Good morning. In today’s email: The nation’s largest mall landlord partners with Leap to bring digital brands to brick-and-mortar locations. Institutional investors expect buying opportunities in real estate despite uncertain times. Newark Liberty International Airport is (finally) replacing its overcrowded, 49-year-old Terminal A. Meanwhile, delayed payments for wages and invoices are projected to represent an estimated $208 billion in excess costs to the construction industry this year.

📚 Learning corner: One of the most important questions that real estate investors sometimes forget to ask themselves is, “What is my long-term, exit strategy?”. Today we explore how 721 Exchanges can be used as an exit strategy, especially for Delaware Statutory Trust 1031 Exchanges.

RESURRECTING RETAIL

Simon Property Group, the nation’s largest mall landlord, is doubling down on its brick-and-mortar retail strategy. The REIT has partnered with Leap, a startup that helps digital-native brands launch physical spaces.

Taking the Leap: Leap, as it describes itself, is building the largest network of retail brands powered by data, technology and scale. Together, the tag-team has one goal: “to help introduce growing brands to the value of brick-and-mortar retail.”

Don’t reinvent the wheel: If this sounds familiar… it is. Simon has a history of working with its retailers, not only as a landlord but also by investing in them (Aeropostale, JCPenney, etc.). To kick off its strategic partnership with Leap, Simon is testing its strategy in four locations in California and Florida with a handful of apparel retailers.

THE TAKEAWAY

Anticipating a trend: The CEO of Goodlife, a brand working with Leap, remarked, “our retail expansion wouldn’t be possible without the Leap platform.” As digitally-native brands (think Warby Parker, Allbirds) wake up to the value of brick-and-mortar, it’s in Simon’s best interest to foster relationships with up-and-coming brands. By playing nice, it may even garner a first-mover advantage in showcasing interesting brands in its malls.

DRYER POWDER

Investors Salivate Over Uncertainty: CRE Allocations Rise as Confidence Falls

The last decade was a golden era for real estate investors. Despite the first decline in confidence in 5 years, institutions are continuing to increase target allocations to real estate.

Proceed with caution: The Hodes Weill & Associates survey conviction index measures the institutional view of real estate as a risk-adjusted investment opportunity. The index dropped from its ten-year high of 6.5 in 2021 to 6.0 in 2022, reflecting a “cautious view” of the market.

Pump the brakes: The survey notes that “decreased conviction coupled with portfolio overallocation has resulted in a slowdown of deployment pacing.” However, institutions plan to increase allocations by 30 bps to 11.1% next year, the largest year-over-year increase in nearly a decade.

THE TAKEAWAY

Uncertain times: Witnessing firsthand the distress caused by current market volatility, investors are positioning themselves to capitalize when conditions settle. Institutions are expecting attractive buying opportunities to emerge over the next two years. The asset class’s outperforming track record will continue to attract capital inflows.

TERMINAL UPGRADE

Out With the Old, in With the Newark

“Newark Airport” and “stunning” don’t usually go together in the same sentence. But on December 8th, an art-filled building showcasing local businesses will replace the overcrowded, old Terminal A at Newark Liberty International Airport.

Major investment: At $2.7 billion, the new facility represents the largest single investment in New Jersey by the Port Authority in the agency’s 101-year history. The terminal has been in the works since 2018, and it ushers in a new era for the airport that’s historically been ranked one of the worst in the country.

Visionaries: The Port Authority is developing a “vision plan” for Newark Airport to alleviate passenger and cargo traffic. As part of its plan, the Port Authority will install a new AirTrain around the airport with connectivity to the new terminal. This replacement is anticipated to cost another $2.0 billion.

THE TAKEAWAY

Still reeling: On top of the $2.7 billion spent to upgrade Terminal A, the pandemic dealt another blow to the Port Authority: $3 billion in lost revenue from tolls and rent collections. Passenger traffic at the Authority’s major airports, EWR, LGA, and JFK, has only recovered to 90% of pre-pandemic levels. Needless to say, the agency is hoping efficiencies from its vision plan will help compensate for lost revenue and change the airport’s reputation.

INFLATION NATION

Inflation is Wreaking Havoc on the Construction Industry Resulting in a $208B Headache

Delayed payments for wages and invoices are projected to represent an estimated $208 billion in excess costs to the construction industry this year.

Speed of payments: Rabbet, a construction finance software provider, surveyed general contractors and subcontractors about the speed of payments in the industry. The survey revealed that the US Construction industry is experiencing delayed payments for wages and invoices of up to $208 billion this year, up 53% from 2021.

Higher costs: In 2022, 49% of subcontractors reported that they waited more than 30 days to receive payment from GCs. When contractors can’t pay subcontractors on time, it results in higher costs and longer delays. 37% indicated that they delayed or stopped work due to late payments to crew members.

Bidding war: Rising material costs and inflation are further exacerbating the issue. 53% of GCs reported that increased material costs prevented them from bidding on projects in 2022. Some GCs said they raised their bids by 5 to 10% to absorb unforeseen project costs.

THE TAKEAWAY

The bottom line: Timely, reliable payments become even more important in an inflationary environment. When GCs and subcontractors aren’t paid on time, the project risk spreads to developers and lenders. “The greatest opportunity to reduce project costs and […] retain the best contractors is by implementing systems to get people paid quickly,” says Rabbet CEO, Will Mitchell.

📰 Editors’ Picks

• The Golden Child: Industrial cap rates appear to be holding strong despite the recent rise in interest rates.

• Homebuyers are getting creative: As rates make housing less affordable, Americans are tapping into HELOCs to buy their dream homes.

• Malls are rethinking anchors: As department stores vacate, mall owners are experimenting with experiences for larger blocks of space.

• Slow your roll: Multi and single family rent growth has started to cool off, even in hot markets like Austin, Boston and Seattle.

• New flagship megastore: Starbucks unveils its one-of-a-kind megastore in the Empire State Building, featuring coffee workshops, tasting flights and cocktails.

• Trouble in paradise: Ex-Keller Williams CEO, John Davis, sues real estate legend, Gary Keller, for weaponized sexual misconduct allegations.

🤝 Deals & Dealmakers

• West Harbor LA Project breaks ground: The development will feature more than 150K SF of shopping, four acres of parks and an amphitheater for live entertainment.

• Did someone say office?: Six office properties in Northern San Diego trade for nearly $50 million, highlighting increased demand.

• Texas forever, Six: A JV between Equity Residential and Toll Brothers has broken ground on a 3-community development in DFW totaling 1,053 homes.

• Betting on amenities: Law firm Haynes and Boone just signed its third new office lease since 2020, adding to the list of companies growing their office footprints.

• 1,800 more EVs: Orange EV, a manufacturer of electric trucks, has agreed to lease a 400k SF facility being developed by NorthPoint in Kansas City.

• Long single-family homes: A JV between JLL and The Amherst Group plans to acquire up to $500 million in single-family rental homes in select markets over the next two years.

📈 CHART OF THE DAY

Large Cities Post the Biggest Declines, Led by San Francisco and Washington

💼 JOB BOARD

The CRE Daily Hiring Block

Looking for a new role? Or need to find top talent? The CRE Daily Hiring Block is a unique alliance of real estate professionals that connects talent and employers.

• Asset Manager (Red Ace Capital Management)

• Real Estate and Development Director (Slingshot Partners)

• Daily Writer (CRE Daily)

• Investment Associate (Greysteel)

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.