The Federal Reserve Beige Book, the eight-times-yearly published compendium of anecdotal information about current national economic conditions, has once again arrived. This time around, the national story on commercial real estate is about modest growth, improvement and expansion. Based on information collected before October 7 of this year, the Fed states:
Home price appreciation continued at a modest pace in general, and commercial real estate activity and construction improved since the last report. Demand for business and consumer loans increased, aside from some seasonal slowing, and credit quality remained strong or improved. Agricultural conditions were mixed, as low commodity prices pressured farm revenues despite generally strong crop yields. There were signs of stabilization in the oil and natural gas sector, while reports of coal production were mixed.
Commercial real estate leasing activity generally improved, and outlooks were mostly optimistic, although contacts in a few Districts expressed concern about economic uncertainty surrounding the upcoming presidential elections. Commercial rents were flat to up, and vacancy rates were generally low and/or declined in reporting Districts, except in the Houston metro area where office vacancies increased further. Sales of commercial properties were characterized as robust in the Chicago, Minneapolis, and San Francisco Districts but softened in the greater Boston area. Commercial construction increased on net, with contacts in the Cleveland and Atlanta Districts reporting increased or high backlogs. Shortages of skilled labor remained a constraint on construction activity in some Districts, such as Cleveland and San Francisco.
Employment expanded at a modest pace over the reporting period. Reports of hiring were strongest in the Richmond, Chicago, St. Louis, and San Francisco Districts. Layoffs in the manufacturing sector were noted in the New York, Philadelphia, Cleveland, and Richmond Districts. The Dallas District reported that energy-sector layoffs had abated, and manufacturing employment was stable following payroll reductions in recent months. Labor market conditions remained tight across most Districts. While reports of labor shortages varied across skill levels and industries, there were multiple mentions of difficulty hiring in manufacturing, hospitality, health care, truck transportation, and sales. The Richmond, Dallas, and San Francisco Districts noted a lack of construction workers with some contacts noting these shortages were constraining construction activity.
While the color beige may be popularly known as the color people use when they don’t want to use color, this report’s findings do point to our industry’s recent health — and to the green of dollars.
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
It’s an old argument, and it goes something like this: the newest federal regulations on commercial real estate lending standards in the wake of the 2008 financial crisis are too onerous for US banks to adapt to. Sarbanes-Oxley and Dodd-Frank regulatory packages taken together, the line of thinking goes, are strangling US banking and threatening efficient capital allocation by introducing piles of red tape. Too many commercial deals slow down and die waiting for capital, and it’s all thanks to these regulations, say many.
An equally old argument is its opposite: that the culture of banking, from too-big-to-fail banks down to community banks, is terrible at self-regulation. That systemic risk in lending and repackaging is a real thing that came astonishingly close to burning down the world eight years ago. That evidence is plentiful for this side — from Wells Fargo’s recent sham-account fraud and criminality to the total fines levied on big banks breaking the $200B mark.
No matter what side you find yourself on, a fact remains: to get commercial real estate deals financed, an increasing number of players are looking beyond the regulatory footprint of the US. The winners this are foreign lenders, who are enjoying eye-popping growth over the past six years of commercial mortgage lending.
Foreign Lenders Growth in CRE Outstrips CRE Growth Rates US-Chartered Banks
The Federal Reserve’s Financial Accounts of the United States includes a subsection called “L.220 Commercial Mortgages”. And on line 13 of the table that illustrates that since 2010, foreign lenders have increased their amount of money lent to commercial mortgages by a little over 80%. Second quarter 2016 has this number at $55.8 billion.
Meanwhile, US-chartered institutions increased their business in commercial mortgages by 15% on a portfolio of over $1.4 trillion. Note the two lines highlighted next to each other in the table above (click to expand).
So while the US banks lead foreign lenders by more than 30-1, the steepest commercial mortgage business growth volume by far is non-US lenders.
The Why And The What
While there’s no Fed data that puts the cause of the sharply increased foreign lending at the feet of recent regulatory attempts, that won’t stop market-ideologues from claiming that regulation is the reason.
But when they do, we have to remember that on a volume basis, under current regulation, the growth increase alone in commercial mortgage lending by US banks absolutely dwarfs the entire total foreign lending commercial mortgage market by almost 4-1.
So recent regulation is by no means fatal to commercial mortgage lending in the US. Even if we assume regulation explains the sharp rise in foreign lending, the period in question has merely eroded the huge lead US lenders have, by moving the ratio of foreign commercial mortgage lending vs US commercial mortgage lending from its 2010 level near 50-1 favoring US lenders vs. a 30-1 ratio today.
When capital markets change, it’s certainly something to keep an eye on. But rushes to judgement about cause and effect just aren’t in the Fed’s own numbers about commercial mortgage lending.
As long as the Federal Reserve continues to hold down the cost of borrowed capital, the market to trade in old financing for better terms on commercial property remains hot. Nationally, here are ten notable refinance deals in commercial real estate. Some went to fixed-rate, some went to floating-rate, but all went to the closi one more time.
- $46M For 763-unit co-op in upstate New York (REBuisness Online, Oct. 8): Details on a new loan funding current and future capital improvements for this cooperatively owned apartment complex.
- Two properties go through defeasance nullifying two CMBS loans (Commercial Property Executive, Oct 8): One consultant walks two properties through loan nullification, coinciding in one case with a sale and a refinance in the other.
- 10-year $32M loan for New Haven apartment building (REBusiness Online, Oct 6): Fannie Mae near-stabilization program participant refinances 137-unit building.
- Pair of suburban DC office properties obtain funding for lease-up – (Commercial Property Executive, Sept. 30): One floating-rate loan and one fixed-rate for two same-class Arlington office properties.
- Toys R Us looks to raise half a billion refi in CMBS market -(NREI Wire, Sept 28): Echoing past moves on the brand’s UK portfolio, toy store chain seeks refinancing of its 875 stores in the US.
- $3M refi for Staten Island office – (REBusinessOnline Sept 28): NorthMarq arranges a ten-tear term with 25-year amortization schedule.
- 1140 19th St. Washington DC – (Commercialobserver.com, Sept 27): $24 million refi for Class A DC office building features 10-year fixed rate.
- Blackstone borrows $99M for 44 Wall Street – (CommercialObserver, Sept 26): A complex debt structure includes project funds, building funds and $67.5 refinance.
- Ohio multifamily properties snag Fannie loans – (REBusinessOnline, Sept 21): One property in Columbus and one in Willoughby benefit from $18.8M in refinance by Hunt Mortgage Group.
- 102-unit senior housing facility near San Diego refinances – (REBusinessOnline, Sept. 15): CBRE Capital Markets Debt & Structured Finance team refinances The Pointe at Lantern Crest in suburban San Diego.
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)
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.
Commercial development without skilled construction workers is a recipe for no development whatsoever. Yet the country’s educational system appears to be failing the construction industry – along with commercial real estate.
The system seems content to allow millions of students at for-profit colleges to be simply fleeced and abandoned, no more employable than they were before going into debt for their education. This is the for-profit education industry’s choice: a grab for the short-term, subsidized buck over the long-term benefit to the student and to the country. Rather than orient itself toward trade education that actually meets the demands of the wider economy, the secondary educational system’s choice to turn away from the trades appears to have placed it on a direct collision course with the needs of the commercial development industry. Those needs are near all-time highs: the latest employment forecasts from the US Department of Labor say that the national need for these workers ranks higher than the needs for workers in all other categories save one (heath care).
Programs To Patch The Gap
Correcting the course isn’t going to be automatic, or even easy. Construction mogul Bill Gilbane’s piece in Commercial Observer highlights the gap between industry needs and trade education by talking up investing in programs that address high school students in the funnel for careers in construction and design. Gilbane sings the praises of the Ace Mentor Program, an afterschool program that brings high schoolers into careers in architecture, construction management, engineering and other disciplines.
Beyond programs like Ace, development and real estate firms have opportunities to address the issue on their own. As Gilbane writes about his company’s internal efforts:
But we must still do more to bring young people onboard and keep them long term. In order to meet future demand, we need to develop the pool of workers in our industry now. Developing the skills of younger professionals helps create our leaders of the future.
That is why we launched a two-year Management Candidate Acceleration Program (MCAP). The MCAP program allows younger employees to gain first-hand experience in each department at Gilbane Building Company and once they’ve completed the program, participants are prepared to step up into those roles full time—and their paths often lead to project or executive management.
This is essential to ensuring current young professionals become our next generation of leaders. It also supports our long-term employees on a path to continuous improvement. By providing technical and educational programs, we help our staff learn new skills to support their current roles and develop their leadership abilities.
These educational and mentoring models — both external and internal — are worth looking at, throughout the commercial real estate and construction industries as the economy surges forward. Let’s not let “business as usual” today serve to shut down huge business and employment opportunities in the future.
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
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
A major problem with using statistics is that today it’s much easier to count things than it is to decide exactly what to count, or exactly why to count. The answers we obtain when analyzing economic and commercial real estate data may reflect the real world, but there’s no guarantee that a set of questions are the right ones. In data science or statistical analysis, the quality of an answer entirely depends on the quality of the design of the question asked.
The way they describe this problem in the computer science world is: garbage in, garbage out. And out it comes indeed: when you ask the wrong question (or a question lacking in the right detail) the answers you get will come pouring out just as plentifully and convincingly as when you ask the right question.
The Retail Closures Question
As e-commerce continues to radically reshape the retail ecosystem, disrupting decades of assumptions about physical space, parking and real estate value, it’s perfectly reasonable to notice that a growing number of once-venerable retailing brands have closed, or are threatening to close, or are pointedly denying they will close.
In such a world, it’s reasonable to wonder what effect all this change is having on retail rents generally. That’s a good general question to put to statistical analysis, but incomplete in its basic form — you have to define exactly what retail rents are, and you have to decide what makes a good relationship between closures and those rents.
This is what Barbara Byrne Denham, an economist in the research department of Reis, Inc. has done. Her best effort to keep garbage out was to get a good handle on what rents were in metros across the country. She included data on rent growth, ranking metro areas by their growth in rent rates, such data coming from within her Reis data warehouse. From her piece “Impact Of Large Chain Closures On Retail Rents” published last week in NREI:
Few, if any, have analyzed the impact of these store closures on real estate statistics. Having property- level retail real estate data, analysts at Reis have been tracking store closures for the larger, more high-profile brands across the country. In short, the Reis database includes 280 store closures in 59 of the 80 primary retail metros that Reis tracks, totaling 12.8 million sq. ft. of closed stores across the United States. The major brands include Wal-mart, Kohl’s, Sports Authority, Pathmark, Superfresh, A&P, Waldbaums, Haggen and Kmart. Many of these closures were concentrated in a handful of metro areas, including Chicago, Central New Jersey, Northern New Jersey, Philadelphia, Long Island, San Diego and Los Angeles—all of which had more than 400,000 sq. ft. of store closures from 2015 through July of this year.
The report looks at the percentage of inventory that store closures account for and the change in rent growth rates by metro. The purpose of this analysis is to see if and how these store closures have affected rent growth rates. In short, the closures may have impacted these metros, but there is no overall conclusion that can be drawn from the data. It should be noted that this detailed data does not include details on whether or not the store spaces have been re-leased to other users. Some may have been in the interim.
The conclusions are carefully drawn in Denham’s work, as she meticulously spells out the limitations of the analysis, highlighting where and how it could differ from the real world. It’s not glamorous or provocative to be complete and correct about what a study has found, nor to be scrupulously above board concerning the work’s assumptions. The business world wants plain and actionable insights, validated by “crunching the numbers”. This isn’t that. Denham’s study suggests that the impact of sizeable retail closures on rent growth was one of many factors that contributed to declines in rent growth, and perhaps not even the strongest factor.
The study is a helpful look into a use of statistics to ask the right questions, to avoid garbage-in-garbage-out and to be scrupulous in never confusing correlation (stuff that happens nearby something else happening) with causation (stuff that happens because something else is happening). In an age marked by oceans of “big data” and thousands of software tools to work through it, it’s of growing importance that we all focus on the quality of the questions before we accept the significance of the answers.
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.