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Q1 2017 Edition

Welcome, 2017!
Mark Doran

Cover Story:
What Comes Next?

Embracing Mobile Data
Brian Landes

Industrial Revolution
Steve Kozarits and Ed Mendence

Micro-Unit Multifamily
Ty Puckett and Josh Delk


Transwestern is a privately held real estate firm of collaborative entrepreneurs who deliver a higher level of personalized service – the Transwestern Experience. Specializing in Agency Leasing, Management, Tenant Advisory, Capital Markets, Research and Sustainability services, our fully integrated global enterprise adds value for investors, owners and occupiers of all commercial property types. We leverage market insights and operational expertise from members of the Transwestern family of companies specializing in development, real estate investment management and research. Based in Houston, Transwestern has 34 U.S. offices and assists clients through more than 180 offices in 37 countries as part of a strategic alliance with BNP Paribas Real Estate. Experience Extraordinary and @Transwestern.

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Welcome, 2017!

A Message from Mark Doran

For an organization with a bold vision for the future, the New Year brings a sense of excitement and anticipation. What opportunities will we explore? Where can Transwestern have the greatest impact on its team members, clients and communities? A perpetual drive for excellence bolstered by notable achievements in 2016 promise to make the coming year one of our most memorable yet.

Over the past months, we expanded our unique approach to client service – the Transwestern Experience – across all of our service lines. We reinforced our commitment to innovation through investments in people and technology. We refined our advisory expertise with broader consulting capabilities and targeted industry specialization. We took bold steps in our development and investment businesses. And we fortified our cherished culture with the launch of robust programs for our young professionals, national support for our philanthropy partner, Make-A-Wish®, and a host of prominent Best Place to Work awards.

During 2017, our passion for continuous improvement will permeate our conversations and drive our decision making. It will ensure we continually expand our knowledge and adapt swiftly to market demands. Along that vein, in this latest issue of Insights we highlight key trends that will shape commercial real estate in the coming year and take a look at some of the ways adaptation and specialization are enabling all of us to better serve our clients and customers:

  • Retailers improve the customer experience using data from tracking shoppers’ movements and behavior throughout a store.
  • Intermodal strategies and functional optimization of space offset rising industrial occupancy costs.
  • Micro-unit apartments achieve lucrative rents per square foot while bringing monthly gross rents within the reach of an underserved market segment.

Our best wishes to you for 2017. And now, full steam ahead!


Mark Doran
Chief Operating Officer
Transwestern Points to Some Important Trends that Will Shape 2017

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Change is in the air. From the first hints of rising interest rates and inflationary pressure, to rebounding oil prices and a strengthening dollar, the nation is gearing up for a faster economic ride in 2017 than it has experienced in several years.

For insight into how recent trends will play out in commercial real estate, we queried experts in our offices from coast to coast. Here’s what they are watching for in the months ahead.


Apartment deliveries originally expected in 2016 have slipped into the first two quarters of 2017 due to the labor shortage among construction trades. Developers and the capital markets will be closely monitoring absorption as this significant number of deliveries hits the market. Construction lending has contracted, loan-to-cost ratios have drifted lower while spreads are increasing. This will impact the number of building permits issued in 2017. Beginning in the second half of the year, limited availability with the requisite entitlements for development will constrain starts. Look for more micro-unit projects nationwide.

“Technology will continue to transform workplaces, as work-anywhere, work-anytime solutions spark further demand for flexible space.”


From a tenant perspective, the promise of an improved economy, job growth and infrastructure investment has drawn attention to workplace accessibility, including transportation and infrastructure. Low unemployment will increase demand for talent and boost wages, driving up the need for high-quality, attractive space at convenient locations to meet desired and varied lifestyles. Technology will continue to transform workplaces, as work-anywhere, work-anytime solutions spark further demand for flexible space, 24/7 access, enhanced connectivity and security. Some occupiers will reassess workplace densification measures that have gone too far. And increasing efficiency will continue to drive decisions that improve the bottom line.


Expect to see more manufacturing shift back to the U.S. Relentless demand in many markets for industrial space, and institutional-quality assets in particular, will keep availability low and reinforce the sector’s position as an attractive asset class for investors, while rallying demand for land. Supply chain optimization will spur demand for distribution centers of all sizes, from 25,000-square-foot spaces to those measuring 1 million square feet or larger, while the service sector snaps up spaces as small as 10,000 square feet. Restrictive access to debt will hamper land acquisition for speculative development, while banking regulatory challenges create opportunities for nontraditional lenders to fund industrial projects. Look for tightened lending to trigger a pricing correction by the fourth quarter.

“All eyes are on brick-and-mortar trends, as successful retailers incorporate physical stores in multichannel platforms that include online sales”


Prices cooled in fourth quarter 2016 from recent over-heated levels as investors adjusted underwriting to reflect slight increases in interest rates. Expect transaction volume to slow from the past two years’ record-breaking pace but remain brisk, fueled by abundant buyer interest. All eyes are on brick-andmortar trends, as successful retailers incorporate physical stores in multichannel platforms that include online sales. Look for more online-only sellers to debut brick-and-mortar stores as the industry evolves to improve the customer experience. Grocers will compete for prime locations, food halls will proliferate, and office building landlords will reposition – and often expand – their retail components.


Off-campus transaction volume outpaced hospital campus activity in 2016 as healthcare systems extended more costeffective services – including ambulatory surgery, rehabilitation, imaging, post-acute and urgent care – into communities and nearer to patients. Demand from foreign capital and private equity investment in medical office space has compressed capitalization rates for investors, while rising interest rates and occupancy costs could put additional pressure on health systems’ profit margins. The Trump administration’s impact on healthcare coverage is still an unknown and may slow the pace of investment in new facilities, but the aging baby boomer population will continue to fuel the market. Look for competitive pressures to drive better service from providers through emphasis on best practices, training and compliance programs.

Retailers Capitalize On Greater Customer Engagement, Improved Site Selection

Brian Landes
GIS Analyst
Research Services
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Retailers have long tracked how many consumers enter and exit their stores and at what hours. However, today’s more sophisticated retailers are now tracking how consumers move and interact with merchandise within stores. Those who have made sense of this ocean of data are using it to engage with customers on a more personal level, as well as to make more informed real estate decisions.

How Can We Help You, Mr. Customer?

Shoppers may be surprised to discover this, but if you enter a store with a smart phone, there is a good chance that the retailer is tracking your location. The process is simple: A smart phone constantly gives off signals looking for Wi-Fi networks or Bluetooth waves in the area, emitting a media access control (MAC) code. Retailers follow how MAC codes move throughout a physical store, in effect creating a map of the customer’s visit.

This may sound a bit Orwellian, but the data helps retailers improve the customer’s shopping experience while staffing and operating their stores more efficiently. For example, by tracking consumer movements within a store’s physical footprint, a retailer can reconfigure the layout to be more efficient and better meet customer needs. Alternatively, a retailer can “force” a customer in certain directions (recall the old grocery store trick, where you must walk through aisles of food to get to the milk and eggs at the back of the store). Moreover, retailers rely on this data to help management decide when and where to deploy additional staff to assist customers or operate cash registers. It may even be used to determine where a “price checker” or “call for assistance” kiosk would be helpful. In high-touch retail scenarios, the data could be the impetus for a highly personal interaction, such as when a New York fashion retailer responded to in-store feedback regarding a coat by contacting its supplier and making an immediate alteration to the design.

“Data helps retailers improve the customer’s shopping experience while staffing and operating their stores more efficiently.”

Tracking shoppers is not always performed covertly; retailers are also actively engaging with customers. This is most commonly done with retailers’ own mobile apps, which customers choose to use, making them feel as if they have a relationship with the store. The retailer might use its knowledge of a customer’s past activities to engage realtime with that individual when they are in a physical store, perhaps suggesting new or similar items. Going one step further, the retailer might push coupons or deal codes to the customer to keep them in the store and entice them to make a purchase.

Of course, with the same smart device in hand, consumers have the ability to comparison shop without leaving the confines of a store, and ultimately decide whether or not to opt into a transaction with the retailer. This is one reason many retailers will match competitors’ coupons at checkout, rather than risk losing the sale.

Mobile Data Takes Site Selection to a New Level

Demographics historically has formed the backbone of site selection decisions, providing important information about shoppers’ ages, education, income levels and other factors. Mobile data is now another tool that can help retailers make better decisions regarding the physical location of their stores, adding a layer to site selection capabilities. Through specialized data vendors such as UberMedia and Streetlight Data, retailers can access data that shows consumer activity patterns and how customers interact with physical space. Instead of simply looking at a radius or drive-time statistic, retailers have the ability to examine a potential or existing location based on real-time data and truer trade areas. A more exact trade area results from plotting out all mobile interactions, including when and how often they connected, even drilling down to differences by day and time. Knowing when and from where customers are coming not only supports location decisions, it also drives the engagement discussed previously, allowing for a more personal connection with a customer.

“For a retailer, the ultimate real estate information is a combination of pure demographic data and mobile location data.”

For a retailer, the ultimate real estate information is a combination of pure demographic data and mobile location data. This provides an ideal blueprint for strategic planning: A retailer can now know where a customer is coming from, where they are headed, and the residential and demographic information at the origin and destination. It’s the mix many retailers are aspiring to achieve as they work to squeeze more value out of their real estate portfolios.

Brian Landes
Brian Landes

Smart Intermodal Solutions Overcome E-commerce Challenges

Steve Kozarits, SIOR
Senior Vice President
Industrial Services
Ed Mendence, SIOR, CCIM
Senior Vice President
Industrial Services
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Online sales have challenged industrial site selection teams by making new and sometimes contrary demands on real estate. This is true whether the company seeking space is a vendor to other businesses or is a retailer serving its brick-and-mortar stores while simultaneously fulfilling internet orders for direct shipment to customers.

Most physical stores in large population centers receive merchandise from warehouses or distribution centers, typically located in the suburbs or even outside of the metro area. One of these regional distribution centers might serve stores in several states, sending out merchandise to its showrooms by trucks driving a day or more to reach their destination. Even some online-only merchants enjoyed lower operating costs in the early days of e-commerce by operating from fulfillment centers outside of costly populated areas, but that model is quickly losing favor among companies engaged in internet sales.

“Online sales have challenged industrial site selection teams by making new and sometimes contrary demands on real estate.”

Increasingly, retailers compete for sales based in part on how quickly their goods reach the customer. E-retailers are establishing satellite distribution centers in more densely populated markets in order to improve reliability and reduce the distance and time required to deliver their products to customers. Traditional sellers determined to capture online market share are following suit by establishing fulfillment centers nearer their online customers, despite the higher costs associated with urban real estate.

The trend is gaining momentum as more brick-and-mortar retailers cultivate online sales. Some of these omnichannel retailers, including Staples and Williams-Sonoma, now generate more than half of their revenue online. Wal-Mart’s recent acquisition of online retailer for more than $3 billion underscores the high stakes in the race to quickly fulfill orders placed over the internet.

Although less visible to consumers, e-commerce has sparked widespread change in the business-to-business world as well, where manufacturers and their distributors are taking greater advantage of cross-country trucking, rail and international shipping to access superior-quality materials at the lowest overall cost. For example, a few years ago, a cabinet manufacturer might use its own trucks to regularly buy and transport plywood from a local vendor’s supply house. Today that cabinetmaker is just as likely to order its materials online from a lower-priced supplier, potentially in another state.

Many industrial suppliers are adapting by consolidating their networks of widely dispersed warehouses into hub-and-spoke networks, characterized by massive, highly efficient facilities at the center that receive, store and ship commodities to customers around the country. For most companies dealing with supply chains, transportation is second only to labor as their greatest operating expense, so slashing miles traveled by consolidating to hub-and-spoke networks helps drive down cost.

The logic is similar to an omnichannel retailer that replaces several faltering brick-and-mortar stores with an e-fulfillment center to handle burgeoning online orders. But rather than migrate to the cities, these large fulfillment centers are more likely to be drawn to intermodal hubs offering multiple modes of freight access including trucks, rail, and even air freight or a seaport.

By relying on intermodal activity, e-commerce is making supply chains more flexible and efficient. That has also made supply chains more complex than ever before.

Meeting the Challenge

From urban fulfillment centers to regional distribution or manufacturing operations, today’s industrial users typically demand competitively priced Class A property features, sophisticated site selection and highly efficient facility operations. Historically and today, the commercial real estate broker’s primary role has been to derive the lowest possible occupancy costs. But a cost-control strategy alone may miss opportunities to boost the bottom line through more productive real estate.

“The goal should be functional optimization, identifying real estate strategies that improve operational efficiencies, output, productivity, employee amenities, and, ultimately, net operating income.”

The goal should include functional optimization, identifying real estate strategies that improve operational efficiencies, output, productivity, employee amenities, and, ultimately, net operating income. This often requires collaboration with architects, industrial engineers, warehouse and production-flow designers, fire suppression engineers, general contractors, and experts in incentives, labor analytics, code compliance and government permitting.

Within the supply chain management industry, companies pursuing functional optimization in their space planning have significantly increased the quantities, densities and classifications of commodities they are allowed to store under fire and life-safety regulations. Together with other aspects of enhanced warehouse flows and throughput, such improvements exponentially increase a building’s utility in the same way that an apartment tower gains revenue-generating potential by adding floors.

This optimization is achieved by understanding – and anticipating – the implications of market conditions, financial strategies, existing and proposed zoning and land-use regulations, local interpretations of building and fire codes, and other regulatory nuances.

From inner-city fulfillment centers to manufacturing and distribution operations in the nation’s busiest intermodal hubs, savvy industrial users are showing a willingness to pay for premium locations that can make them more responsive to customers and control overall operating expenses. Those firms owe it to themselves to procure space that offers maximum operational potential and minimized occupancy costs.

Steve Kozarits
Steve Kozarits, SIOR
Ed Mendence
Ed Mendence, SIOR, CCIM

Small Spaces,
Big Development Opportunities

Ty Puckett
Executive Vice President
Transwestern Development Co.
Josh Delk
Vice President
Transwestern Development Co.
Indie Apartments
138 Units
Austin, Texas
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In an increasing number of cities, the migration of residential renters into urban neighborhoods has accelerated rent growth and pushed even entry-level lease rates for downtown housing beyond the means of many recent college graduates, service workers and young professionals. In turn, high market rents and investor demand have fueled rising land prices for infill sites that keep construction costs at a premium. It's a situation ripe for innovative thinking.

Despite demand for a product that is more affordable to renters, current market conditions have left developers with few opportunities to deliver conventional apartments at the low end of the rent spectrum while still recouping costs and generating a healthy return for investors.

Transwestern Development Co. is tapping that underserved segment of renter demand with Indie Apartments, taking shape in Austin, Texas. By introducing a microunit multifamily tower outside of the nation’s primary markets, the firm is spotlighting a development niche that it plans to pursue as it finds similar opportunities in urban hubs across the country.

Foundation work is already underway on the midrise community, which combines 138 apartments and a ground-floor restaurant onto a half-acre tract in the thriving East Sixth entertainment district, just east of downtown. The 55,814-square-foot complex will consist primarily of 350-square-foot studios and 520-square-foot, two-bedroom units. The fully furnished apartments maximize space by using sliding doors, built-in storage units and flexible furniture systems such as Murphy beds, hideaway kitchen modules and convertible tables. Offsetting the size of individual units is a large communal area that will flow from the inside of the lobby into the outdoor courtyard, which will feature fire pits and outdoor televisions.

The young renters who will constitute the bulk of the project’s residents show a preference for walking, biking, public transit and ridesharing over driving, so Indie Apartments provides ample bicycle storage and is less than one block from a lightrail station. Fewer residents relying on their own vehicles also reduced parking requirements, meaning the subgrade garage only needed to provide spaces for about 60 percent of the units, helping to control construction costs.

Indie Apartments represents a new application of a proven property type. High-efficiency living spaces have been around for years in cruise ships, private airplanes and yachts, and more recently as apartments in densely populated cities like Tokyo, New York and San Francisco. Yet offering micro-units not only outside of a primary market but in a city with just under 1 million residents in sprawl-prone Texas, breaks new ground.

High-efficiency studios solve the developer’s dilemma by achieving the high rent per square foot that developers and investors require to meet their return on investment threshold, while offering to renters an apartment with amenities and finishes otherwise found only in Class A, market-rate properties, and at an attractive monthly gross rent. They simply get less space in their apartment.

“An affordable, furnished living space is often a good choice for anyone in a life transition, from students to retirees and newly singles.”

Millennials have shown a willingness to forego large living spaces in order to gain access or convenient proximity to places where they can congregate, eat, drink, play or work. Additionally, furnished micro-units are a good fit for recent college graduates, who often lack furniture of their own.

Furnished micro-studios appeal to business travelers visiting the same market regularly, and to employers that would rather keep one or more apartments ready than put up their frequent visitors in hotels. Leasing a 350-square-foot apartment in Indie Apartments is more cost effective than paying for three nights at a downtown Austin hotel each month. By the same token, micro-units can be a good option for attorneys, accountants or other professionals who frequently work late nights downtown, serving as a nearby retreat for a recuperative sleep before returning to their homes in the suburbs or other cities.

Looking beyond Austin for micro-unit development opportunities, Transwestern seeks excellent infill sites. For renters who use their apartments mostly to sleep between outings, developers must select locations offering convenient access to transportation, dining and entertainment. The Indie Apartments site, for example, is within walking distance of some 50 bars, restaurants and music venues in a rapidly gentrifying area of Austin that has embraced the arts as well as the local food scene.

High market rents are another requirement. Entry-level rent for new apartments must be high enough to make micro-unit rents appealing despite their smaller unit size. Indie Apartments’ gross monthly rent is expected to be 20 percent below that of Class A efficiency apartments.

As in many downtowns with a vibrant night life, Austin offers few housing options for the musicians, bartenders and service staff who operate downtown venues and want to live close to their jobs. Micro-units can bring affordable rent and convenient locations to those workers. Or a young lawyer may choose to lease a unit at Indie Apartments because the complex is less than a mile from the center of downtown, and live there as a stepping stone to a larger apartment or home later on. In truth, an affordable, furnished living space is often a good choice for anyone in a life transition, from students to retirees and newly singles. And micro-unit apartments offer an excellent opportunity to serve a renter segment that has been priced out of many urbanized markets.

Ty Puckett
Ty Puckett
Josh Delk
Josh Delk