Latest posts by Randolph Taylor (see all)
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When JPMorgan Chase released its fourth quarter earnings for 2013, it announced that it had provided $19 billion of credit to U.S. small businesses. The figure sounds impressive, but it pales in comparison with the $589 billion of credit that it provided to big corporations.
This should not surprise anyone. The country’s biggest banks ($10 billion+ in assets) actually prefer to provide capital to “small businesses” that average $10 million in revenue or more. While, it is encouraging that the spigot has opened and big bank loan approval rates for small businesses reached 17.6 percent, according to the December 2013 Biz2Credit Small Business Lending Index, many of them are primarily interested in lending to large “small businesses.” (Yes, that is an oxymoron.)
For many of the big banks, small loans are paper intensive and thus cost more to process. This is a reason why they prefer to offer non-SBA loans, which typically require more forms and documentation and, as a result, take longer to process.
Small banks, which typically do not have the same type of brand recognition, cannot afford to be as choosy. Often, they are a secondary choice as consumers tend to go to the names they know first. Further, because of the amount of advertising that big banks have invested in advertising to promote their small business loan-making, entrepreneurs are going to the bigger players.
Unfortunately, although big bank lending approval rates are currently at post-recession highs, they do not approach the percentage of loan applications granted by small banks (almost 50 percent). Alternative lenders, comprised of microlenders, cash advance companies, are approving more than two-thirds of their requests.
1) As they continue to be thwarted by big banks, borrowers will continue to comparison shop and seek alternatives to the big banks. Many will use the Internet to find the best deals. Small business owners will secure capital from community banks, alternative lenders, and increasingly, institutional investors that are hungry to make deals.
2) Big banks can improve and upgrade technology. It is still astounding that many of the biggest financial institutions in the country do not allow for online loan applications or eSignatures. What makes this so perplexing is the fact that the large, name brand banks have more vast resources to invest in upgrades.
One can look at the mercurial rise of alternative lenders as proof that when there is a void in the marketplace, the hole is quickly filled. Accounts receivable and cash advance lenders used their technological advantage and made capital more readily accessible. In many cases, speed is often more important to borrowers than low interest rates.
For instance, if you need working capital to make payroll, you cannot wait three months for an SBA loan. Employees want to be paid in a timely fashion and likely won’t wait around for a long period of time without payment.
A number of the large banks, such as TD Bank, Union Bank and others, are investing in upgrades and becoming more active in small business lending. Look for others to follow suit in 2014.
Source: Smallbiztrends Jan 26, 2014 by Rohit Arora
A 114,016-square-foot office building in Naperville owner Omaha, Neb.-based Quarter Circle Capital LLC sold for more than $5.7 million. DuPage County records show the buyer of the property at 1717 Park St. was a venture of a Farida Tazudeen, a local real estate investor who could not be reached. The venture financed the Jan. 15 purchase with a $4 million loan from New York-based Garrison Realty Finance LLC, according to county records. It was the last remaining building owned by an approximately eight-year-old fund that also had included 1755 Park, which previously sold for $2.5 million to Riverwoods-based Podolsky Circle CORFAC International, Quarter Circle Principal John Martin said. A Podolsky venture also agreed to buy 1717 Park, but Quarter Circle sued the venture in December, saying it failed to close on the deal. The lawsuit is still pending, Mr. Martin said.
Source: Chicago Real Estate Daily January 28th, 2014
Many of the nation’s hottest retailers are either on a growth tear or coming off a major acquisition — which may be a good thing or bad long term, if too much baggage was included in the transaction. Next year’s Hot 100 report will likely tell tales of what happened to several of this year’s leaders. Various scenarios are well-represented at the top of this year’s STORES Hot 100 Retailers report, with Bi-Lo Holdings, a collection of struggling supermarkets, ranking No. 1, followed by Michael Kors, one of the hottest brands in clothing.
While the economy is improving, the outlook isn’t overly rosy, notes Bryan Gildenberg, chief knowledge officer at Kantar Retail.
“We are looking at retail growth over the next five years as roughly the same as the rate of inflation, about 4.5 percent, but that isn’t to say everyone will be growing equally,” Gildenberg says. “We see non-store and online growth of 11.4 percent and the bricks-and-mortar segment growing at 3.5 percent … [and] losing market share. Right now, non-store accounts for approximately 7 percent of non-automobile consumer sales, but we see that doubling to 14 percent by 2020.”
Food for thought
B i-Lo emerged from Chapter 11 in May 2010 after operating for 14 months under bankruptcy protection. Controlled by private equity fund operator Lone Star, it acquired the remnants of the Winn-Dixie chain in December 2011. Bi-Lo was the smaller of the two entities, hence 2012’s triple-digit sales increase.
This spring Bi-Lo also acquired three groups of supermarkets from Delhaize Group: 72 Sweetbay stores in Florida; 72 Harveys markets in Georgia, Florida and South Carolina; and 22 Reid’s Groceries in South Carolina.
Grocery retailing is a $450 billion business and supermarkets “have always been a bit of a mirror as to what is happening in retailing in general,” says Gildenberg. He sees further contraction among traditional supermarket chains while specialty supermarkets will grow as they “get their value message across to the consumer.” Kantar sees a scenario in which “20 supermarket chains control as much as 90 percent of the market” at some point in the future.
No. 3 Sprouts — 2012’s hottest retailer — is one of the specialty grocers that Kantar sees as driving supermarket growth. Earlier this year, the company hit a milestone by opening its 150th store just a decade after its founding. Though its origins can be traced to 1943 when Henry Boney opened a fruit stand in Southern California, the company marks its modern era from the time Boney family members opened the first Sprouts store in Chandler, Ariz.
Also in the top 10 is The Fresh Market, another specialty supermarket. Emphasizing customer service and presenting an unconventional store layout, it has grown to more than 100 locations in 25 states over the past 30 years. Rather than growing progressively, it clusters stores by region: In the past few months, the company opened its fourth store in Pennsylvania, its eighth in Illinois and its sixth in California, with four more slated to open later this year. In all the company plans to add 19 to 22 new stores in 2013.
Craig Carlock, Fresh Market’s CEO, suggests that there are three reasons consumers shop The Fresh Market stores, which average just over 21,000 sq. ft.: Food quality that emphasizes healthy, fresh, local and regional; extraordinary customer service; and the stores’ neighborhood grocery atmosphere. In the first quarter of this year, sales remained in “hot retailer” territory with a 12.9 percent increase and same-store sales growth of 3 percent.
Wearing it well
M ichael Kors, which went public in December 2011, posted a 57.1 percent jump in revenues and same-store sales gains of 36.7 percent in the first three months of 2013. The company has increased revenues at a compound annual rate of about 50 percent over the last five years and has tripled its store count over the past three years.
No. 4 Lululemon Athletica has been through a dramatic year that included a quality control issue that led to the exit of its chief product officer and, subsequently, the abrupt and unanticipated departure of chief executive Christine Day. In March, Lululemon was forced to remove nearly one-fifth of its inventory after its black stretch pants were deemed too sheer when the exclusive Luon fabric was stretched. The recall would cost between $57 million and $67 million, the company said.
“While we regret that we had quality issues … we are proud of the organization’s ability to get Luon delivered back into our stores within 90 days of having pulled it from our line, all the while keeping our guests happy and engaged with the brand,” Day said in announcing her resignation. In June, Lululemon said it would begin opening stores devoted exclusively to menswear by 2016.
No. 6 Under Armour, which sells almost as much merchandise through Dick’s Sporting Goods as it does through its own stores and website, may see tougher competition as it expands into global territory controlled by Nike and Adidas. Well-represented among American high school, college and professional teams, last year only about 6 percent of Under Armour’s revenues were from abroad; Nike and Adidas each generated about 60 percent of their revenues in non-U.S. markets.
Company executives acknowledged that “international was underinvested because they were trying to find the right team,” noted Kate McShane, a securities analyst with Citi Research. Under Armour outfits one team in the English Premier soccer league and plans to outfit many athletes at the 2014 Winter Olympic Games in Sochi, Russia, and the 2016 Summer games in Rio de Janeiro.
Hot 100 newcomer H&M has experienced a slowdown in sales so far this year and says it will step up store openings in response, particularly in China and the United States. American store openings include a high profile location on New York’s Fifth Avenue about a block from Saks Fifth Avenue, and another three-story, 42,500-sq.-ft. site at Broadway and 42nd Street. The company also plans to launch an e-commerce site catering to U.S. customers.
H&M, which was stung three years ago when news media reported the retailer disposed of unsold inventory by putting holes in the garments and leaving them on the street for trash collectors, in February launched a program to encourage customers to recycle old garments in exchange for discounts on new merchandise.
“We don’t want clothes to become waste, we want them to become a resource,” says Henrik Lampa, H&M’s sustainability manager. “We want to make new commercial fibers out of this, to make new clothes and textiles.”
The online factor
No. 5 Apple’s hot growth continued last year, but this spring’s e-book pricing trial was a distracting sidelight for company executives seeking to keep consumers’ attention focused on products and services. iTunes Radio, a streaming music service offering more than 200 free stations, was launched in June; later this year, Apple is expected to introduce its Mac Pro, a sleek new desktop computer. One of Apple’s more significant retail moves was last fall’s ouster of Scott Forstall, a long-time associate of Jobs who oversaw Apple stores.
No. 7 Amazon.com’s most recent splash in the retail arena was entering the Los Angeles market with a grocery delivery service honed for years in its Seattle home territory. Called Amazon Fresh, the operation was jump-started when Amazon acquired Kiva Systems last year for $775 million; Kiva employed concepts and technology used by early Internet grocer Webvan.
Citing Amazon as “one of the few large-cap [businesses] to have secular exposure to e-commerce,” Oppenheimer & Co. analyst Jason Helftstein says the company “continues to gain share of U.S. e-commerce with its deep product selection, low-cost express delivery through its Prime program and breakthrough successes of its Kindle e-reader platform.”
Amazon also has an advantage because of its “head start and deep operating capability,” says Kantar’s Gildenberg. “It’s hard to see other e-commerce start-ups replicating what Amazon has done.” There is still plenty of opportunity for Amazon, he says, noting its relative weakness in such areas as consumables and apparel.
The expansion of Amazon Fresh to a second major market may turn out to be as significant a game-changer as Wal-Mart’s entry into the grocery business, Gildenberg says. “There are a lot of parallels” in that both Amazon and Wal-Mart went about showing the retailing establishment “a fundamentally different way of selling,” he says. “They operated with business models that were different from the way consumers bought things before.”
Curation and convenience
Kantar predicts drug stores, dollar stores and membership warehouse clubs will remain in growth mode.
“One reason club stores and dollar stores will be successful is that they both do a good job curating product,” Gildenberg says. Drug stores will also see an anticipated $15 billion increase in prescription medication spending as a result of coming changes in health care coverage, he says.
Even if dollar store openings see a temporary slowdown after the past five years’ explosive growth, Gildenberg sees expansion in the sector continuing as they exploit their capability “in curation and proximities as competitive advantages.”
The most successful retailers will be those that “best present their business’s value proposition to consumers,” he says.
Whatever the economy is doing, consumers were out and about in their cars more often in 2012 than 2011, as evidenced by the presence of eight convenience store chains on the Hot 100 Retailers chart, up from seven last year. Kantar’s researchers say c-store chains are growing through “acquisition of smaller chains and independents, rapid organic store growth and big investments in store remodels, food service and private label merchandise.” The numbers back that up: At the end of 2012, there were nearly 150,000 convenience stores in the United States, according to Nielsen Research — accounting for a little more than a third of all retail stores in the country.
As much as a quarter of the population says it shops convenience stores as often as supermarkets, according to a study released in June by Imprint Plus. The survey, which polled 1,000 consumers, also found that 60 percent of respondents bought something at a convenience store at least once a week.
C-store sales are segregated into two major categories: Fuel sales, which last year amounted to $501 billion, according to the recently-released State of the Industry Report by the National Association of Convenience Stores; and in-store sales of $199.3 billion. The three hottest categories for in-store sales were “alternative snacks” like meat snacks and health/energy/protein bars, which grew 12.2 percent year over year; liquor, up 11.6 percent; and cold dispensed beverages, up 11.3 percent.
The highest-ranked c-store chain on the Hot 100 Retailers chart is No. 24 Stripes, owned and operated by Susser Holdings. Stripes, which has locations throughout Texas, New Mexico and Oklahoma, has opened eight new stores so far this year. The company recently brought in Sid Keswani from Target stores to serve as senior vice president of store operations.
No. 73 7-Eleven, owned by Japan’s Seven & I Holdings, is the largest c-store chain among the Hot 100 Retailers in terms of sales and has plans to double its North American footprint over the next several years, both through takeovers of small operators and increased penetration of urban areas.
The chain “could increase … store numbers to 20,000 or even 30,000,” says Toshifumi Suzuki, chairman of Seven & I, declining to specify a timetable for the expansion. The company acquired more than 650 stores last year and controls nearly a quarter of the North American market. 7-Eleven has also invested heavily in remodeling and renovating both its own older units and acquired stores. It has been an industry leader in improving the quality and freshness of its offerings along with increasing the amount of private label products.
|Rank||Company||Headquarters||USA Retail Sales (000)||Sales Growth (’12 v ’11)||Worldwide Retail Sales (000)||USA % of World Sales||2012 Stores||Growth (’12 v ’11)|
|2||Michael Kors Holdings||New York||$850,000||63.2%||$1,063,000||80.0%||173||2.4%|
|3||Sprouts Farmers Market||Phoenix||$2,142,000||62.6%||$2,142,000||100.0%||146||41.7%|
|4||Lululemon Athletica||Sumner, Wash.||$823,000||57.7%||$1,287,000||63.9%||135||25.0%|
|5||Apple Stores / iTunes||Cupertino, Calif.||$23,998,000||34.6%||$26,760,000||89.7%||255||4.1%|
|9||Helzberg’s Diamond Shops||N. Kansas City, Mo.||$692,000||20.5%||$692,000||100.0%||232||-0.4%|
|10||The Fresh Market||Greensboro, N.C.||$1,329,000||20.0%||$1,329,000||100.0%||129||14.2%|
|12||Lumber Liquidators||Toano, Va.||$813,000||19.3%||$813,000||100.0%||279||9.0%|
|14||Grocery Outlet||Berkeley, Calif.||$1,300,000||18.2%||$1,300,000||100.0%||173||11.6%|
|15||Ulta Salon Cosmetics & Fragrance||Bolingbrook, Ill.||$2,099,000||18.2%||$2,099,000||100.0%||550||22.5%|
|16||Chico’s||Fort Myers, Fla.||$2,581,000||17.5%||$2,581,000||100.0%||1,357||8.0%|
|19||Tops Holding||Williamsville, N.Y.||$2,066,000||16.4%||$2,066,000||100.0%||137||5.4%|
|21||Whole Foods Market||Austin||$11,324,000||15.6%||$11,699,000||96.8%||322||3.5%|
|22||Bed Bath & Beyond||Union, N.J.||$10,853,000||15.6%||$10,983,000||98.8%||1,434||25.5%|
|23||Ralph Lauren||New York||$2,167,000||14.6%||$2,367,000||91.5%||249||-0.8%|
|24||Stripes||Corpus Christi, Texas||$1,009,000||14.5%||$1,009,000||100.0%||559||3.3%|
|26||Bodega Latina||Paramount, Calif.||$1,061,000||13.6%||$5,009,000||21.2%||45||25.0%|
|27||Ross Stores||Pleasanton, Calif.||$9,712,000||12.9%||$9,721,000||99.9%||1,198||6.6%|
|29||Foot Locker||New York||$4,468,000||12.9%||$6,129,000||72.9%||2,406||-2.8%|
|32||Dick’s Sporting Goods||Coraopolis, Pa.||$5,836,000||12.0%||$5,836,000||100.0%||601||7.1%|
|33||Hibbett Sports||Birmingham, Ala.||$819,000||11.7%||$819,000||100.0%||873||4.9%|
|37||Dollar Tree||Chesapeake, Va.||$7,266,000||11.3%||$7,395,000||98.3%||4,531||6.6%|
|38||Festival Foods||Onalaska, Wis.||$587,000||11.0%||$587,000||100.0%||17||6.3%|
|39||American Eagle Outfitters||Pittsburgh||$3,158,000||10.8%||$3,586,000||88.1%||971||-2.3%|
|40||Pier 1 Imports||Fort Worth, Texas||$1,564,000||10.8%||$1,691,000||92.5%||982||1.1%|
|43||Vitamin Shoppe||North Bergen, N.J.||$942,000||10.6%||$949,000||99.3%||575||9.3%|
|44||IKEA North America||Conshohocken, Pa.||$3,902,000||10.4%||$36,406,000||10.7%||39||2.6%|
|46||Tractor Supply Co.||Brentwood, Tenn.||$4,664,000||10.2%||$4,664,000||100.0%||1,176||8.4%|
|49||Newegg.com||City of Industry, Calif.||$2,686,000||9.3%||$3,074,000||87.4%||N.A.||N.A.|
|50||Family Dollar||Matthews, N.C.||$9,331,000||9.2%||$9,331,000||100.0%||7,442||6.0%|
|51||Yankee Candle Company||South Deerfield, Mass.||$445,000||9.0%||$447,000||99.4%||562||2.7%|
|52||C & J Clark||Newton, Mass.||$990,000||9.0%||$990,000||100.0%||286||11.3%|
|53||Aldi Süd||Batavia, Ill.||$10,041,000||8.9%||$42,321,000||23.7%||1,260||5.4%|
|54||Conn’s||The Woodlands, Texas||$650,000||8.9%||$650,000||100.0%||68||4.6%|
|55||Harp’s Food Stores||Springdale, Ark.||$826,000||8.8%||$826,000||100.0%||74||8.8%|
|62||Dollar General||Goodlettsville, Tenn.||$16,022,000||8.2%||$16,022,000||100.0%||10,506||5.7%|
|64||Sally Beauty Holdings||Denton, Texas||$2,601,000||8.1%||$2,601,000||100.0%||3,658||3.6%|
|65||Cumberland Farms||Framingham, Mass.||$798,000||8.0%||$798,000||100.0%||972||5.4%|
|66||WinCo Foods||Boise, Idaho||$4,932,000||8.0%||$4,932,000||100.0%||86||7.5%|
|67||Abercrombie & Fitch||New Albany, Ohio||$3,445,000||8.0%||$3,721,000||92.6%||912||-3.6%|
|68||99 Cents Only Stores||City of Commerce, Calif.||$1,605,000||7.9%||$1,605,000||100.0%||319||7.0%|
|69||Academy Sports + Outdoors||Katy, Texas||$2,191,000||7.7%||$2,191,000||100.0%||156||9.9%|
|70||Ascena Retail Group||Suffern, N.Y.||$3,125,000||7.6%||$3,235,000||96.6%||2,585||3.0%|
|71||Verizon Wireless||Basking Ridge, N.J.||$8,010,000||7.6%||$8,010,000||100.0%||1,910||-18.0%|
|74||Casey’s General Stores||Ankeny, Iowa||$2,004,000||7.5%||$2,004,000||100.0%||1,754||3.2%|
|75||Ann Inc.||New York||$2,376,000||7.4%||$2,376,000||100.0%||984||3.3%|
|76||Trader Joe’s *||Monrovia, Calif.||$7,844,000||7.4%||$31,666,000||24.8%||395||5.1%|
|77||Signet Jewelers||Akron, Ohio||$3,330,000||7.3%||$4,065,000||81.9%||1,333||1.1%|
|78||Burlington Coat Factory||Burlington, N.J.||$4,104,000||7.1%||$4,131,000||99.3%||492||4.5%|
|81||O’Reilly Automotive||Springfield, Mo.||$6,182,000||6.8%||$6,182,000||100.0%||3,976||6.3%|
|82||VPS Convenience Store Group||Wilmington, N.C.||$324,000||6.7%||$324,000||100.0%||190||6.7%|
|83||CVS Caremark||Woonsocket, R.I.||$63,688,000||6.7%||$63,863,000||99.7%||7,472||1.7%|
|87||The Home Depot||Atlanta||$66,022,000||6.4%||$74,754,000||88.3%||1,965||0.1%|
|88||Hot Topic||City of Industry, Calif.||$734,000||6.3%||$742,000||98.9%||803||4.8%|
|89||Pilot Flying J||Knoxville, Tenn.||$694,000||6.3%||$771,000||90.0%||549||3.0%|
|90||Wakefern / ShopRite||Keasbey, N.J.||$13,656,000||6.3%||$13,656,000||100.0%||300||3.1%|
|92||Stein Mart||Jacksonville, Fla.||$1,232,000||6.2%||$1,232,000||100.0%||263||0.4%|
|93||Petco||San Diego, Calif.||$3,011,000||6.1%||$3,011,000||100.0%||1,193||4.9%|
|95||Ethan Allen Interiors||Danbury, Conn.||$834,000||6.1%||$834,000||100.0%||211||2.4%|
|96||BJ’s Wholesale Club||Westborough, Mass.||$12,465,000||6.0%||$12,465,000||100.0%||200||2.6%|
|97||Harris Teeter Supermarkets||Matthews, N.C.||$4,535,000||5.8%||$4,535,000||100.0%||208||2.0%|
|98||C&K Market||Brookings, Ore.||$514,000||5.8%||$514,000||100.0%||65||4.8%|
|99||The Buckle||Kearney, Neb.||$1,124,000||5.7%||$1,124,000||100.0%||440||2.1%|
|100||Kinney Drugs||Gouverneur, N.Y.||$825,000||5.7%||$825,000||100.0%||95||5.6%|
Other trends predicted for the new year include that multifamily properties might fall off of investors’ must-have lists, construction investment could pick up and foreign investors are expected to continue to scoop up trophy properties in the U.S.
“Looking ahead, I would fully believe investors would take advantage on value added and opportunistic strategies instead of focusing on core,” said Brad Morrow, senior private markets consultant in the New York office of Towers Watson & Co. The riskier strategies appear to be a better opportunity because of the risk-return spread between them and core.
Mr. Morrow does not expect a wholesale switch of capital out of core for value added and opportunistic real estate. Instead, he expects investors to begin using riskier strategies with a little more return potential “at the margins.”
As for the real estate markets, Jim Sullivan, managing director, REIT research, of Green Street Advisors Inc., a Newport Beach, Calif.-based research firm, said real estate market projects are “tied at the hip with any investor’s view of interest rates.”
One camp’s view is that interest rates might go up because the economy will be recovering at a robust pace, Mr. Sullivan explained.
“A higher cost of capital is bad for real estate investing but a robust economy is great for real estate,” he said. Another view is that if interest rates go up unaccompanied by strong economic growth, it will be bad for real estate because it is an industry that is capital intensive, Mr. Sullivan said.
Multifamily is out, malls are in
Meanwhile, multifamily real estate investments may no longer be the darling of real estate investment community in the coming year.
Apartments — and the multifamily sector as a whole — have been extremely strong for several years, but it won’t be as hot going forward, Mr. Morrow said.
The net operating income might start to come down as new multifamily development projects that are in the pipeline are completed, he said. Indeed, there might be oversupply of multifamily properties in certain markets.
“I don’t see the growth opportunity we’ve seen in the past,” Mr. Morrow said. “Apartments might become less desirable.”
It could be a completely different story in the apartment real estate investment trust sector, Mr. Sullivan said.
Apartment REITs were red hot in 2011 and 2012, but underperformed the rest of the public markets in 2013, he said.
“Our view is the market overreacted to the decelerating growth,” Mr. Sullivan said. “Apartment REITs look cheap going into 2014.”
There will be a similar story with mall REITs, he added. In 2013, the mall sector significantly underperformed as investors anticipated a decline in consumer spending and a tax increase.
As a consequence, high-quality malls look cheap in the public real estate market, Mr. Sullivan said.
“Investor angst in relation to investor spending is legitimate but the mall sector was overly discounted,” he said.
One really big-picture item in 2014 is that the pace of new construction is starting to pick up.
“The commercial real estate party … usually ends not because of the lack of demand but because of excess new supply,” Mr. Sullivan said.
New construction, which had been at generational lows, is starting to change “in a pretty meaningful way,” he said.
The pace is picking up the quickest in multifamily, industrial and niche strategies such as student housing and data centers.
“The good news is that there is demand to meet the new supply,” he said.
The increasing supply is not enough to ring any alarm bells, but it is the first time in two or three years that observers will be watching out for oversupply.
One trend that sprouted in 2013 and might take firm root in 2014 is an increase in co-investments in real estate. While co-investments are fairly common in private equity, real estate deals have not been large enough for co-investments.
Real estate managers that can’t raise a large blind pool closed-end fund are looking to new ways to raise capital including seeking co-investments.
Managers may be more open to it in 2014 as fundraising continues to be a challenge, said David M. Sherman, president and co-chief investment officer of Metropolitan Real Estate Equity Management, Carlyle’s newly acquired real estate fund-of-funds business, and head of the real estate fund of funds group in Carlyle Group’s solutions subsidiary.
“Managers that need to stretch the remaining equity in a fund may co-invest, even if their deal sizes are manageable, during the latter half of a fund’s lifecycle,” Mr. Sherman said. “A manager of a new fund may seek co-investment because fundraising is going slowly. Some managers utilize co-invest in between fund raises.”
A big theme in 2014 is expected to be continued investment by foreign investors in U.S. real estate, said P.J. Yeatman, head of private real estate for CenterSquare Investment Management, a Plymouth Meeting, Pa., real estate manager. In a flight to quality, foreign investors have been buying up trophy assets in the U.S., leading to the overpricing for these properties, Mr. Yeatman said.
“We (the U.S.) became the flight-to-quality market,” he said.
These investors consider U.S. core real estate to be akin to fixed income, Mr. Yeatman said. What’s more, many of these buyers purchase properties on the basis of “perception,” he added. “The perception is that New York is a fortress and it is worth paying anything for New York real estate,” Mr. Yeatman said.
He added: “I don’t expect (foreign purchases of U.S. property) to stop” in 2014.
Astute investors will begin investing in value added and opportunistic real estate in order to sell into the overheated core market.
“The smart money will recognize the arbitrage opportunity between creating income streams to sell into the overheated market vs. buying income streams,” Mr. Yeatman said.
Another huge investment opportunity will be European real estate debt, said Joe Valente, managing director and head of real estate research and strategy in the London office of J.P. Morgan Asset Management (JPM).
Some €400 billion ($546.7 billion) of distressed European assets will be coming to the market, Mr. Valente estimated. “Half will be in core European markets where investors don’t have to take macro risk,” he said.
As for the year just ended, one of the big surprises was that the capital markets rebounded stronger than many real estate investors expected.
“I expected it to be strong, but it was stronger than I had expected,” said Gary M. Tenzer, Los Angeles-based principal at real estate investment banking firm George Smith Partners Inc.
Even though prices were at very high levels, in many cases around the pre-financial crisis levels, cap rates were very low, he said, noting that investors were chasing yield.
Source: PIOnline Arleen Jacobius, January 2nd 2014
It’s a sellers’ market for distressed commercial real estate and Taylor Burke, senior executive vice president and chief lending officer for the $2.62 billion Burke & Herbert Bank in Alexandria, VA, wants to move his inventory.
“I think this is a great time to buy distressed property, especially that which we are selling,” joked the Alexandria-based banker.
More seriously, though he says, the market is good for bad property right now.
“Banks should be cleaning out their inventory this spring,” said Burke. “I want to sell all my stuff now and I suspect that my conferees are ready to unload their REO now, too. There is finally some demand in outlying areas where most of our problems are located. Not just income-producing any more – even lots are selling at last. Builders need inventory. There are a lot of troubled suburban strip centers and offices everywhere. There has been a sea change in demand.”
But, therein also lies the weakness to the distressed investment market.
“I don’t see enough of a price spread to justify the risk of buying an empty or troubled building,” Burke said.
Luke Wood, partner in Haverwood Management, an opportunistic investment and management firm in Austin, TX, concurs.
“If you can find a good distressed deal at a ‘distressed’ price, buy it,” Wood said. “Good distressed assets are selling at market value (or above market value, depending on your opinion) at this point in the market recovery. Equity is looking for limited parking spots and we are seeing many distressed assets sell at non-distressed prices to optimistic buyers, eliminating the high returns sought after for distressed deals.”
Distress Sales By the Numbers
Distressed sales as a percentage of total commercial real estate property transactions have been on a declining trend since the start of 2011, according to CoStar Group data. Distressed property sales made up 20% of the dollar volume of deals in 2011 but just 11% of total property sales volume in 2012 as the number of nondistressed sales soared and the volume of distressed sales fell. There was $16 billion fewer distressed sales last year compared with 2011. At the same time total sales increased 26% from $255 billion to $322 billion.
The number of distressed sales decreased significantly in many core markets. Distressed sales in New York state were down $7.6 billion; down $3.1 billion in California and down $1.2 billion in Texas. Notable also was that distressed sales in Nevada were down $1.3 billion; where distressed sales made up almost entire volume of sales in 2011, they represented less than 30% last year.
However, different markets appear to be in different stages of the recovery cycle. For example, while total distressed property sales volume dropped year-to-year in Michigan, Nevada and Georgia, they still accounted for nearly 30% or more of all commercial property sales. But as distressed property sales plummeted in some states, they were increasing in other. Distressed sales were up more than $100 million in 2012 vs. 2011 in Maryland, South Carolina, Illinois, Colorado, Pennsylvania, New Jersey and Missouri.
Lots of Buyers, But Numbers Don’t Always Pencil Out
Ember Grummons, a commercial sales and leasing representative for Investors Realty in Omaha, says there are a lot of buyers looking for distressed product in his markets.
“But the numbers need to make sense,” Grummons added. “Most of my clients require a 20% or greater internal rate of return on a distressed asset, using realistic lease-up assumptions.”
“There is a tremendous opportunity in tertiary markets in the Midwest right now, both for distressed as well as core and core+ opportunities. Markets such as Omaha, Tulsa and Des Moines have strong economies and fundamentals, but are overlooked by most buyers due to the size of the market, Grummons added. “There simply are not a lot of bidders for these properties, and it is possible to purchase them at very attractive pricing.”
Kevin Markwordt, managing director of Transwestern in Atlanta, said, “The likelihood of an investor or owner/user over-paying is unlikely (given rising property values). There are lots of buyers in the Atlanta market and competition is driving up prices.”
But there is a downside too, Markwordt said. “The negatives can be carrying costs and a slow turnaround time. Vacancy rates and rental concessions remain high, which are affecting projected cash flows downward, and ultimately providing a ceiling on the price per square foot (for purchases).”
“The market is appreciating at rapid rate and the longer you hold assets off the market the more value sellers will extract, as long as the carry (expense) does not cause hold costs to outweigh the opportunity an investor will associate with the acquisition,” said Paul Choukourian, managing director of Colliers International in Detroit.
In many markets, brokers say investors have cherry-picked the ‘best’ of the distressed inventory. “The remainder that will come to market has some inherent challenges,” Choukorian added. “The lenders are of aware of the demand and their focus seems to be maximizing the amount they extract. The majority of distressed assets that have the most significant value-add potential do not come to market due to the CRE market turn around.”
Multifamily and retail continue to attract the most interest from buyers. “They have decreased risk and a larger audience that can afford their purchase,” Choukorian said. “These assets are available because they are still seeing mature defaults that will not allow the current owners to procure take-out financing due to changes in lending practices.”
Retail Distress Still a Hot Commodity
Among all property types, only retail property saw an increase in distressed sales volume last year, up 4% in 2012 over 2011, CoStar data shows. Sales of distressed property for all other types declined. Distressed hospitality sales were down 52% year-to-year; office, down 45%; multifamily, down 26%; and industrial, down 22%.
“Retail seems to be a strong interest for distressed investors at present and there seems to be an ample supply of attractive, newer yet distressed retail properties,” said Ryan Phillips, president of Signature Asset Management in Dallas. “Moderately leased suburban office may be an opportunity in distressed real estate. I would stay away from very low occupancy buildings unless they are small and could be filled with a few leases. Any Class “A” product that is moderately leased could be viable — as long as it is priced as distressed and not at very low cap rates.”
Cheryl Pestor, senior vice president of NAI Capital, Pasadena, CA, also noted the strong interest in retail among investors targeting distressed real estate assets.
“I specialize in retail or service-oriented retail investments with about 20% of my sales working with banks on their REOs, and there is continued interest for retail properties if they are well located corner locations with good visibility,” Pestor said.
While there are always value investors in the market, no matter where the market is in a recovery, Pestor faults seller for not pricing distressed property correctly to incentivize an investor for the risk in buying a property “as is, where is, with all faults.”
Capital and Deal Structure Will Define Distress in 2013
“We’re at an interesting point in the cycle of distressed investing with many funds reconsidering the nature of the value investment thesis from a fundamental standpoint,” said Sean Banerjee, managing director of RedBrook Capital, a distressed investment firm in Seattle.
Banerjee sees synthetic credit markets re-emerging after largely being absent throughout the last cycle. He believes funds will be able to leverage newly available credit to acquire higher quality assets, which have been priced out of the range of distressed buyers in this cycle.
“Funds are starting to realize that when you are stepping into great product in great locations and taking advantage of circumstantial distress that isn’t always related to the real estate (such as entity-level or lender-level distress, then you’ve got a better overall picture to sell to investors when attempting to fundraise,” Banerjee said. “Ultimately you’ve got to successfully execute for current investors, but to attract new interest from sellers of distressed assets and investors alike, funds must also be innovative and ahead of the market. Investors don’t want to hear about funds returning capital. They’d rather hear about great deal junkies who have found creative ways to get deals done.”
Market timing is everything, but Banerjee and others understand while current conditions offer a great time for sellers to sell-off distressed assets, changes could be in store for the market down the road.
“Ultimately in the next three to five years, many local and regional banks will have the expiration of FDIC loss-share agreements, which will unlock their ability to sell assets at their sole discretion,” points out Banerjee. “This has the potential to cause flooding in the marketplace, which would saturate a market which has really been driven by competition over assets.”
The Triumph of “Extend and Pretend?”
Up until now, many banks have been reluctant to put to their distressed assets on the market, says Michael J. Tharp, an associate vice president for NAI Norris, Beggs & Simpson in Portland, OR.
Tharp, who works with a special asset team set up to work with REO subdivision, apartment land and raw land for residential, said the strategy pursued by many banks to work with borrowers on troubled loans rather than foreclose and take the loss is paying big dividends as prices recover in many areas.
“It’s become less risky the further we get into the recovery, so the length of time you might get stuck holding an asset with no market lift whatsoever is shorter,” agreed Joshua Anderson, COO of The Roseview Group in Seattle, who invests with and advises institutional clients across the nation.
“In terms of supply and demand of product, it’s more of a seller’s market for bank holders of distress than it is a buyer’s market, especially for notes,” Anderson said. “Geographically the best opportunities are in markets that are showing some initial signs of recovery but that are not as far along the curve as others yet. That applies to most of the Southeast and Midwest. “In terms of strategies, I think many of the best opportunities remain to be had by working through borrowers to approach lenders with white knight restructuring capital; that is generally the best path to getting off-market deals.”
Michael Lapointe, executive managing director and who runs the Capital Market’s in Florida for Newmark Grubb Knight Frank in Miami, said, “Banks, servicers and other asset managers have gotten incredibly savvy in the past few years in marketing assets for sale using a combination of off market, auction and other techniques.”
“Regardless of the medium, the groups that are successful are ones with a clear strategy that is often consistent amongst their dispositions,” Lapointe said. “Lenders that pick off single assets early to close relationships and then mass market remaining notes or poor assets often yield a lower total value then if a more thought out strategy was applied.”
Source: CoStar Mark Heschmeyer March 27, 2013
Independent grocery chains affiliated with the Centrella cooperative are in negotiations to buy as many as 10 Dominick’s stores, sources familiar with the talks said.
Grocers affiliated with Centrella, the brand name used by Joliet-based Central Grocers Inc., are looking to purchase stores as a group in both the city and suburbs, sources said. It’s unclear which Dominick’s locations Centrella would buy on behalf of its member firms.
The group has hired food industry investment banker David Schoeder to negotiate the package deal with Dominick’s parent, Pleasanton, Calif.-based Safeway Inc., which announced it would leave the Chicago market.
Mr. Schoeder, a principal with Food Partners LLC in Washington, declined to comment. A Centrella executive could not immediately be reached this evening.
Centrella grocers looking to open stores in soon-to-close Dominick’s around the region include Tony’s Finer Foods, Treasure Island and Strack & Van Til, among others, according to the sources. The co-op has more than 150 members.
Tony Ingraffia, president of South Barrington-based Tony’s Finer Foods Inc., did not return calls. Christ Kamberos, vice president of development at Treasure Island Foods Inc., declined to comment. An executive with Highland, Ind.-based Strack & Van Til did not return a call.
Jewel-Osco, meanwhile, is suspending plans to snap up additional Dominick’s on the market here. The firm, owned by private-equity firm Cerberus Capital Management LP, is no longer looking to buy additional Dominick’s stores that are currently open, said an Itasca-based spokeswoman for Jewel.
When Safeway announced in October that it would leave the Chicago market, the firm operated 72 stores across the region. No more than 55 remain.
Earlier this month, Milwaukee-based Roundy’s Inc. announced a $36 million deal for 11 Dominick’s. Jewel-Osco has purchased four. And Dominick’s leases are expiring at properties in Matteson and Morton Grove and the landlords there are pursuing other options.
A Safeway spokeswoman did not return a call.
Jewel announced its Dominick’s acquisitions in October, stores at 1340 S. Canal St. and 2550 N. Clybourn Ave. in Chicago, and in Homer Glen and Glenview. It’s currently operating those outlets as Dominick’s, with plans to convert them into Jewel stores by mid-January, according to Jewel spokeswoman Allison Sperling.
The grocer won’t buy any more operating Dominick’s stores, Ms. Sperling said. Instead, Jewel will wait to see what’s left after Safeway shutters its chain Dec. 28th.
“In the near future, we will consider any opportunities that arise” to take over closed Dominick’s, said Ms. Sperling, who declined to elaborate further.
Chicago Tribune first reported on Jewel-Osco’s decision not to pursue Dominick’s that are currently open.
In other Dominick’s developments, Safeway did not renew its lease for its store at 4233 W. Lincoln Hwy. in south suburban Matteson. A spokesman for Indianapolis-based Simon Property Group, which owns the retail property that Dominick’s is leaving, said in a recent email that Simon is trying to find a new tenant for the space.
In Morton Grove, Dominick’s lease is expiring in April, a source said, and the landlord plans to pursue a retail-focused redevelopment project there.
Source: Crains Chicago Business Micah Maidenberg December 18, 2013
If you’re thinking about purchasing office space, this guide will help you evaluate the pros and cons of leasing vs. buying, assemble a real estate search team, choose a location, and make the purchase.
Every few years, the real estate market suffers through a crash or a correction and underscores a perpetual dilemma for small and mid-sized businesses: Is it better to rent or own commercial property?
Buying commercial real estate is a complex undertaking that is difficult even for experts to time right to maximize their investment value, let alone entrepreneurs or business executives whose areas of expertise are in different industries. It’s also a venture rife with risk, as buyers, sellers, agents, and renters alike can suffer the consequences of a dip or spike in demand. At the same time, for a business, on the upside the potential rewards can be substantial.
Why should a business buy? “To get a greater control over the cost of the real estate component of overhead, as opposed to leasing, where you can be victimized by the market if the lease rolls over when the market is tight and, as a result, you have higher rental costs,” says William Martin, chair of the real estate group in the Denver office at Kutak Rock LLP, a law firm with 400 attorneys and offices around the country. “The other benefit would be investment benefits, including depreciation of the property for tax purposes and, over the longer term, asset appreciation.”
There is no one-size-fits-all strategy for purchasing commercial real estate. That decision must be weighed by each business. The following guide will help a small business assemble a real estate search team, choose a location, and purchase property.
Purchasing Commercial Real Estate: Deciding to Buy Versus Lease
When deciding whether to buy commercial real estate, it’s important to understand the potential risks. The last thing you want is to buy property and realize a year or two later that you would have been better off renting. Here are some of the potential risks a business faces when buying:
In order to be aware of risks, do your homework. Undertake extensive due diligence before signing any contract. You also need to be hands-on with your commercial property by overseeing every level of operation and making frequent on-site visits — otherwise, you may learn about problems after it’s too late to do anything to fix them.
The decision ultimately comes down to the economics. You may want to have a real estate expert help you undertake a rent versus own analysis, taking into account growth forecasts for your business and real estate market trends. “It’s really beneficial to sit down with an expert that can lay out options for you and discuss scenarios, such as in three years this is where business will be in terms of revenue, size, or people. This is how many locations we will have. This is what our space needs will be. A real estate expert can also help you figure out the costs of renting versus buying, factoring tax benefits such as depreciation.
Purchasing Commercial Real Estate: Assembling a Team of Experts
As a small business owner, you’re most likely not a commercial real estate expert. That’s why it’s important to surround yourself with the right team of experts. They can help you determine the right time to buy or sell, the right locations to consider, and the nuts and bolts of closing the deal. Here are some of the experts you may consider contacting:
Purchasing Commercial Real Estate: Identify the Right Property
There are a number of factors to consider when looking for suitable commercial real estate to purchase. The old adage “location, location, location” is true for commercial properties just as much as it is for residential. But there are other issues at play, as well. Here are some things to consider:
Purchasing Commercial Real Estate: Do Due Diligence and Evaluate the Property
After you locate the right property, you go to contract and commence a one- or two-month period during which you need to do your homework. Now is the time to revisit your objectives, and ask yourself if the property you have identified helps you meet or further your stated objectives.
Beyond that, this is where your team of trusted advisors plays an important role. A broker will often help bring in third parties — engineers, appraisers, environmental analysts — to help verify the condition of the property, its prior use, and any potential liability issues, whether structural soundness or necessary upgrades of electrical wiring. You should also be involved to make sure that there isn’t any potential for changes in adjacent properties that could negatively impact your business or property value, such as development, road or infrastructure construction, etc. A title company can also make sure there are no prior or existing litigation and/or insurance claims affecting the property.
If you find any problems, you may have the opportunity to renegotiate with the seller or sometimes to walk away from the deal.
Purchasing Commercial Real Estate: Taking the Plunge and Making the Purchase
Once you’ve found the right property and worked with the owner on the right price, the next big step is to secure financing and come up with the right mix of how much cash you’re putting down and how much you need to finance, Nadji says.
During good economic times, there are a host of attractive financing options available to small and mid-sized businesses. After the global economic meltdown, starting in 2008, banks tightened up credit and limited many of these options. In order to get a loan during a tough economy, it’s doubly important to make sure your business has sufficient cash reserves, has a good credit rating, and is profitable.
Your attorney and accountant play key roles here to ensure contracts are sufficiently detailed, and structured to your maximum advantage. You need to envision every possible contingency, and make sure it is covered — clearly and unambiguously — in the contract. Everything from air rights and other zoning laws to the nuances of existing tenant leases and tax requirements must be understood here. You also need to verify — and re-verify — the financial terms associated with this purchase, to confirm you are ready to pull the trigger.
At this step, you should also update or add to your original business plan, to cover the specifics of this acquisition; this is when your plan comes to life. Once the purchase takes place, it is imperative that you implement and execute on the plan without procrastination. The cliché “time is money” is never truer than when you are building or renovating a commercial real estate property.
Before buying commercial real estate, it’s important to make sure that buying is right for your business for the long-term. “The most important thing is to think carefully about what could happen in the first 12 to 24 months after buying a building that would make you look back and say, ‘I made a mistake,'” says Nadji. “If you’re very aggressive with revenue growth projections or overshoot how much space you need to occupy or buy and then the business doesn’t grow fast enough into that, you may have a problem.”
Source: Inc Magazine
Shopping Centers Seeing Healthy Demand from Retail Tenants
Continued healthy demand for retail space is driving strong occupancy increases for many of the nation’s shopping center landlords and is even beginning to show up in rent increases.
“We’ve seen occupancy increase for a couple of years now and landlords are showing increasing net operating incomes and some are starting to see rents pop,” said Ryan McCullough, senior real estate economist CoStar Group (PPR division), speaking at CoStar’s 2013 Q3 Retail Review & Outlook webinar last week. “However, rents for most retail space are still low to the point that they are not an undue burden on the tenant,” a positive for both sides, said McCullough.
In fact, he added, the decline in vacancy appears to be accelerating. Net absorption of retail space reached its highest point since the start of the recovery with 19 million to 20 million square feet of net absorption per quarter, the best results in years.
McCullough said there is still plenty of upside for quarterly net absorption, which remains well below the height of the market in 2007 when national net absorption per quarter was approximately 50 million square feet.
With the increasing net absorption, retail rents are even starting to tick up.
“We’re just talking about a 0.8% gain over the year, not a huge number,” McCullough said, but also noting that some of the stronger U.S. markets are seeing retail rent gains of from 4% to 5% and even higher.
McCullough’s comments on the CoStar webinar are backed up by other comments made by senior executives for some of the largest publicly held retail REITs in their third quarter earnings conference calls.
Demand Coming from National, Regional Tenants
“We’re still not seeing the formation of new mom-and-pop businesses; and most of our new leases are coming from national, regional or franchise operators. These tenants want to be in Weingarten properties because our top tenants, supermarkets and discount closing retailers, continue to drive sales and traffic to our centers.
Rent growth for new leases continues to accelerate. We produced an increase of 9.4% in the third quarter and 12.6% year-to-date. We do see leverage slowly shifting to the landowner, particularly in urban markets that have more depth of retailer demand.
Johnny L. Hendrix, Chief Operating Officer and Executive Vice President of Weingarten Realty Investors
New Retail Outlet Concepts Spur Growth
We love all the new outlet concepts that are coming. There are several that have announced plans to expand, such as Francesca’s, Asics, Talbots, Vince Camuto, Cache. We’re also working with folks like Helzberg Diamonds, Joe’s Jeans, MaxStudio, Theory, Andrew Marc. There seems to be an ever-increasing list of high-quality designer and brand names that want to enter or expand in the outlet space.
Steven B. Tanger, President and CEO of Tanger Factory Outlet Centers
Demand Driving Tenant Turnover
The demand we’re seeing is from domestic retailers looking to expand the existing footprints to scale up new concepts, international retailers seeking to enter or expand within the U.S. market and the traditional destination retailers that are coming into the mall.
It is also an opportunity for us to replace lower productivity tenants with a higher productivity tenant, thereby supporting a continued growth in sales at the malls.
Sandeep Lakhmi Mathrani, CEO of General Growth Properties
Occupancy Increases Up for both Anchors and Small Shops
Quarter over last quarter, overall occupancy was up 30 basis points pro rata and 20 basis points gross. Anchor occupancy increased 40 basis points to 97.4%; small shop occupancy was up 40 basis points to 84.7%, an 80 basis points increase from third quarter of 2012. The increase in small shop occupancy continues to be driven by positive net absorption from the disposition of riskier assets.
Given that demand for large boxes is very strong, and occupancies are high for this space across our sector, Kimco is benefiting from this trend through higher rents for a larger portion of our portfolio. Additionally, we continue to see the advantage of old leases in our portfolio coming to the end of their term.
Conor C. Flynn, Chief Operating Officer and Executive Vice President of Kimco Realty
Retailers Making Up for Over-Reacting Three Years Ago
You know everybody probably overreacted in terms of closures in 2010. And so a lot of [what] you see is a lot of these national guys who are really scrambling to find space.
There has been a real strong increase really across the board and demand from national tenants. A good example is Starbucks as an example. Eighteen months ago people would say ‘they’re done, they’re closing stores, they’ve got too many stores.’ Now Starbucks is opening lots of stores or re-opening stores that they [had previously] closed.
John Kite, CEO of Kite Realty Group Trust
Lease Terms Also Becoming More Landlord Favorable
On a same-property basis, the operating portfolio is nearly 95% leased at the close of the quarter, and shop space occupancy stands at roughly 89%, the highest it’s been since 2008 and a 130-basis-point improvement over 2012. With this increase in occupancy, aided by strong tenant demand and limited new supply, we continue to gain pricing power. Rent growth returned to double digits this quarter. Average rents for side-shop tenants continue to trend upward and are now 34% above the trough.
And not only are starting rents improving, but we’re also seeing more favorable lease terms as a whole, including better rent steps and more aggressive commencement dates.
Retailers are acting on this positive sentiment. Many are making significant investments in their current spaces, as well as in new ones. Given the underlying strength of tenant demand, we see no slowdown in the positive momentum in all of the key operating metrics.
Brian M. Smith, President, Chief Operating Officer of Regency Centers
8% Rent Increases in Core West Coast Markets
We have seen a considerable increase in retailer demand across each of our core markets this year, coming from a broad range of large national retailers, as well as regional and local tenants. Needless to say, we have been working very hard to capitalize on the increased demand and as a result, our overall portfolio occupancy has risen to 95.3% as of September 30.
In terms of same-space comparative numbers, cash rents increased by approximately 8% on average for the third quarter.
Source: CoStar Mark Heschmeyer November 6, 2013
(Download PDF or read content below)
Increasing your value on a commercial property is not that simple. As an asset, land purchase has many subtleties that require keen analysis, local knowledge and an eye to the faraway horizon.
Dean Saunders, ALC, CCIM, of Coldwell Banker Commercial Saunders Real Estate in Lakeland, Florida, is one of the top land-sale brokers in the United States. Dean Saunder’s experience is long and wide. He stresses that a knowledgeable, local professional is critical to a successful purchase. A local professional will have a network of useful relationships and a thorough understanding of political and/or environmental issues that are unique to the location. You have to know the right questions to ask in order to fully evaluate a potential transaction. Saunders maintains that understanding land purchasing is primarily a matter of economics and covering the basics. “The basics” means doing the research on the obvious (the title is clear, the land has been surveyed) and thoroughly investigating what he calls “the three constraints to value: political, physical and market.”
“You make your money when you buy land,” he says. “You realize the profit when you sell. If you know you bought it right, then you know you will make money on it.” But what is the right price? This is where careful analysis benefits potential investors.
Agricultural land in the Midwest and the Mississippi Delta tripled from 2007 to 2013. A combination of high commodities prices and low interest rates is making farmland attainable, which in turn is driving prices. USA Today reported, “In Iowa, where rich soil, favorable weather and ethanol and livestock production help foster demand for limited growing space, farmland values have soared 90 percent since 2009. An acre of farmland that a decade ago sold for an average of $2,275 now sells for $8,700.”1 This is a very attractive return on investment, by any measure.
Fred Schmidt, president and COO of Coldwell Banker Commercial Affiliates, believes recent demand on agricultural land as an investment is putting pressure on prices. “Prior to the 2008 recession, that had not been the case,” he says. Additionally, land is attractive to overseas buyers. “The United States is number one in property rights. Conveyances of property by deed with the chain of title available for investors to see in the United States helps to drive secure investment in the United States. International investors are looking at secondary and tertiary markets for sound investments, and for opportunities to convert them into revenue-producing vehicles.”
Saunders recounts the past decade’s land-market turbulence. The boom prices in Central Florida and other parts of the country were sky high and highly speculative in late 2006. By 2008, the market corrected and prices went down dramatically—in his opinion, below where they should be, creating potentially profitable opportunities. “There is art in knowing when and for how much. Buying land, assuming it will always go up in value, is simply not realistic,” says Saunders. In the heady speculative days of 2007, buyers paying over-the-top prices were validated by lenders who were willing to lend on the sky-high prices. Many were badly burned. Whether you are a buyer or a lender, “Don’t neglect the basics, and be diversified,” says Saunders.
DO THE GROUND WORK ON LAND
Saunders says that basic research includes understanding the water rights, road access and frontage, taxation, zoning, power sources. All are important factors. “Is it in the path of progress?” asks Saunders. “Look at fundamental demand: Where is the growth going to be? Is it logical?” He talks about three “constraints to value.” He says the first constraint is physical. “What can actually be built on the property? What are the physical characteristics of the land?” For example, does it have wetlands, and if so, where; what soil types do you have; and what can you grow on them? The second constraint is political. “What does the government say I can do on the land?” Saunders cites land use and zoning, water and sewer lines, endangered species, tree ordinances etc. Then there are market considerations: “Is there demand for what you want to build? Will they come if you build it?”
Saunders stresses that having a knowledgeable professional on your team is key. Your consultant should be able to tell you what is in the public record, and also what is in the wind, as it will likely pertain to future legislation or other projects in the same locale. Those subtleties will be invisible to someone who does not have in-depth local knowledge. Expensive missteps occur when potential buyers do not know the right questions to ask. “Hire the best counsel you can,” he says. “You need someone on the beach who can tell you whether it is safe to be in the water right now. All real estate is local.”
DEEP IN THE HEART OF TEXAS
The pivotal role of working with a professional who has local expertise is echoed by Beau Tucker, CCIM, a commercial land specialist at Coldwell Banker Commercial Rick Canup in Lubbock, Texas. Tucker specializes in all aspects of land, build-to-suits and commercial real estate investments. He maintains an inventory of more than $100 million in land and investments and is among the most active land brokers around. He does a lot more than help buy and sell tracts. “I help landowners get the most out of their land.” Tucker invests a lot of time and talent in building relationships with potential tenants as well as landowners. He knows what commercial buyers/tenants want and need. Perhaps their businesses depend on being near multifamily dwellings or offices or Lubbock’s large college community. Through his extensive networking activities, Tucker considers himself as much a matchmaker as a commercial real estate adviser. He brings project partners together to their mutual benefit.
For instance, he worked closely with a large land developer to strategize the “big picture” for 500 acres. Rather than simply transacting sales of parcels, together they created the vision for a retail corridor that houses a synergistic mix of tenants and links major transportation routes through the city. The whole was greater than the parts. It elevated the value of the land, the value of the economic activity and the value to the community.
COMMERCIAL REAL ESTATE AND PHYSICS
Saunders says that the economics of land purchase is the same as the laws of physics. What goes up must come down. Every action has an equal and opposite reaction. When there is money to be made, everybody wants to jump in, causing the market forces to rebalance. Among the reasons farmland is expensive now is that corn prices are high, as it is being used to produce ethanol for fuel. Inevitably, higher prices for corn will mean that more growers in the United States and overseas will find corn economically viable. More supply will cause corn prices to moderate. The land that is being used to grow it will be affected, too. Similar forecasts are echoed in Agricultural Commodity Markets Outlook 2011 – 2020, which states, “Current high commodity prices result in a supply response which puts downward pressure on prices, easing from current high in nominal terms.”
On the other hand, burgeoning demand from China for agricultural products will support demand. Former Senator Thomas Daschle told the U.S. Department.
of Agriculture’s 2013 Agricultural Outlook Forum, “To keep up with this rapidly rising demand, we will need to increase global food production 70 percent by mid-century.”
“These are the kinds of susceptibilities that must be observed with caution,” says Saunders.
EVERYTHING OLD IS NEW AGAIN
Schmidt emphasizes the central role of accessibility and transportation in the future of land values. In the industrial sector, accessibility to rail is re-emerging as a desirable factor. “The rail siding is coming back. It is part of the long-term planning, as a hedge against high fuel costs. We haven’t seen that in the past 15 to 20 years,” said Schmidt.
“There is a trend toward adaptive reuse around urban markets and exurbs, repurposing older factories and obsolete buildings into mixed-use developments. In part, it is a demographic shift, because millennials are looking for high-density living,” Schmidt notes. “Developing commercial land and high-density residential carries a higher degree of risk because there is not an immediate revenue stream. It is predicated on approvals, zoning, financing. It requires a sophisticated knowledge base and astute advisers.”
WATCHING FOR RISK FACTORS
The economy of West Texas fared well through the Great Recession. It has been growing at a rate between 2 percent to 5 percent in various cities for the past several years. In 2013, housing inventory was at pre-recession levels, signaling robust health and opportunity for retail, hospitality and health care. Yet it takes an expert with local knowledge to keep a cautious eye on market pressure and risk factors.
Tucker says the market dynamics in West Texas have changed dramatically over the past few years. Development is raging. Reasons include the region’s stability throughout the economic downturn, historically low interest rates, an oil boom, the growth of Texas Tech University, major medical districts and a population shift from small towns to the larger cities.
Low interest rates have been major drivers in land sales and development growth. They have allowed developers to build, get the returns they need and still charge rents that are reasonable in the West Texas market. Some of Tucker’s investors are doing 1031 tax deferred exchanges into new investment properties to get better returns. Tucker’s expertise in doing financial analyses steers them toward the best solutions.
The role of keeping or transferring mineral rights along with property has become infinitely more important in land-sale negotiations in the Lubbock area within the past five years, although other cities in Texas have dealt with it for a long time. At the same time, buyers need to make sure that they have 100 percent of the surface rights so there are no unpleasant surprises in the future.
Tucker has his eye on potentially higher interest rates and how that will affect the volume of commercial real estate activity. He believes CAP rates will follow the interest rates and make the industry more attractive to cash buyers; higher interest rates have the potential to slow down some investors. He believes that in rural subdivisions, making sure that there is sufficient, sustainable well-water is going to be increasingly important. While West Texas has ample room for development, Tucker thinks it needs to be done in a thoughtful and deliberate way. A land professional will help make sure that happens.
“Every single land sale requires a specialist in that area,” he says. But it isn’t only in flat, mineral-rich West Texas. “In East Texas and Oklahoma, where there is timber or other issues pertinent to the area, professionals in that particular market are the best equipped to advise on this particular issue. Buyers need to seek out a professional in each market,” he says.
Unquestionably, transacting land is both an art and a science. Thorough research and the best advisers will help you see the potential in all aspects of the deal. That’s rock solid.
Fred Schmidt is president and COO of Coldwell Banker Commercial Affiliates. He is a veteran commercial real estate professional with more than 30 years of experience in the industry. He is a member of CoreNet Global, the leading professional association for the corporate real estate industry, as well as IAMC and ICSC.
Dean Saunders owns Coldwell Banker Commercial Saunders Real Estate (land sales) and its new division, Coldwell Banker Commercial Saunders Real Estate | Forestry (timber land and management), and Coldwell Banker Commercial Saunders Ralston Dantzler Realty (commercial property) in Florida. He has more than 30 years and millions of acres of land-sales experience. He is an ALC (Accredited Land Consultant) and a CCIM (Certified Commercial Investment Member).
Beau Tucker is a top land-sales representative for Coldwell Banker Commercial Rick Canup in Lubbock, Texas. He is a CCIM (Certified Commercial Investment Member), a Member of Realtors Land Institute, Member of International Council of Shopping Centers and a Member of (ULI) Urban Land Institute.