Georgetown Property Trades at Record Rate

McLean-based Capital One recently purchase the prime Georgetown property located at 3150 M NW for $50.2 million ($5,720/sf), according to Washington Business Journal. The sale of the 8,769sf retail building breaks the record for a non-redevelopment transaction in DC, according to the report (citing CoStar). Sagamore Development, the development arm of Under Armour founder Kevin Plank was the seller. Sangamore purchased the property in 2014 for $12.2 million and proceeded to renovate the building and create a new basement. The transaction included a ground lease for the adjacent property at 3146 M NW which was not included in the $50.2 million purchase consideration.

3150 M NW – Photo: PoPville

Cyclical Trends in Real Estate

Average U.S. commercial real estate prices fell by 40 percent between the 2007 peak and the trough in 2010, according to Alex Pollock of R Street. Since then, prices have rebounded and are now 22 percent above the 2007 peak in nominal terms (six percent higher than 2007 peak levels in inflation-adjusted terms). By comparison, inflation-adjusted prices in the housing market are at the 2004 level which was about two-thirds of the way to the 2007 peak.

Bank credit to the CRE industry has grown at over 7 percent per year in the last two years and is currently at $1.35 trillion – up $238 billion (21 percent) since the end of 2013.  On the residential side, growth in lending has been slower in part due to increased government regulation aimed at protecting homeowners from foreclosures and reforming capital markets in general. The result has been less liquidity in the housing sector and a lower rate of asset price inflation. Total residential mortgage loans were $2.45 trillion in 2012 and $2.41 trillion in the first quarter of this year with total mortgages outstanding (1-4 family) increasing only from $10.04 trillion to $10.33 trillion in the same period, according to the report.

CRE Prices (Nominal and Real) – Graph: R Street

Cap Rates Rise in the Net Lease Dollar Store Sector

The supply of single-tenant dollar store properties increased by 34 percent in Q2–2017 when compared to Q2–2016 with cap rates rising from 6.65 percent to 6.75 percent during this period, according to Commercial Property Executive. The significant increase in supply is attributed in part to new construction properties (properties up to 12 months old) which comprised more than 57 percent of the supply of net lease dollar stores in the second quarter of this year. Dollar store properties priced at a 52 basis point discount compared to the overall net lease retail market in the second quarter of this year.

Starbucks Shutters Teavana Stores

Starbucks will close all 379 Teavana stores citing underperformance, according to MarketWatch.  The coffee company purchased the primarily mall-based Teavana chain in 2012 for about $620 million. Starbucks will continue to sell Teavana-branded products in its stores and elsewhere, capturing a share of the $1.1 billion premium ready-to-drink bottled tea market. The company’s tea business has grown about 40 percent in the past five years. Starbucks has over 23,000 locations worldwide.

Teavana – Photo: Taubman Centers

L.A. Leads U.S. CRE Market in H1–2017

In the first half of this year, Los Angeles outpaced New York in commercial property sales, according to Dow Jones Newswires (citing data from Real Capital Analytics). Investment into Los Angeles property totaled $12.6 billion compared to $10.6 billion in Manhattan, which is typically the national leader in terms of volume. Nationwide, $209.4 billion in commercial property traded hands during the first half of 2017, a nine percent decline from the same period last year.

Amazon’s Market Dominance

Amazon is growing at 30 percent per year, according to Business Insider (citing analysis from Needham & Company). The online retailer’s market share is expected to grow from its current 34 percent to about 50 percent in 2020. Third-party selling makes up 49 percent of the company’s sales and is growing at a higher rate than first-party sales. Over 100,000 sellers do more than $100,000/year in business on Amazon, according to the report. Amazon also has the most popular e-commerce app with about 76 percent of consumers using the app compared to 33 percent for the Walmart app (the next most popular app).

Whole Foods Market, Amazon’s recent $13.7 billion acquisition reported total sales of $8.7 billion for the 28-week period ending April 9, 2017. Average weekly sales per store were $663,000 ($880/sf) which is one of the highest in the industry and net income was $194 million (2.2 percent of sales).

Mexico City Abolishes Minimum Parking Requirements

Mexico City has eliminated minimum parking requirements and will instead cap the number of parking spaces allowed in new developments, according to Streetsblog. The cap number will depend on the type and size of the building with some of the former minimum requirements now becoming the maximum number of spaces allowed. The new regulations require new developments to have space for bicycles and include a provision to assess a fee to developers who build more than 50 percent of the parking cap in the city center area. Mexico City has the second largest metro system in North America (after New York) with the ninth highest ridership in the world, according to Wikipedia. About 30 percent of city’s residents own cars. With a population of 21.2 million, Greater Mexico City is second-largest metropolitan area in the Western Hemisphere (after Metropolitan New York) and the largest Spanish-speaking city in the world.

Mexico City – Photo: Andres Balcazar/Getty Images

Retailers Increase Lobbying Activity

Retail sector lobbying expenditures increased by 31 percent in Q1–2017 compared with the same period last year, according to OpenSecrets.org. Better technology and the resulting shift in shopping culture has let to economic distress for the retail sector, especially for bricks-and-mortar retailers. Since January, over 50,000 retail jobs have been cut and in June Moody’s listed 22 U.S. retailers as being at risk of bankruptcy (rated Caa or lower). The border adjustment tax, proposed by the House Republican leadership, is causing particular angst among many retailers and is one of the reasons for the increase in lobbying expenditures. Target, which has so far spent over $1.3 million in lobbying, estimates that a border adjustment tax would increase its tax rate by 40 percent which would ultimately be passed on to consumers. Other reasons for the increased lobbying activity include the digital sales tax (the Marketplace Fairness Act bill) and general uncertainty surrounding the new administration.

West Coast Coffee Continues DC Invasion

Oakland-based Blue Bottle Coffee Company has opened its first DC location at 1046 Potomac Street NW in Georgetown. Founded in 2002 by James Freeman, the gourmet coffee chain also has stores in California, New York and Tokyo. In addition to the Georgetown location, Blue Bottle is planning to open in Union Market and at The Wharf complex in SW DC. The coffee shops typically don’t have WiFi or power outlets to encourage people to talk to each other.

San Francisco-based Peet’s Coffee is planning to open two new locations in NoMa and the Atlas District before the end of this year, according to Eater. The stores will be strategically located near grocery stores (in NoMa at 1275 First Street NE and in the Atlas District next to Whole Foods at 528 H Street NE), according to the report. Peet’s currently has 22 locations in the DC area. In the course of four years, Peet’s sales doubled from $400 million to about $800 million in 2016.

Blue Bottle headquarters in Oakland, California – Photo: Blue Bottle Coffee Company