According to Dodge Data & Analytics, commercial real estate construction will witness a “6% increase on top of the 12% gain estimated for 2016”. The report also indicates increases in construction activity in the single-family, institutional, and manufacturing plant markets ranging from 6%-9%. Conversely, Dodge Data estimates that the multi-family and utility plant construction markets will decrease by 2% and 29%, respectively.
Source: CoStar News
By: Mark Heschmeyer
Date Posted: December 20, 2016
Fred’s Inc. (NASDAQ: FRED) has signed an agreement with Walgreens Boots Alliance Inc. (NASDAQ: WBA) and Rite Aid Corp. (NYSE: RAD) to purchase 865 stores and certain assets related to store operations located across the eastern and western United States for $950 million in cash.
Closing of the transaction is expected to take several months after Walgreens Boots Alliance’s proposed acquisition of Rite Aid is completed. The deal is also subject to approval by the Federal Trade Commission as well as customary regulatory approvals and closing conditions.
The pending $17.2 billion merger between Walgreens and Rite Aid first proposed in the fall of last year has lingered while the FTC analyzed its competitive impact. This past October, Walgreens Boots Alliance and Rite Aid announced an extension of their end date for the merger agreement to Jan. 27, 2017.
Walgreens executives continue to signal their confidence in closing the merger and have always expected that they would have to sell from 500 to 1,000 stores to help seal federal approval.
Shareholder approval is not required.
The store divestiture to Fred’s Pharmacy, if approved, is targeted to close during the first half of 2017 and will position Fred’s as the third-largest drugstore chain in the U.S. and create a new national competitor. Memphis-based Fred’s Pharmacy currently operates 647 discount general merchandise stores and three specialty pharmacy-only locations in 15 states in the southeastern US.
In connection with this transaction, the company said it has received financing commitments from BofA Merrill Lynch and Regions Bank to fund the purchase price, transaction-related costs, ongoing business operations and anticipated capital investments.
“This will be a transformative event for Fred’s Pharmacy that will accelerate our health care growth strategy,” said Fred’s Pharmacy CEO Michael K. Bloom, “We have been working for several months on integration plans to ensure a seamless transition.”
Fred’s appointed Michael Bloom as its new CEO last summer. One of his first moves was to hire Chris McDonald as vice president for real estate. McDonald previously was senior category manager at CVS and has extensive real estate experience from her time at Chase Bank and Walgreens.
In aggregate, the 865 stores are generally representative of Rite Aid’s pre-divesture store performance with respect to both sales and EBITDA. Fred’s Pharmacy expects that the acquired stores would be accretive to earnings and generate substantial cash flow.
Fred’s Pharmacy said it expects to keep certain store and certain field and regional team members, contingent on consummation of the transaction. Post-acquisition, the company will operate the acquired stores and will retain the Rite Aid banner through a 24-month transition.
A.T. Kearney served as a strategic advisor to the CEO and board and provided financial and operational diligence related to the transaction.
Link to article: Walgreens Rite Aid Merger
Federal Reserve Chairwoman Janet Yellen indicated in November that a raise to the U.S. interest rate could be happening “relatively soon.” The “soon” came just a month later with the announcement by the Federal Reserve yesterday that the rate will increase by an initial 0.25%. However, as reported by the Wall Street Journal, the rate could increase by as much as 0.75% over “three quarter-point moves” in 2017.
Financial analysts are suggesting that the move to increase the rate is a signal by the Fed of its optimism about the strength of the economy and “pointed to a strengthening labor market nearing full employment and inflation moving more rapidly towards targeted levels,” according to the article. This latest increase by the Fed is only one of two in the last decade.
But what the increase to the interest mean for commercial real estate? According to Bisnow, rate hikes usually lead the way to “higher borrowing costs…impacting profitability and future acquisitions.” However, as the article points out, this particular increase was long in the making and investors, REITS and property owners have anticipated this increase and have planned/priced accordingly. Therefore, the impact of the first .25% jump “may not have as great an impact” on commercial real estate activities as the effect that “comes from long-term rates.”
Achaogen, an antibacterial drug developer, has found new digs at the Genesis tower in South San Francisco. According to the San Francisco Business Times, Achaogen leased 47,000+ square feet comprised of the “entire third floor and part of the fourth floor,” all while scoring a “$5.6 million” tenant improvement package.
Genesis-South San Francisco
The Genesis building, formerly known as “Centennial Towers”, has historically been marketed as high-end office space and has experienced long swaths of vacancies. But, given the high demand for biotech/lab space, Phase 3 Real Estate Partners coverted the building from office to research and development as reported by the San Francisco Business Times earlier this year.
Achaogen is expected to employ over 200 employees at the site with other biotech companies expected to join the tenant roster early next year, according to the article. Phase 3 also intends to complete a “neighboring 21-story tower” in 2018.
Merck has signed at 15-year 294,000+/- square foot lease in South San Francisco’s West Coast R&D Center, as reported by The San Francisco Business Times. Merck could take occupancy as early as 2019, and paid what is estimated to be $57+/- per square foot for the building, according to the article.
Aerial Overview of 213 E. Grand Ave: Future site of Merck’s 9-story R&D building
The South San Francisco’ location leased by Merck neighbors Rinat Neuroscience Corporation, Genentech, Alphabet Inc and Verily. AstraZeneca also
Vacancy Remains under 3%; Rents up 3.85%
The San Francisco industrial market ended Q3 2016 with vacancies increasing slightly to 2.8% from Q2 vacancies of 2.7%. Although the vacancy rate reflects a net negative absorption of 16,706 square feet, vacancies remain south of 3% . Reported rents for the same time period have increased by nearly 4%. Sublease vacancy also decreased modestly in Q3 2016 to 200,217 square feet from 173,183 square feet reported in Q2. Conversely, industrial sales activity is up in Q2 2016 with total sale revenues equalling $131,278,489, and averaging $215.42 per square foot, compared to $100,718,100 in revenue, and $204.17 average per square foot in Q1 2016. Year-over-year sales are lower than 2015, but investors are seeing higher CAP rates averaging 5.62% in 2016 compared to 4.47% during the first half of 2015.
San Francisco’s Industrial Bayshore Corridor Area
The San Francisco industrial leasing activity, as reported by CoStar, for Q3 2016 decreased slightly, however other firms, including Calco Commercial, have reported steady leasing activity with positive absorption rates. Calco Commercial leased several notable industrial properties in Q3 including: 2045 McKinnon Avenue (25,251+/- sf), 650 Potrero Avenue (21,650+/- sf) and 201 Toland (32,580+/- sf land). Calco Commercial leased 61,680+/- square feet in Q2 compared to 125,253+/- square feet in Q3. Due to the continued lack of quality product coupled with no new construction, and the redevelopment of industrial properties into other uses (i.e. residential & office) demand for industrial space persists. For these reasons, now is the time to consider leasing, subleasing, selling or re-positioning your asset.
Calco Commercial is a leading industrial & commercial real estate firm. We have completed more transactions in the industrial market than any other firm in San Francisco. We have decades of experience in Landlord /Owner representation, and repositioning assets into net leased properties with in-place income streams. Calco Commercial is a full service firm that can help make the most of your real estate properties and investments.
Click here to download the full report: Calco Q3 2016 Industrial Report
San Francisco CRE News:
California’s site-wide ballot measures could have reaching effects on the Bay Area
California voters will be facing a bevy of propositions this November ranging from legalizing recreational marijuana use to affordable housing measures. The San Francisco Chronicle has reported on a list of state-wide ballot initiatives that could potentially affect the real estate market and values in the Bay Area. Specifically, rent control measures Q & R in San Mateo and Burlingame, respectively, “could have a dramatic effect on the (Bay) area’s economy” by placing further restrictions on Property Owner rights and creating an “unaccountable” commission that would cost taxpayers “millions annually.”
Another tower to join the San Francisco skyline
The Transbay Terminal project boasts new transit connectivity, public parks, new retail, but is now also becoming a hub for new office tower development. BisNow reported on October 18, 2016, that a new “806 foot tall tower at 546 Howard Street” will join the ranks of the planned tower at 181 Freemont Street and the “Salesforce Tower.” The new tower at 546 Howard Street is slated to have ground floor retail, a 250-room hotel, condos and office space. According to the article, 546 Howard will be the “second tallest residential tower in the city.”
Transbay Terminal rendering showing the Howard Street site (transparent building) Registry
12,000 Jobs Coming to Silicon Valley
The Silicon Valley Business Journal, has reported the Beijing tech company LeEco, is slated to bring 12,000 jobs to the Bay Area. LeEco’s employees will operate from their “48-acre office complex in Santa Clara purchased from Yahoo earlier this year for $250 million.”
According to the tech firm’s website LeEco is “a leading global company born from the internet, (LeEco) seamlessly blends devices, content, applications and distribution in a first-of-it kind ecosystem.” LeEco believes in creating an “Eco Lifestyle” as referenced by its “vision to sell smartphones and TVS in the US bundled with easy subscriptions to its premium content.” LeEco was founded in 2004 by YT Jia.
The Federal Reserve Chairwoman Janet Yellen reported to the House Financial Services Committee earlier this week, and according to the Wall Street Journal, she stated that there is no “fixed timetable” for increasing interest rates. However, Chairwoman Yellen indicated that a hike is on the horizon if the job market continues to grow, spurring inflation gains.
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According to The Registry, Blackstone is in the process of acquiring approximately 12 million square feet of properties with a $1.5 Billion price tag. Most of the properties being purchases are located in California, with a focus on Bay Area industrial product.
SocketSite has reported that permits for the 410,000+ square foot, 11-story office campus have been filed by UBER. The modern glass structure, designed by SHoP Architects, is being developed by UBER and Alexandria Real Estate Equities.
The San Francisco Business Times also reported the UBER story, stating that construction will commence by the end of September and the project (which will be located next to the future home of the Warriors) is slated for completion in 2018.
An exterior rendering of the future Uber Headquarters in San Francisco’s Mission Bay (Photo courtesy SHoP Architects/Uber)
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