Lunch Break

Alec J. Pacella

During my school days, lunchtime was always an interesting experience. In addition to providing a nice break and opportunity to socialize, there was the actual main event – food. And with this came great variety, sometimes in a good way and other times in a bad way. I have similar thoughts when looking back at the commercial real estate investment market in 2022.

To see how our real estate market relates to school lunches, read on.

PIZZA

Nothing made me happier heading down the lunch line than seeing a huge sheet of pizza, cut into squares, of course. And nothing made investors happier last year than seeing a new, net leased industrial warehouse offering. This sector continued to be red hot, both on the leasing and the sale side. Occupancy was at an all-time high and increasing rental rates coupled with falling cap rates led to record activity and pricing. Facilities leased to Amazon led the pack and routinely traded at cap rates in the upper 4% range with pricing eclipsing the $300 per square foot (psf) mark. But even more routine deals were greeted with cap rates around 6% and pricing of $75 to $85 per square foot. These include the JB Hudco facility in Bedford ($83 psf at a 6.25% cap rate), the ID Images facility in Brunswick ($77 per square foot at a 5.8% cap rate) and the True Value facility in Westlake ($75 per square foot at a 6.75% cap rate).

CHICKEN NUGGETS WITH CRINKLE FRIES

Nuggets and fries along with some packets of BBQ sauce was a close second in my book, similar to investor interest in apartment properties being right on the heels of industrial warehouses. And while glitzy complexes such as the 401 Lofts in Akron made headlines with equally glitzy per unit pricing that exceeded the six-figure mark, it was the solid activity amongst the Class B product that carried this sector last year. Examples include Clifton Plaza Apartments in Cleveland (108 units sold for $57,000 per unit), Oak Hill Village in Willoughby (182 units sold for $77,000 per unit), State Hill Manor in Parma (110 units sold for $75,000 per unit) and 200 West in Fairview Park (173 units sold for $65,000 per unit).

SPAGETTI AND MEATBALLS

This lunch choice was always polarizing, with some loving a heaping platter of pasta while others hating it. It reminds me of the appetite for retail properties last year. A favorite type was well-located, smaller footprint centers occupied by credit tenants. Examples include Great Lakes Plaza, a 7,200-square-foot center occupied by Condoda Taco and Sleep Number, which traded for $5 million, and Parma Outlet Center, an 8,000-square- foot center anchored by Bank of America and Verizon, which sold for $1.8 million. Meanwhile, a clear unfavorite was tradi- tional, larger centers in mature locations. Examples include Stow Falls Center, a 95,000-square-foot center occupied by Planet Fitness and Litehouse Pools, which traded for $6.1 million, and Pheasants Run, a 30,000-square-foot center in North Olmsted, which sold for $1.7 million.

SLICED HAM WITH GREEN BEANS

When this showed up on the menu, most students opted to pack their lunch, which is similar to the activity in the office sector last year. When an office building showed up for sale, most investors headed in the opposite direction. The sector continues to struggle with weak fundamentals, including static occupancy, flat rent but rising expenses, all against a backdrop of uncertainty of the future of office space. As a result, pricing has languished. Examples of this softness include Westgate Plaza, a 92,500-square-foot building in Fairview Park that sold for $25 per square foot. Springside Place, a 97,000 square-foot property in Montrose that sold for $37 per square foot; the PDC Building, a 70,000 square-foot property in Beachwood that sold for $50 per square foot; and One Independence Place, a 100,000 square-foot building in Independence that sold for $50 per square foot.

ICE CREAM SANDWICHES

No matter how good or bad the lunch choices were, there was always a line when the ice cream freezer opened. This is very similar to investment activity in the single-tenant, net leased sector. Regardless of what may be going on in the broader real estate market, investors always seem to be able to make room for a good net leased offering. There were plenty of examples last year. A newly constructed Jiffy Lube in Avon traded for just over $700 per square foot, at a 7.2% cap rate. A Citizens Bank in Bainbridge sold for $1,400 per square foot, at a 5% cap rate. A Starbucks in Aurora sold for $1,100 per square foot, at a 5.75% cap rate. And a Wendy’s in Cleveland sold for $1,450 per square foot, at a 4.5% cap rate.

While the full effect [of the Fed rate hike] on the commercial real estate market isn’t readily apparent, the activity level clearly slowed over the last part of the year. More importantly, this sluggishness is anticipated to continue into the first part of 2023.

NEW MENU COMING

One of the most interesting days in the cafeteria was when the new menu for the upcoming month was posted on the bulletin board. Everyone would gather around to figure out what days they would packing their lunches and what days they would be buying them. Last year, the bulletin board was replaced by our phones or computers. But we weren’t looking for a menu but rather a news release on the results of the most recent Federal Reserve Board meeting. The Fed met eight times last year and raised the fund rate at seven of these meetings. As a result, the rate went from 0.75% to 4.5% and has obviously had a dramatic impact on the cost of borrowing. While the full effect on the commercial real estate market isn’t readily apparent, the activity level clearly slowed over the last part of the year. More importantly, this sluggishness is anticipated to continue into the first part of 2023.

But I’m starting to get into 5th period so for now, let’s just kick back and enjoy the rest of our lunch!

What I C @PVC

PAINTING A PRETTY PICTURE Last year ended with a bang when it was announced that Sherwin- Williams was entering into a sale/leaseback for the new 1 million-square-foot corporate headquarters. Benderson Realty Development is paying $210 million for a 90% interest in the property, which is currently under construction and scheduled to be completed in early 2025. –AP

For February 2023 Properties Magazine