Quick, no Googling – on what does the US spend more on energy? Transportation or buildings?
Every year, $400 billion goes to energy to buildings, a sum that adds up to roughly 40% of the total US annual energy expenditure. That makes energy to buildings is the largest single sector in US energy consumption, including transportation.
With a figure that large, and with so much commercial property inventory having been built decades before serious energy efficiency features occurred to architects, owners and developers, you can bet that opportunities to save energy dollars in commercial property are huge.
Along with huge opportunities to control costs and rewrite operation and development plans, local government sustainability policies figure greatly in the bottom line of new and existing commercial property development. Getting to the actual policie, so as to know what flies in one state and doesn’t fly in another presents a challenge.
Building Energy Policy Briefs Aplenty
BuildingRating.Org is operated by the Institute for Market Transformation, a DC-based nonprofit dedicated to promoting energy efficiency in buildings, has done a service by collecting and making available an ever-growing archive of sustainable energy building policies for local jurisdictions across the US. Check out the most recent collection at these links today — and get a handle on how energy efficiency savings and local government relate with programs, policies and case studies.
- District of Columbia
- Austin, Texas
- Washington State
- New York City
- San Francisco
- Montgomery County, Md.
- Cambridge, Ma.
- Berkeley, Calif.
- Portland, Ore.
- Kansas City, Mo.
- Boulder, Colo.
A pair of Chicago-based brokerages have reported that all-time lows in cap rates for net leased industrial properties are a harbinger of greater demand for the property class. In its Net Lease Market Report for Q1 2016, net lease commercial real estate firm Boulder Group has identified the see-saw linking low cap rates top high price points for net lease single-tenant industrial properties. From the report, authored by Boulder VP John Feeney:
Cap rates in the first quarter of 2016 for the single tenant net lease retail and industrial sectors reached a new historic low rate of 6.18% and 7.10% respectively. During the same timeframe, cap rates for the office sector increased by 20 basis points to a cap rate of 7.20%. Cap rates for retail assets continue to decline and trade at much lower cap rates than that of net lease office and industrial properties due to their preference amongst private and 1031 buyers. Private and 1031 investors typically pay lower cap rates than institutional investors, especially for retail assets. Private and 1031 buyers are more familiar with retail tenants, prefer the lower price points and understand the general business practices of these tenants when compared to industrial or office tenants […]
After the decision was made in the December Federal Reserve meeting to raise key interest rates, the 10 Year Treasury plummeted to its lowest point since February of 2015. Since that time, the 10 Year Treasury has trended upward, however remained lower than its sudden increase prior to the Federal Reserve’s decision to increase rates in December 2015. The net lease market is expected to remain active in 2016 as investor demand and allocated capital for this asset class remains strong. With the volatility of the 10 Year Treasury effecting capital markets, investors will be monitoring the capital markets and adjusting their bids accordingly. 1031 and private investors will be less effected by the volatility of the financing markets than institutional investors. This can be attributed to their acceptance of lower returns when financing or all cash closings due to their 1031 timing and tax consequences.
Stan Johnson reports that the average cap rate for the entire net lease market fell to 5.79 percent in the first quarter, from 6.24 percent over the past 12 months. The average price per sq. ft. went up about 10 percent, to $169.
The overall supply of product in the net lease sector declined by 3.0 percent since the fourth quarter of 2015, The Boulder Group reports, as new construction has remained limited.
“New construction properties are in the highest demand amongst 1031 and private buyers as they typically have the longest lease term,” the firm’s researchers write. “The limited supply has kept cap rates low for all three sectors despite the volatility in the 10-year treasury over the past year.”
Download a complete copy of NREI’s Net Lease Trends report here.
The recently announced Financial Accounting Standards Board changes to lease accounting won’t be in effect for three to four more years, but their potential impact on commercial real estate portfolios could be significant. New business could be the result — moving multi-year leases around on the balance sheet could tip said balances enough to prompt a round of property purchases or consolidations. Complying with the new changes could mean that and more for landlords — and the professional services that go with compliance are sure to be in a bit greater demand as the rules burn into business plans.
Talking a bit about potential impacts and timeframes is NAR Commercial Regulatory Policy Representative Stephanie Spear, who appears in a quick video outlining the changes potentials from the perspective of the commercial real estate industry.
CCIM Professional Education on FASB Lease Accounting Changes
It’s no surprise that CCIM Institute is on the case with instructor-led education on the lease changes and their connections to commercial property. After the jump, check out the course offerings by instructor Peter Barnett, PwC’s Director Of Real Estate.
The recent changes to the Foreign Investment in Real Property Tax Act (FIRPTA) that came with the 2015 Omnibus Spending Bill are making waves in commercial real estate investment circles. Stay on top of what the changes mean to private equity, real estate and mutual fund investors and managers. The ins and outs are many and complex – if a REIT or a RIC (“regulated investment company”) is on your radar screen, the changes to FIRPTA are probably worth knowing about.
Mark the date: on Tuesday, April 12, 2016 at 2:00 pm EST, the National Association of REALTORSⓇ has scheduled a free live webinar on the very topic. Presenters include Evan M. Liddiard, CPA, NAR’s Senior Policy Representative on Federal Taxation. and Linda Monaco, Esq., Legal Education Attorney.
The Protecting American Taxpayers From Tax Hikes Act (PATH), enacted in December 2015, included several important changes to the Foreign Investment in Real Property Tax Act. The Path Act changes mean more foreign investment in U.S. real estate but also some compliance headaches. FIRPTA imposes a withholding tax on foreign persons disposing of real property in the U.S. This webinar will explain the reasons behind the changes and also teach everything you need to know about complying with the new rules. It will discuss recent changes to FIRPTA made by Congress, the tax implications for residential and commercial buyers and sellers, and practical “nuts and bolts” information about how to comply.
To register for this free NAR webinar on April 12, click here.
In today’s commercial real estate, large technology systems used for high-volume financial settlements are not a great fit. As an asset class, commercial property’s tendency toward illiquidity carries a peculiar anti-technological bias. In CRE, most financial settlements occur in the process of property transactions such as purchases or leases. These tend to have lifetimes measured in months and years, as opposed to stocks and bonds, where ownership and packaging can repeatedly change on the basis of seconds and minutes.
The added volume and complexity that comes with comparatively liquid stock and bond markets has been a driver for the creation of high-technology settlement systems that tick along in the background of Wall Street. These back-office utility systems are seldom thought of, but in fact provide market participants with a critically important service: the bedrock truth about ownership and transactions.
In the CRE world, comparable truth is about keeping track of payment, escrow and title. By and large, these mechanisms are designed into contracts known to the parties, crafted to describe an immediate future where the players are unlikely to change.
That said, not everything here runs at the speed of paper. The industry has developed its own investment vehicles – REITs, private equity, CMBS, crowdfunding – and can be expected to create more in the future. When those vehicles are created, expect to see greater involvement of the blockchain.
What’s the Blockchain?
Today, when money moves into or out of a transaction, we update at least one ledger. That ledger could be a hand-built Excel sheet, it could be a database system containing all transactions, it could even be paper, presuming you’ve got a goose quill to match. Typically, ledgers are, like most accounting, private.
The blockchain is a very modern software mechanism to conduct payments, accounting, escrow, repurchase, even title, in full view of all parties, subject to contract rules. Consider it a distributed ledger. It operates in public, heightening transparency of transactions. It can be automated, meaning the funding, for example, of escrow accounts ahead of dependent transactions found in leases or purchase agreements can be made automatic, potentially speeding up the transaction and heightening financial predictability.
Growing past its origins as part of the digital currency called Bitcoin, the blockchain’s features are attracting attention from increasingly heavy hitters in finance.
Getting Ready For Prime Time
In a sign that the blockchain is maturing, it is now being offered as a primary technology by a giant among those back-office settlement systems I mentioned earlier. DTCC, the Depsitory Trust & Clearing Corporation provides a raft of services to financial markets, including the tracking of repurchase agreements between banks. With this week’s announcement, DTCC will be offering the blockchain as the means by which counterparties will conduct automated repurchase business, a kind of short-term financing where debt bounces between opposite ends to meet a goal.
This doesn’t mean anything’s changed in commercial real estate, but it does mean the blockchain’s features are going to get their moment in the mass-financial-market sun. How well the blockchain does at delivering predictability, liquidity, transparency and other features that mark popular investment vehicles is a great indicator for how much change is on the horizon for CRE –from leases to securitization and everywhere in between.
In Krispy Kreme’s national growth story, a company set out to test two different strategies: franchising vs. company ownership of stores. With hundreds of stores nationwide today, the donut brand seems to have made a choice: of the two, franchising is sweeter.
At this month’s earnings call, CEO Tony Thompson spelled it out plainly in Jonathan Maze’s piece in Nation’s Restaurant News:
“Domestically, our franchisees continue to outperform our company shops,” he said during the call. “Thus, we believe that by focusing more on franchising, we will be in a greater position to maximize the value of the brand for the long term.”
Consider the fourth quarter ended Jan. 31. Company-operated locations in the U.S. reported same-store sales growth of 0.2 percent. But franchisee same-store sales rose 2.5 percent.
Krispy Kreme has 297 domestic locations. Franchisees operate 181 of those locations after adding a net 14 units. The company, by contrast, opened a net five locations over the past fiscal year, after factoring in five closed company units. Franchisees operate all 824 of the chain’s international locations.
To focus more on franchising, however, the company has to make several investments and changes to help operators build more profitable locations and generate higher sales from those units.
Krispy Kreme has several initiatives in place to reduce the investment cost for new stores by “several hundred thousand dollars,” Thompson said. That includes lower costs for construction, site location, equipment and pre-opening.
CEO To Hike Support For Franchisee Real Estate
Thompson went on to spell out what giving the nod to the franchising business model entails – heightened support for real estate, finance, technology and development. A foundational part of any growth plan, real estate support for a franchise traditionally includes strategies for site selection, lease negotiation and build-out.
Will that knowledge flow from Krispy Kreme corporate out to franchisees existing and prospective? Or will the superior profitability track record of franchisees originate some of this heightened support to future store operators?
Time will tell.
Photo credit: Wikipedia
The Mortgage Bankers Association’s combined national numbers for commercial mortgage debt held by non-banks tell an interesting tale. The total dollar amount of maturities has risen a sharp 51% from 2015, meaning more debt will mature – yet the bottom line is that principal balances are increasingly prepaid and paid-down. Michael Gerrity’s piece in World Property Journal spells it out:
“More commercial and multifamily mortgages are maturing in 2016 and 2017 than have the last few years, but early refinancings and pay-downs are chipping away at those totals. The bottom line is that the ‘wall of maturities’ that has been the focus of concern the last many years is receding,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research. “Last year’s survey tracked $225 billion of commercial and multifamily mortgages that were set to mature in 2016. This year’s survey found that 2016 maturities had dropped by 18 percent, to $183 billion as loans prepaid and paid-down. That’s roughly the same amount that matured in the year 2010.”
The “wave of maturities” in the space — approximately $350B worth set for the three years 2015-2017 — do suggest that a whole lot of refinancing is expected for those loans needing it. The specter of rising interest rates means the price of financing may be set on a collision course with the demands of of extra commercial borrowers feeling the pinch.
In 79 AD, the Roman cities of Pompeii and Herculaneum were famously destroyed by the eruption of nearby Mount Vesuvius, a volcano found near the Mediterranean coast of modern-day Italy at the Gulf of Naples. At the time of the eruption, the Roman empire was in full flower, bringing with it civil engineering, commerce, law and property markets. Before the volcano buried Pompeii in twenty feet of ash, it was a busy city of stone streets and multi-story buildings, with a population guessed at 16,000.
Studies of ancient Latin graffiti found written on the walls, peristyles and vestibules of the ruined Pompeii include amazing references to every day life and commerce, including among them at least one commercial real estate listing.
Written on the wall of a house identified as “House of Olii, “we find the following commercial property ad, complete with a call to action identifying the property broker:
(House of the Olii; on the Via Consolare); 139: The city block of the Arrii Pollii in the possession of Gnaeus Alleius Nigidius Maius is available to rent from July 1st. There are shops on the first floor, upper stories, high-class rooms and a house. A person interested in renting this property should contact Primus, the slave of Gnaeus Alleius Nigidius Maius.
The Via Consolare on Google Street View
The Via Consolare is a major throughway on Pompeii’s west side. Thanks to Google Maps and Street View, you can stroll this street in Pompeii today and take in the neighborhood. Click here to take the trip.
And while you do, have a thought for poor Primus. Chances are, he (she?) saw zero commission for any work performed, least of all the showing of Gnaeus Alleius Nigidius Maius’s storefronts to a renter.
NOTE: Studies of the ancient graffiti found in Pompeii detail a great deal of non-family-friendly sentiments, which is why I’m not linking directly to the archaeological work. If you’d like to read these, send the kids out of the room and search Google for graffiti from Pompeii with Professor Brian Harvey.
A café concept that debuted in Taiwan in 1998 is making it to the US midwest. The cat café — coffee and food in one room, and a furry staff of friendly kitties in the other — is a café format taking off in apartment-heavy cities around the world where pet restrictions are very common. Customers stop by and pay by the hour to spend time with furry friends, reaping the benefits to health and well-being that spending time with animals delivers.
The concept got its start in the city of Taipei eighteen years ago has moved to cities around the globe since. Chicago made news last year with the construction plans for its first permanent cat cafe and the developers are making progress through the city council’s approval process.
In February, Ald. Debra Silverstein (50th) sponsored an ordinance to allow for an “animal shelter cafe permit” under city code. The council will vote on the ordinance next month.
The ordinance bans alcoholic beverages and requires the cafes to be in an enclosed area of a licensed shelter. No food can be served, just drinks such as coffee.
Only service animals are allowed to pass through the café, and drinks are meant for prospective adopters or people otherwise utilizing services at the shelter — which includes a vet clinic, classrooms and more.
In June, Jenny Schlueter, director of development at Tree House, said one floor plan for the cafe included the separately partitioned coffee room next to two additional rooms that held adoptable cats, where patrons could take their drinks and visit with the cats.
Considered And Rejected
As a lifelong animal lover, I wholeheartedly approve of the animal cafe business concept. That said, in the drafting of this blog post, there were a number of cat cliches I considered and rejected. These included references to apartment dwellers being rubbed the wrong way by animal lease restrictions, press releases letting the cat out of the bag and cat cafe entrepreneurs thinking outside the (litter) box.
These cliches give me pause, and I avoided them by a whisker.
Got questions abut the recent big changes in lease accounting standards? Mark the date: March 29, 2016, the Financial Accounting Standards Board (FASB) will host IN FOCUS: FASB Accounting Standards Update on Leases, a live webcast taking place from 1:00 to 2:00 p.m. EDT. The webcast will feature FASB Members Marc Siegel and Daryl Buck discussing the update in lease accounting standards with FASB staff, and answering questions submitted by viewers. Live broadcast viewers will be eligible for up to 1 hour of CPE credit. For more information or to register for the free event, click here.
Further information about the ASU—including a FASB In Focus overview, a FASB: Understanding Costs and Benefits document, and a video titled Why a New Leases Standard? —is available at www.fasb.org.