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Skyscrapers Give Way to Sheds as Covid Changes UK Real Estate

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(Bloomberg) — On a building site about 20 miles east of London, workers are busy putting up the largest warehouse in Europe. Just leased to Amazon.com Inc., it can’t go up fast enough.

When it’s done next summer, the four-story “mega-box” will encompass 2.3 million square feet, the size of 40 American football fields. Developer Tritax Big Box REIT Plc had plenty of interest from retailers in the site on the River Thames, but when Amazon came knocking, the rest were pushed aside.

A development on this scale during the U.K.’s first recession since 2009 highlights how the growth of e-commerce has helped make warehouses one of the hottest assets in real estate. Demand for these properties hit a record in the second quarter as online shopping spiked during lockdown. The value of the rent they’re bringing in is surging at more than twice the rate of offices.

“The pandemic has accelerated the shift in consumer habits to online, which means online retailers’ demand for warehouse space in the U.K. is increasing at unprecedented levels,” said Jonathan Compton, senior director for U.K. industrial and logistics intelligence at broker CBRE Group Inc. “This sector is undoubtedly a key area of growth for real estate investment.”

The U.K. has led the e-commerce boom in Europe, and warehouse builders and operators have reaped the benefit. Landlord Segro Plc has seen its shares soar over the past five years; it’s now worth about 11.5 billion pounds ($15.2 billion), making it the country’s most valuable listed property firm. The market has also attracted global giants including Blackstone Group Inc. and Prologis Inc., which runs a logistics park next door to the Tritax site in Dartford.

By contrast, the rise of online shopping has battered traditional retailers and their landlords, most dramatically in the case of Intu Properties Plc. The owner of nine of the U.K’s top 20 shopping centers collapsed into administration in June after failing to reach a deal with its creditors. Other firms are also struggling, such as Hammerson Plc, which is raising money to help it through the pandemic.

Covid-19 threw this trend into overdrive. Internet sales accounted for 20% of all retail purchases in February, before the U.K. government shut down much of the economy to slow the outbreak, according to Office for National Statistics data. In June, the number was 31.8%, with average weekly sales of 2.5 billion pounds.

Driven by this internet shopping spree, the demand for warehouses climbed to a record 12.8 million square feet in the three months through June, with online retailers taking up nearly half of that space, according to CBRE. Amazon alone accounted for 36% of the market in so-called big-box facilities in the first half of this year, according to Savills Plc.

”We’re seeing a massive change in the way people perceive logistics. Twenty years ago, it was the ugly duckling,” said Andrew Parsons, who manages over $3 billion in assets at the Nedgroup Investments Global Property Fund. Now, warehouses are “prime pieces of real estate with massive amounts of capital being put to work. It’s remarkable the reordering of the real estate pecking order.”

The growth in demand is being fueled not only by online retailers, but also by traditional merchants ramping up their internet businesses to adapt to the post-Covid economy. John Lewis Partnership Plc, which is closing department stores and cutting jobs, has said it expects online sales to account for 60% of total trade, up from 40% before the coronavirus.

“Whether it’s for PPE, virus-testing kits or everyday essentials, some supply chains were found wanting during the pandemic, and we are seeing a renewed focus on this by governments and businesses alike,” Segro Chief Executive Officer David Sleath said in an emailed response to questions. The result will be more production in the U.K. and more inventory held locally to prevent disruptions.

“Brexit and global trade wars will only add to these pressures, and that means more warehousing demand in the future,” Sleath said.

With the U.K. mired in a recession, the government trying to prevent a second wave of infections and the looming possibility of a no-deal Brexit further damaging the economy, the outlook for real estate is uncertain. Yet firms in the logistics sector are betting that the changes that have reshaped consumer spending during the pandemic will become permanent.

While internet spending will probably come down slightly from its lockdown highs as brick and mortar shops reopen, it’s still expected to remain at about 28% of total retail sales, according to Len Rosso, head of industrial and logistics at Colliers International Group Inc.

For every 1 billion pounds spent online each year, another 950,000 square feet of warehouse will be needed, CBRE estimates. But the supply of warehouses is tight, especially so-called last-mile facilities located on the fringes of towns and cities. This is an area where U.K. firms are competing with Blackstone. It started a company last year called Mileway, which is the largest last-mile logistics real estate company in Europe, according to its website.

Rent Premium

Urban warehouses are “a huge area where we obviously need a lot more capacity,” according to Bloomberg Intelligence analyst Sue Munden. “Demand there is still very strong, and I think rents will continue pushing up.”

For Tritax, this means Amazon will pay a rent premium for its Dartford warehouse, which is located inside London’s M25 ring road, said Bjorn Hobart, a partner at the developer. With this one deal, Tritax locked in the profit expected from the entire site, which has planning permission for another 450,000 square-foot shed and space left over.

A representative of Amazon declined to comment on the deal.

The site’s location and the demand for warehouses also afford Tritax a luxury that few U.K. landlords have these days: the ability to be choosy about its next tenant. The developer has turned down “many offers” for the smaller plot in Dartford, and is holding out for “high-quality” tenants.

“We feel we can achieve better,” said Hobart.

Source: – BNN

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This Week’s Top Stories: Canadian Real Estate Prices Forecasted To Fall, As Households Make Fewer Payments – Better Dwelling

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Time for your cheat sheet on this week’s most important stories. 

Canadian Real Estate 

Moody’s Doubles Down On Forecast Of Canadian Real Estate Prices Falling Soon

One of the world’s largest credit rating agencies confirmed an early forecast of falling home prices in Canada. Moody’s had expected government measures would delay any impact to home prices. The firm believes this is still true, and even elaborated on which markets will be hit. They expect enthusiasm over stimulus measures will begin to wear thin. At this point, the reality of a damaged labour market, and how meaningful improvements have been will start to hit sellers. This is expected to be stronger in some markets, like Toronto, than other markets – like Vancouver. 

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Canadian Condo Prices Peaked In April, Only Three Major Markets Now At Peak

Despite booming Canadian real estate sales, condo apartment prices have now fallen from their peak price. The aggregate benchmark reached $478,700 in August, up 6.45% from last year. This number is down 0.15% from the all time record reached in April. As you might expect, not everywhere is falling. Three markets have printed new all-time highs as of August. The rest however, have fallen – and some markets haven’t seen an all-time high in over half a decade.

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CMHC: Nearly Half Of Canadian Real Estate Markets Have “Moderate” Vulnerability

Canada’s national housing agency, and state-owned insurer, sees a lot of risk in real estate markets. Seven markets are now flagged as having “moderate” levels of vulnerability, up from five in the spring. Toronto and Vancouver remain in the moderate category, while Montreal continues to be considered low risk. The organization did say things appear better than the reality, due to disposable income temporarily being inflated by government support. Once disposable income falls back to non-supported levels, overvaluation metrics should rise once again.

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Canada’s Largest Real Estate Markets See Permanent Resident Declines Accelerate

Canada’s biggest real estate markets are seeing one of their fundamental drivers continue to deteriorate – immigration. Toronto only saw 4,450 permanent residents arrive in July, down 64.0% from last year. Vancouver  saw 1,300 people, down 71.1% from last year. Montreal fell to 2,110, down 47.2% from last year. Toronto and Vancouver have seen the declines become larger from the month before. Montreal bucked the trend by seeing a smaller decline, but has also seen a much longer trend that goes back before the pandemic.

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Canadian Mortgage Debt Is Soaring, But Payments Fall Over $4 Billion

Canadian mortgage debt is swelling, but households are making a lot fewer payments. The amount paid towards mortgages hit $90.27 billion in Q2 2020, down 3.32% lower than last year. Almost all of this is due to paying off less interest. Breaking the numbers down, we see payments towards principal are on the decline, while payments towards interest are actually rising. 

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Office real estate market will get back to pre-Covid level, in 2025: Cushman & Wakefield – CNBC

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The coronavirus remote work experiment will become a permanent trend, but at some point, employees will return to the office in numbers that match the past. When? It could take five years, according to a new forecast from Cushman & Wakefield.

Global office vacancies will not return to their pre-Covid peak levels until 2025 and, in all, a net 215 million square feet of office vacancy will have been lost due to the pandemic, according to the outlook from one of the largest real estate services firms in the world. Between Q2 2020, when Covid-19 hit the U.S., and Q3 2021, the net negative office square feet damage will reach 95 million square feet, roughly 10 million square feet more than the financial crisis trough.  

The situation will be the worst in the West. During the financial crisis, Canada, Europe and the U.S. recorded a combined loss of 120.5 million of square feet occupancy from peak-to-trough. Including Q2 2020, that will reach over 200 million square feet of “negative absorption” peak-to-trough in the Covid recession, according to Cushman & Wakefield’s analysis.

Work from home is ‘very real’

“We know this work from home trend is very real,” Kevin Thorpe, the firm’s chief economist, recently told CNBC.

For the study, Cushman & Wakefield surveyed some of largest companies around the world about the future of the office, and attempted to measure both the cyclical impacts of the Covid recession and structural impacts assuming a higher increase in work from home. 

Thorpe said two key findings emerged. First, office leasing fundamentals will be significantly impacted and vacancies reach an all-time high. But the second find is more encouraging: the office real estate market will fully recover, according to Cushman & Wakefield, largely due to employment growth and the ongoing shift in the U.S. economy’s concentration in certain types of professional jobs. 

Vacancies caused by Covid-19 will result in over 200 million of net negative square footage in the office real estate market, but the growth of professional services sector jobs will help lead to a recovery over five years, says Cushman & Wakefield.
Thomas Barwick | Getty Images

In all, the real estate firm estimates that 82% of the damage will be related to cyclical factors: permanent office job losses and the rise of coworking, while 18% is related to structural factors: primarily assumptions about permanent remote workers and hybrid workers — those who work remotely some of the time.

Work from home will double, and hybrid workers will increase. The study estimates that the share of people working permanently from home in the U.S. and Europe will increase from roughly 5-6% pre-Covid-19 to between 10% and 11% post-Covid, while the share of hybrid — also referred to as agile workers — will increase from between 32% to 36% to just under half of all workers.

Levi Strauss & Co. CFO Harmit Singh recently told a CNBC @Work virtual event that it pulled the plug on any new commercial real estate during the crisis. “The myth that work from home is not productive has been busted,” the Levi Strauss CFO said. “I believe we will settle into a culture where working from anywhere will be the new norm, with work from home or office or a hybrid arrangement.”

Google recently announced it will try a hybrid model of work as most of its employees do not want to be in the office every day.

Many younger workers are taking advantage of the Covid remote working shift to travel, embracing a “digital nomadic” lifestyle, a shift which could become permanent for a new generation of labor.

Over time, as economy shifts to a knowledge-based, professional services economy, it will offset the flexible workforce trend, Cushman & Wakefield’s study concludes. “But in the near-term, there will be significant challenges for the office sector,” Thorpe said. 

Many workers still do not feel safe enough to return to office. One study found that only 14% of workers said that they trust their CEOs and senior managers to safely lead them back to work. 

Global office vacancy will rise from 10.9% pre-Covid crisis to 15.6% by Q2 2022, the study forecasts.

Some of the largest companies in the world have been expanding office space in major cities, such as New York, during the crisis.

Facebook, which has been acquiring New York real estate for years, agreed last month to a major lease at the old James A. Farley post office building in Manhattan. Amazon has also purchased the Lord & Taylor building on 5th Avenue, and that is even though Facebook CEO Mark Zuckerberg has said as much as half of the company’s workers may be remote in the future. In March, just as the Covid crisis hit the U.S., Amazon paid over $1 billion to acquire tha Lord & Taylor building in New York, which includes over 600,000 square feet of space.

A new analysis from Cushman & Wakefield estimates that work from home will double across the globe in the next five years with the largest share in the West.
Cushman & Wakefield Research “Global Office Impact Study and Recovery Timing”

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Appraisal data shows scale of value destruction in US real estate – Financial Times

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Commercial properties hit by the economic effects of coronavirus could have lost as much as one-quarter of their value or more, laying bare the scale of the damage being wrought across American malls, hotels and other commercial buildings.

Evidence emerging in the commercial mortgage-backed securities (CMBS) market from recent appraisals also raises questions over the value of the collateral backing commercial mortgages throughout the financial system.

Properties that have gotten into trouble are being written down by 27 per cent on average, data from Wells Fargo shows. New appraisals are triggered when a commercial property owner starts to have trouble paying the mortgage, and the loan is handed to a “special servicer” that could eventually seize the property on behalf of CMBS holders.

“It’s a big number,” said Lea Overby, an analyst at Wells Fargo. “This is material.”

Recent examples show hotels being especially hard hit, given the collapse in tourism and business travel. A Crowne Plaza hotel in Houston was valued at $25.9m this month, down 46 per cent from when it was bundled into a CMBS deal in 2014. The hotel, which sits just off the Katy Freeway has not paid its mortgage since March and was transferred to the special servicer in May. 

The Holiday Inn La Mirada, about 20 minutes drive from the centre of Los Angeles, was recently valued at $22.1m, down 27 per cent since it was securitised in 2015, having not paid its mortgage since April. Another Holiday Inn in Columbia, Tennessee, had its appraised value cut by 37 per cent this month to $7.7m.

“The numbers themselves are atrocious,” said Gunter Seeger, a fixed income portfolio manager at PineBridge Investments. “A 30 per cent markdown in appraisals pretty much across the board is horrific.”

The number of new appraisals is accelerating. The Wells Fargo analysis covers 116 struggling properties bundled into CMBS that have had new appraisals since April 1 — 68 of them this month.

Of the total, 75 of the mortgages were backed by hotels while 26 were retail properties, whose tenants have been struggling under lockdown-enforced closures and economic weakness.

Banks have been raising provisions to cover potential real estate losses this year, and the number of commercial real estate loans in US bank portfolios that were flagged as being potentially problematic spiked in the second quarter.

Meanwhile, CMBS investors have been keeping an eagle eye on appraisal values to gauge their risk of losses. Over the past four years, the average loan-to-value ratio on mortgages bundled into CMBS has been below 60 per cent, giving investors a sizeable cushion, even if a property has to be seized and sold for the loan to be repaid.

Coronavirus has substantially eroded that cushion, however, and loan-to-value ratio in the average multi-property CMBS is now almost 90 per cent.

“The longer this crisis goes on, we will move into a valuation problem,” said James Shevlin, president of special servicer CW Capital. “It absolutely concerns us but right now I still think we are covered.” 

New appraisals are an early step taken by special servicers and help them assess how much time to offer borrowers to resolve their difficulties before they start foreclosure proceedings.

Special servicers and analysts said that it can be challenging to accurately appraise a property in the current environment. The potential sale value over the next few months could be heavily affected by another uptick in coronavirus cases, more stringent rules governing travel and people’s ability to go outside, or even a volatile presidential election. Equally, property values could appreciate if the economic recovery gathers speed. 

“It’s someone’s best estimate of value,” said Alan Todd, an analyst at Bank of America. “Right now there is so much uncertainty. There could be a very high margin of error.”

Additional reporting by Robert Armstrong

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