Browse Author: David O'Rell

Is the Retail Apocalypse Fact or Fiction?

Is the Retail Apocalypse Fact or FIction

Is the Retail Apocalypse – Fact or Fiction?

If you read the headlines, you would believe the Retail Apocalypse is imminent with announcements seemingly each week of new store closures. In fact, earlier this year, we posted a story called Retail Store Closures Pick Up Speed, Says Report based on a report by Fung Global Retail and Technology Tracker.  But a new report by IHL Group entitled Debunking the Retail Apocalypse provides an alternative perspective.  Their research shows that retailers and restaurants are planning to open 14,248 locations in 2017 compared to 10,168 announced closures.  A net increase of more than 4,000 new stores is a very different story than what is captured in the headlines.  And the projections for 2018 are even stronger with more than 5,500 openings projected.

The report then breaks down the activity by segment that reveals there are only two segments with negative Net Store Growth: Department Stores and Softgoods, that includes clothing, shoes and jewelry stores.   From a real estate perspective, Department Stores have the largest footprints and can be the most challenging to release. And when enough of the department stores anchors leave a center, it frequently becomes a challenge to retain other tenants or attract new ones.  In some cases, a regional mall that is no longer viable will be converted to another use, like the recent announcement of Amazon to build a fulfillment center at the site of the Randall Park Mall site in the village of Randall, Ohio.

If you take the number of closures for the 16 brands with the largest decline multiplied by the typical store footprint, these stores will be vacating more than 72 million square feet of space.  Sears, Kmart and JC Penny account for 55 million square feet, or 75% of the total.

While the Net Store numbers are important, they don’t necessarily reflect the actual real estate impact.  The report included the 16 brands with the largest increases and declines.  Another way to review the impact is to take the number of stores and multiplying it by the typical square footage for each brand.  The 4,162 new store openings will absorb approximately 34 million square feet of space, with an average store size of 8,339 square feet.


New Stores From These 16 Banners

The amount of space that will be vacated totals more than 72 million square feet, or an average store size of 14,805 square feet.  However, three department stores, Sears, Kmart and JC Penny, have a disproportionate impact since their typical store size is 100,000 square feet or more.  While department stores account for only 500 of the nearly 5,000 store closings (10%), they account for more than 55 million square feet, or 75% of the square footage.


Planned 2017 Store Closings

What will happen to the 38 million square feet of space that will be vacated this year?  Retailers and restaurants all have specific requirements for potential new locations.  Will existing centers or buildings be converted to accommodate these growing brands?  Or, will there be more redevelopment of prime locations into new uses?

If you have retail space to fill or are looking for your next location, try CommercialSearch.com.

3 Things to Know When Negotiating a Commercial Lease

3 Things to Know When Signing a Commercial Lease

Today’s guest post is by Evan Tarver, a small business and investments writer for Fit Small Business, fiction author, and screenwriter with experience in finance and technology. When he isn’t busy scheming his next business idea, you’ll find Evan holed up in a coffee shop working on the next great American fiction story.

3 Things to Know When Negotiating a Commercial Lease

Commercial leases typically have longer terms than residential leases and have more tenant and landlord clauses. Whether you’re working with a broker or negotiating yourself, it’s important to fully understand a commercial lease before you sign as it can have a significant impact on the success of your business.

Below are the top 4 things you should know about commercial leases that’ll help you negotiate more favorable lease terms:

1. Your Commercial Property Parameters

Before you start negotiating your lease it’s important to fully understand your commercial property parameters. This is because the needs of your business will dictate the types of properties you can lease as well as the terms you can negotiate. Your commercial property parameters should include the following:

  • Ideal customer or employee pool (including location)
  • Commercial property zoning
  • Desired property size (rentable space and usable space)
  • Maximum monthly lease budget
  • Accessibility (foot traffic, vehicle traffic, and parking needs)

By defining each of these commercial real estate parameters, you’ll know the exact type of property you need as well as what you can and can’t negotiate. For example, if you’re a restaurant, you might be able to negotiate landlord build-outs, which are improvements made by the landlord – such as upgrading kitchen appliances – at potentially no cost to you.

2. Lease Types and their Associated Costs

Most people aren’t aware of the fact that there are typically 3 different types of commercial leases. These leases include a full-service lease, net lease, and a modified gross lease. The major differences between these 3 are the costs and fees associated with them as well as the types of businesses who typically sign them.

The Types of Leases

Understanding these different types of leases will give you greater negotiating power. For example, a full-service lease is the most common type of lease for commercial office buildings. This lease is all-inclusive, meaning that the landlord is required to pay for expenses such as utilities, property taxes, insurance and repairs out of the rent he/she receives from the tenants.

By contrast, a net lease can either be a single, double, or triple net lease and is most commonly used for restaurants and retail. Depending on the type of net lease, the tenant will be required to pay for a pro-rata share of property taxes, property insurance, and common area maintenance fees (CAMS) if it’s a multi-tenant building. If there is only a single tenant, the tenant will be responsible for those expenses.

A compromise or a hybrid between the full-service lease and the net lease is the modified gross lease. This type of lease is most commonly used for multi-tenant office buildings. Typically, the landlord is responsible for the major expenses and the tenant is responsible for their directly related expenses. For example, the landlord may pay real estate taxes and insurance and the tenant may pay janitorial and utility expenses for their specific space. The landlord usually has the right to expense pass-throughs using a base year.

Costs Associated with Your Lease

Of course, the type of lease above will largely dictate the costs associated with your monthly commercial lease payment. Still, it’s important to understand the general costs associated with a commercial lease so that you can better negotiate your terms.

The common types of monthly expenses associated with a commercial lease include:

  • Rent (based on a price per square foot)
  • Pro-rata property taxes
  • Pro-rata property insurance
  • General repairs and maintenance
  • Utilities and janitorial services
  • Tenant build-outs (improvements made by the tenant)

While these costs are dependent on the type of lease, some of the costs can potentially be negotiated with the landlord. Of course, certain costs like janitorial services and utilities can’t be negotiated unless you decide not to use the services. It’s important to remember which types of costs are typically associated with each lease type. This will help you better estimate your monthly costs as well as determine whether it’s more cost effective to buy real estate or lease the space.

3. Common Commercial Lease Terms and Clauses

When negotiating a commercial lease, it’s important to be familiar with the lease terms and clauses you might encounter. These terms and clauses will typically dictate the length of your lease, the total monthly costs, annual rent increases, lease terminations, and more. Understanding these terms will help you negotiate a more flexible and cost-effective commercial lease.

 

The key commercial lease terms that you should become familiar with include:

  • Use clause –  Determines the types of businesses that are allowed to use the commercial space. This is particularly important if you expect to sublease in the future.
  • Length of lease – Commercial lease terms typically range from 3 – 10 years.
  • Assignability – A lease is required to be assignable in order for the tenant to sublease the space. An assignable lease can be included in the potential sale of your business.
  • Escalation – Commercial leases will often have escalation clauses that let landlords increase rent annually, around 3% a year.
  • Build-out credits – These credits give the tenant the chance to make improvements at the expense of the landlord.
  • Termination clause – Clause that allows a landlord and/or a tenant to terminate a lease if certain criteria are met.

4. Benefits of Leasing vs Buying Commercial Real Estate

Ultimately, negotiating a commercial lease is only a good idea if leasing commercial real estate is more cost effective than buying a commercial space. Since each space is unique you’ll want to run a cost-benefit analysis on the difference between renting and owning the space.  

Some factors to consider when weighing the options of leasing or buying commercial real estate include:

  • Tax benefits of owning the space
  • Down payment available to purchase the space
  • Will you outgrow the space?
  • Being responsible for maintenance of the property if you own it
  • The freedom to alter the property if you own it

Bottom Line

Overall, a commercial lease can be confusing and it’s important to adequately prepare when negotiating one. In order to negotiate favorable lease terms, you’ll want to know your property parameters, lease types, potential costs, potential lease terms and clauses, as well as the benefits of leasing vs buying commercial real estate.

Get Your Competitive Edge on Pre-Due Diligence 

Today’s guest post is by Leigh Budlong, founder of Zonability. You can connect with her on LinkedIn or email her at [email protected]

The purpose of formal due diligence is well known to all real estate professionals. We’ve all experienced either the first-hand hiring of experts to help mitigate risks or advising clients to do so. It takes time and money with results often bringing up more questions than answers.

In this age of technology, a new approach for gaining insight into important issues that can impact real estate deals quickly and efficiently is now a reality. It means leveraging technology assets to quickly and inexpensively ascertain initial answers to questions that would typically require extensive time and money during a formal due diligence process.

This stage is called pre-due diligence and can help to quickly evaluate a listing you might find on CommercialSearch.  Pre-due diligence sacrifices accuracy in return for speed, but that tradeoff is perfectly acceptable as long as everyone involved is clear about the objectives and capabilities of pre-due diligence vs formal due diligence which involve experts.

 

Consider what it would mean to have your own process around this stage of information gathering and property assessment. How can it be mined to improve your work and business relationships? Can it become your competitive edge?

 

Before going into more detail, my inspiration for this blog post came from a summer read, Phil Knight’s book, “Shoe Dog”. The memoire came recommended by a real estate data executive, and it has all the thrills – and letdowns – that come with building a business and the people you meet along the way.

 

Phil Knight talks about Steve Prefontaine, an American runner from Oregon known from the 1972 Olympics. Known as “Pre”, he was an early endorser of Nike shoes and a real athlete. According to Knight, Pre’s “competitive fire, gutsy race tactics and inherent charisma charmed crowds and inspired up-and-coming runners to stick with the sport and give it their all.” 

 

Who doesn’t like to be inspired, or to inspire others? In reading these words I instantly recognized the traits that make a great athlete also make a successful real estate professional. It takes training, dedication and a positive “can-do” attitude. The training is what pays dividends during a race or match. The same is true for the real estate professional.

 

By being willing to train hard on honing your skills around pre due diligence, you can be better prepared to serve clients and help them succeed. As part of any training, it means approaching the learning curve. In this case, you’ll need to find those technology tools designed for efficiency and use them regularly to get in more reps, to get better in your role.

 

In my role as an inventor of real estate technology called Zonability, I focused on showcasing a method successfully employed when I practiced in real estate as a commercial real estate appraiser and broker (earning both the MAI and CCIM designations).  Rather than spend hours piecing together, our customers instantly assess a property from a pre-due diligence perspective. It employs what I call “the PLE technique”.

 

P stands for physical, L for legal and E for economic. Together, the review of PLE on any property, at the pre due diligence level, provides a solid initial assessment.

  • Physical – property strengths and weaknesses.
  • Legal – find the hidden opportunities and risks.
  • Economic – run numbers to test “what if” scenarios.

At Zonability, our role in pre-due diligence focuses on assessing untapped development potential and uncovering risks associated with zoning regulations which tie to some of the property’s physical attributes, legal and eventually, economic. How do they tie to economics? It is the combination of the land – its size and zoning relative to the existing improvements and what economic benefits they continue to offer in their market.

 

My years of experience as a commercial real estate appraiser and broker helped hone my skills to assess PLE opportunity and risk. I wanted to translate that when I had Zonability developed. Some call it a “highest and best use” starter, others see as a way to hone in on their to-do list – especially those who handle real estate development.

 

Here are highlights:

 

  1. Identify ALL kinds of regulations impacting the parcel. Yes, these fall under the L category (for legal). Our aim is to give these letter/numbers some meaning and include “future land use” plans which really start to touch on E for economics.

  1. Make it obvious what is the zoning landscape around the subject and showcase the parcels’ shapes – this gets into the P for physical as well as L for legal.
    Quickly gather intelligence within a 1/4 mile of the property for existing conditions: zoning category distribution, building size and lot size. Use this information to size up the subject and the ideas about how it might be used which leads to point #3.

  1. Does the property have zotential? Zotential is our way of saying data-driven potential. The reason we opt to use this language is to make it abundantly clear, this is an interpretation, it is not documented in some city file or stamped and ready for approvals. No, it is very much in the early stage – or “pre” – realm where ideas are still being kicked around.


  1. Get the numbers running! Zonability also has a one click “pro forma” that generates an Excel using our zotential estimates. You can set the basics like monthly rent and cap rate range then iterate in Excel.

Real estate professionals have always had a unique opportunity to differentiate themselves from competitors by discussing untapped property potential with their clients. However, before Zonability, the process of calculating untapped potential was slow, frustrating, and expensive given the complexity of regulations involved.

 

The reality is that most people won’t make the effort to do this work manually. However, we’ve repeatedly found that there’s a direct correlation between the difficulty to obtain important data and the opportunity to deliver value to clients.

 

By having your process in place, quickly and inexpensively:

  • Gauge demand, including current a highest and best use analysis.
  • Develop initial marketing, including ballpark pricing and valuation considerations.
  • Work with the owner/stakeholders to set expectations.

At the root of this process, is being able to decide if the deal is worth pursuing or will terms need to be changed as well as a focus on further evaluation?

In order to remember this concept, think of the long-distance runner, Pre, who had to often “dig deep” to find the energy reserve required for deals that take weeks and months to come together. Building relationships focused on problem-solving and not solely on closing the deal are worth the time. These are the types of deals that people walk away from satisfied and wanting to do again. Who doesn’t appreciate the chance to repeat a win?

In summary, offering fundamental real estate information that can’t easily be “googled” is a great way to establish expertise and build trust with clients. Tech driven pre-due diligence is a way to reduce the time and money required to deliver value to clients. Ultimately this leads to better relationships, which is still the basis for success in real estate.

Do you have success stories about having employed such a technique that saved you and your client time and money? If so, I’d like to hear about it.

 

CRE Brokers’ Ingredients to Success

Today’s guest post is by Dave Morris, CCIM, Sales Executive with Xceligent and former president of St. Louis CCIM, SIOR, Missouri Commercial Realtors, and St. Louis Commercial Realtors chapters. Connect with David on LinkedIn: DavidMorrisCCIM

 

CRE Brokers’ Ingredients to Success

What do top producers do differently than average brokers? They adhere to a discipline of hard work, market knowledge, and relationships.

Aptitude

A broker must be educated enough to know investment real estate theory and why CRE works for investors. They must also keep pace with many industries and know whether a sector is growing or dying and why.

Attitude

Think and act like a winner. (Fake it until you make it if required). Enthusiastically think “team” and “collaboration” to bring about win-win deals. In general, winners want to work with winners…attract winners to your circle. Execute your services with the highest ethical standards.

Work Ethic

Put in the hours. Stretch your comfort zone. Do the things other brokers don’t or aren’t willing to do.

Infrastructure and Support

Take inventory of every resource available to you (software, CRM systems, lease analysis, Xceligent, staff, senior management, etc…). You need an infrastructure of capable support staff with access to the necessary tools to conduct your business effectively and productively.

Brand Recognition

Build your personal brand within your company brand. A positive reputation is everything! You and your company must be seen as a trusted source.

Market Depth

Work in a market niche (by product type or geography) that has a deep enough commission base and that you are able to control a reasonable and sustainable market share. Every year, re-evaluate it and try to expand on it.

Market and Economic Conditions

While somewhat out of your control, whatever the conditions, you must understand how different cycles affect your marketplace, then plan and react accordingly. Top producers know and understand trends which allow them to stay ahead of the curve.

Relationships

CRE brokers are the fabric of the business marketplace. Combine your personal relationships with your business relationships. Educate everyone you know as to what kinds of opportunities you’re specifically seeking. Do the same for people/customers you know. (You will win a client/friend for life if you refer them a prospect!)

Impact of Tax Code Reform on 1031 Exchanges

Today’s guest post is by Wayne D’Amico, CCIM, EVP of Corporate Development & Strategic Relations with Xceligent & Past President and Chairman of the CCIM Institute. Since 1987, D’Amico has been engaged in diversified services in nearly a billion dollars of commercial and investment real estate projects in the areas of strategic and valuation consulting, transactional brokerage and creative financing to a national clientele.

 

Stumping for the preservation of Internal Revenue Code Section 1031, Like Kind Exchange rule, appears to be another attempt by rich folk looking to keep their trough over flowing at the expense of the little guy.  Will the promised Trump tax reform preserve 1031 rules or gut them to the chagrin of investors?  It’s complicated, but let’s try to break it down.

 

The Tax Code provides that the seller of real estate does not pay tax on any increase in value (gain) at the time of sale – provided, the seller invests all the sale proceeds into another property.  The tax is not avoided, but deferred until the time that the owner sells and cashes out instead of buying another property.

 

Why was Section 1031 enacted nearly 100 years ago?  Unlike buying and selling stocks, real estate transaction volume, velocity and value stimulates economic activity.  How?  Every real estate deal results in more work for a variety of jobs including appraisers, brokers, consultants, engineers, lenders, inspectors, insurers and contractors.  Greater transaction volume requires more people to perform the ancillary jobs.  And as real estate values increase, more money goes to those jobs.   The rule incentivizes owners to reinvest sale proceeds into the next deal within 180 days generating tremendous velocity in the market.  If you believe in this argument that robust real estate transaction environments are drivers of the overall economy, then legislation that supports higher sales volume and velocity ensure favorable economic stimulus.  Need stats?  In 2014, the National Association of REALTORS study suggests that some 39% of transaction volume was associated with 1031 related deals.  Eliminating the 1031 code will reduce the overall capital available to buy future properties by 25 to 40 percent due to capital gains tax and reduce the velocity with the removal of the 180-day reinvestment requirement.  If the capital pool controlled by private investors is reduced, the economy will slow and shrink.

 

Can revision of this code be a good idea?  Sure.  The real estate investor is not a species that is inherently averse to taxation.  In fact, it’s really just math.  The decision to utilize the 1031 rule is not about an aversion to taxes empirically. It is the impact of the tax expense within a financial analysis of the return to the investor on and of her money invested in the real estate as it performs over time that matters.  The amount and timing of the tax are simply variables that plug into the proforma along with many more factors that result in an overall investment return.  If the right set of comprehensive tax reforms were put together as a part of the repeal of 1031 considering amongst other things depreciation, capital gain rates, real estate tax policies, overall economic conditions and interest rates to name a few, I can envision a world without 1031.  But, until I see such a proposal in detail, I’d rather keep the 1031 rule in place and let the private sector do the heavy lifting of stimulating the economy.

Trends and Predictions for Industrial Real Estate from NAIOP I.CON Conference

NAIOP I.CON logo

Last week, more than 600 attendees attended the NAIOP I.CON Conference to learn more about the trends that will be impacting industrial real estate.  Topics included: the impact on possible changes in trade agreements, the development of supply chain management allowing for nearly instant delivery of products and the impact of cannabis legalization in many states. Key highlights from the panel discussions include:

  • There is a major focus on the last mile, a term used in supply chain management to describe delivering products to your home.
  • Last mile is giving new life to infill / older buildings.
  • Location trumps all for last mile buildings, and occupiers will pay premium rents for these buildings.
  • Last mile buildings are for moving product, not storing product, so many of the traditional amenities like 30-foot clear height are not important.
  • City leadership must recognize that last mile re-use is valuable to constituents and be welcoming to these uses.  
  • Last mile facilities are providing new life for 50,000 to 100,000 square foot older industrial buildings or vacant retail spaces.
  • Of Amazon’s 100 million square feet of logistics space, only 3 million is focused on last mile.
  • Developers like ProLogis are getting creative and developing Georgetown Crossroads, a 3 story, 414,000 s.f. logistics building on 9 acres in Seattle.
  • Multistory logistics facilities are also being discussed in gateway markets like San Francisco, Los Angeles, Northern New Jersey and Miami.  
  • Japan and Singapore utilize multistory distribution centers, even up to 11 stories, but use smaller trucks.
  • In California, marijuana operations and dispensaries will challenge last mile delivery for space and may be preferred by cities due to its tax generating capacity. 
  • Warehouses can be retrofitted to grow marijuana, but the capital expenditure is more than 5 times the cost of a green house.
  • The Gulf Coast markets will be the biggest beneficiary of the recently completed Panama Canal expansion.