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)
The industrial property subcategory 3PL, or third party logistics, is a rapidly expanding market across the US. Steady growth in e-commerce has created a growing dependency upon these warehousing and logistics properties thanks to their effect of reducing delivery time on goods shipped to customers. With e-commerce sales worldwide set to pass $2 trillion in 2017 in pursuit of double-digit annual growth, knowledge of the 3PL industry will pay off for the commercial real estate professional patrolling this piece of the national supply chain. What follows in this post are two helpful sources of quick information about the 3PL as it lives and breathes today.
Video: Dynamic 3PL Logistics
If you’re in need of a rapid refresher on the global supply chain and need a helpful glimpse at the shape and vocabulary of 3PL, check out this short video by 3PL provider Dynamic 3PL Logistics. To the point, short, yet packed with illuminating info, this clip will get the point across about 3PL — fast.
Fifty Most Successful 3PLs
While far from a comprehensive or updated list, the article “North America’s 50 Most Successful 3PLs” from SupplyChainBrain.com collects an excellent top-down view of North America’s top 50 3PL operators, including some depth on the operations, local and global. Researchers arriving to this market will find a useful bookmark here.
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.
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.
Funding commercial mortgages with customer deposits is a central purpose for any huge bank. But when a big bank plays fast and loose with its reputation to the degree Wells Fargo has, it creates a special risk to the entire commercial lending ecosystem that should be understood.
Wells Fargo’s recent scandal is the living definition of “fast and loose”. The bank was outed as an identity thief and slapped with a $185 million fine for the fraud of signing up millions of its customers for programs without their knowledge or consent. But that’s a mere traffic ticket compared to what may be coming from market recrimination.
A recent study by consulting firm CG42 spoke to 1,000 of Wells Fargo’s customers and found, unsurprisingly, that people don’t like doing business with a bank they can’t trust. The study identified a potential loss of deposits totaling $99 billion as customers head for the door. From the CG42 study:
Our findings show significant damage has already been inflicted on the bank’s reputation. Over 85% of consumers surveyed are aware of the scandal, and positive perceptions of the brand sunk from 60% before the scandal to 24% post-scandal. More tellingly, negative perceptions of the brand increased from 15% before the scandal to 52% post-scandal. This blow to Wells Fargo’s reputation will hamstring the bank’s ability to retain customers and attract new ones, as our study reveals.
While only 3% of Wells Fargo’s customers report being affected by the scandal, a full 30% claim they are actively exploring alternatives and 14% have already made the decision to switch banks as a result of the scandal. This represents $212B of deposits and $8B of revenues at risk. Our projections indicate Wells Fargo will lose $99B in deposits and $4B in revenues over the next 12-18 months as a direct result of the scandal, dealing a hard blow to the bank’s finances.
Consistent with findings from our past Retail Banking Vulnerability Studies, community and regional banks stand to gain the most from the fallout of the scandal, with a projected $38.7B in gained deposits and $1.6B in gained revenues over the next 12-18 months. Chase and Bank of America will also profit from the fallout, largely due to their national presence which makes them a viable alternative for customers who seek the convenience of a bank with branches across the U.S.
The chain of cause and effect goes like this: $99 billion of deposits walk out the door, depriving Wells of its least expensive capital, leading to higher capital costs for its borrowers financing new commercial mortgages. Add to this the (unknown at press time) potential for angry commercial borrowers currently financed through the bank to re-finance and take their business elsewhere.
Is there a mass exodus of commercial customers through refinance in the cards for Wells Fargo? Some believe not, with one Wall Street analyst referring to Wells’ customer base as “incredibly sticky”, meaning the overhead cost of changing lenders is too steep for customers.
But that perspective may fade as the scandal continues to expand from the retail side and into the commercial side of the bank’s business. Coming to light now are tales of Wells’ shabby treatment of its business customers. In other words, Wells appears to have been just as abusive in the cultural and economic space where commercial financing lives. From Reuters:
Reuters also spoke to a former Wells employee, and a lawyer representing former employees and a former and current Wells customer, who described abusive sales practices with multiple business accounts. Jose Maldonado, a restaurant owner in Southern California who banked with Wells Fargo for 15 years, said he discovered seven accounts after enlisting the help of his accountant. He initially closed extraneous ones, and ultimately moved his remaining business to Bank of America Corp and JPMorgan Chase & Co.
“I don’t like Wells Fargo anymore. I don’t feel comfortable,” Maldonado said in an interview. “In the past, there were sometimes crazy accounts without my permission.”
Langan declined to comment on Maldonado’s accounts.
An ex-Wells Fargo business banker, who declined to be identified, said employees at his former branch were required to sell products to small business customers such as hair-salon owners and carpet cleaners in packages of three – regardless of whether they needed them.
Those typically included accounts for checking, credit card processing and payroll, and were often linked to additional savings accounts, said the former Wells banker. Bankers also tacked on business credit cards and were pressured to call a Wells insurance unit, with the customer present, to push business liability policies.
News of Wells Fargo’s business practices isn’t done doing damage. The question is: will the commercial mortgage finance marketplace hold Wells alone responsible, or will all too-big-to-fail banks be looked at skeptically in the future?
With the expected flight to community banking, and with so many alternative financing options arriving every quarter, it wouldn’t be a surprise.
(Photo credit: Wikipedia)
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.
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)