U.S. Construction Spending Down in January 2017

US Construction Spending Down, Nonresidential Construction Slightly Higher

US Census data indicates a drop in U.S. construction spending for the month of January 2017.  A 1% fall from the figure for the preceding December nonetheless represents an increase of 3% as compared to the preceding January of 2016.

Also hidden in the downtick was a year-over-year rise in nonresidential construction. That figure rose 1.5% year-over-year even as January compared to December showed a 1.9% drop.

Are Massive Gains In New Office Construction Over?

Annual census data showed an eye-popping annual increase in new office projects of 28.8% annually, which was the largest increase for any type of property tracked.  Looking solely at office construction from December-January shows a fall of 1.7%, suggesting either a reversal of a trend or an end-of-year slowdown in the sector generally.

How Can I Get US Census Data On Construction?

The US Census releases data on construction regularly and can be found at Census.gov. U.S. Construction spending numbers are sourced from the Census’s VIP Survey, aka the Value Of Construction Put In Place survey, which provides monthly estimates of the total value of construction work in the US. Included in the survey are estimates of architectural and engineering work, labor, materials, taxes, interests and overhead costs.

 

Stadium Finance: Wins On The Field Can Mean Wins For Investors

Panorama of Dodger Stadium in Los Angeles (tak...
Panorama of Dodger Stadium in Los Angeles  (Photo credit: Wikipedia)

As Spring Training for the 2017 Major League Baseball season gets underway, our attention turns to stadium finance, a strange intersection of finance, athletics and real estate that leverages competition on-field and off.

Stadium development in the US is often subsidized by the public, meaning development risks are often shared by taxpayers in various ways, from tangible environmental impacts (parking availability, foot traffic) to the borrowing of already-strapped municipalities aiming to improve the business fitness of the areas surrounding the stadium.

That borrowing – typically performed by issuing municipal bonds – is rated by bond ratings agencies, allowing comparisons to be made in a bond market matching lenders and borrowers.  But which sport throws off the most data to use for investment comparisons?  It’s baseball.

Baseball Is The Handiest Test Case

Of the major sports, only Major League Baseball puts the “business fitness” argument behind stadium development to its greatest utilization test. Unlike football, basketball or hockey, (major league) baseball hosts a whopping 81 home games a season. From April to September, baseball stadium utilization when the team is in town is a nearly-every-day-of-the-week affair, whereas other sports make their home appearances only a handful of days of a season-week – or only one day, as in football.

It’s in part because of this high utilization that the finances of stadium development can be deeply affected by the performance of the team on the field.  In an amazing post at Commercial Observer by Terrence Cullen, exactly how on-field performance can affect financial performance underwriting a development is shown by a long look at the New York Mets and Citi Field. From “How Batting Averages Can Affect A Stadium’s Bond Rating”:

“There are two ways to argue for a new stadium,” he said. “One is, ‘Our team sucks, we need a new stadium so we can be good again.’ Which usually doesn’t work very well, because if your team sucks, nobody cares. Or, ‘Our team is great. If you don’t give us a new stadium, you’ll never see this again.’”

The latter option, he added, is often the better route. “This is very, very common,” he said. “If you’re trying to get a new stadium you compete that one year.”

[…]

Gerstner pointed to the instance in which the San Diego Padres leveraged its All-Star roster to secure financing in the late-1990s to build what is today Petco Park. The Padres boosted their roster for the 1998 season, making it all the way to the World Series that October (the Yankees swept the team). The following month, voters went to the polls to determine whether the team could build the stadium. The city invested $300 million into the project, while the Padres invested $115 million, according to news organization Voice of San Diego.  

Following the approval, however, the Padres traded away key players and lost others to free agency, Gerstner noted. The team finished fourth in its division with a 74-88 record.

Read the entire post at Commercial Observer here. And don’t forget to Play Ball!

 

Downtown Cleveland’s Key Center Sells For $268M: What’s The Market Like?

Key Tower in downtown Cleveland, Ohio
Key Tower in downtown Cleveland, Ohio (Photo credit: Wikipedia)

The cornerstone of Cleveland’s skyline has sold this week for $268M to a local owner.  What does it mean for the local office market?

The Key Center, a 1.3M SF office tower sporting 57 stories and Class A status has been sold by national office REIT Columbia Property Trust to a Cleveland-based multifamily property and development firm. Built in 1991, the Key Center anchors a deal that includes a nearly 1,000-space parking garage as well as a ten-story bank building.

The anchor tenant in the tower is a regional banking power. KeyCorp, a holding company that owns the 18th largest bank in the US, lends a significant chunk to the tower’s 95% occupancy at sale time. The new owner, Ohio’s Millennia Companies – a group of real estate operations and development firms – intends to move operations into the tower, further bolstering the Cleveland CBD strong net absorption numbers, reported in Xceligent’s 4Q2016  Cleveland Market Report as the city’s leading absorption submarket with over 75KSF absorbed.

A Peek Around The Neighborhood

The deal takes place against Cleveland’s backdrop of declining office vacancy and modest levels of new construction. From Xceligent’s most recent Market Report:

  • During the 4Q 2016 the Cleveland office market has absorbed 104,105 square feet (sf) of space.
  • At 12.0% the regional vacancy rate has continued to decline, showing improvements from the 4Q 2015 at 13.1%.
  • The Cleveland CBD submarket observed the greatest positive net absorption totaling 75,222 sf during the 4Q 2016.
  • The Cleveland Office development pipeline had 67,000 sf under construction during the fourth quarter

Cleveland, In Fact, Rocks

If nothing else, the Key Center deal is a strong show of local commercial confidence in the face of a city’s commercial history that has suffered from capital flight, at times resulting in “rust belt” perception. It’s the duty of CRE professionals to look past such cliches, however. Industry players who might shadow the principals in this deal — such as financial support services or real estate service companies who have or seek profiles in the Midwest — can indulge their interest in low-barrier office markets such as Cleveland’s with a quick and easy look at Cleveland CBD’s comparable and nearby office properties.  To view a live query at CommercialSearch of office properties listed for lease or sale in the shadow of the Key Center,  click here.

Get Xceligent’s 4Q Cleveland Office Market Report

To get your own copy of Xceligent’s latest (4Q2016) Market Report on the Cleveland Office Market, click here to drop us a note today.

New Amazon Air Hub and the Cincinnati Warehouse Market

Amazon’s latest step in its apparent plan to take over its own supply chain is an announced $1.5B cargo hub outside of Cincinnati. The hub, slated to be placed in Cincinnati/Northern Kentucky Airport (CVG) is expected to enable the company to fly its Amazon Prime cargo jet fleet into and out of a healthy property market blessed with what Amazon’s SVP of Worldwide Operations Dave Clark called “a large, skilled workforce, centralized location with great connectivity to our nearby fulfillment locations and an excellent quality of living for employees.”

Construction of the facility is sure to have some follow-on effects as vendors and customers consider the Airport submarket’s nearly 31 million sf of inventory.  A recent arrival of new space allows plenty of options, boosting total vacant space to 1.4 million. Here’s a quick look at Queen City’s market as published this week in Xceligent’s 4Q2016 Cincinnati Industrial Market Report:

  • During 4Q 2016 the industrial market has absorbed just over 538,504 square feet (sf), with a year to date absorption of just over 5.2M sf.
  • As a result of just over 4.6 million sf of newly delivered space, industrial vacancy has risen from 3.7% in 2Q 2016 to 4.3%.
  • The Tri-County submarket has posted the highest positive net absorption for two consecutive quarters, closing 4Q 2016 with just over 676,000 sf. This positive movement was offset by the Airport submarket which posted a negative net total of 750,000 sf.
  • The weighted average asking rent has increased year over year from $3.56 per square foot (psf) to $3.96 psf. This increase can be attributed to an increased demand with limited warehouse availability.

Industrial Property Search: CVG Airport Cincinnati

Click here to take a look at live property data centered on CVG Airport/Covington at CommercialSearch.com.

Taking To The Skies

The location choice of CVG Airport by Amazon has the company striking while the iron is hot; the airport itself has been the beneficiary of ready warehouse inventory nearby. Its growth in freight handling has been in the double digits year-over-year for the last five years. If the extra freight loads Amazon represents seems a good fit for an airport with a record of expanding capacity in a sustained push, that may be part of the company’s interest in taking to the air: their designs for floating warehouses and plans for drone delivery are far more likely to arrive than it might at first seem. If there’s one thing Amazon does, it’s deliver.

If Trump Targets Dodd-Frank, What Are the Commercial Real Estate Impacts?

While we find ourselves in the early, frenetic days of the Trump administration, it’s far from clear exactly what to expect from a White House that has single-mindedly pursued its own private list of policies without much concern for fallout or for some campaign promises. In what appears to be a intentional pattern of confusion, some of the President’s campaign promises have been confusingly dropped by the Oval Office, only to picked back up within hours. The very latest example of this pattern over the past 24 hours being his pledge to negotiate with the pharma industry to achieve lower drug prices.  This was a promise apparently dropped only to be picked back up hours later the same day.

So when the President announced yesterday that he intended to “do a big number” on the Wall Street reform package called Dodd-Frank, we got a warning something might (or might not) happen to key regulations on risk retention that deeply affect the commercial real estate industry.

Regulation, Risk and Reminders

President Trump severely criticized the Dodd-Frank law yesterday, calling it a “disaster” and promising to “do a big number” on the law soon. If the President does actually follow through with gutting Dodd-Frank, what could change for commercial real estate?  Whatever changes that stick will affect at least one of these areas:

  • The Credit Risk Retention Rule – Forces issuers of bonds comprised of performing commercial real estate properties to hold a percentage of the offering.  Affects CMBS marketplace significantly, as written about here.
  • Credit Rating Agency Reform – Rules that prevent the complicity of risk ratings agencies (Moody’s, Fitch, S&P) in mislabeling bond offerings to obscure systemic risk.  Affects CMBS and REIT share markets as well as the wider debt market transparency.
  • Legislative proposals to wind down the Government Sponsored Entities such as Freddie Mac that originate a great deal of capital for apartment building projects
  • The Volker Rule – Prevents banks from engaging in trading in certain kinds of investments. Affects: proprietary trading, disallows banks from owning or investing in hedge funds or private equity funds. If struck down, may increase availability of capital from banks to exotic or alternative financing vehicles serving the CRE industry.

Unclear (Still)

Guessing at impact is tough, because Dodd-Frank rules are a moving target — rules are still being designed and implemented with a time schedule that reaches into 2019 and beyond.  While the President signed an executive order this week compelling the elimination of two regulations for every one invoked, a move that tends to support speculation that the President sees regulations as intrinsically bad things, nobody should claim to know exactly what’s on the Donald’s mind before a) he announces it himself  and b) we wait a little bit for the dust to settle.

New FASB Standards Likely To Shorten Lease Terms

For some entities’ fiscal years beginning after December 15, 2018, we can expect to see the appearance of new property lease standards as enforced by the Financial Accounting Standards Board. Commercial real estate industry lease agreements will be subject to a new accounting standard intended to force the recognition of leases that run longer than twelve months as assets or liabilities on the books.

That’s not to say the new standards exempt leases that run shorter than one year — lessees may choose to not record an asset or liability for a lease a) whose term runs less than twelve months and b) that includes no purchase option that the lessee is reasonably likely to activate.

Minimizing the impact

The landlord side of the negotiation table is likely to be faced with pressure to reduce the lease term so as to retain the flexibility afforded by lease accounting under the old standards.  Prior to the new standards, leases were not commonly characterized as assets or liabilities and as such could be arranged relative to an owner’s bottom line with much more latitude than is offered today.

A major segment of the property leasing world impacted by the standards is tenants at the crossroads considering wether to rent or buy.  As Howard Barash of CohnReznick writes in National Real Estate Investor:

Preparing for, and complying with, the new leasing standard is not all bad news. In fact, smart businesses should treat the implementation of the new standard as an opportunity to re-evaluate, and then optimize, their leasing strategies. Companies should closely examine their current leasing contracts. They should also revisit their lease vs. buy decision criteria in light of the standard to determine which option makes the most sense for their business.

The implementation deadline for the new FASB lease standard is approaching and will be here before we know it. It will impact most businesses well beyond an accounting exercise. As such, now is the time for your business to examine its leasing process and gain input from your key business leaders.

 

President Trump’s 60-Year Lease With Uncle Sam

The inauguration of President Donald Trump, titan of commercial real estate, marked the start of a great number of legal fights concerning his numerous undivested CRE holdings.  One set of concerns raised by the political opposition centers on what it means legally for the sitting President to be doing business with foreign governments, something that appears to be happening routinely within the context of his ownership of Trump International Hotel in Washington, DC, just blocks from the White House.  The broad argument from political opponents goes: with each hotel bill paid by a foreign government staying at the luxury hotel comes a potential conflict of interest as long as the President continues to own that hotel.

Any guest-related potential conflicts aside, the development details of the hotel itself may hold unprecedented potential conflicts. The hotel property was redeveloped inside a former Post Office owned by the US Government — more specifically, the General Services Administration, an independent federal agency established in 1949 that contributes to the management of around half a trillion dollars of US federal property including over 8,300 owned and leased buildings.

GSA is the owner of the Trump International building. The lease has a reported 60-year term with two 20-year options.  The lease has clauses that are drawing attention from industry and governmental players in a way that promises much fighting in the future.

Breach? No Way To Know Yet

The legal confusion is not made clearer by the political forces interested in it.  Efforts by Congressional Democrats to undermine the administration have called certain lease clauses into question: As USA Today reports:

The [hotel] lease reads: “No member or delegate to Congress, or elected official of the Government of the United States or the Government of the District of Columbia, shall be admitted to any share or part of this Lease, or to any benefit that may arise therefrom; provided, however, that this provision shall not be construed as extending to any Person who may be a shareholder or other beneficial owner of any publicly held corporation or other entity, if this Lease is for the general benefit of such corporation or other entity.”

Thus far, the landlord does not see a breach —  GSA has not been moved to act on the strength of these inquiries, stating:

“GSA does not have a position that the lease provision requires the President-elect to divest of his financial interests. We can make no definitive statement at this time about what would constitute a breach of the agreement, and to do so now would be premature. In fact, no determination regarding the Old Post Office can be completed until the full circumstances surrounding the President-elect’s business arrangements have been finalized and he has assumed office,” the statement reads. “GSA is committed to responsibly administering all of the leases to which it is a party.”

For a in-depth look at the lease, read Steven Schooner and Daniel Gordon’s legal analysis piece at Atlantic “Has Trump’s Election Breached His D.C. Hotel Lease?”

The potentials for conflict are certainly there – without them, GSA might not respond – and the wrangling over the outcome will no doubt continue for much, much longer.

Add this to the giant pile of unprecedented commercial real estate issues raised by the inauguration of Donald Trump.

Ten Medical Property Deals This Year

The medical property sector continues to heat up nationally thanks to the greying of the population and the decentralizing trends in outpatient care. Medical office building (MOB) and retail retrofit deals are coming out of the pipeline in strength for the time being as Congress once again aims to repeal the Affordable Care Act. Only the future will tell if ACA’s repeal and replacement with “insurance for everybody” as promised by the incoming Trump administration will put a damper, a rocket booster, or something in between on the commercial property deals in the medical sector.  For now, let’s look at a national snapshot made up of ten medical sector deal items in a young 2017:

Sessions Points To Congress On Legal Marijuana

During his confirmation hearing yesterday on Capitol Hill, prospective US Attorney General Jeff Sessions sent an ambiguous message to the real estate developers, property owners and lenders working to expand legal marijuana business in states that allow it. Pressed by Sen. Patrick Leahy (D-VT) on the topic of enforcement of federal law prohibiting marijuana in those states, Sessions responded with a bit of safe boilerplate before pointing to Congress:

“Using good judgment on how to handle these cases will be a responsibility of mine. I know it won’t be an easy decision but I will try to do my duty in a fair and just way.” 

He added: “One obvious concern is the United States Congress has made the possession in every state and distribution an illegal act. If that’s something that’s not desired any longer Congress should pass a law to change the rule. It is not the Attorney General’s job to decide what laws to enforce.”

Banks, developers, investors looking for guidance on legal marijuana

The commercial real estate implications of Sessions’ dodge are significant. A growing legal marijuana industry and the real estate professionals that serve it await clear leadership on the issue as sales figures are jumping by double digits in year-over-year measures. The hunt has been on for property and legal stability for dispensary developers in a growing number of states that have adopted legalization measures, from the 28 states that have legalized medical marijuana to the eleven now legalizing recreational use. Traditional capital sources such as banks have been shy to lend and serve the industry under conditions that leave open the possibility of federal action closing the enterprises due to cannabis remaining illegal at the federal level.

As the business of legal marijuana waits for clarity from Washington, it appears the wait will go on.

States that have legalized weed

As of November 2016’s election, these seven states plus the District of Columbia have legalized marijuana for recreational use:

Alaska, California, Colorado, Massachusetts, Nevada, Oregon, Washington, Washington D.C.

And these states have some form of legalized medical marijuana:

Arizona, Alabama, Arkansas, Connecticut, Deleware, Florida, Hawaii, Illinois, Iowa, Kentucky, Louisiana, Maine, Missisippi, Missouri, Maryland, Michigan, Minnesota, Montana, New Hampshire, North Carolina, New Jersey, New Mexico, New York, North Dakota, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Wisconsin, Wyoming.

Build Better L.A.: Los Angeles Votes In New Requirements For Developers, Affordable Housing

Los Angeles is the second largest city in the ...

A significant initiative with commercial real estate effects was passed on last week’s ballot in Los Angeles. Expected to take effect this month, the measure changes, almost overnight, the labor and affordable housing requirements for developers building in the city, affecting multifamily projects with ten or more units, as well as other projects.

Measure JJJ, also known as the Build Better L.A. initiative, was sent to the voters in the general election of Nov. 8.  In Los Angeles City, JJJ passed with 64% of the vote at over 461,000 votes and according to JDSupra law blog, takes effect within ten days of the certification of vote results, or, on November 19, 2016.

Affecting projects that ask for a zoning exemption, a plan amendment, a height change or a authorization of residential use of land where previously not permitted, JJJ requires developers of projects with ten residential units or above to provide a percentage of affordable housing units on-site. Depending on the exemption sought, the percentage will fall between 5% and 40% affordable units.

Some alternatives to compliance are available.  Per JDSupra:

[T]he Initiative offers alternatives to compliance, including providing affordable housing units off-site, acquisition of “at-risk” affordable housing properties and converting the units into non-profit or other similar type of housing, or payment of an in‑lieu fee into the City’s new Affordable Housing Trust Fund. The in-lieu fee will be determined by a formula using an “Affordability Gap” multiplier as defined in the Initiative.  Additionally, projects that opt to provide off-site housing will be required to provide additional affordable units based on a formula that increases the number of required units based on the distance from the primary project.

Further, the Initiative requires that residential housing projects seeking discretionary approval be constructed by licensed contractors, with good faith effort to ensure that 30% of whom are permanent Los Angeles residents and at least 10% of whom are “transitional workers”—single parents, veterans, on public assistance, or chronically unemployed—whose primary place of residence is within a 5‑mile radius of the project.  Projects subject to the Initiative will be required to pay “prevailing wage”—an average of area wages based on a formula created by the state government—to all construction workers on the project.

(Photo credit: Wikipedia)