Browse Category: Research

Latest Federal Reserve Beige Book: National CRE Market Review

The Federal Reserve Beige Book, the national summary of the economy as published eight times yearly by the Federal Reserve Board arrived April 19.  What’s the commercial real estate national market picture at-a-glance?  Here’s an executive overview by district.

New York: Housing markets have improved somewhat except at the high end, while commercial real estate markets have been steady to slacker. […] industrial market continued to strengthen. New construction activity has been sluggish–both on the commercial and residential side. Banks reported that loan demand strengthened, while delinquency rates were mostly steady.

Minneapolis: commercial real estate activity was steady at strong levels.

Boston: Commercial real estate markets were somewhat mixed in the region. [..] Office construction activity continued to be restrained across the District. […]  Apartment construction activity remained significant but the pace of new deliveries slowed and the pipeline of planned projects contracted somewhat amid evidence of slowing rent growth.

Philadelphia: Commercial real estate loan volumes grew notably […]

Richmond: On balance, commercial real estate leasing rose moderately. Industrial and retail leasing and sales activity remained very active throughout the District.  […] Commercial real estate loan demand generally strengthened, but varied throughout the District.

Atlanta: Demand for commercial real estate continued to improve and construction increased from the year-ago level across most of the District. […] Most commercial real estate contacts noted improvements in demand that continued to result in rent growth and increased absorption, but cautioned that the rate of improvement varies by metropolitan area, submarket, and property type

Chicago: The pace of commercial real estate activity increased only a little overall, and the gains were limited to the for-lease segment. That said, a number of contacts reported signs of slowing activity, particularly in the retail segment.

St Louis:  Commercial real estate activity has been flat since the previous report. Local contacts indicated that demand has remained steady for most property types. Contacts noted some concerns that St. Louis office vacancy rates will rise in the near future due to new construction combined with expiring leases of vacant properties. […] Commercial construction activity was mixed.

Minneapolis: […] commercial real estate activity was flat at strong levels. […] Office vacancy rates in Minneapolis-St. Paul have ticked higher after significant new office development. There were reports of more preleasing before new projects move into the construction phase. A Minneapolis-St. Paul source noted that retail vacancies had crept up to 6 percent, but that “is still considered very low. Prime retail areas are very tight and have high rents.”

Kansas City:   […] [C]ommercial real estate sector activity continued to rise at a modest pace as vacancy rates declined and absorption, completions, construction underway, sales and prices increased. A moderate expansion in the commercial real estate sector was expected in the coming months.

Dallas:  Apartment leasing activity slowed and occupancy fell in the first quarter. Annual rent growth was solid in Dallas-Fort Worth but moderated in Austin. Rents were flat to down in Houston. Contacts generally expect slower rent growth this year.

Demand for office space was healthy in Dallas-Fort Worth, and office construction continued to be elevated there. In Houston, office demand was mostly weak and office construction tapered.

San Francisco: In some regions, activity in the commercial real estate sector slowed to a modest pace. In Alaska, residential and commercial construction activity declined, as commercial investment stalled and overall economic activity remained sluggish.

Legal Marijuana: What Will The DOJ Do To A Growing Business?

Seal of the United States Department of Justice

US Attorney General Jeff Sessions has gotten to work on clarifying the US Department of Justice’s posture on legal marijuana. The move couldn’t come sooner for the commercial real estate industry supporting this growing sector of the economy.

The enforcement of federal marijuana laws in the face of legalization by 29 states is of considerable concern to commercial real estate markets; based on the latest wave of state legislation passed, nearly 1 in 5 Americans now have access to state-legal marijuana, a figure that encompasses a whopping 68 million people.

In legalized states — and in the states expected to vote in favor of legalizing — the commercial real estate industry is on the march with sourcing and developing the industrial, land and retail property types that support and house the growing, distribution and dispensary needs of the legal marijuana business. But the road has gotten bumpy since the 2016 election.

A perpetual challenge to smooth real estate investment and to property sourcing is market uncertainty, and the Trump administration has been doing the legal marijuana industry no favors on that score. Since his confirmation as AG, Sessions, who as recently as April 2016 made the statement that marijuana users aren’t “good people”, has introduced quite a bit of national uncertainty into the legal marijuana business.  First pointing to Congress as the responsible party for a final decision, Sessions this week got a memo out to 94 US Attorney’s offices and DOJ heads that appears to take greater ownership of the impasse in legal marijuana enforcement.

The memo (read the full memo here)  addresses a newly created Task Force of Crime Reduction and Public Safety and tasks them with the following:

Task Force subcommittees will also undertake a review of existing policies in the areas of charging, sentencing, and marijuana to ensure consistency with the Department’s overall strategy on reducing violent crime and with Administration goals and priorities. Another subcommittee will explore our use of asset forfeiture and make recommendations on any improvements needed to legal authorities, policies, and training to most effectively attack the financial infrastructure of criminal organizations. 

Gone is any mention of Congress, and the singling out of marijuana in a sentence concerning itself with consistency reads (to these eyes, anyway) as a signal that the AG is looking for ideas from his bureaucracy. If I had to guess, at least some of the feedback Sessions receives will mention in no uncertain terms that violent crime and the legal marijuana business are distinctly different phenomena in at least 29 states of the union.

The deadline for response from the memo recipients is July 27th of this year.

Self Storage Investing On Rebound In 2017

Photo of self-storage facility hallway

After reading IRR’s latest report on the national self-storage property marketplace, I was inspired to take a closer look at this dynamic sub-sector. A wealth of commentary and metrics, the 2017 National Viewpoint National Self-Storage Report lifts the veil on this specialty sub-sector’s comeback from the 2008 recession and suggests where the market is headed based on past performance.

The fundamentals of the market are solid, says report author Steven J. Johnson, MAI, Senior Managing Director at IRR-Metro L.A.  Coming off of a hot year in 2016, the national marketplace in self-storage saw two huge portfolio deals completing, totaling over $3 billion alone. This in a wider market that sports some interesting drivers and leading indicators:

Only 15% of self-storage held by REITs

Quoting the report as calling the national market “fragmented” and dominated by small groups or mom-and-pop operations, it surprised me to see that institutional investors have thus far left 85% of the self-storage pie on the table. From where I’m sitting, that suggests that, all things being equal, acquisition volume in is likely to rise in 2017. Adding to the heat: cap rates on average are landing between 6 and 6.25% across all class types.

Customer life events drive the self-storage business

Classic drivers of the self-storage industry include marriages and divorces.  There were approximately 2.2 million marriages and 800K+ divorces in the US in 2016.  This shows basically flat to declining national trends, both trailing downward slightly, which might appear to go against the case for market growth, but remember that buried in these numbers are cohabitation events displacing some marriages.  Other important life events include births,

See for yourself: browse Self Storage national property listings right now at CommercialSearch.com

Check out the live national picture in self-storage property right now —  click over to this query of  self-storage properties for sale at CommercialSearch.com. The current listings count reads nearly 250 properties, located all across the US in primary, secondary and tertiary markets. The range of locations and classes tell the tale: this is an investment property class that has hung out its shingle and is doing business.

(Photo credit: Wikipedia)

CommercialSearch Integrates Realtors Property Resource

Logos of CommercialSearch and RPR

Transformational providers of commercial real estate data don’t often find ways to interoperate, but when they do, the user benefits pile up fast.  Starting tomorrow, a notable new integration arrives: REALTOR® users of CommercialSearch’s national marketplace in commercial real estate data will have one-click access to powerful new features driven by RPR Commercial, including tax information, transaction history, and more.  From RPR:

As of March 16, 2017, REALTORS® with CommercialSearch who hold RPR accounts can easily jump from a listing within CommercialSearch into RPR’s extensive commercial property and trade area data, investment analysis tools, business intel, and comprehensive reports.

“RPR’s mission is to serve the needs of our 1.2 million REALTORS®,” said Emily Line, RPR vice president of commercial services. “Through partnerships like the RPR / CommercialSearch integration, we are able to expand our service offerings and to ultimately save our members time and money previously spent on multiple applications and subscriptions.”

The integration offers REALTORS® on CommercialSearch one-click access to RPR data found on both the website and RPR Mobile™. Subscribers will find property and owner facts, mortgage and tax info, transaction history, maps and photos. Visual heat maps can be drawn down to the census block group level with 25+ variables including traffic counts and more than 20 million business points of interest. And RPR Commercial reports––which can be sent by way of email or text–– reveal data on consumer segmentation, population, age, marital status, economic conditions, and education comparisons, among other datasets.

David O’Rell, managing director of CommercialSearch, believes the partnership furthers Xceligent’s commitment to providing an open technology platform that combines researched content with leading workflow tools.

“We are excited to partner with Realtors Property Resource®,” said David. “We will now be able to provide RPR account holders an exclusive opportunity to analyze local dynamics surrounding properties actively listed for lease or sale in the CommercialSearch national marketplace.“

About RPR® Commercial

Realtors Property Resource® (RPR®) is a wholly owned subsidiary of the NATIONAL ASSOCIATION OF REALTORS®. RPR Commercial provides REALTORS® with persuasive, decision-making data and reports for all types of clients. From identifying site selection using data sets such as public records, traffic counts, business points of interest, demographic and psychographic insights, and consumer spending data, to presenting reports that accurately depict current market activity as well as future projections, this valuable members-only benefit truly helps to validate a practitioner’s expertise.

About Xceligent™

Xceligent™ is a leading provider of verified commercial real estate information across the United States. Xceligent’s professional research team pro-actively collects: a comprehensive inventory of commercial properties, buildings available for lease and sale, tenant information, sales comparables, historical trends on lease rates and building occupancy, market analytics, and demographics. This information assists real estate professionals, appraisers, owners, investors, and developers that make strategic decisions to lease, sell, and develop commercial properties. Xceligent™, backed by dmg information, has launched an aggressive national expansion that will provide researched information in the 100 largest United States markets. Visit Xceligent.

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.

 

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)

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