MOBILE APPS enhanced selection of mobile and smartcar apps for easier experience between customer and site CONVENIENCE STORE ADD-ONS evolved consumer segments including fast-casual restaurants, grocery items, and online delivery options

Change is inevitable and it’s critical for both net lease investment owners and gas/ c-store operators to constantly evaluate and stay up to date regarding their tenant’s latest rollouts and strategic moves.

Operators need to focus on strategies that can capture new customers, meet the needs of changing consumer preferences, and sharpen their competitive advantage against new threats and competition.

chris sands chris.sands@matthews.com (925) 718-7524

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Analysts say vacation-starved Americans are making up for lost time during the pandemic, and there’s even a new term for it: revenge travel.

Revenge Travel (ri-'venj 'tra-vəl) noun Slang term for leisure travel that follows a period of being unable to travel. Specifically, the term originated to refer to vacationing following the lessening of COVID-19 restrictions.

- NPR

Bookings Bounce Back

Occupancy, ADR, & RevPar 68%

S E C U R I N G H O S P I TA L I T Y ’ S R E B O U N D

By Mitchell Glasson, Kate Dockery, and Ryan Kawai Sanchez Years of lockdowns, restrictions, and limitations have consumers eager to get out and explore the world again. Packing up bags, hopping on planes, or hitting the road, people are itching to vacation and travel no matter the long wait times or headaches of cancellations. With travel and tourism back at all-time highs, commercial real estate’s hospitality sector is thriving, recovering quickly from the detrimental effects of COVID-19. But with purchasing power down, will the influx of travel hold as consumers tighten the purse strings? Hospitality’s miraculous recovery is promising, but what should investors look out for as discretionary spending weakens and families begin to shift budgets?

 12-MONTH OCCUPANCY



F O R EC A S T

$220

66%

$200

64%

$180

62%

$160

60%

$140

58%

$120

56%

$100

54%

$80

52%

$60

50%

$40

48%

‘17 ‘18 ‘19 ‘20 ‘21 ‘22 ‘23 ‘24 ‘25 ‘26 ‘27 ■ Occupancy

■ ADR

Demand for hotel rooms through the first half of 2022 matched bookings from the same period in 2017 and 2018, and only 3% lower than bookings in 2019.

- CoStar

Source: CoStar

■ RevPAR

$20

12-MONTH ADR & REVPAR

Revenge Travel

Continued improvement in travel has helped hospitality recover rapidly, posting fundamentals that surpass 2019 stats in some markets. Revenue per available room (RevPAR) is performing well, with nominal RevPAR up 30 percent year-overyear. The 12-month average daily rate (ADR) is also strong at $142.09, according to CoStar. Short-term rental RevPAR is above 2019 numbers as well in 140 defined markets. Defined as furnished properties that are available to rent for a limited time, short-term rentals are now considered a subsector of hospitality real estate.

Although the hospitality sector fundamentals are higher than in previous years, it’s important to note that recent inflation rates have made it difficult for operators to match 2019 profit. Experts predict profits will meet previous levels by 2025 as inflation weakens.

Occupancy has remained steady at 62.8 percent and above 70 percent for several weeks in major tourist destinations like Los Angeles, San Diego, New York City, Seattle, and Oahu. Fullservice hotels, hotels that offer supplementary services like food and beverage, fitness room, gift shop, etc., are seeing business travel return but at a slower rate than it was pre-pandemic.

However, corporate and networking events have bounced back, making up for any lost profit.

When compared to the same month in 2019, the demand for high-end meeting hotel group rooms only differs by 1 million rooms.

- CoStar

B E T T I N G B I G O N H O S P I TA L I T Y Transaction activity for the hospitality sector hit a record high in Q2 22, with the $17.8 billion sale of MGM Properties LLC making up a large portion of the total sales volume. Investors are confident that hospitality is back with a vengeance, providing security and high yields. Below is a SWOT analysis of the hospitality sector and what investors should consider while making an investment decision.

Strengths

Weaknesses

Consumer demand is higher than ever

High operating costs such as energy,

RevPAR and ADR have recovered quickly and sustained throughout the year

labor, and maintenance

Slow development pipeline due to limited land availability, expansive supply amounts, and labor shortages

Supply is not meeting demand allowing for increased rates

Opportunities

Threats

As workers return to the office and business

Inflation affecting consumer

As airline prices go up, patrons prefer to drive

High-interest rates impacting sales activity

travel picks up, full-service hotels recover

to their vacations, increasing the likeliness of domestic travel

Z A , x i n Phoe

discretionary spending

Corporate brands may start revamping renovation

Upscale hotels in major markets will continue

to perform well as high-end customers are not impacted as much by inflation

AD

and/or improvement plans that were put on hold during COVID-19, increasing expenses

Travel’s Biggest Threat With revenge travel being hospitality's biggest opportunity, its absence is the industry's biggest threat. The hospitality industry relies on a high percentage of the population having disposable income, which is threatened by the current economic climate. As inflation rages on, travel will become less affordable for average-income families. Without increased levels of travel, hotels and short-term rentals will struggle to keep rates as surcharged as they currently are in a high-demand market. It's unclear whether the rebound of travel will outpace inflation, but so far, inflation's impact has yet to be seen, and travelers are charging ahead with plans.

The hospitality sector is both challenging and rewarding.

Hotels and short-term rentals offer immense opportunity, giving customers an escape from everyday life that can go for a high price tag, even in difficult times. Hospitality’s resilience is unmatched, and as consumers shift budgets, some will continue to make travel a priority, especially in major markets.

MITCHELL GL ASSON mitchell.glasson@matthews.com (949) 432-4502

K AT E D O C K E R Y kate.dockery@matthews.com (949) 873-0270

R YA N K AWA I S A N C H E Z ryan.sanchez@matthews.com (949) 287-5854

NATIONAL

OPERATIONS CENTER W W W. M AT T H E W S . C O M

™

MANUFACTURED

HOUSING THE FIGHT TO MAINTAIN AN AFFORDABLE HOUSING MARKET

AFFORDABLE HOUSING

Over the past two years, the median home price has increased 36.5 percent. This significant increase, paired with the average 30-year mortgage rate jumping from 3.3 to nearly seven percent, has caused many Americans to press pause on house hunting, unable to match the income requirements of homeownership. According to the World Population Review, families in the U.S. earning the median household income can afford a mortgage of about $250,000. Since the average traditional home costs $344,000, families are finding themselves priced out of the market. Overall, current interest rates and inflation have caused Americans to rethink their buying decisions and look for affordable alternatives to achieve the American Dream of homeownership.

Americans spend more on housing than other expenses, with an average of 35% of income dedicated to housing.

MOST EXPENSIVE STATES TO OWN A TRADITIONAL HOME (MEDIAN HOME VALUE):

$538,500

CALIFORNIA

$398,800 MASSACHUSETTS $343,500 NEW JERSEY LEAST EXPENSIVE STATES TO OWN A TRADITIONAL HOME (MEDIAN HOME VALUE):

$157,600 KANSAS $164,000

AFFORDABLE HOUSING

Source: World Population Review

NEBRASKA

$174,600

SOUTH DAKOTA

Growth in Manufactured Home Purchases

AFFORDABLE HOUSING

The annual inflation rate in the United States is 8.3 percent for the 12-month period ending in August 2022, after previously rising to 8.5 percent in July 2022, according to data from the U.S. Labor Department. With the median income across the country at $44,225 and consumer prices increasing every quarter, homeownership is not feasible for many families. The high costs have caused Americans to investigate more viable options until the market cools off.

Although renting is always an option for those unable to purchase property, increased rent rates across the country have hindered consumers’ want and ability to rent. Some feel they would rather put high rent costs towards a mortgage, which gives a return on investment at sale. The rapid rent growth is also forcing some residents to downsize to smaller units that offer lower rates.

NEED TO ADD GRAPH

With consumers shying away from traditional residential homes, other housing opportunities have been introduced to help residents either achieve homeownership or find more affordable options. The increased need for more accessible housing is where manufactured housing communities come into play, drawing over 22 million Americans.

Manufactured housing communities have high occupancy rates, averaging about 94.2 percent Source: NorthMarq

Manufactured homes are usually between 1,000 and 2,000 square feet and are sometimes referred to as prefabricated housing. These homes are built off-site and then assembled on a rectangular chassis.

Manufactured homes are usually built as single or double-wide units.

Thanks to upgraded technology and development, the overall quality and design of manufactured homes has greatly improved in recent years.

MANUFACTURED HOUSING SALES PRICES BY STATE (YTD)

AFFORDABLE HOUSING Source: NorthMarq, CoStar $120,000

THESE IMPROVEMENTS INCLUDE: Vaulted Ceilings Working Fireplaces Custom Kitchens and Baths

These finishes are common among these homes, appealing to homebuyers who may not have considered a manufactured home initially.

Typically, there are eight to 15 homes per acre in a manufactured housing community, offering residents plenty of space, with some high-end communities offering valuable amenities.

Development hot spots for these type of communities include Florida, California, Nevada, and the Midwest.

$100,000

Median Price Per Square

Rising Concerns

$80,000

$60,000

$40,000

$20,000

$0 CA

FL

AZ

NV

IN

U.S.

The average price to buy a manufactured home in California is $106,000 per space in the first quarter of this year, a $50,000 jump from the first quarter of 2021.

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GROCERY ANCHORED

GROCERS Pushing Back ON RECESSION FEARS

By Andrew Gross & Cole Voyles

Consumer Shifts in Grocery Shopping

Grocery inflation is currently at its highest point since 1979, and the price of food at the grocery store is expected to increase by up to 11 percent this year, according to the U.S. Department of Agriculture (USDA). Consumers are looking for ways to cut back on expenses and think twice about buying name-brand items. As a result, the shift to cheaper private-label products is trending. This switch has happened during other periods of economic downturns, and it’s a boom for retailers like Aldi and other discount grocery chains with a strong roster of private-label brands.

With soaring inflation, rising interest rates, and a volatile marketplace, analysts are predicting that an economic recession is on the horizon. However, investors continue to keep their eye on the grocery-anchored retail sector due to its impressive sales growth, better risk-adjusted returns, and strong performance during the pandemic. Technological innovations and infrastructure improvements fuel the bullish outlook, and discount grocers are leading the sector as prices continue to rise.

FOOD - AT - HOME PRICES LEAPED AHEAD IN AUGUST AT A 13.5% ANNUAL RATE — THE FASTEST PACE IN MORE THAN 43 YEARS, ACCORDING TO DATA FROM CSA.

GROCERY ANCHORED STATE OF THE GROCERY MARKET

When stay-at-home orders were issued during the pandemic, it drove a surge in buying that wiped grocery shelves out of stock and provided an important reminder of the critical role grocers have in providing essentials to consumers. The result of panic buying caused a significant increase in sales and ignited a resurged interest in the grocery space for investors. As more consumers trade down restaurant outings in favor of home-cooked meals,

chains emphasizing low prices are seeing positive year-over-year visit trends despite the overall retail sector downturn.

Source: Placer.ai

YoY Change in Visits

15% 10% 5% 0% -5% -10% April 2022

Whole Foods Market

May 2022 Kroger

Safeway

June 2022 Trader Joe’s

Restaurants

21%

July 2022 Albertsons

45% Groceries

August 2022

Walmart Neighborhood Market

September 2022 Publix

Aldi

46% 6%

Purchased Less

NATIONAL GROCERS YEAR - OVER - YEAR CHANGE IN MONTHLY VISITS

-15%

46%

23%

DESPITE A DECLINE IN IN - STORE VISITS AS CONSUMERS ADJUSTED TO INFLATION AND HIGH GAS PRICES AT THE START OF 2022, GROCERS ARE SEEING FOOT TRAFFIC BOUNCE BACK QUICKLY.

Consumers have no choice but to buy essentials like groceries, although they will likely switch to more affordable brands or change how frequently they buy items amid rising prices. Kroger has revised its store brand strategy to simplify its budget-priced options and launch a private label line called Smart Way, including 150 products. Grocers providing more value-based options and prices that meet the needs of customers on a budget are seeing the most increase in sales and traffic.

IN A RECENT PRICE COMPARISON BETWEEN ALDI AND WALMART, ALDI HAD LOWER PRICES IN MOST GROCERY CATEGORIES, INCLUDING PRODUCE, PANTRY SALES, MEAT, AND EGGS, ACCORDING TO BUSINESS INSIDER.

GROCERY ANCHORED

% OF RESPONDENTS WHO SAVED MONEY Source: Morning Consult

How to Adapt to Cost-Conscious Consumers

Purchased Cheaper

Did not Purchase

Retailers that host new programs and initiatives, including specials, loyalty, and subscription programs are also performing better. Grocery chains operating on a membership model like Sam’s Club, and Costco, are benefiting from the same trends pushing customers to shop at discount grocers. Recent price comparisons from Insider found lower prices at Costco and Sam’s Club than at other grocery stores due to bulk discounts and deals offered.

WHY BUDGET - FRIENDLY GROCERS ARE ON TOP

Aldi’s aggressive expansion quickly made it the most active grocer, with 88 new store openings in 2021, nearly tripling the new store count of its next closest competitor, Publix. Aldi’s branding is built around being a low-budget option, where items are shelved in their shipping packaging to cut back on labor needs and to keep costs low. The chain says more than 90 percent of its products are Aldi brands, which are much cheaper than its name-brand counterparts.

Furthermore, the store is particular about its design, as it plays a crucial role in the business’s success and how it provides the most convenient option to customers. Stores have a modest size of 22,000 square feet, and all products are organized into five aisles, with each store location holding a minimum of 95 dedicated parking spots. The simplicity of the store design gives the tenant or the company a huge leg up over traditional grocers because of low overhead, great value for high-quality products, and an easy-to-navigate environment.

ACCORDING TO AN INMARKET REPORT, AVERAGE SPENDING ON GROCERY PRODUCTS AT DISCOUNT CHAINS JUMPED 71% BETWEEN JUNE 2020 AND OCTOBER 2021, AS SPENDING ON THE SAME ITEMS AT GROCERY STORES DROPPED 5%.

GROCERY ANCHORED

GROCERY ANCHORED Due to the success of profitability for discount retailers, several national chains and off-price retailers are planning to open thousands of new stores in 2022. In August, WinCo opened its 138th store in Washington. The chain now has locations in 10 states across the nation. Dollar General has expanded its footprint this year by opening 1,110 new stores and additional distribution centers. The retailer is also doubling down on its $1 offerings to provide a wider range of private brands and fresh produce. Soaring food costs will continue to send more shoppers, even in higher income brackets, into discount retailers.

AVERAGE MONTHLY REPORTED SPENDING ON GROCERIES Source: Morning Consult $450

$440

$430

Andrew Gross

andrew.gross@matthews.com (214) 295-4511

$420 Jul ‘21

Aug ‘21

Sep ‘21

Oct ‘21

Nov ‘21

Dec ‘21

Jan ‘22

Feb ‘22

Mar ‘22

FOOD FOR THOUGHT

Since the pandemic sent grocery sales soaring, investors regained interest in the sector due to the resiliency and adaptability it provides. Historically, grocers have proven resilient to the type of e-commerce-driven disruption that has challenged other retailers and is adapting incredibly well to changing shopper habits. Market downturns can be an opportunity for retailers and investors alike to capitalize on growth opportunities and expand into new markets. Grocers will need to enhance their fulfillment operations and provide better convenience to stay in the battle against high inflation and increasing grocery prices.

Cole Voyles

cole.voyles@matthews.com (972) 636-8441

southern california

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Crumbl Cookies

JUGO

Rockbird Row House

CycleBar

King & Queen Cantina

Rumble

Devil & Angel

Kalaveras

Silverlake Ramen

Cleveland Barkour

AD Dunkin’

Sauce the City

Boss Chick N Beer

Express Employment Professionals

Scout & Mollys’ Boutique

Cheesesteak Whizard

Fifty-Six Kitchen

Shelter Insurance

Cricket Wireless

Just In Time Staffing

Smoothie King

Crumbl Cookies

RYBA Dentistry

Tutu School

We currently represent and assist local businesses, regional franchises, and national corporate tenants in identifying, negotiating, and securing lease locations.

Dallas Baja Ritas

Curry Up Now

i Fratelli Pizza

Bakers Dozen Donuts

Dutch Bros

Marvel Car Wash

Beach Cities Cryotherapy

Egg N Bird

Silverlake Ramen

CityVet

Feng Cha

Tower Loan

Clean Start Express Wash

House of Bread

World of Beer

Cold Stone Creamery

HTeaO

austin/san antonio 1st Franklin Financial

Cajun Skillet

KavaSutra

BokaBuku Boutique

Delicious Tamales

Nori

DripKit

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MIXED USE

N T , e l l i v Nash ANNOUNCING THE NEW

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W W W. M AT T H E W S . C O M

Meet Meet @@

NMHC’s meetings bring together senior NMHC’s meetings executives from bring together senior the nation’s executives from leading multifamily the nation’s leadingfirms for high-level networking, multifamily firms for actionable business high-level networking, intelligence and actionable business thought-provoking intelligence and discussions.

thought-provoking discussions.

™

contributors