Browse Category: Research

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.

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)

New Supermarket Arrival Lidl Promises To Be Big

Retailing industry analyst Kantar Retail this month released an impact study on the US supermarket sector that highlights a new entry from Europe. Lidl, a no-frills grocery chain headquartered in Germany, is in business in 28 countries in Europe, is expected to enter the US market in 2018.

Similar to Aldi, another German supermarket competitor who have long since set up shop in the US, Lidl stores take a low-staff, no-frills approach to supermarket operation, displaying skids of product in aisles, letting customers take product from opened cartons. A lack of specialty areas, preferred by some other supermarket chains, creates store floor plans that are streamlined and configurations that demand less of basic space than does the average US supermarket.

The Predictions

Kantar sees Lidl as opening over 100 stores a year in the US, with a total of 400 up and down the east coast by 2020.  The chain’s operating efficiency is touted, as a single, fully mature store could generate $14 million, or , “a lot of volume packed into a 36KSF box”. Other highlights from Kantar:

  • Lidl could surpass USD2 billion in volume by the end of its second full year of operations
  • By 2023, we believe Lidl could approach USD 9 billion in sales, which is more than what Wegmans does today
  • Expect Lidl to have over 400 stores up and down the East Coast by the start of the next decade

East Coast Rollout Locations To Watch

The chain’s US corporate headquarters is announced as being located in Arlington County, VA. European press has put a location of the first wave of Lidl stores as Virginia Beach.  Its logistics network has already put down roots with two regional distribution centers, one in Alamance County, NC and Arlington County.

Boo Diligence: Evaluating The Halloween Industry

With over 4,000 haunted houses and horror attractions running across the United States, chances are there’s one serving your scarea. Ever wonder what goes into site selection for these specialty properties? Plenty of boo diligence.

The holiday’s economic impact is spooktacular: according to the National Retail Federation, Americans spent over $8 billion on Halloween in 2012. October brings not only p-eek foot traffic for haunted attractions, but also a wave of retail pop-ups to sell costumes and party supplies. Chopping center managers know: these seasonal pop-ups can produce a distinct upward pressure on NOI (net op-boo-rating income) for the fourth quarter balance sheet.

And why not?  Vacant commercial space screams out for an inexpensive solution, one without capit-owl expenditure. Landlords can cash in on the holiday, but must be careful to not leave themselves exposed on costs for CAM (cauldron area maintenance), especially for properties financed with steep groan-to-value terms or that that depend on high IRR, (interment rate of return). As always, sound business principles should win over witchful thinking.

List of haunted commercial sites

The haunting industry — yes, it’s actually called that — appears to have a nerve center online called Hauntworld.com.  There you can find a North American directory of haunted house operations, suitable for a quick dip of real estate market research as we find ourselves in the trick-or-REIT season. Use it to spot an opportunity: maybe you can put some of your vacant invent-eerie to work next year.

2,200 Year Old Lease Literally Written In Stone

Stone tablet containing 2,200 year old lease agreement

2,000 years ago on the western coast of Turkey, the ancient Greek city of Teos stood. A Mediterranean port and center for regional commerce, Teos’s two harbors brought people and goods throughout the Anatolian region of modern Turkey. The commerce brought with it law and paperwork, although a great deal of the “paper” twenty centuries ago was actually stone.  Teos is today an archaeological goldmine thanks to so many written — or chiseled — words.  Discovered this year: a 1.5 meter-long inscribed stone tablet containing a detailed 58-line commercial lease complete with a few disturbing clauses. From the Ars Technica piece on the discovery:

Carved into a 1.5 meter-long marble stele, the document goes into great detail about the property and its amenities. We learn that it’s a tract of land that was given to the Neos, a group of men aged 20-30 associated with the city’s gymnasium. In ancient Greece, a gymnasium wasn’t just a place for exercise and public games—it was a combination of university and professional training school for well-off citizens. Neos were newbie citizens who often had internship-like jobs in city administration or politics. The land described in the lease was given to the Neos by a wealthy citizen of Teos, in a gift that was likely half-generosity, half-tax writeoff. Because the land contained a shrine, it was classified as a “holy” place that couldn’t be taxed. Along with the land, the donor gave the Neos all the property on it, including several slaves.

Use Of Premises Clauses

Beyond enshrining the brutal custom of slavery, the lease agreement also describes a tax-deductible donation of property and numerous clauses concerning punishments if the property was misused.  From the Hurriyet Daily News:

In order to meet the expenses of this land and to get income, the Neos rented the land. The inscription tells us who owned the land in the past and what it includes. It also mentions a holy altar. The Neos express in the agreement that they want to use this holy place three days a year. In this period, the state collected tax from lands. But since the land was defined ‘holy,’ it was exempted from tax. It is understood that the land was rented at an auction and the name of the renter is written on the inscription,” [Archeology professor Mustafa] Adak said.

[…]

Almost half of the inscription is filled with punishment forms. If the renter gives damage to the land, does not pay the annual rent or does not repair the buildings, he will be punished. The [property-owning] Neos also vow to inspect the land every year,” said the Akdeniz University professor. 
 “There are two particularly interesting legal terms used in the inscription, which large dictionaries have not up to now included. Ancient writers and legal documents should be examined in order to understand these words mean,” Adak said.

As I’ve written here before, the ancient world’s commercial property business was a fascinating and sometimes depressing thing. So the next time you’re convinced the commercial lease on your desk is difficult to understand as well as being hard to break, think of  the landlords of Teos, their human property and their stone lease.  Today’s tenant has it relatively easy under that comparison.

Photo credit: Ars Technica

 

Parking Ratios: The Next Great Correction?

English: Photo of parking spaces in an America...

Determining the parking ratio for a commercial property project isn’t complex arithmetic. The number of parking spaces per 1,000 square feet of gross rentable space is the parking ratio. Sometimes a property’s type calls for a minimum number of spaces, sometimes local zoning regulations call for a minimum.  But these minimums are getting a second look in the near future as driving becomes less popular and cities stress walkable development.

A University of California study on parking in 2011 found that the US sports over 800 million parking spaces, taking up 25,000 square miles of land, or about the equivalent of the entire land area of West Virginia — or four New Jerseys.

With a commitment like that, it’s a fact that a huge amount of value is locked up in parking lots.  And now, cities across the US and the world are rethinking the level of commitment to parking.

The Guardian’s recent piece “Lots to lose: how cities around the world are eliminating car parks” takes a drive around the issue, looking for a future less committed to yellow painted lines on asphalt and more committed to green — both the sustainable and the folding kind.

As cities across the world begin to prioritise walkable urban development and the type of city living that does not require a car for every trip, city officials are beginning to move away from blanket policies of providing abundant parking. Many are adjusting zoning rules that require certain minimum amounts of parking for specific types of development. Others are tweaking prices to discourage driving as a default when other options are available. Some are even actively preventing new parking spaces from being built.

[…]

To better understand how much parking they have and how much they can afford to lose, transportation officials in San Francisco in 2010 released the results of what’s believed to be the first citywide census of parking spaces. They counted every publicly accessible parking space in the city, including lots, garages, and free and metered street parking. They found that the city had441,541 spaces, and more than half of them are free, on-street spaces.

Knowing the parking inventory has made it easier for the city to pursue public space improvements such as adding bike lanes or parklets, using the data to quell inevitable neighbourhood concerns about parking loss. “We can show that removing 20 spaces can just equate to removing 0.1% of the parking spaces within walking distance of a location,” says Steph Nelson of the SFMTA.

The data helps planners to understand when new developments actually need to provide parking spaces and when the available inventory is sufficient. More often, the data shows that the city can’t build its way out of a parking shortage – whether it’s perceived or real – and that the answers lie in alternative transportation options.

 

Getting Demand Right

Using dynamic pricing, San Francisco managed to reduce the demand for parking by nearly half.  But sometimes demand falls without changing pricing, as in Philadelphia:

Since 1990, the city of Philadelphia has conducted an inventory of parking every five years in the downtown Center City neighbourhood, counting publicly accessible parking spaces and analysing occupancy rates in facilities with 30 or more spaces. Because of plentiful transit options, a walkable environment and a high downtown residential population, Philadelphia is finding that it needs less parking. Between 2010 and 2015, the amount of off-street parking around downtown shrank by about 3,000 spaces, a 7% reduction. Most of that is tied to the replacement of surface lots with new development, according to Mason Austin, a planner at the Philadelphia City Planning Commission and co-author of the most recent parking inventory.

What becomes plain as more cities line up to improve infrastructure and walkability, or use technology to re-jigger pricing as demand fluctuates: parking as we’ve known it — and priced it — is nearing the end of its era. Fixed minimums or quotas may lag behind the new reality, but developers and property owners will need to stay vigilant as old, reliable parking ratios no longer find space in reality.

(Photo credit: Wikipedia)

 

 

Cornstalks In The Big Box? Target To Add In-Store Vertical Farms

English: Logo of Target, US-based retail chain

Major metropolitan areas are making an effort to distance themselves from the traditional food supply chain. Cities, dreaming of achieving food independence from the farms that surround them, are increasingly turning to vertical farming projects that grow food in urban settings.  Thanks to giant advances in green engineering and sustainable agricultural technologies, these vertical farms are gaining industrial scale efficiency.

Marking this progress is news that Target stores will debut vertical farms inside some of their stores this spring.  According to Business Insider, the big box retailer will add vertical farms to some of its stores this spring.  Customers will be able to pick their own leafy greens — or have store staff take on the task. From the piece in Business Insider:

In January, Target launched the Food + Future CoLab, a collaboration with design firm Ideo and the MIT Media Lab. One area of the team’s research focuses on vertical farming, and Greg Shewmaker, one of Target’s entrepreneurs-in-residence at the CoLab, says they are planning to test the technology in a few Target stores to see how involved customers actually want to be with their food.

“The idea is that by next spring, we’ll have in-store growing environments,” he says.

During the in-store trials, people could potentially harvest their own produce from the vertical farms, or just watch as staff members pick greens and veggies to stock on the shelves.

Most vertical farms grow leafy greens, but the CoLab researchers are trying to figure out how to cultivate other crops as well.

“Because it’s MIT, they have access to some of these seed banks around the world,” Shewmaker says, “so we’re playing with ancient varietals of different things, like tomatoes that haven’t been grown in over a century, different kinds of peppers, things like that, just to see if it’s possible.”

Space And Indoor Agriculture

Does your property portfolio include a potential vertical farm? For ideas on vertical farming space configurations, these concept videos from architects help to visualize indoor farming on a profitable scale. To overcome the big spread between cost of land in urban vs. rural areas, most vertical farming has to emphasize the vertical and get more yield per ground square foot than traditional dirt.  In the case of a big box or supermarket devoting a portion of its footprint to vertical farming, that requirement might not apply, suggesting there’s a market developing for modular indoor farming operations that insert smoothly into traditional food retailing floor plans.  If you’re aware of developments in this area, leave a comment and let’s both keep an eye on this technology.

 

Introducing Spaceful by Xceligent: Space Tours Made Easy

Screenshot photo of Xceligent Spaeful

When it’s time for a business to investigate new locations for itself, decision-makers have a big job. Commercial real estate brokers and their tenant clients need to tour locations and experience spaces in ways big and small.  Putting together tour books — the right mix of location information and space experience — is a major challenge. Yesterday,  a new software tool arrived that smooths out and radically speeds up the process of building, distributing and collaborating on space tour books.  Introducing Spaceful by Xceligent.

What used to take hours now takes minutes with Spaceful. “The space-tour is a critical step on a broker’s path to closing a deal,” said Doug Curry, Xceligent CEO.  “So, we created a tool  that makes that process fast and hassle-free.  Brokers can now assemble digital tour books in minutes – not hours – and edit or update them in real time based on feedback from colleagues and clients,” Curry said.

Spaceful delivers dynamic tour books that contain easy-to-view, detailed information on spaces and buildings, area information including notable companies nearby, retailers, restaurants, and public transportation options.

Assemble Tours Easily

Screenshot of Spaceful by Xceligent
Click to expand

If plans change, reordering tour stops is a snap – real time map updates reflect property information contained in past tour books, third-party data providers.  Include information about notable neighbors and area amenities with ease.

Send Tour Books To Clients The Way They Want Them

Click to browse a sample tour book — no more paper! Spaceful’s sharp digital interface presents the books to clients’ smart phones, pads or computers – send out links to participants in a snap.

Collaborate Easily On Tour Books

Spaceful allows you to share work-in-progress tour books with collaborators.  Leverage your entire team’s knowledge of the area and bring it to bear at exactly the right time and place.

Try Spaceful For Free

Create your first tour book with Spaceful by Xceligent at this link.

 

Kmart CEO: We’re Not Going Under

 

kmart_logo-svg

Kmart, granddaddy of the big box retail format, addressed fears yesterday that the brand’s recent struggles are fatal.  Kmart CEO Eddie Lampert took to the pulpit to deny “recent reports”  that the chain was near the end, a matter of great importance to hundreds of Kmart-anchored shopping centers across the US.

Reports have persisted over 2016 that the chain was in a free-fall, but Lampert took issue with the fears in a statement posted at Kmart parent Sears Holdings:

I also wanted to comment on the frequent false and exaggerated claims surrounding our Kmart business. Recent reports have suggested that Kmart will cease its operations. I can tell you that there are no plans and there have never been any plans to close the Kmart format. In fact, we’ve been working hard to make Kmart a more fun, engaging place to shop, powered by our integrated retail innovations and Shop Your Way. To report or suggest otherwise is irresponsible and is likely intended to do harm to our company to the benefit of those who seek to gain advantage from posting these inaccurate reports.

There are a few things that are very important for you to keep in mind. First, Kmart continues to operate over 700 stores. Second, a significant number of these stores are profitable and have been profitable for many years. Third, we have been clear that we are intent on improving the performance of our unprofitable stores and, if we cannot, we will close them. Actions to improve our store productivity, including reducing inventory stored in the stockrooms, are designed to make our stores easier to operate and to eliminate unproductive inventory and processes. Decisions to close stores are never easy, but we recognize that the way people are shopping is changing significantly. This is why we have made major investments in our online and mobile platforms and this is why our focus on serving members through Shop Your Way is so important.

Uber Partnership Touted

In what could become, if proven successful, a game-changer for shopping center parking space calculation formulas, the Shop Your Way customer-convenience program touted by Lampert leverages both Kmart and Sears brands and includes an innovative partnership with ride-sharing powerhouse Uber. Points and reward programs are used to tie ride-sharers and Uber drivers to the Kmart brand at the same time they shop among Kmart and Sears’s shelves.

Will the new customer-convenience programs rescue these troubled, venerable retail brands? Can Kmart and Sears innovate their way into the future?  Can a recipe of hundreds of millions in loans from its CEO plus new ideas rescue Kmart?  Answers to these questions are fast approaching, anticipated by landlords, managers and brokers from coast to coast.