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2023 Industrial real estate market impacts

1/26/2023

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In no particular order, here are things that will have an influence on the industrial developers, investors, boots-on-ground implementers, and brokers like yours truly:

The creeping impact of ESG

A relatively new acronym, ESG, stands for Environmental, Social, and Governance and is a new part of investor criteria in the U.S., especially.  And it definitely applies to real estate. Staying clear of politics, Republicans dismiss this and Democrats over-emphasize it at times, but it is increasingly an influence in our world. Think solar, wind, diversity/inclusion and more boardroom scrutiny -- in public companies especially.
      
The nagging fear of recession with big influencers: potential US default and Russia
 
Again, staying away from politics, this one is a battle between budget hawks and more arcane economic futurists who downplay national debt. But one thing is for certain: a recession, perhaps a deeper one, will follow a U.S. default on its obligations. It can’t be allowed to happen. As far as Russia's war in Ukraine is concerned, nobody knows. It could end neatly or could turn into a catastrophe. It is up to Putin -- or to those who can somehow take him out of the picture.
 
Re-shoring: how much wishful thinking vs. reality?
 
It’s happening, for sure, and accelerating due to supply chain woes which, in the most dramatic example, left thousands of new cars and trucks to deteriorate unsold for lack of key components, notably computer chips. The question is, how much extra will Americans pay for American-made products. History says: not much.
 
Migration from the Northeast and California, and to Texas, Arizona, and Florida
 
It’s happening despite fears of decimated oceanfronts -- not just fears, of late -- in Florida, especially, but also Texas and Arizona are growing with welcoming governments with less regulation and lower taxes, whereas California and the Northeast have flights from high expenses and taxes. California, despite the trifecta of drought, fires, and unprecedented rainfall, is losing population, but not as much.

Volatility of tech: layoffs at end of 2022 and early 2023

Microsoft: 10,000, Twitter: 3,700 (half its workforce – thank you Mr. Musk), Facebook/Meta: 11,000, Google/Alphabet: 12,000, and, of course, Amazon laying off 18,000 employees which is a lot, but far fewer than the 100,000 furloughed in 2022 (out of 1.6 million employees). Of more consequence is the abrupt change in their real estate footprint from adding 20-30 million square feet in a year to giving back that much. Building material lead times shrunk dramatically as Amazon represented such a large percentage of national industrial development.

The elephant in the room: inflation

Until there’s a return to 3% inflation or less, there will be no stability in what property trades for and lease rates will be all over the map in trying to adjust. One thing is for sure: lease rates are headed up. Everyone has a story of a tenant trying to renew, being outraged at the landlord proposal, leaving in a huff, only to return with hat in hand begging for a renewal when competing properties all have similar high lease rates.

Finally, labor: It’s a major problem

Americans are not having children at a rate to perpetuate the supply of workers needed in our economy. You can talk robots and self-driving vehicles (including trucks) all day long, but we have a critical shortage of skilled and unskilled labor. Last fall, the nation was short more than 100,000 truck drivers, for example. Our broken immigration system and the dramatic reduction of legal immigrants has only made things worse. Talk of re-shoring for manufacturing and new suburban greenfield development stops cold when you know that you can’t fulfill the labor component.

Challenging times, for sure. Broker playbooks are getting thicker.

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The Differences in Real Estate in the Last 30 Years: Part IV

1/9/2020

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Investment & Industrial

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Photo credit: MetroCreative

 (See Part III: Hospitality & Land)

Investment:

This is such a broad category, that it has to be discussed almost globally to start. To begin with, since 1990, several entities with huge pools of available capital have concluded that real estate risk is less than that of equity markets, or at least a balancing asset class, and that portfolios should include good quality net-leased properties. These entities, insurance companies, pension funds, managed equity funds for high net-worth individuals, sovereign funds from outside the U.S., etc. have entered the commercial real estate investment market in a big way. Another factor for holders of wealth is that with U.S. inflation rates and interest rates so low, a much lower return is acceptable for a real estate investment – therefore individual properties and portfolios of properties can be sold at much higher prices than ever believed possible. In 2019, new developers who had sprung up since the beginning of the U.S. economic recovery, since about 2010, came to discover that they could buy land, develop property on a speculative basis, fully lease that property, and sell it for a huge spread over actual hard and soft costs of development. Many of these new development firms were lean and mean, offshoots of some of the larger players of the early 2000s, but without the overhead. And in many cases, without being a public company or beholden to one source or a few sources of income.

Another recent trend: we're seeing huge portfolio sales by major players such as Blackstone, Exeter, Stag, Ivanhoe Cambridge, sovereign funds from the Middle East and Singapore. Prologis, a REIT, (publicly-traded Real Estate Investment Trust) bought two other REITS, first DCT in August 2018 for $8.5 billion and then announced in October 2019 its intent to purchase Liberty Property Trust for $12.6 billion. Blackstone, in four days in September, 2019, purchased the U.S. Logistics assets of Colony Capital for $5.9 billion, and then the U.S. Logistics assets of China’s GLP for $18.7 billion.

Industrial:

The big change from 1990 to 2020 has been the fallback in manufacturing and the dramatic increase in large bulk distribution centers. Refrigerated food buildings continued to, and always will, service America’s breadbasket. Printing companies died by the hundreds, with survivors having huge investments in specialized machinery. But for the biggest change -- e-commerce fulfillment — nobody is a bigger part of this story than Amazon. Several buildings they occupy are more than a million square feet, in many cities. In Memphis, they are building a 4.2 million square-foot facility; in Nashville, a 3.6 million sf building, and in Northern Kentucky, their new Prime Air Hub at the airport will be 2.8 million sf. They claim to have created 100,000 new jobs by beginning their last mile delivery initiative just a little over a year ago in 2018.

In 1990, new bulk warehouses were mostly 24’ clear height. In the months preceding the dawn of 2020, most new bulk buildings were 36’ or 40’ clear height. In 1990, concrete floors were leveled with strings and straightedges measured by humans; now they’re precisely flat with new technologies with lasers and dozens of computer calculations, in all directions.

Another big change in new warehouse development is the presence of adequate truck trailer parking away from the building; such parking was rare in the ‘90s. Also, though it costs more to do this, column spacing is almost always over 50’ in all directions, with 52 x 60 not uncommon. In the ‘90s it was sometimes 40 by 40. Wider spacing provides more racking configuration options. In addition, in the early ‘90s it was quite common to have rack sprinklers to provide better response in case of fire with dense flammables, whereas now with ESFR (Early Suppression Fast Response) sprinkler systems, fire protection is as good without in-rack sprinklers.

Lighting is another big improvement. Thirty years ago there were fluorescent bulb systems, sodium vapor lighting (yellowish quality) and metal halide systems. All were energy hogs and expensive to repair. The first breakthrough in the early 2000s were the new efficient small diameter fluorescent systems, T-5 and T-8. They had a short time on the stage, as soon thereafter, highly-efficient LED lighting systems came out, and with motion sensors as the previous upgrades had, further saving bulb life and energy costs.

Most big bulk warehouses before 2008 were constructed with precast panels, which were factory-produced and with insulation sandwiched in and rated. A few developers stayed with the older tilt-up technology for cost reasons (where the building slab is poured first, and after curing, the wall panels are poured on top of the new floor and tilted up). When the recession hit, many of the pre-cast panel factories went out of business, so when things picked up later, most of the first buildings went back to tilt-up as the lead times for the few panel manufacturers still in business could be over 12 months. Eventually new plants opened or re-opened, and lead times got more reasonable.

But with more big bulk warehouses built more than ever before in the years between 2015 through 2020, led by Amazon, with many firms re-configuring their historic distribution patterns, and with many new players building facilities just for e-commerce, almost all being leased by good credit tenants, net-leased industrial was the new darling in the institutional investment community. And, as previously mentioned, with a long-term lease with a solid credit tenant, in tier one, or primary markets, CAP rates were often below 4 percent, which means the property values were astoundingly higher than in past years.

To conclude: industrial (just ahead of multi-family) is the new darling of institutional investment: never before has so much money been chasing so many buildings at so many record prices. The investment market and the industrial leasing market has the same marquee star: the net leased e-commerce distribution center, or fulfillment center! And free one-day delivery!
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The Differences in Real Estate in the Last 30 Years: Part III

1/9/2020

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Hospitality & Land

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Photo credit: MetroCreative
(See Part II: Multi-Family & Medical)


Hospitality:

The face of the hospitality industry has changed radically in 30 years. In major cities, convention centers have gotten bigger and bigger, (and the accompanying hotels, too) and larger in scale.  Consolidation has occurred with the major brands. Emerging as the leaders of the pack are Choice Hotels International, Wyndham Worldwide, Hilton, and Marriott.

Choice Hotels? Of course, not a known name – but its economy-minded clientele will recognize Comfort Inn, Econolodge, Quality Inn and Mainstay suites. They have popped up everywhere on the interstates. Wyndham, while itself a luxury brand, features mostly economy-class products with familiar names such as Days Inn, La Quinta, Howard Johnson's, Super 8, and Travelodge - and even the slightly tarnished Ramada Inns.

Hilton, long a luxury brand, now also features Waldorf-Astoria in that category, and has promoted next-level brands such as Homewood Suites and Doubletree. Hilton has also funded the rapid growth of Embassy Suites and Hampton Inns. Marriott, the 800-pound gorilla, has separate marketing strategies for luxury brands such as Ritz Carlton, St. Regis and Westin, longer-stay brands such as Residence Inn and Springhill, and old standbys, Sheraton, Courtyard, and Fairfield Inn.

Occupancy rates are high in the booming 2020 economy, averaging a solid mid-60s percent but the impact of Airbnb and Vrbo has been noticeable, with lobbyists working hard to quash the upstart disrupters and to subject them to the same regulations as hotel chains. Big investments made by the major chains in new brands designed to be chic, less stodgy, and attractive to Millennials and Generation Xers show the pressure felt by the iconic brands.

All told, though, with more money globally seeking stable assets, accepting lower CAP rates, the values of the good products in the hospitality industry are dramatically good, and will probably stay that way as U.S. citizens continue robust travel habits.

Land:

In 1990, there was barely ever a mention of tertiary markets by large commercial real estate developers, many of them being national. Primary markets such as the “Gateway Cities” e.g. New York, Boston, Atlanta, Dallas, Houston, Chicago and Los Angeles were everybody’s targets. Secondary markets peeked through; Indianapolis (Chicago Jr.), Memphis (Fedex), Louisville (UPS), Seattle (Microsoft, Boeing, Starbucks), Kansas City (rail from Mexico), and Denver and St. Louis, just because. Dense population is a major factor as 70 percent of the U.S. Gross Domestic Product is from consumer spending, mostly impacting retail. But, population drives all asset classes and institutional investors, many still new at investing in real estate, feel more comfortable with major metro areas.

Tertiary markets were those just beneath those mentioned, partially based on size of the trading area, partially on sheer population and prospects for growth, and all impacted by the health of the local economy, with south and western areas inching ahead of northern and eastern metroplexes. As for land needs in industrial, in the ‘80s and early ‘90s it was important to be near existing power and water for manufacturing, though labor was an increasing factor and non-union was preferred. Thirty years later, however, land needs for industrial were for large big distribution centers that could service a good part of North America’s population such as Nashville, Salt Lake City, , Orlando, Columbus, and Cincinnati. Different criteria for each was based on geography.

But, the bigger the market, the greater the demand for land at major intersections for fast food growth. (Heaven help you if you’re not on the right side of the street during commute times). It became more likely for a developer to tear down an older facility to build a new one (where land prices were so high, demo work made sense). In the older cities, it's harder to do inner-city development from a regulatory, infrastructure, and cost perspective. And for major land purchases for mega-warehouses? Hey, if you’re in Indianapolis or Columbus, where land is flat and stable, you’re in much better shape than in Los Angeles (where regulations add a good year to a pro forma), Louisville or Nashville (where soils, flood plain, or nasty topography get in the way) or Boston (where 500 years of history can turn up in an excavation. Case in point; The Big Dig, estimated in 1982 to cost $2.8 billion and take seven years, ended up costing more than $8 billion and took 15 years).

So land, at best, anywhere, is an iffy proposition, taking months to properly evaluate and incorporate into a business model that is economically viable.

Big changes in 30 years in land acquisition include properly handling Native American burial sites when uncovered, properly designing storm water and water run-off characteristics with proper retention, so as not to unduly impact neighboring properties, proper harvesting of woodlands without disturbing mating patterns of endangered avian or other species, and in many more rural areas, properly relocating family cemeteries, some of which can contain dozens of graves.

Technology has of course helped. In 1990, a project known as a “cut and fill” site with rolling topography could often end up with a need for hundreds of truckloads of fill dirt. Or, the opposite, a project might have needed to dispose of that extra dirt. Today, within minutes, a topo can be created and a design suggested, with proper runoff in the right direction – with an accurate estimate– without importing or getting rid of dirt. Moreover, with laser and GPS technology, earth moving machines can be programmed to carve up the site exactly to design without much operator input.

But, land is land. As the old saying goes: “They ain’t making any more of it." So as metropolitan areas develop, the trade offs are: pay more, take more risk away from the owner/farmer (i.e. pay dearly for an option to buy), compromise on what’s the best location, or buy an older facility and raze it properly.

It’s difficult to assess trends in land values, but in a strong economy, common sense says that the supply will dwindle and the demand won’t stop – so up go the prices. And in certain sections of the country, they have skyrocketed. Scarcity and certain land price rises have given rise to some multi-story warehouses in the U.S. for the first time since the 1950s. (One major difference: those were all freight elevator-dependent; these new versions have truck loading and unloading on every level!) We're also seeing the success in other countries such as Japan and Singapore in multi-level. Less land is needed at the exorbitant prices, but it requires much more expensive construction to accommodate truck traffic on upper levels.

What will eventually hold land prices in check will be even a mild hike in inflation, now hovering around 2 percent or lower with 10-year T-bills yielding below 1.8 percent. When both rise, today’s historically low investment CAP rates will, too, putting downward pressure on real estate vale, and squeezing profit out of new development. Land will be the first place cuts will be made in new development.

Stay tuned for Part IV: Investment & Industrial

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The Differences in Real Estate in the Last 30 Years: Part II

1/8/2020

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Multi-Family & Medical

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Photo credit: MetroCreative
(See Part I: Retail & Office)


Multi-Family:

In the early ‘90s, home ownership was still the American Dream, and the percentage of people owning homes was in the mid-60 percentile. It had just taken a hit with the Savings & Loan debacle, but a robust economy and desire to own prevailed, and the national housing stock increased dependably every year with local and national-brand home builders. Apartments were a choice only when affordability was a factor. Condominiums flourished also, where apartments in fact, could be owned.

Despite the usual fluctuations that occurred when the economy soured, home ownership continued to rise, and lenders often lent 100 percent – or even more – to provide mortgages for ever-rising home values, with a national push to increase home ownership to 70 percent. To lenders, the risk was low as their mortgages were mostly bundled into financial securities, often recklessly. The rating agencies looked the other way when securities, including subprime mortgages, were created, and in 2007, a crash occurred that lasted almost three years, flushing out the home buyers who probably weren’t really capable of performing. A boom began in multi-family units that hasn’t stopped since, fueled also by the billions of dollars in college tuition debt incurred by a whole generation of erstwhile homeowners now relegated, by financial constriction, to the rental market. In almost all communities nationwide, apartments appeared everywhere, and condominium developments, unable to be sold individually as units, converted to apartments as well. The local communities which stifled apartment development because of the burden on the school systems (with not enough property tax generated per student) relaxed somewhat when the per-unit children ratios went down, and in a full-employment economy, apartments were needed for local labor force increases.

 The effect on real estate? Values of modern multi-family units have skyrocketed, and older, smaller complexes have appreciated nicely as well. There is a trend to create new walkable communities, many of which contain far more rentals than any time in the past. And in today’s full-employment economy, living units near metro areas mean more people to hire.


Medical:

The United States, unlike the UK, Germany, Czechoslovakia, France and Japan, to name other countries, has had population growth sufficient to sustain the drift toward an aging population. Natural growth (without immigration) has been 2.1 children per family of two parents in order to even stay at current levels; the rest coming from immigration. Politically, immigration as an issue has had an up-and-down effect on a country’s population. But with people living longer, and medical advances adding many new life-sustaining techniques, medical facilities – hospitals, urgent care centers, and medical office buildings–have grown in number far more rapidly than the general population. For countries with shrinking or event stagnant population growth, the era of diminished medical care may be coming, as there aren’t enough healthy and young people to pay for it at today’s growth rates. Though the trend appears to have nothing changing its inflection, it appears unsustainable economically in the long run. In 2020, billions of dollars have been invested in major new hospitals around the country, mostly in locations away from their historical centers, gravitating to the suburbs where the aging population resides. New smaller hospitals with fewer beds –and even some that are almost exclusively outpatient– have become a new asset class. Medical office buildings, on the rise for most of the new millennium, are now plateauing due to the downward pressure on physician income levels. Those doctors who continue to prosper are orthopedic surgeons, heart and vascular specialists, cancer practitioners, and dermatologists and plastic surgeons. Those struggling include pediatricians, family practice physicians, anesthesiologists, and others.

The values of the real estate for hospitals appear to be rising, especially for the newer, more nimble models, but medical office buildings attached to them are a little more uncertain, and remote medical office facilities may not keep pace over the long run, especially those owned by groups of doctors. More expensive to build than conventional office space, they may find themselves someday unable to compete with lower rental rates.

Stay tuned for Part III: "The Differences in 30 Years": Hospitality & Land

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The Differences in Commercial Real Estate in the Last 30 Years

1/7/2020

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Photo credit: MetroCreative
Part I: Retail and Office

Retail:

In 1990, the economy was booming, and enclosed shopping malls around the U.S. were everybody’s favorite for shopping. Anchored by such stalwarts as Sears, Macy’s, Hess’s, Montgomery Ward, Saks Fifth Avenue and the like – all were thriving. Bookstores, (Waldenbooks, B. Dalton, Barnes & Noble) shoe stores, (Kinney, Thom McAn, Foot Locker) and electronics retailers (Sharper Image, Circuit City, Radio Shack) peppered the malls, with the larger ones often being single destination. Strip malls were the darling of small investors, and grocery-anchored centers as choice real estate investments were still in their infancy. Blockbuster, Media Gallery and Hollywood Video were soon to displace the Mom & Pop video rental and music stores (Sam Goody and Media Play suffering a similar fate) with thousands closing by the mid-2010s leaving Redbox kiosks in grocery stores the lone survivor. Large footprint electronics stores, regional and national (HH Gregg, Steinberg’s, Best Buy, Circuit City) were thriving on large TV and new personal computer sales, but they were soon to feel the pinch from online sales.

By the beginning of 2010, the American buying public had transformed radically. The largest single factor was the emergence of online sales, now 10 percent of all retail, and destined to climb dramatically. (In comparison, 35 percent of all retail sales in China today are online). Large retailers such as those mentioned above were finished. Kmart merged with Sears, and then folded the entire empire. Even Walmart, the king of the big discount stores back then, had to radically alter its platform to accommodate e-sales, as did Target, and Kroger as well as others  had to offer food delivery to compete with Amazon’s Whole Foods.

Amazon! The single biggest disrupter of retail, (38% of all e-commerce sales) along with smaller forces such as eBay, has transformed the buying landscape. The demise of so many shopping malls and big-box retailers happened while e-commerce warehouse construction flourished. The last mile was still elusive, and drones, timed combination lock boxes, and the traditional delivery players (UPS, FEDEX, USPS) filled the bill – until Amazon decided to go all-in – or all-out – with their own Prime network of contract delivery drivers, and by the end of 2019 fully half of Amazon deliveries were through this “Last Mile Program."

The impact on retail real estate? Malls, for the most part, are severely devalued. Neighboring shopping centers/strip malls are suffering high vacancy rates with little leasing activity in a booming economy. Restaurants that fail are usually razed, or often radically revamped, to add more seats and squeeze down the kitchen size. Different outlot players appeared, but fast food was still dominant.

And “Lifestyle Centers” sprang up – retail, residential, hospitality, parks, entire new mini-communities. The concept is still in its beginnings, often struggling for identity, but it has caught on in many places with Gen Xers and Millennials, who prefer apartment and walkability to suburban car-dependent home ownership.

Office:

In 1990, having a downtown office was the ultimate, but suburban office parks with free parking were springing up, and slowly vacancy rates in CBDs climbed above suburban. Many new CBD office buildings built in the ‘80s became a little dated, older ones more so, and there was little downtown residential to offset the suburban advantage of proximity to homes. But all company employees were in the office, clustered by departments, and being near the courthouse and county records kept attorneys and commercial real estate players nearby.

Slowly the Internet age took over, accelerating in the new millennium, and gradually, WiFi-connected employees started working from coffee shops and other cafes – and from home. The growth in office space stopped, and actually reversed when shared space – first called “hoteling” (where employees, at different times, shared work stations) began to flourish. And in the post 2010 era, companies like WeWork began offering space with WiFi on a monthly rental basis, so satellite offices in urban areas didn’t need a leased space-- which when not in a small suite, would be in Regus or HQ offices that provided clerical help. As laptop/WiFi usage evolved, the need for the assistance vanished--only copiers/scanners/printers were needed, along with amenities like coffee, beer, big screens. Flexibility was the goal, though the WeWork model appears to have grown too fast and a bit recklessly.


The effect on office real estate? Lease rates plateaued, and only the best-located buildings increased in value. The conundrum included parking now being more uncertain, the impact resulting from driverless cars, and more and more employees who don’t drive cars to work. And with lease rates leveling out and yet construction costs and land costs continuing to escalate, far fewer new office buildings are being built as this segment of the industry struggles to meet the needs of tomorrow. Open office plans, more included services in tenant space, and high-capacity Wi-Fi lead the suite of attractions to lure new tenants in existing Class A buildings. Class B buildings struggle, with only painful price reductions as an offering, and Class C? Many are being converted to residential, especially in active urban Primary and Secondary markets, as younger workers seek walkable living. Time will tell on the office market and its future prospects.

Stay tuned for Part II: "The Differences in 30 Years": Multi-Family & Medical

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Rounding Third and Heading for Home

7/10/2019

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Photo courtesy Metrocreative
For years, Cincinnati Reds radio broadcasts were done by Marty Brennaman, a stylish, articulate radio voice, along with Joe Nuxhall, a beloved Reds legend who started pitching for the Reds when he was 15! Joe fractured syntax, went off on tangents, but his colorful stories were a great complement to Marty. At the end of every Reds radio broadcast, Joe would sign off by saying, “this is the ol’ lefthander, rounding third and heading for home….”

I’ve had a long, fairly successful run at being an industrial real estate broker in Cincinnati, and at an age I’d never have ever suspected, I’m still fully engaged and doing well. Our market is so healthy, I can pick and choose projects I want to work on, and the people I like. And in a stark contrast to the days of paying for multiple educations and scrambling for deals, I’m in a position where work is optional and financial obligations pretty much gone. It’s a fine place to be.

One of the things I like to do – have always liked to do, but now there’s more time to do it – is work with younger people who are newer in the business. Some are women, some are minorities. It’s an industry that cries for more diversity, and the major organizations representing us – NAIOP, SIOR, CCIM, ULI, etc. – are really making an effort to widen the tent.

But it’s almost as true today as it was when I started 32 years ago – when you walk in a room to talk about an assignment, those at the table are almost entirely white men.

So in this mentoring role, which to me is just giving forward (I had some really great teaching and solid support when I started), I find myself starting at fundamentals.

Examples would be,
  • “If you have an easy time getting ahold of someone, just remember, the next person does, too” – or “
  • If you try and try to reach someone, don’t give up, but when you finally reach that person, you’d better have something to say, or it will be the last time," or –
  • “Don’t just text or e-mail. Do you think your font looks better than the next person’s? Go meet with the client. If you don’t believe in your ability to show your worth in person, you’re in the wrong business!”

I always start with the example of me walking into a room full of people. I almost always have felt comfortable doing that and am confident that in a minute or two, I’ll have their attention. But it’s not the same for everyone.

How I usually handle that is by using a ladder example – that a project has you start on the first rung, and you have to earn your way to it. I’d get there immediately after entering that room – I caution the people I mentor that they’ll have to get accepted by a collection of unknowns in the first-impression world we live in, so concentrate on that first. If you know your stuff, or if you are comfortable with a little harmless banter, you’ll probably overcome most initial discomfort, assuming most people are reasonable. So there’s an extra half-step for you as you start.

When you’re active, and constantly on the move, sometimes you can miss the obvious. My epiphany was several years back when my company (then Cassidy-Turley, now Cushman & Wakefield) was reinventing itself, and, at first I felt great, that I was an insider fully involved with the change. Then a month later, it occurred to me – there had been a seismic shift to some younger leadership and new “fencing” around the decision process, and that I was feeling “aged out”. Nothing drastic – but it was there.

I recalled a few years earlier at an SIOR conference when an older industrial broker who I really respected hosted a breakout session that was titled something like “What Older Brokers Should Do." I was curious enough, and was getting older myself, so I said “Why not!”

I was shocked. The message being delivered was about as far from anything I’d ever do as I could imagine. The presenter, as I indicated, was well-respected, but he was advocating coloring your hair, styling it like younger guys, buying younger clothes, wearing makeup, and – this one I couldn’t believe – he said he was considering a face lift! The overarching problem he perceived was somewhat accurate – that to appear old was to be a disadvantage.

Being healthy, intellectually OK, and energetic, is mandatory in this business. It’s not easy. And it’s not always possible for older people. But for me? I decided long ago, that I would be as technically able as anyone else, would know the market well, would do what I could to stay energetic and healthy, and would focus hard on adding value to anyone I encountered. And I told myself when I couldn’t, I’d stop immediately. No putting on a suit and tie, going downtown, sitting in front of a monitor, and playing solitaire for this guy!

So now my mentoring has a bit different slant. We ALL have to establish our worth in the beginning when we enter that room. Me with gray hair and wrinkles, but upright with spring in step. And throwing out indicators, one hopes, that I’m still relevant.
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​Commercial Brokers: who’s smart, and who’s floating with the tide?

1/30/2019

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Photo courtesy Metro Creative
Anyone who’s been in this racket (I’m an industrial broker, 32 years’ worth) has suffered through similar phases, with a few differences in the rhythms depending on when they began. Those who started when times were good (most of us) have had a career something like this:

Phase 1: work like hell and starve for X months; Phase 2: a tenuous, but unsteady foothold; Phase 3: a shot in the chops with an economic downturn, and Phase 4: recovery to solid and steady ground for a long time.
 
Those who started during a recession had a Phase 1 that was 2X months if they even lasted. But their Phase 3, if they made it, was easier.
 
It’s human nature to want to enjoy the fruits of one’s labor today, especially in an instant-gratification society. It’s even more of a pull for those who never had much. And, of course, in an industry where youth is revered more than ever due to technology and being up to speed with pop culture, listening to – and heeding – advice from old war horses who have learned from mistakes – is often dismissed. And so, the same mistakes keep occurring with some, generation after generation.
 
In 2009, in an impromptu gathering of brokers after work one fall day (after the October meltdown), a talented – and cocky – young broker turned to the guy who mentored him, in front of all, and said, “You know, I feel sorry for you!” Caught a little by surprise, the senior guy could only say “Me? Why?” All heads were turned to the junior guy, who then said, “Well, you’ve worked all your life, and now you have half of what you thought you had!”

Actually, it was an astute and pertinent observation, not said with total malice, but definitely designed to be a zinger. The senior guy thought for a minute, then said, “You know, I appreciate you thinking about me, but in all honesty, my life really won’t change much. I have no debt, the kids are all through college, so a hit on paper at this point doesn’t really change that much. But what about you? I know you have three kids who are going to college; I know you just built a new house, I assume, with a big mortgage, and I think you have a couple of new cars that are financed. How will it affect you?”
 
All heads swiveled back to the junior guy, but the message was fairly clear. There wasn’t much he could say.
 
A year later, a few of the same people were having lunch together, and the junior guy was agitated. He finally blurted out that he was going to have to get out of the business. He was close to being in trouble.
 
Fortunately for him – and for his company, as he really was talented and a pretty good guy – things finally rebounded and he got himself back to economic health. He may be a guy that people listen to when we go through the inevitable next downturn.
 
A less pleasant example of someone affected by his industry downturn was a really talented, older industrial broker in my network. A highly respected guy, locally and nationally, in another city from me. He was a high flier. He made, during good times, more money than most, consistently, but he’d spend it, too. He had a second home; country club memberships; spectacular family trips; even an interest in a plane. And though it was never known for sure, it appeared that he wasn’t investing or putting anything away.
 
Again, this took place in 2009, which – in all fairness – was the most severe recession since the Great Depression – but still, one that should have been at least partially anticipated. This High Flier was caught, and it was like getting hit by a train. His income went way down. Sadly, he coaxed a signing bonus out of a major competitor, and he left his company, awkwardly. The signing bonus was merely a Band-aid, and soon his problems got worse. The pressures on him were enormous.
 
I wish there was a better ending to his story. He was a friend. He died suddenly at, by today’s standards, a pretty early age, and there’s no doubt that it was hastened by how he had boxed himself in.
 
So the lesson learned mostly by people who have gotten very wealthy over time, is this: anticipate a downturn, have a lifestyle that can live at the lower level comfortably, but if you really want to survive a recession – and even profit because of it – have a personal fund ready to take advantage of low equity prices, distressed properties, or even be part of a group buying a distressed enterprise that has great potential (but don’t let your heart get involved – it’s business).
 
….And be grateful that you can be part of an industry where you can make choices like these! I was shocked at the stories of people who were furloughed in the latest government shutdown who had nothing to fall back on. It’s a tough way to live! Often, it’s not their fault, due to illness, perhaps helping wayward kids, many of life’s obstacles.
 
But often it is.
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Amazon, the 800-pound gorilla in the room

5/8/2018

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Everything you read these days talks about the strength of the industrial real estate market and the low vacancies nationwide.

Well, Cincinnati has even a bigger disrupter. Who else, but Amazon! When the biggest player in the room (can the 800-pound gorilla be eight thousand pounds?) decides to make a move, brace yourself! A short while back, Amazon chose to locate its Prime delivery hub at the Greater Cincinnati Airport in Northern Kentucky, leasing some 900 acres from the airport, and announcing that they would spent $1.5 billion in gearing up, the plan initially being to build three million square feet of air cargo hub.

But they weren't, by any means, finished. Earlier this year, Amazon purchased 210 acres southeast of the airport along Aero Parkway, most of which had been owned by the family of Paul Vester. 

Now with 1,100 acres tied up and 10,000 full-time employees, maybe someone might notice what they're doing......(not to mention ramping up to 100 jumbo air freight carriers......)

Read that story here by Northern Kentucky Tribune: Amazon purchased an additional 210 acres of private land next to CVG for Prime Air operations



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Using CoStar from my perspective

4/11/2018

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I've been pretty engaged in the CCIM and SIOR threads nationally on the recent phenomenon of CoStar now being the only real national commercial property player ever since Xceligent went out of business. There are almost as many opinions as there are people, but there is one common theme, and that is, people don't seem to like CoStar and there's a surprising amount of anger directed towards them, resenting the monopoly they have, and often griping about cavalier treatment by CoStar reps and by poor data.
 
I was a reasonably satisfied Xceligent user for many years, and found the system easy to use and the data accurate enough, though far from perfect. Shortly after they ceased operations, I signed a contract with CoStar, feeling that I couldn't really represent myself properly with prospective clients without a database from which to draw information when needed, whatever it might be. And - I'm an industrial broker, so my perspectives are limited to what I find important. I think it's similar to what office brokers would feel, but much different from the needs of retail brokers and investment brokers. And all are worlds apart from the needs of residential agents.
 
So: CoStar from my perspective: the local representatives that I've dealt with couldn't have been nicer or more professional. The contract I signed for 2 years was reasonable. The system has a lot of features, many more than Xceligent had. But the property information, from my perspective, isn't quite as complete or as accurate as Xceligent's was. Assigning arbitrary numbers, I'd say Xceligent was about 85% accurate and Costar is about 75%. This could be different market-by-market, though. My guess is that broker-input systems like Catalyst, or cooperative broker efforts such as in Columbus, Minneapolis, Nevada, are about 90 to 95% accurate because the information is put in by the brokers. Xceligent and CoStar relied/rely on employees who are not in the industry canvassing the markets to get property information, and they don't always get it right. May not be their fault - many brokers won't give them the time of day.
 
NAR has a new system for agents called RPR; Realtor Property Resource. It’s intriguing.
 
So where does RPR fit today, and where could it fit? The industry is crying for something better. RPR might have the potential to fill the need, but it's not even realistically in the conversation today, and unless something changes, it won't be. It looks like a robust platform from a technology standpoint - but if it relies on local MLS systems to populate the commercial property data, it's as irrelevant as you can get.
 
I really doubt that any market the size of Cincinnati would successfully integrate commercial property information into the MLS system because commercial firms wouldn't want all the calls from residential agents. This is not to disparage the skills it takes to be a successful residential realtor - the good ones are highly skilled, work very hard, and I'd never buy a residential property without one. But Commercial listing agents get enough time-wasting calls from their own peers who want to show properties, and qualifying people for arranging showings is hard enough, but to have to do that for residential agents would be mind-numbing. So there'd never be buy-in for integrating commercial listings into MLS.
 
But going back to Columbus, for example, or for the CINDAT model we had in Cincinnati 20 years ago, if you can get all major players to be a part of it, to buy in, so to speak, then you have the basis of a local CIE (Commericial Information Exchange) system that could work, and with RPR, be superior to CoStar. There's a market need for that to happen.
 
But will it? It isn't easy. In local markets, the large companies like CBRE, and to a lesser extent, JLL, Cushman & Wakefield, Colliers, are reluctant to be in a CIE because they feel that they are providing most of the value, and that the smaller companies or the tenant rep companies benefit at their expense. There's an economic way to handle that, but it's complex.
 
My feeling is that NAR, SIOR, and CCIM could collaborate, and a national Commercial CIE system could result, that would at worst, be a strong competitor for CoStar, and at best could lead the industry in that commercial agents are already paying to belong to these organizations, so the economic impact on agents could be minimal.
 
To succeed, pilot programs in cities like Columbus Minneapolis, Las Vegas - just for example - would have to be huge successes for the concept to take off.
 
If I were younger and in a different place in my working career, I'd love to be a part of it.
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An interesting wrinkle in the sale of commercial property

4/4/2018

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Commercial Real Estate is a broad category, though it may seem otherwise.
Newer agents cut their teeth on small leases or as a ‘caddy” on larger ones, and often gravitate to the sale of small empty buildings, usually to the entity that will occupy the space. This is especially true of office and industrial buildings, maybe not so much for retail.
 
A lot of new lingo has developed over the years. Now, those who sell and lease buildings are part of a group called “occupier services.” This is intended to distinguish them from those who sell occupied buildings as investments – currently the hottest product class in the U.S. market.
 
But one thing they have in common: almost everywhere in the U.S. taxing authorities have very little understanding of values in the market for all commercial buildings, especially not industrial, so the tried-and-true  method for determining value is to track public records for the amount of a sale – and bingo! That’s the new value. For those who own and occupy buildings for a long time without transferring ownership, the taxing authority – in Ohio, the County – will usually value the property below market, as to consistently do otherwise is to be challenged in court, and owners and their attorneys usually have far more weapons at their disposal to win tax appeals on their merits. So, to keep values below market is self-serving for the taxing authority, but not so much for those who live in the taxed area.
 
This being said, there’s a dirty little secret in the sale of net leased property. Tenants are obligated by their leases to pay rent to landlords, and as additional rent, the real estate taxes (and other actual owner costs) costs. If the building hasn’t sold in a long time, the taxes can go way up – to the surprise of the tenant – when the taxing authority sees the amount of the sale in the public record.
 
But what if the building and land is sold as a part of the sale of the enterprise itself? In other words, when investor X decides to by Widget Manufacturer Y, the real estate is only part of the asset sale. Often, the LLC that owns the real estate remains the same – the LLC itself is part of the sale, but there is no ownership change.
 
What happens then? Almost always, nothing involving the real estate or its value. And this can easily be justified, as it may very well be that the enterprise has elaborate value-add components within the building, and many times with intrinsic value far in excess of the real estate. In other words, the structure that provides the shade and shelter may have a value that is not important, or even  meaningless. To the buyer of the enterprise, it is crucial and very valuable. To a buyer of the building and land for a wholly different use – the property could be worth less than zero.
 
So why not buy the LLC in every case when you want net leased real estate? There’s really no reason not to, and it certainly will curry favor with your tenant, who, of course, is your willing accomplice, as the existing real estate tax is almost certain to stay lower this way, for reasons listed above.
 
 
 
 
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