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.
Boston University’s Menino Survey of Mayors (PDF follows the link) puts it plainly: the central challenge facing US cities and the greatest roadblock to expanding and adding value to land and developments is the sad state of US infrastructure.
Conducted by the BU Initiative On Cities, the survey asked US Mayors for answers on a range of issues concerning challenges facing urban development. But the starkest response came when the mayors were asked to look over the next five years and select the single state or federal matter that posed the biggest challenge. Infrastructure came back in nearly 50% of responses, dwarfing guns, energy, healthcare, education and other responses.
Heightened Tensions Between State and Local Governments Cited
Study authors identified a greater-than-ever break between state and local government as an enormous problem. From the BU study’s authors: “City-state conflict has a long history in American politics, but several mayors saw recent fissures as particularly problematic. For example, one mayor stated that he believed that state interference with local autonomy was “accelerating [in] the last five years.” In many instances these disagreements reflect tensions between cities’ claims to local autonomy on issues like the minimum wage and states’ claims to advantages of consistency within the state.”
In a commercial real estate industry whose profitability rests on physical access to property and functioning amenities, the bleak infrastructure outlook of mayors should be front and center in any market analysis going far enough forward. As we have seen time and time again, ignoring long-term risks will lead to real estate industry disaster.
Coming off its second-strongest January ever, the national market in commercial real estate looks as robust and promising as it ever has. But are signs of a downturn hidden in all the good news?
Real Capital Analytics SVP Jim Costello thinks there are. Costello has identified a series of warning signs in the national CRE market that he believes foretell bad news for national commercial property as an engine of profitability. They include:
- Deal volume year-over-year is lower (-7%), despite big gains in the total number of dollars changing hands (+12%). Costello cites the momentum in the lost volume, making it harder to perform the comps that ultimately inform and inspire so many new deals in CRE.
- The transaction types lend to the alarm, according to Costello. He cites a significant 42% of the market was taken up last year with transactions at the “portfolio-level” or “entity level”, where aggregations of properties hit the market together. He cites the sale of individual buildings as the “bedrock” of the CRE market, and points to such a large portion taken up with stratospheric marriages of big capital and big portfolios as a negative for ongoing growth. He further cites that individual building transactions were down 18% from the previous year.
- CCAR testing regulations for banks servicing secondary and tertiary markets made Costello’s list of negative indicators, where capital adequacy testing imposed by Dodd-Frank could add to the worry of creditors contemplating financing of commercial transactions and projects in these smaller markets.
Not a doomsayer roaming the land in sackcloth and ashes, Costello cites the US commercial property market as the fastest growing and most stable in the world and predicts the markets will perform as a “bond equivalent,” attracting capital from around the world seeking safety and performance. But with numbers as high as they are, Costello’s bearish voice could find validation in a market that shows any signs of getting away from its fundamentals.
The disruptive force of the sharing economy is undeniable. As noted by tech cheerleader Tom Goodwin, the world’s largest taxi company (Uber) owns no vehicles, the most popular media company (Facebook) makes no content, and $25B lodging provider Airbnb owns no real estate, despite its operations adding up to giant impacts on apartment rents in its biggest markets. There is a chance that large apartment landlords will bring increasing levels of apartment inventory onto a collision course with hotels, at least in the top cities.
But measuring the impact Airbnb has on national hotel business is tougher – and the executive leadership of national hospitality operators doesn’t seem too worried about it. In Lydia DePillis’s piece in the Washington Post, collecting thoughts from hotel CEOs on conference calls, quotes from hotel execs were generally dismissive, noting that the amenities and service such as their industry is known for providing can’t spring from a vacuum:
Trade Group Highlights Multifamily Landlords
Hotel industry trade group AHLA released a white paper that claimed 40% of Airbnb’s revenue was from persons operating multiple units, prompting a pushback from the technology company and a bit of controversy, none of which has to date affected the CEOs outlook on Airbnb as a national-level threat to their hospitality expertise. Will the boardrooms remain confident in their business model, or will they get drawn into the technology-driven disruption as many industries have before them? Time will tell.
(Photo Credit: Wikipedia)