An empty office building doesn’t have to remain an office building — and an old supermarket doesn’t have to continue to house groceries. As the needs of communities evolve, the way people use older buildings can also evolve. Repurposing commercial real estate gives you the opportunity to revitalize an older building and breathe new life into a neighborhood or town.
A recent report by IHL Group entitled Debunking the Retail Apocalypse included a recent chart showing the planned expansion for major restaurants for 2017. Demand appears to remain strong for fast food and quick serve restaurants. Restaurants continue to be popular commercial real estate investments as many restaurant leases are triple net (NNN) that more passive investments allowing the owner to receive a monthly rent check, while the tenant is responsible for taxes, insurance, and maintenance.
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.
In today’s commercial real estate, large technology systems used for high-volume financial settlements are not a great fit. As an asset class, commercial property’s tendency toward illiquidity carries a peculiar anti-technological bias. In CRE, most financial settlements occur in the process of property transactions such as purchases or leases. These tend to have lifetimes measured in months and years, as opposed to stocks and bonds, where ownership and packaging can repeatedly change on the basis of seconds and minutes.
The added volume and complexity that comes with comparatively liquid stock and bond markets has been a driver for the creation of high-technology settlement systems that tick along in the background of Wall Street. These back-office utility systems are seldom thought of, but in fact provide market participants with a critically important service: the bedrock truth about ownership and transactions.
In the CRE world, comparable truth is about keeping track of payment, escrow and title. By and large, these mechanisms are designed into contracts known to the parties, crafted to describe an immediate future where the players are unlikely to change.
That said, not everything here runs at the speed of paper. The industry has developed its own investment vehicles – REITs, private equity, CMBS, crowdfunding – and can be expected to create more in the future. When those vehicles are created, expect to see greater involvement of the blockchain.
What’s the Blockchain?
Today, when money moves into or out of a transaction, we update at least one ledger. That ledger could be a hand-built Excel sheet, it could be a database system containing all transactions, it could even be paper, presuming you’ve got a goose quill to match. Typically, ledgers are, like most accounting, private.
The blockchain is a very modern software mechanism to conduct payments, accounting, escrow, repurchase, even title, in full view of all parties, subject to contract rules. Consider it a distributed ledger. It operates in public, heightening transparency of transactions. It can be automated, meaning the funding, for example, of escrow accounts ahead of dependent transactions found in leases or purchase agreements can be made automatic, potentially speeding up the transaction and heightening financial predictability.
Growing past its origins as part of the digital currency called Bitcoin, the blockchain’s features are attracting attention from increasingly heavy hitters in finance.
Getting Ready For Prime Time
In a sign that the blockchain is maturing, it is now being offered as a primary technology by a giant among those back-office settlement systems I mentioned earlier. DTCC, the Depsitory Trust & Clearing Corporation provides a raft of services to financial markets, including the tracking of repurchase agreements between banks. With this week’s announcement, DTCC will be offering the blockchain as the means by which counterparties will conduct automated repurchase business, a kind of short-term financing where debt bounces between opposite ends to meet a goal.
This doesn’t mean anything’s changed in commercial real estate, but it does mean the blockchain’s features are going to get their moment in the mass-financial-market sun. How well the blockchain does at delivering predictability, liquidity, transparency and other features that mark popular investment vehicles is a great indicator for how much change is on the horizon for CRE –from leases to securitization and everywhere in between.
As mentioned in these pages last year, recent SEC deregulation has cleared the way for commercial real estate investments to seek capital from individual investors with fewer requirements than before. Add the internet to this new playing field and you get crowdsourcing of real estate investment: where property-based offers are thrown open to anybody with a web browser (and sufficient capital).
Among the early wave of startup companies in the crowdsourced real estate investment business is Realty Mogul. If this startup is any indication, it appears the new crowdfunding sector is getting off the ground: the company has announced $10 million in property acquisitions totaling 27 properties.
When is the best time to plant a tree?
Bo Barron, VP of Organizational Development for Sperry Van Ness International and blogging superstar, is Alex Ruggieri’s guest on this Commercial Connections Podcast. Along with answering the question above, Bo and Alex discuss how and why he got started, and how he got over his hesitation in developing his widely-read blog about life and commercial real estate.
In this week’s video from The Street, Broadstone Real Estate CEO Amy Tait talks about the new Reg D solicitation rules under the JOBS act from the perspective of a leader of a company in the REIT and commercial property management spaces.
It’s not especially well known that the retail / e-commerce juggernaut Groupon started life not as a provider of retail savings to consumers but as a nonprofit crowdfunding platform for communities called The Point. Groupon founder and former CEO Andrew Mason’s original software project let communities pool their money online to, for example, get a park built in their neighborhood or to solve some other community problem together. It was only later, after a nudge and a million-dollar check from a venture capital latecomer that Mason applied the same crowdfunding idea and software to coupons. The rest, as they say, is retail history.
In 1990, President George H.W. Bush signed into law the 1990 Immigration Act, which included a novel provision to attract foreign investment and create jobs in areas that most need them. The EB-5 Visa program is a way for foreign investors to earn a green card if they invest in the economic development of a “targeted employment area” (TEA), defined by the program administrators, the US Dept. Of Citizenship and Immigration Services (USCIS) as:
“…an area which, at the time of investment, is a rural area (not within either a metropolitan statistical area (MSA) (as designated by the Office of Management and Budget) or the outer boundary of any city or town having a population of 20,000 or more), OR an area within an MSA or the outer boundary of a city or town having a population of 20,000 or more which has experienced unemployment of at least 150% of the national average rate.”
Tax-deferred exchanges of commercial property can postpone and even eliminate federal taxes due on the sale of properties that qualify for tax-deferred status. Since 1921, the IRS Section 1031 exchange rules have been in place with the intent and effect of generating capital for investment. Tax deferment on an exchange of property in “like kind” as 1031 stipulates is effectively an interest-free loan from the federal government in the amount of the taxes that would have been due on a simple sale.