Browse Month: July 2013

Buildouts Bulletin: Copper Price Speculation Rolled Back

English: Wall Street sign on Wall Street

As reported here in The Source in January, copper prices affecting budgets containing plumbing conduit and electrical buildout were undergoing a series of gyrations and increases some linked to the trading in physical copper by investment banks.  Following the SEC approval of investment banking giant JPM Chase’s creation of a fund called JPM XF Physical Copper Trust to trade physical copper, members of the copper user community including two wire companies lobbied the SEC to stop the trading, claiming it would artificially tighten supply and raise prices.

They were rebuffed by the SEC in March.  But as with so many other areas under the SEC’s purview, what that regulatory body will allow and what’s good for the world beyond Wall Street have been determined to be at odds.

In a Friday night story published by Reuters and written by David Shepard and Jonathan Leff, JPM Chase announced it would be getting out of the physical commodities business.  After a week of intense Congressional scrutiny of the banking industry’s non-capital-allocation activities, plus a spate of media coverage concerning banking’s involvement in the market for physical aluminum, JPM Chase quietly reversed its path, perhaps deciding to focus more on capital allocation than trying to turn everything under the sun into gambling chips.

Under Seige, JPM To Quit Physical Commodities

 JPMorgan Chase & Co is exiting physical commodities trading, the bank said in a surprise statement on Friday, as Wall Street’s role in the trading of raw materials comes under unprecedented political and regulatory pressure.

After spending billions of dollars and five years building the banking world’s biggest commoditydesk, JPMorgan said it would pursue “strategic alternatives” for its trading assets that stretch from Baltimore to Johor, and a global team dealing in everything from African crude oil to Chilean copper.

The firm will explore “a sale, spinoff or strategic partnership” of the physical business championed by commodities chief Blythe Masters, the architect of JPMorgan’s expansion in the sector and one of the most famous women on Wall Street.

Release The Bakken: The North Dakota-Montana Energy Boom

The Bakken-Three Forks Shale Formation
(The Bakken-Three Forks Shale Formation)

Since the recent development of hydraulic fracturing drilling technology in 2008, vast deposits of US oil and natural gas trapped in shale formations have become reachable, spiking prices for land and development leases in locations not associated with such booms since the 19th century gold rush. The names of shale formations on the lips of property professionals across the country seem to have turned them into amateur geologists.

Rising chatter in the land business includes names such as Monterey Shale (2,000 square miles running north and south through the center of California), Barnett and Eagle Ford Shale (Texas) Utica Shale (most of New York, Pennsylvania, Ohio, and West Virginia) and the most eye-popping of them all, the Bakken Shale in North Dakota, South Dakota and Montana.

Shale Far Below, Cap Rates Far Above

The rush to extract the Bakken’s natural gas and oil has produced unexpected volumes of energy, as well as a radically shifted market for some North Dakota land. As the area struggles to accommodate the tidal wave of energy workers that has driven unemployment in North Dakota to below 4%, genuinely rare business conditions prevail.  A quick look around found a trailer park in far northwestern ND is commanding a 24% cap rate and 100% occupancy, one sign among many that a full-bore boom is underway in the Roughrider State.

“An Industry, Not A Boom”

The cycles of capitalism have been historically clear: after boom follows the bust. But will it here?  No, says Tom Rolfstad, executive director of the Williston Economic Development Corporation. During the Bakken Chicago Summit held yesterday. Rolfstad spoke about the oil industry, an industry that has been growing at an amazing clip in North Dakota’s Bakken region.

Thanks to new technology — and fracking — the oil wells in this region of the state are producing more oil than ever. And Williston — a municipality located in the center of the region — is dealing with its own growth because of it. Williston’s population is booming. And the municipality needs everything from apartment units and grocery stores to gas stations and permanent housing. This means there are plenty of opportunity for investors in this region, investors from the Midwest and beyond.

And Rolfstad disagreed that that oil industry in his part of North Dakota is experiencing a boom. A boom, he said, ends quickly. The oil surge in the Bakken, he said, is showing few signs of a quick slowdown. “The oil industry here is going to be around for another 60 years, at least,” he said. “That’s a long time. We’ll be around in 60 years. Will you?”

Upcoming Book Illustrates The Marketplace

The Natural Gas Revolution: At The Pivot Of The World’s Energy Future is a title by Robert Kolb expected to publish this year.  The book lays out the history, costs, benefits and likely future of the post-fracking US energy market, with special attention paid to the Bakken and North Dakota.

 

Presenting The Commercial Connections Podcast: Jill Dumeland And Power Working

Commercial Connections Podcast Host Alex Ruggieri, CCIM
Commercial Connections Podcast Host Alex Ruggieri, CCIM

We’re happy to announce the launch of the NAR Commercial Connections Podcast! The inaugural episode features a talk with Jill Dumeland, commercial broker extraordinaire, mother and 4th-generation commercial real estate professional.  In today’s fifteen-minute cast, Jill talks about her childhood introduction to cap rates and dealmaking, and her concept of “power working” to maintain excellence and balance all at once, plus more.

Listen to the podcast here!

About Your Host Alex Ruggieri

Alex Ruggieri, CCIM is Senior Advisor at Sperry Van Ness specializing in the sale of investment properties and corporate relocations. With a career transaction volume of over $500 million, Alex has more than 30 years of commercial real estate experience.  Ruggieri is a member and a Graduate REALTOR® Institute designee of the National Association of Realtors. He also holds the prestigious CCIM Certified Commercial Investment Member designation. Ruggieri earned a master’s degree in Business Administration with an emphasis in Finance from the University of Illinois at Urbana-Champaign.

About Podcast Guest Jill Dumeland, CCIM

Jill Duemeland is the fourth generation of  North Dakota’s Duemelands Commercial. Prior to joining Duemelands in 2004, Jill spent the prior three years working at Frauenshuh Companies in Minneapolis.  While at Frauenshuh, Jill played an active role in the Medical and Retail Brokerage division, doing tenant and landlord representation, demographic analysis, and site selection.

At Duemelands, Jill specializes in tenant and landlord representation and sale and leasing of industrial, medical, and retail properties in Bismarck-Mandan, North Dakota; South Dakota; and Minnesota.

Jill earned the Certified Commercial Investment Member (CCIM) designation at the age of 26 by completing over $15 million in real estate transactions. Jill is a member of National Association of Realtors (NAR) and International Council of Shopping Centers (ICSC). In 2009, Jill was invited to become a member of Vistage International, a chief executive organization. She earned her Bachelor of Science degree in real estate from University of St. Thomas in St. Paul, Minnesota and is licensed in North Dakota, South Dakota, and Minnesota.

Listen to the podcast here!

 

 

Medical Real Estate: Demand Higher Than Ever

English: A roadside sign at Santa Clara Valley...

Changes underway stemming from the Affordable Care Act are shifting the national healthcare landscape. The US heath care system is bracing for the addition of 30 million previously uninsured patients while at the same time undergoing a series of business transformations that come with significant real estate effects.

Preventative, specialized and routine care is being more broadly distributed to outpatient facilities and away from monolithic hospitals.  At the same time, a wave of business consolidations is taking place where standalone “doc-in-a-box” small medical centers are finding institutional buyers in increasing numbers.  The buy and the sell side are heating up in medical office property, but even that isn’t where all the action is.  On top of these shifts, retail chains long doing pharmacy business are opening clinics for primary care, modifying space calculations and opening new avenues of opportunity for customer engagement.  In ten years, your average trip for medical care will not look like it does now, from the property to the practices.

Consolidation Trend Fueling The Buy And Sell Side

There are two main directions the delivery of healthcare services are leading: acute care is being consolidated into ever-larger hospitals that amass resources, share space and achieve economies of scale, while outpatient care is being distributed throughout communities. In Leslie Braunstein’s Urban Land Institute piece “How Changing Healthcare Delivery Will Affect Land Use”, the numbers are run and the difference is clear:

With improved medical technologies, an increasing number of treatments, tests, and procedures can be conducted on an outpatient basis; as a result, the average hospital stay has decreased from 7.2 days in 1988 to 5.5 days now. And while the total number of hospital beds has decreased, the percentage of physicians employed by hospital groups has increased to 50 percent and is growing. 

Although increasingly employed by hospitals, physicians and other practitioners are bringing medical care into a distributed network of satellite-type facilities scattered throughout communities, noted Eric W. Fischer of Trammell Crow Company. These include everything from medical office buildings to walk-in clinics located within retail stores such as CVS, Walgreens, or Wal-Mart. The next level, he said, is the “outpatient pavilion” where specialists and sub-specialists can share technology and resources. Finally, there is the acute care hospital. 

Demand Is Up For Medical Office And Outpatient Facilities 

The multibillion market for present and future healthcare space shows heightened demand as long-standing assumptions about healthcare are challenged and efficiencies sought.  Highlighted by Sue Ter Maat in Amanews: 

Medical office and outpatient facilities sold for nearly $6 billion in 2012, higher than the 2006 peak of $5.5 billion. Sales of medical office buildings exceeded $2 billion in 2012, more than double the previous sales record set in 2007, according to real estate developer and manager Jones Lang LaSalle’s health care report, issued in May. The company said it wouldn’t be surprised if more records are set in 2013. The report tracked medical office buildings that are more than 25,000 square feet.

The sales increase is partly due to the big push for more outpatient care. Medical office buildings performed well compared with other real estate classes, especially during the economic downturn in 2009, said Mindy Berman, managing director of capital markets at Jones Lang LaSalle.

Less Is More: Standalone Emergency Rooms 

Not fitting into other trends is the appearance of the standalone emergency room, as currently under discussion in Alabama. At first glance, the economics of this development trend seem to make little sense: emergency room care is uniformly more expensive than other kinds, such expense having been a major factor in preventing people from seeking care until their conditions make it impossible to avoid.  Nonetheless, Alabama is voting on wether or not to undertake more of these ER-only properties.

BIRMINGHAM, Alabama — Free-standing emergency departments — emergency rooms not physically attached to its parent hospital buildings — are in an odd situation in Alabama.

Three of these standalone ER’s are approved by health regulators to be built  — all in the Birmingham area.

But there are no rules to regulate them.

Demand outpacing a state’s regulatory ability is an old story and not limited to a single state.   Keeping an eye on these developments in Alabama might give us a clue about ER-only adoption across the country.

The REO Schedule: Too Much Information Is Never Enough

Finance

The underwriting of commercial real estate loans is part art and part science. When approaching the bank for the capital your transaction needs, it’s important to be able to see the process from all sides. Underwriters will tell you: what gets the benefit of the doubt in underwriting decisions is detail – the more you provide to the lender, the happier and more agreeable that lender will likely be.

The borrower’s property portfolio — the list of property owned by a borrowing entity, also known as a REO schedule, is the “other half” of the one-two punch along with the balance sheet/personal financial statement. These deliverables are the minimum a loan discussion requires. But what belongs on the REO schedule?

[DISCLAIMER: Never, ever take anything you read here at The Source as legal or fiduciary advice.  Always retain qualified counsel!]

An experienced underwriter will be able to tell at a glance of the REO schedule what he or she is dealing with: is the borrowing entity a big corporate firm?  An individual?  A majority partnership LLC held n a minority partnership LLC all in turn held by a full corporation?  What the balance sheet doesn’t tell by itself the REO schedule will address and fill in the gaps.

Typically an REO schedule contains property facts and figures and the lender will have a form available.  But the fact is that many forms can be inadequate for the task at hand: demonstrating what the balance sheet and personal financial statement alone can’t.  Since a borrower isn’t there just to fill out forms, but instead to have a discussion about a financing, it’s essential to pay attention to what is and isn’t on the given form, and to make every effort to put what should reasonably be on that form into the hands of the lender.

The basics – property name, address, type, today’s loan balance, market value, monthly expenses and monthly income – are the bare minimum and space for these are found on REO schedule forms almost every time.  But this isn’t a detail level that gives the underwriter what is needed.    Consider adding more in the form of monthly operating expenses, the borrowing entity’s date of acquisition and percentage of ownership, names of existing lenders and other critical information.

Format For The Win

Make sure there are sufficient columns and that column headings are well-defined, leaving no chance to confuse monthly averages vs. annual totals.  Aiming to include 10-12 properties on a legal-sized sheet is a good benchmark when working in Excel, so set your type size to 11 points, limit your columns to A through Q and set a page scale of around 70%.

Photo credit: Hard Hat Stickers

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2013 NAR Commercial Member Profile

Hot off the (digital) presses is the NAR 2013 Commercial Member Profile.  Highlights arranged into a handy infographic below.

Whats’ the bottom line?  Or, lacking a single bottom line in a big collection of interesting facts – what’s the best news? Commercial members are moving more square footage.  In 2013, there’s significant year-over-year growth in the median commercial lease volume and median commercial sales volume.  And if that bump isn’t notable enough, the increase from 2010 is nothing less than eye-popping.

Download The Entire Report

NAR members with an NRDS login can download the entire report here.  Learn the membership’s preferences and backgrounds, learn what they know and begin to learn what it is they’re likely to want in the future with this bit of premium research.

 

 

 

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Walkability: A Key Metro Metric

English: Pedestrians prohibited sign in Israel

 

Matching buyer and seller takes information.  There are almost as many types of facts about commercial properties and their environs as there are locations in which to do business.  One result is that there are thousands of possible strategies toward marketing of properties that combine and present relevant metrics to sellers and buyers.  The trick, as always is to find the combination that presents the most important metrics about a location with the right timing to hit the important part of the conversation.

The conversation about a commercial property presents a set of moving targets.  The sales cycle takes time and work and every deal is different.  But some aspects of deals aren’t so different.  Every building has a purpose for people. And people need freedom to get to that building and to get to things that surround it.   One way to express accessibility in cities is a metric called walkability.

A key concept in sustainable urban design (and the #1 sorely missing feature of most suburban and exurban properties), walkability measures how easy it is for people to reach the and experience the property’s surrounding area.  Less important for industrial than for office and multifamily, walkability is a discussion that is worth having because it addresses the potential deal exclusively from the perspective of the people using the property.  It’s where projections of usage and traffic patterns tell stories that help to more concretely visualize the completed deal in terms of what it allows a whole bunch of people to do over and over.  A discussion about people is an attractive one to have: in a very real way, providing facility to people is why we are here.  Fail to provide that facility, and ultimately, profit and performance are lost.

How To Discuss Walkability

Auditing an area’s walkability is easier to do with a set of fixed questions about the area.  One such checklist produced by the US Department of Transportation is the Walkability Checklist.  It’s a set of tasks and ratings for various aspects of walkability with an all-important scoring mechanism included.  Using ratings is a great way to benchmark offerings against each other and highlight favorable conditions – and on the buy side, conditions that need improvement.

Also: evaluating metro areas for walkability is the role of WalkScore.com, a site that more or less goes through a version of this checklist and publishes the walkablity scores, providing an easy benchmark for national searches.

Another site dedicated to producing walkability measurements is Maponics, which includes a set of criteria not found in WalkScore.

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Small Investor Lending Up Modestly In 2013: NAR Research

NAR Research Economist George Raitu has divined the tea leaves of the NAR Commercial Real Estate Lending Survey and found the small investor has it a bit better than last year.  Also interesting were some comments about the big names in commercial RE data aggregation and how many NAR Commercial members might not see their activity reflected therein.

Capital A Little Easier To Find, Transactions More Stable

While 72% of survey respondents reported capital availability was tied up in stiff loan underwriting standards, 2012 saw 30% of respondents report a loosening of capital availability.  Tied to this appears to be the declining rate of transaction failure due to financing .

 

The $2M Cutoff: Hidden Riches?

Most property transactions took place at the $2 million mark and below. As Raitu puts it, that suggests a blind spot in industry reporting:

The figures indicate that a significant segment of the commercial market is flying below the radar of the established data aggregators, such as Real Capital Analytics. In addition, commercial REALTORS® handled a wide range of properties, from free standing buildings and mixed use, to churches, restaurants and self-storage.

Presented below: the entire 2013 Commercial Real Estate Lending Survey from NAR:

Green Building Cert Update: LEED v4 Coming Online

United States Green Building Council

 

Adopting LEED green building certification for new commercial construction is rising in popularity across the US as concerns about environmental sustainability and impact on commercial tenants mount.   The commercial property without LEED certification faces a future where conversation about that property’s value that will be affected.  On the buy side, tenants and prospects will use new benchmarks to make comparisons among properties that include LEED parameters as well as energy usage and performance metrics enabled by modern energy management with an eye toward sustainability   On the sell side, landlords and brokers need to answer the mounting questions about suitability along sustainability lines as retailers increasingly factor green practice into conversations and customer experience.

Find your state’s LEED Market Brief and State Snapshot at USGBC.org.

LEED v4 Launching This Fall, Includes Performance Specs

The new version of LEED  — v4  — will launch at the Greenbuild Conference and Expo, Nov. 18-23 in Philadelphia. The new  standard includes a performance-based system for green building design, construction and operation.  A focus on outcomes, commensurate with the increase in data collection available to property operators, is baked into the new LEED standard.  New concepts include a holistic approach to property construction and operation as opposed to a more materials-based approach.  The greater complexity ensures a steeper learning curve, but the focus on performance means that valuing LEED-compliant properties is a process that has taken a big step toward the practical.   Meter readings and bills for consumables will be more central than ever in the total LEED picture.

Special Focus On Medical Property

This year, health care giant Kaiser Permanente announced plans to earn LEED certification for $30 billion in new construction projects over the next ten years.  The projects cover 14 million square feet of office space in about 100 buildings.

 “By adopting the LEED standard for all new major construction, we are demonstrating our commitment to green building strategies and to the total health of our communities,” said Don Orndoff, Kaiser Permanente senior vice president of National Facilities Services. “The LEED certification program provides an internationally recognized approach to building and operating well-designed buildings.”

Total health – there’s that holistic approach once again.  Expect more of this nationally as the commercial property sector is increasingly compelled to “consider the forest as well as the trees”.

The Showrooming Solution? Motorola’s Connected Shopper

Shopper

In the retail sector, what’s the solution to disruptive change brought on by technology?  Often enough, more technology.

While it doesn’t mention it by name, a recent article in RetailCustomerExperience.com suggests a technology-manufacturing giant has addressed the phenomenon of “showrooming” head-on with a unique, connected solution based in the smartphones of shoppers in brick-and-mortar stores.

Since the rise of e-commerce, the traditional retail industry has been struggling with showrooming – where a shopper visits a store only to put hands on the product, not to buy.  The buying is done online, usually with a competitor after a quick price comparison, carried out often enough in the store itself, using an internet-connected smartphone and a search engine.  Thus the expensive square footage of the brick and mortar enterprise becomes not more than a showroom for a product maker, throwing the business model of retailing into a state of chaos.

Leveraging Connectivity 

The problem  – and the opportunity – is one of connectivity.  The customer brings along with them to the store  a live connection to a retailer’s competitor by way of the smartphone.  No retailer should want to shut down that connection – any store that jams or blocks smartphone connectivity would quickly fall from favor from shoppers increasingly wedded to their devices for everything from staying in touch with family and friends to, yes, saving 20 bucks on a lawnmower occupying the retailer’s sales floor. The question is: what can that connectivity come with?  What can be added?

Motorola is a company that knows a thing or two about mobile connectivity.  Since its development of the first car radio in the 1920s, wireless communications has always been a key part of what has made the Motorola company a global success.  Its latest engineering combines software, product tagging and smartphones to redefine that conversation the showrooming shopper is having with a competing e-tailer.

[Motorola] recently rolled out its Connected Shopper portfolio, covering aspects such as mobile integration, indoor positioning, endless aisle kiosks and in-aisle product scanning via smartphones.

“We have taken the view that there is a common theme of connectivity in everything we do,” said Tom Bianculli, senior director of the Emerging Business and Engineering office at Motorola. “Customers, sales associates … even the store itself is getting smarter.”

Bianculli said the Connected Shopper technology is designed to personalize in-store shopping — and much of that is done by utilizing the shopper’s smartphone. The solution can enable a retailer’s app to automatically connect a consumer’s smartphone to a store’s Wi-Fi network once the shopper opts-in and authorizes the application. From there, things start to get personal.

For example, if a shopper is in the store to purchase a specific item and searches for a lower price on the item in another store, the app, regardless if running, can send a notification to the shopper’s phone with a price match based on that search.

Long story short: far from restrict internet access, the system provides it to the shopper in the form of Wi-Fi connectivity.  The catch: this is Wi-Fi that is connected to the store’s product inventory and is programmed to watch when a customer makes that online price comparison.  When they do, it doesn’t interfere — but it does tell that customer by way of their smartphone that the store is willing to match the price they just got.

Connectivity: it works in (at least) two directions.

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