Crains Chicago Business reports that McDonald’s corporate HQ is bugging out from its sprawling suburban Oakbrook, IL campus back to a locale it once called home — downtown Chicago. The reasons seem to stem from the classic reverse-migration of white collar workforces from suburban enclaves to metropolitan districts. Beyond that, the fast-foot behemoth’s business woes might play a role in the decision as well. From the Ryan Ori and Peter Frost piece in Crain’s:
McDonald’s is in advanced negotiations with Sterling Bay to move its headquarters to well over 300,000 square feet in a structure the Chicago developer plans to build on Randolph Street, according to people familiar with the deal.
The office development is planned on Oprah Winfrey’s former Harpo Studios campus, which Sterling Bay bought for $30.5 million in 2014.
The deal comes about nine months after McDonald’s backed out in the final stages of a deal for more than 350,000 square feet at One Prudential Plaza near Millennium Park.
McDonald’s is believed to have considered several existing office buildings as well as potential new projects before settling on Sterling Bay’s redevelopment west of the Loop and the Kennedy Expressway in the northwestern edge of the West Loop.
After former Harpo buildings are demolished, construction of the new office building McDonald’s will occupy is expected to be completed by 2018.
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The McDonalds HQ move would mark a return to downtown, as the company headquarters once called home the 1930 LaSalle-Wacker building at 221 N. LaSalle, growing to occupy eight floors before moving to Oakbrook in the 1980s.
Having visited the truly huge Oakbrook McDonalds HQ complex many times, what struck me immediately about the deal was its potential to represent a backdoor real estate downsizing for the company. To speculate: if the company moves 100% from its campus, currently arrayed around a four-story, 700,000 sqaure foot building, nothing in today’s news item suggests more than 300,000 square feet for the new location. That’s a haircut on space of more than 57%, which, if pulled off, should please shareholders on its face, as the burger giant faces strong headwinds globally and peak profits are well in its rearview mirror. All that said, the company’s full relocation plans, future employment levels and ultimate disposition of the Oakbrook campus are unknown at this time. It’s a story to follow for sure.
Earlier this month, the US Senate Banking Committee held a hearing critical to borrowing in the commercial real estate industry. The hearing, entitled “Improving Communities’ and Businesses’ Access to Capital and Economic Development” included discussion of a House bill introduced by Rep. French Hill (R-AR) tagged H.R. 4620, the “Preserving Access To CRE Capital Act”.
The Act, according to a May 19 letter sent from NAR President Tom Salamone, makes a modest yet important change to the “Qualified Commercial Real Estate” (QCRE) exemption to the commercial real estate risk retention rules slated to go into effect in December of 2016 under Dodd-Frank.
The issue centers on the class of commercial mortgage-backed securities (CMBS) called single-asset, single-borrower, or SASB. In his letter, President Salamone continues:
The Preserving Access to CRE Capital Act makes a modest but important change to the “Qualified Commercial Real Estate” (QCRE) exemption to the commercial real estate risk retention rules slated to go into effect in December 2016. These impending rules are, as written, overly broad. Single asset/single borrower (SASB) commercial mortgage backed securities (CMBS) are not exempt, despite being low-risk, and not the type of transaction the Dodd-Frank Act was intended to regulate. Rep. Hill’s legislation would fix this oversight by widening the QCRE exemption to include SASB and interest-only loans. Without this fix, liquidity rates will be impaired and borrowing costs will go up.
CMBSs are important sources of financing for commercial real estate projects of all kinds, providing about 25% of all commercial real estate lending in the country1 . They are especially important in secondary and tertiary markets, where they provide a significant portion of the financing for smaller, “Main Street” businesses. Arbitrarily reducing liquidity in the CMBS market will thus reduce liquidity across the board and raise borrowing costs for commercial real estate loans in all markets.
H.R. 4260, introduced in the house in February, promises to address the problem of overly broad risk retention rules. To learn how, you can read the entirety of the bill after this link.
Fluctuations in the cost of capital serve to change the price of commercial property opportunity on a daily basis. Investors, owners, and brokers: here’s a handful of the recent refinancing deals for shopping centers culled from the national marketplace in commercial real estate:
- NorthMarq Arranges $50M Refinancing of Franklin Village in Metro Boston – Shopping Center Business, May 23, 2016 – 300KSF mixed-use center gets a new 10-year loan.
- CBRE Snags $43M Refinancing of 116KSF Retail Center in Carlsbad, CA – Shopping Center Business, May 4, 2016 – Bressi Ranch Center is 97% occupied.
- $550M Fresh Debt For One Of Denver’s Biggest Malls – BusinessDen – May 12, 2016 – Metropolitan Life loans over half a billion at 3.5%.
- Corte Madera Mulls ReFi – MarinIJ.com, May 18. 2016 – A town-owned shopping center in Marin County, CA faces a refi decision in the wake of a deficit.
- Green Hills Mall – Law firm website – Nashville, TN Green Hills Mall goes to the insurance company well for $125M refi.
- California Retail Center Refinanced For $16.9M – Commercial Real Estate Direct, May 12, 2016 – 13 Miles southwest of Los Angeles, a Target-anchored mall pulls a nearly $17M refi.
(Photo credit: Wikipedia)
The newest US Industrial Outlook from Colliers puts Q1 2016 in its sights. Bottom line: the news is good. Q1 shows the lowest national industrial vacancy rate in over a decade. Decline in industrial vacancy marked its 22nd consecutive quarter to arrive at 6.3%, which is 70 basis points lower than this time last year.
Although new construction is on the rise, the demand still outpaces new supply. According to Colliers, construction completions added up to 60.1 million square feet of new supply in 1Q 2016, adding up to a near-record 0.40% of total inventory. At the same time, 63.8 MSF of industrial space was absorbed, logging an eye-popping 9.6% increase over this time last year.
You can download a free copy of the information-packed report from Colliers “US Industrial Market Healthy Despite Headwinds” after the link.
I spotted a substantial and interesting post at REJournals from Monte Mann, co-chair of the real estate litigation group at Chicago law firm Novack & Macey, LLP that may help illustrate some the legal theory behind some disputes over commissions in commercial real estate. Mann, a commercial real estate litigator practicing in Illinois for twenty years as well as admitted to the Washington DC bar, shares some thoughts concerning legal fights over commission money, including notions of “procuring cause,” a claim that brokers add weight to with every communication they make with and concerning prospects, properties, contracts and other pieces on the game board of the commercial real estate marketplace.
As always: never, ever, ever take anything you read at The Source as legal advice, and always, always, always seek qualified commercial real estate counsel!
Mann on “procuring cause:”
In court, it is the broker’s burden to prove that he or she was the procuring cause of the transaction. Typically, brokers will attempt to satisfy the procuring cause standard with evidence like correspondence between the broker and the owner, advertising and marketing materials for the property, and testimony establishing the broker showed the property to the prospective tenant or purchaser and/or negotiated the transaction. Conversations between the broker and the parties to the transaction are often critical in these cases. A broker may also prove that he or she was the procuring cause of a transaction with evidence that the broker provided the eventual buyer or tenant with information such as zoning regulations, tax information, and construction details.
A broker will not be considered the procuring cause of a transaction where the court rules that the broker’s influence on the transaction was only “slight,” the broker was initially involved for a short period of time, but another broker actually induced the buyer or tenant to enter into the transaction, or where the contract actually signed differs so greatly from the contract the broker originally was authorized to negotiate that the actual contract was beyond the parties’ original contemplation.
Lost to the mists of time, Best Products was a successful national retail chain operating 169 stores in 23 states, filing Chapter 11 in 1991. Founded in 1957, Best’s retailing recipe was a precursor to today’s big box floor plan, but the chain was owned by persons of singular vision who refused to actually build big boxes to house their stores. Instead, they built eye-popping works of art.
The MessyNessy post Lost Facades of the 1970s Anti-Walmart shows Best in its heyday — a collection of outrageous and provocative architecture that played with themes of destruction and chaos while somehow remaining inviting and successful. Best store facades had a merely casual relationship with right angles and gravity. Some portrayed the collapse of brick walls, some portrayed the lifting and tilting – as if made of cardboard and hoisted by the wind – of an entire store front measuring over 200 feet in width. And some invited forests into the floor plan, where trees grow to this day in one structure that survives today under new management. Maybe most surprising, these unforgettable designs were not clustered in the comsopolitan enclaves you might suspect, but were instead a national undertaking, with the chain headquarters in Richmond, VA.
For their vision, Best owners Sydney and Frances Lewis were awarded the National Medal of the Arts in 1987. You can browse the entire collection of photos at the SITE Studios, who originated most of the designs.
(Photo credit: SITE Studios)
Federal judge Emmet Sullivan has blocked the proposed $6.3 billion merger of Office Depot and Staples stores. The decision came in the form of an injunction against the acquisition, and was felt as a surprise by some observers on social media, who prematurely proclaimed the success of the deal.
The Federal Trade Commission sought to block the merger in Sullivan’s courtroom on the basis that the deal would be anticompetetive and would harm consumers. Observers of the case noted that Sullivan’s attitude seemed to favor the merger early, or at least seemed to be critical of the FTC’s case. From Bloomberg’s piece by David McLaughlin and Andrew M. Harris:
The decision caps Sullivan’s role in an often contentious proceeding during which the judge criticized the FTC’s handling of the case and frequently interrupted the questioning of witnesses for his own queries. That led some investors to become optimistic that he would allow the deal to proceed.
“Given some of the judge’s rulings during the trial, it was somewhat surprising,” Seth Bloom, an antitrust lawyer at Bloom Strategic Counsel. “This is another example of how one can’t make a judgement based on a judge’s comments from the bench.”
Staples Chief Executive Officer Ron Sargent said in a statement that the company was “disappointed” by the decision and that it won’t appeal the ruling. The company will instead focus on a strategic plan that includes trying to win mid-market business customers, exploring alternatives for its European operations, cutting costs and returning cash to shareholders.
Office Depot currently operates over 1,900 locations, Staples, over 3,800 worldwide. Bloomberg video on the case:
Watching the commercial property markets at the national level is tough: trends in one corner of a region need to be placed into context with trends in others in order to form a coherent national picture. National players such as Fannie and Freddie (the GSEs) have lending policies that provide some of that context, but these too are subject to change as regulators and Congress attempt to put the brakes on the kind of systemic risk that torched everything in 2008.
A particularly good job was done this week summing up the above while framing the multifamily property marketplace in secondary markets. A piece at NREIOnline by Geoff Smith and Jay Thomas, a pair of Managing Directors at commercial property financiers Walker & Dunlop, put the secondary real estate markets under a microscope and managed to expose some usable insights concerning causes and effects in the multifamily sector.
Of particular interest is the role of falling oil prices. Energy production and employment in the post-meltdown world is what first attracted capital back to secondary market apartment plays. While falling oil prices have made these plays less attractive in oil-heavy markets, the appetite for secondary markets generally has only grown, and lenders have leveraged their familiarity with the earlier plays to move out into the country’s many other opportunities at secondary population levels. An excerpt:
While the demand for mortgages against properties in secondary locations has experienced strong growth over the past four years, key aspects of its character are experiencing historic shifts. One of the best examples of this is within the central region of the country, in cities like Oklahoma City, Okla., and secondary markets throughout Texas, where the availability of capital has been very strong because of the growth of the oil and gas industries. As those employment markets have grown weaker as a result of falling oil and gas prices worldwide, the mortgage market outlook in those areas is also waning, requiring a more conservative investment approach and allowing other previously less attractive secondary markets to take center stage.
It is safe to say that the availability of debt and equity capital for secondary markets has successfully “come back,” with cap rates and acquisition prices now at or above their pre-recession levels for most commercial real estate asset classes. While at the height of the recession, between 2008 and 2011, many industry players and investors remained firmly on the sidelines of acquisition activity within the multifamily market, eventually this turned into cautious “toe dipping” back in, first in primary, then in secondary markets. This, in conjunction with low interest rates, resulted in compression of cap rates, and spurred the influx of new construction projects in non-primary markets.
Check out the entire piece here at NREIOnline.
The NAR Commercial annual report Commercial Real Estate Lending Trends 2016 is now available for free download. The 31-page overview of the national commercial property markets includes a great many leading and trailing indicators that situate the commercial property markets in the wider economy. Wondering what sector added the most jobs in 2015? (It was business and professional services.) Like to know the total CRE closed transactions in ’15? $534 billion, says NAR research partner Real Capital Analytics. Interested in the national average for a commercial real estate deal in 2015? $1.8 million.
You can get this overview for free in two ways. Download a PDF using this link, or peruse the report clicking on the image right below in this page. Happy reading!
Still running your brokerage or property management business on an AOL email account? Law blog JDSupra Business Advisor has something to say about that decision. In an April 27th post “AOL, Dropbox, And The Big Uh-Oh,” a story is told by data security-focused attorney Drew Sorrell concerning the purchase of a New York apartment, and how it went wrong during a trip down the intertubes. (Despite the headline, Dropbox is not involved in the story.)
A New York couple brought suit against their former law firm because it used an America Onlineaccount to transact firm business. If you are my age you probably remember that AOL and “You’ve got mail!” were the future—back in 1990. Well, now AOL is culturally a relic of the past and occasionally I still run across someone who is using an AOL account for their email. Usually, I silently judge them as technological dinosaurs (don’t tell me you don’t do the same thing).
Well, it turns out that this law firm and its AOL account were being used to help a couple purchase a $19.4 million cooperative apartment in Manhattan. Hackers had breached the firm’s AOL account and were monitoring its email traffic. The hackers then used the account to pose as the attorney working on the deal to direct the clients/couple to deposit $1.9 million by wire transfer into a hacker-controlled account. The hackers were kind enough to send the buyers/clients a receipt for the funds.
Once the fraud was detected the couple was able to recover all but $196,200 (plenty enough to still ruin my day). While this is a brand new suit, it should be warning enough. So, what are the lessons learned here?
As a business technology observer, I’d offer that there’s nothing very special about AOL email addresses when it comes to risk of data security – committing millions of dollars of transactions over insecure email can go badly wrong no matter what service you use.
While you can read the entirety of the post and the lessons learned, let me interject with the usual disclaimer: Take nothing you read at The Source blog or really, at any blog, as legal advice. Always, always, always get advice from qualified real estate counsel.
Photo credit: BusinessInsider