Getting creative: CRE investors looking closely at campground investments

Campers now expect amenities such as water parks at campground sites.

by Dan Rafter

Commercial real estate offers plenty of opportunities for investors. Distribution centers, downtown office towers and modern apartment buildings all offer investors a safe harbor for their dollars.

But some investors are getting more creative, sending their dollars into real estate that doesn’t quite fit into traditional sectors such as multifamily, hospitality, industrial or retail.

Consider what executives at Jellystone Camp-Resorts are seeing today.

Jim Westover, vice president of operations with Jellystone Park, said that a growing number of REITs are investing in the 80 campgrounds that Jellystone runs, including many in the Midwest.

They’re doing this because they consider the kind of campgrounds Jellystone runs, family-friendly and catering to campers who aren’t exactly hardcore outdoorsy types, to be safe investments, Westover said.

The REITs investing in such family campgrounds find that the revenue they earn from the short-term rentals in which these parks specialize is only one source of income.

“Spending with the park is what we get people to do,” Westover said. “We get more dollars per night. We benefit from the ancillary income generated inside the park.”

Westover said that each Jellystone park gets about 30 percent of its income from visitors buying souvenirs, food and t-shirts emblazoned with Yogi Bear and his cartoon friends.

Then there are the added attractions. Many Jellystone campground sites feature extensive water parks and laser tag arenas. Others come with high-end cabins with flat-screen TVs and comfortable bedding.

Thanks in part to these amenities, Jellystone’s parks average 1.4 million visitors a year, Westover said. That steady attendance, along with the in-park spending, have made Jellystone campgrounds a top draw for real estate investors, Westover said.

Finding new opportunities

Jellystone, of course, isn’t the only campground operator drawing the attention of REITs. Investors who are interested in alternative investments that offer a steady stream of income are finding that campgrounds are solid choices.

Real estate mogul Sam Zell provides a good lesson here. He operates Equity LifeStyle Properties. That’s a REIT focusing on mobile home and RV Parks.

It’s true that a mobile home park isn’t quite the same as a campground. But it still ranks as an investment class that operates outside of the traditional CRE sectors of industrial, office, multifamily, retail and hospitality.

Zell’s REIT is performing well these days. In February of last year, investors in Equity LifeStyle saw a return of 27 percent on their shares over the previous year. That made Equity LifeSytle Properties the fifth-strongest REIT in the nation at that time.

Jellystone, then, would see to offer plenty of opportunities for investors. According to the company, in 2016, revenue per available room at the campsites was up more than 13 percent. The company credits that increase to a jump in cabin rentals and discretionary spending within the parks.

Investors looking for Midwest-based real estate are in luck, too. Jellystone has a strong presence in the Midwest, operating campgrounds in Oklahoma, Illinois, Indiana, Missouri, Ohio, Michigan, Iowa, Indiana and Tennessee.

No boredom allowed

Camping is growing in popularity today. The 2017 North American Camping Report, a study supported by Kampgrounds of America, said that an estimated 1.3 million U.S. households plan to camp more often this year than they did in 2016. The report also said that 1 million new households have started camping ever year since 2014.

What’s behind this trend? Millennials, of course.

The report said that 51 percent of Millennials plan to increase the number of times they go camping this year.

And often when people go camping they’re not turning to tents and campfires. They want cabins outfitted with TVs, comfy couches, king beds and fully stocked kitchens. Increasingly, campgrounds are investing in these upgrades, something that attracts not just more visitors but more real estate investors, too.

“Campers want to be entertained all day,” Westover said. “They don’t want to be bored, ever. They want the luxury cabins that have all the comfort of home. They want to be away, but not really. They want WiFi and flat-screen TVs. We make sure we offer that.”

Westover said that traditional campground REITs have invested in parks that cater to more traditional, seasonal campers. These campers rent a space for five or six months.

Jellystone parks, though, cater to a more transient type of camper. These are people who camp for a weekend before heading home.

“We get more dollars per that spot in the long run,” Westover said. “We keep turning people over. You make more money with our model.”

To become a Jellystone park, campgrounds need at least five cabins on site and they need at least one water feature, such as a pool or water park.

Campgrounds that can offer this, can join the Jellystone network, Westover said.

“We need to be entertained these days,” Westover said. “When you can offer that entertainment, it puts you in the best position to be successful. It brings in a different clientele. With the Millennials and Boomers more interested in camping, we have to offer a different product mix. People are focusing on the cabins. They want to do the outdoor activities. But they also want to stream their movies and have access to a food court. We give them that.”

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Marcus & Millichap: Apartment construction booming in Milwaukee

Junction at White Stone Station

by Dan Rafter

Apartment construction is surging across the Milwaukee market, according to the latest research from Marcus & Millichap.

According to the company’s second quarter multifamily research, developers are expected to add 3,633 apartment units to the Milwaukee market during 2017. That is a significant increase from 2016, when 1,924 new apartment rentals came online.

Certain areas of the market will see more new apartments, of course. Marcus & Millichap points to the downtown/Shorewood submarket. Developers are expected to complete 12 multifamily projects in this submarket before the year ends, bringing nearly 1,300 rental units to the area.

Waukesha County is also seeing a big influx of new apartment units, with Marcus & Millichap reporting that 1,100 new rental units will come online this year. The biggest delivery of 2017 is slated for this submarket, too, the 318-unit Junction at White Stone Station.

What is fueling this construction boom? Increasing demand for urban living is helping. At the same time, the population in the Milwaukee area is expected to grow. Marcus & Millichap reported that Milwaukee’s population is expected to grow by 14,600 in the next five years. The market is also expected to see 21,000 new households during the next five years.

This higher demand is good news for landlords. Marcus & Millichap predicts that average effective monthly rents will increase 5.4 percent this year to $1,059. This follows a jump of 4.1 percent in the Milwaukee market in 2016.

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RentHop study: When it comes to dragging down apartment rents, not all crimes are created equal

by Dan Rafter

Plenty of factors cause apartment rents to rise and fall. But how about crime rates? Do high crime rates automatically result in lower apartment rents?

Usually, according to a new study from RentHop. But the type of crime plays an important role.

RentHop found that certain crimes tend to have a bigger impact on rental rates. Burglary and robbery are the most likely to drag down rents in an area.

The RentHop study confirmed the initial assumption of researchers here that high crime rates tended to result in lower rents. However, RentHop found that the relationship between crime and apartment rents was more nuanced than that simple reading.

In short, certain crimes matter more than others. RentHop found that the crime that had the biggest impact on rents was burglary, followed by robbery. Next came motor vehicle theft, larceny theft (this generally means the non-violet theft of possessions other than a vehicle), murder, arson, aggravated assult and rape.

To demonstrate the power that some crimes have on rents, RentHop compiled a chart listing the correlation of these crimes with rental prices. The closer the numerical correlation a crime has to -1, the stronger its relationship to lower rents. Burglary, topping the list, had a correlation of -0.84. Robbery had one of -0.79, while motor vehicle theft had one of -0.76. Aggravated assualt, near the bottom of RentHop’s list, had a correlation of just -0.49.

RentHop looked at the crime rates in several major cities across the United States, cities that are important markets for the company. It found that Atlanta ranked first among these cities in crimes per capita, with Houston coming in second, Miami third, Dallas-Fort Worth fourth and Chicago — the only Midwest city on the list — fifth. Philadelphia came in sixth, with Los Angeles seventh and New York City eighth.

How did these cities rank when it came to apartment rents? New York City, not surprisingly, topped the list as the city boasting the highest monthly multifamily rents. Los Angeles came in second, while Atlanta and Houston, with their higher crimes per capita, brought up the bottom in rental ratees. Chicago came in fourth on RentHop’s list of rental rates, behind New York City, Los Angeles and Miami, and ahead of Dallas-Fort Worth, Philadelphia, Atlanta and Houston.

It’s little surprise that, in general, neighborhoods with more crime do tend to have lower rents. It’s important to note, though, that some neighborhoods with higher crime rates might still have higher apartment rents. That happens when an area’s amenities — its restaurants, parks, public transportation options, shops and night life — outweigh the higher crime rates.

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Spec industrial boom hits Des Moines

by Dan Rafter

The industrial sector remains a hot one, as a new spec project in Iowa shows.

The Opus Group is planning a 200,700-square-foot speculative industrial development in Ankeny, Iowa. This particular building will mark the second phase at the Corporate Woods Industrial Park, a 50-acre master-planned development.

As in most other Midwest markets, demand for industrial space in the Des Moines market — Ankeny is about 13 miles from Des Moines — is strong. This is evident in the strong performance so far of the Corporate Woods development.

Opus reports that the development is already home to a fully leased 208,000-square-foot industrial warehouse. It also has additional space for a third facility of up to 200,000 square feet.

“Corporate Woods has proven to be a great home base for industrial tenants both for the flexibility of the space and its location in the heart of Iowa with quick access to two major interstates,” said Jason Conway, director of real estate development for Opus Development Company, in a written statement.

“Building on the success and quick leasing of the first building in the park, the second development has similar features with an added benefit of providing more space for outside storage or trailer parking,” Conway said.

The new warehouse will offer 32-foot clear height, one drive-in door, up to 54 dock doors, ESFR sprinkler systems, 121 parking spaces and the ability to accommodate up to 58,000 square feet of outdoor storage or additional auto or trailer parking.

Construction on the new development began in June. Opus predicts a completion date of May of 2018.

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Build-to-Suit 2.0: Not your grandfather’s office building (Or timeline)

By Steve Wright, Wright Heerema Architects and Tim Sweeney, Quadrangle Development Company

Has your office space begun to feel like an old iPhone—you’d love to upgrade, but the infrastructure just isn’t there?  You’re not alone. Many companies today are finding that existing office buildings – even relatively new ones built in the ‘90s or early 2000s – just don’t cut it for their needs. The good news: build-to-suit options are more relevant than ever, and faster to implement. So for that CEO ‘cultural change’ mandate—there’s a solution, and it’s not too far out.

Office design that supports C-Suite goals is more than just open-plan layouts and Millennial-friendly amenities. In fact, the building’s shell, its infrastructure and even its parking options can deeply impact key goals, such as fostering a new culture or attracting and keeping employees. To achieve the desired goals, a build-to-suit may be necessary.

Competition for large Class-A office tenants is forcing an evolution of the build-to-suit process. Recognizing the design needs and time constraints of companies today, some developers are teeing up projects to a much greater extent before a tenant is even identified. They’re selecting development team members, including the architect, civil engineer and contractor, and taking the building shell and site designs almost to completion. With these components in place, it’s possible to seek and receive many of the time-consuming governmental approvals.

The result is a product that still allows significant flexibility to ensure that the tenant’s objectives are addressed and incorporated, but that can be delivered in as little as 18 months from commitment. In some markets where tenants are finding limited availability of large contiguous Class-A spaces and realizing the significant improvements required for existing spaces, many times the office build-to-suit can be delivered for a competitive cost without a significant time premium.

A few scenarios where a new office building can make a difference include:

Footprint Shape

The shape of a building isn’t just for aesthetics – it provides the shell in which the workplace inside must operate. As such it can add – or detract – from a building’s ability to serve its tenants. Many companies are finding the footprint of the building itself can drastically change the space inside. For example, in a recent Northshore build-to-suit, a financial services firm found that by widening an office building by one-and-a-half feet, they could fit 25 percent more workstations inside. Some suburban law firms, too, are beginning to prefer wider buildings, but for a different reason. Offices filled with natural light are a prime perk for employees, and buildings with taller windows can maximize the natural light. 

Building for Natural Light

Open office floor plans have become ubiquitous; bench seating and open-air layouts are not just for tech companies anymore. What’s not always obvious is how essential the architecture of the base building itself is to enabling these interior layouts.

Make no mistake—redevelopment can go a long way toward modernizing older buildings. We can knock down walls to create expansive work areas. Amenities such as high-tech conference facilities and fitness centers can take over a floor once occupied by cubicles. But you cannot increase ceiling heights, expand the window line or add parking spaces. The fact remains that buildings erected 15 to 20 years ago were not designed to support modern office design or the higher population densities of many corporate offices, and many times don’t offer the natural light or building systems (HVAC, power and plumbing) that support a higher employee population.

Systems Designed for Density

The structure of a building can make or break a tenant’s shift to a more efficient floor plan. Sitting closer to your coworkers can feel more bearable if you have an extra foot or two over your head thanks to taller, 10-foot ceilings. Larger windows can let in more natural light, making the space feel bright and airy.

And when more humans share a space, there’s more required from the building’s HVAC system, too. That’s why what’s above the ceiling matters just as much as the spaces below. Mechanical systems need to be able to keep up with the extra demand for electricity and cooling that comes with having more bodies, laptops and phone chargers in a space. And all those people coming to your office need a place to park, particularly in suburban markets.

Would your firm benefit from a build-to-suit?

In the quest to design offices that are uniquely suited to a particular company culture and working style, many executives are asking whether it makes sense to custom design their next office to suit their special requirements. But not every company wants to take on the risk or effort of buying and developing land themselves.

Build-to-suit projects offer an alternative, a happy middle ground between owner-occupied and spec buildings. They’re often the option of choice for office tenants with exotic needs, such as laboratories, special auditoriums and test kitchens. But ordinary office tenants can also benefit from having the ability to influence building design before shovels hit the ground, particularly when they care about features that maximize workplace efficiency.

Some new developments are taking these attributes into account. Eight Parkway North, a five story, 200,000-square-foot build-to-suit office project in Deerfield, Illinois, will have 12- and 10-foot ceilings with floor-to-ceiling glass and high parking ratios, with the expectation that the future tenant will desire a high-density workspace. The project can be delivered in 18 months from commitment. The site also features dual power feeds from two substations, offering redundancy for businesses who want to ensure continuity of their operations in a power outage.

Build-to-suit projects also allow the opportunity to add special features that go above and beyond typical tenant improvements in a spec building. Tenants sometimes request staircases between floors to create a greater sense of connectivity, or an atrium that serves as a bright common space for employees to gather and build community. Many corporations today are also building full-service dining facilities, often with healthy food options, to help encourage employees to stay on site and socialize. These facilities require more out of the building than a small deli, such as special exhaust and mechanical systems, as well as practical ways to bring trash and inventory in and out of the building.

Making your next move a lasting one

Build-to-suit developments can often be the best option for companies who cannot find the large contiguous space in the right market with the attributes they want. This problem is being strongly felt in some Chicago submarkets, such as on the Northshore where the majority of buildings are 20 years or older. Even in downtown Chicago, where several new speculative office towers just opened, the properties are new—but the customization must fall within the footprint of the recently-delivered towers.

A successful build-to-suit results in a building that has lasting value for the developer, and meets the unique requirements of the tenant. It’s essential to have architecture and corporate interior design partners on both sides of the deal who can work together to make sure the tenant gets what it needs out of the space without sacrificing long-term value for the developer.  You may be able to do wonders with an existing building—or you may be surprised at the value a build-to-suit can bring to your bottom line.

The decision to move offices is never taken lightly—whether a company has outgrown its space or needs a more modern workspace to help attract and retain valued talent. The new office needs to be one that will accommodate the needs of today’s desired corporate culture and employee needs—but also the needs of building inhabitants for many years to come.

Steve Wright is a principal with Chicago architecture firm Wright Heerema Architects. Tim Sweeney is a principal with Quadrangle Development Company, based in Deerfield, Illinois.

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Store closures not the best measure of retail’s health

by Dan Rafter

The retail market is changing, but this doesn’t mean that physical stores are becoming extinct. Those predicting doom for physical retail? They might be looking at the wrong metrics, says a retail specialist with Colliers International.

The number of store closures isn’t the most accurate indicator of the health of brick-and-mortar retail, said Anjee Solanki, national director of retail services for Colliers International. Solanki says that many closures are the result of decisions that retailers are making to adjust to the changing shopping habits of consumers.

These closures, then, shouldn’t be viewed as disastrous for physical retail, but rather as sound business decisions.

“If we look back at the number of stores that retailers operated back in the 1990s, we see that retailers were more aggressive back then,” Solanki said, in a phone interview.  “Retailers needed more stores and more locations to get their brand in front of consumers. Retailers were looking at various models, opening locations outside of malls, inside malls, as storefronts. The goal was often to have as many locations as possible, to operate like Starbucks operates today. That, though, is changing.”

Today, retailers are paring the number of physical stores they operate. The most successful are then combining their physical locations with busy online portals.

“Retailers are getting more sophisticated,” Solanki said. “They have more tech tools at their disposal. They have learned the lessons on how to be more efficient. They know more about how many stores they should have and how large those stores should be. They have done more analysis on how they should stock those stores from a point of view of what items are selling. Retailers are simply much more efficient today.”

Solanki said that retailers need to pay more attention to their physical spaces if they hope to keep the shoppers coming. She said that a recent retail report from Colliers International found that too many retail spaces are cluttered, with merchandise that is difficult to find.

“I travel quite a bit,” Solanki said. “When I am in other markets, both domestically and internationally, I gravitate to stores where I am seeing a vignette of a story that is being developed, a story that pulls me in.”

Solanki said that clothing retailer Anthropologie is one that does a good job of creating ambience.

“It’s about creating a mood, a feeling,” Solanki said. “There is more here than just the merchandise itself. It creates inspiration for customers. You might go into a furniture store and say, ‘I never knew I could create a living room that looks like this.’ Or you might enter a clothing store and say, ‘I didn’t know I could pair clothing in that way.'”

Solanki points to retailers whose employees are clad head to toe in that retailer’s clothing in fashionable way. Solanki said that she once walked into a clothing store to encounter an employee wearing a blouse from the store’s inventory along with a pair of shoes that caught her eye. Solanki asked the employee if the store sold those shoes.

The store didn’t; they instead belonged to the employee. But the fashion combination did inspire Solanki to start a conversation with the employee. And that employee directed her to similar shoes offered by the retailer.

“That is important for retailers, creating stores that are exciting,” Solanki said.

Reworking struggling malls

Even the largest of malls can succeed today, according to a new report from Transwestern. The report, “Why Mall Reuse is Just Beginning,” looks at the ways in which owners and cities are repurposing struggling regional malls for other commercial uses.

“The assumptions that all purchases are moving online, all retailers are going bankrupt and all Millennials reject the suburban mall and the lifestyle it represents are grossly exaggerated,” said Brian Landes, the report’s author and director of GIS/location intelligence for Transwestern. “Furthermore, we’ve seen that when malls are reconsidered and repurposed for other uses, their value may far exceed their use as conventional retail space.”

The Transwestern report says that regional malls have had positive net absorption since 2010, with the only blip in absorption occuring in 2009, the height of the Great Recession. In 2016, the report says, the U.S. retail market experienced 105 million square feet of net absorption, representing an occupancy growth of nearly 1 percent.

Transwestern reported, too, that mall productivity has remained steady and rose 0.7 percent last year to $465 a square foot.

“While we’ve seen store closures increase in 2017, for the most part, malls are attracting new tenants through strategic marketing and property enhancements,” said Nick Hernandez, managing director of retail for Transwestern. “And in cases where a retail mall no longer makes sense, we have seen many owners successfully adapt to the changes in their trade areas by repurposing the mall for another use.”

Transwestern’s report says that regional malls are today attracting office, medical and community users as replacements for typical retail tenants.

Other owners are redevelopment their malls’ parking lots into multifamily projects, office buildings and hotels, Transwestern says.

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Foreign investors still spending big on U.S. industrial real estate

by Dan Rafter

Industrial real estate continues to attract the dollars of foreign investors, according to the latest research by Avison Young.

Avison Young reported that foreign investors purchased $4.3 billion of corporate distribution, warehouse and related-space between the first quarter of 2016 and the first quarter of this year.

Which countries are buying the most U.S. industrial real estate? Canada topped the list for the first quarter of this year, with Avison Young reporting that investors from here purchased $831.1 million worth of industrial real estate during the quarter. China came in second, with investors purchasing $284.9 million of industrial assets in the first quarter of the year.

Avison Young says that the U.S. industrial sector has been on a strong run of foreign investment since 2008. In 2016, the total foreign investment in U.S. industrial assets was $3.5 billion.

“With the strength of the U.S. supply chain and continued growth in e-commerce, the industrial asset class should continue to attract investors looking for stable, long-term returns,” said Erik Foster, a principal with Avison Young and practice leader of the U.S. national industrial capital markets group.

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