The View From Development '14: Disruptors Abound
By: Kim Long, founder of “The American Forecaster Almanac,” an annual report on U.S. consumer and business trends. Ron Derven, Margarita Foster and Julie Stern contributed to this article.
The high altitude and thin air of Denver provided an appropriate atmosphere for exploring current trends and coming scenarios at NAIOP’s Development '14: The Meeting for Commercial Real Estate. More than 1,100 people gathered there on October 27-29, a record number for a NAIOP conference.
Market and industry disruptors — including crowdfunding, rising interest rates, demographic shifts, the Affordable Care Act, new technology and the growing impacts of e-commerce — provided key topics for discussion, as the theme of planning and preparation for whatever lies ahead was repeated throughout the conference’s many events.
The consensus of panelists at a session titled “The Changing Face of Office Space” was that “choice drives productivity,” as Chuck Carefoot, vice president of construction for Ryan Companies U.S. Inc., put it. “Flexibility and choice are drivers among those conversations, all the time.” Dean Patrinely, managing principal, Patrinely Group, added that the energy companies with which he works “want employees to connect.” Those companies also are looking for total mobility and flexibility, both in space use and in technology. Demountable partitions allow building floor plates to be reconfigured more quickly and efficiently than permanent walls; landline phones and desktop computers are being replaced by mobile phones, laptops and WiFi, so that employees can work from anywhere within or outside the office space.
Representatives from more than 15 different companies, including lenders as well as other financial and economic analysts, offered their views on the capital markets at sessions throughout the meeting. Noting that “the spread between cap rates and interest rates is still at historical lows,” Edward Coco, senior managing director at GE Capital Real Estate, compared the current market to the previous peak, commenting that “in 2006, cap rates were 4 percent and interest rates were 5 and 6 percent. Today, we are looking at a large portfolio of $700 million plus, … the cap rate we are buying on is 6 plus and our financing cost, if we close the loan, is probably 3.5 percent, so the leveraged return is north of 10 to 12 percent. We are looking at margins that are probably better than historical norms.”
Keynote speaker Chris Wallace, host of “Fox News Sunday,” regales the audience with a broad sweep of observations on the current political environment in Washington, with special emphasis on the November midterm elections.
“Today, overall subordination levels in the CMBS [commercial mortgage-backed securities] markets are double what they were in 2007,” said Wayne Brandt, managing director at Wells Fargo. He added that there is no pro forma underwriting and that “there is more structure and positive leverage in the system.” With cap rates at 6 and finance rates at 4, “you don’t have to manufacture equity returns” through debt the way lenders were doing in 2006 and 2007.
What will happen when interest rates rise? Brad Hyler, vice president, Brookfield Property Group, said “we think there is room for interest rates to rise and not adversely affect cap rates.” If interest rates rise quickly, the result could be hyperinflation, “but we don’t think that is the likely outcome.” What Hyler believes to be more likely is that rates will rise as a result of strong economic growth that will bring about “meaningful rent growth in the market.”
According to Mark Roderick, an attorney at Flaster/Greenberg PC, who spoke at a session titled “Real Estate Crowdfunding — What It Is and Isn’t,” this alternative method of raising capital enables individual investors without access to “the country club set” to invest in real estate, an industry traditionally based largely on private relationships. This new funding “pipeline” has investors on one end and sponsors at the other, eliminating both the middle man and many fees. Crowdfunding sites connect sponsors with investors, but sponsors must manage those investors directly. This is essentially syndication via the Internet, so investors must perform their own due diligence and be prepared for capital calls, should the investment require them.
Darren Powderly, cofounder and vice president of real estate at CrowdStreet, reported that investors on his site, all of whom are accredited, are mostly baby boomers and some Gen Xers, and that the average investment is $60,000, spread out over various projects. Both CrowdStreet and RealCrowd, the other site featured at the session, charge sponsors a flat fee; RealCrowd’s fee is typically $20,000 to $40,000.
Craig Meyer, president of JLL’s Logistics and Industrial Services Group for the Americas, moderating a session titled “CEO Insight: Heavy Lifting of Industrial Real Estate,” pointed to 18 quarters of consecutive net absorption and low vacancy rates, among other indicators, as signs that “from our perspective, things are pretty good.” Bill Hankowsky, president and CEO of Liberty Property Trust, described a major transformation underway within his firm: large sales of suburban office space over the past three-and-a-half years and other changes are “flipping” the company from predominantly office properties to industrial real estate. Mike Curless, chief investment officer at Prologis, described how his firm’s current activities now center on about $2 billion in new development around the world (most of it in the U.S.), property dispositions of about $1.5 billion, and property acquisitions of another $1.5 billion.
From DCT Industrial Trust, CEO Phil Hawkins added to the optimistic assessment, commenting that “portfolio operations are where 90 percent of the cash flow is going to come from and where 95 percent of the value creation is going to happen.”
Panelists Gregg Macaluso and Mark Albright participate in a game of “Supply Chain Jeopardy” moderated by Rich “Alex” Thompson.
At a session titled “The Weakest Link: Benefits of Understanding the Supply Chain,” presenters heeded the suggestion of conference organizers to avoid “death by Powerpoint.” They produced content in the form of a “Supply Chain Jeopardy”-themed game, moderated by Rich Thompson, managing director at JLL. The answers — right or wrong — provided points of discussion by industry experts acting as judges. Among the key points: automated storage retrieval will have a big impact on commercial real estate; limits on daily driving time for truck drivers influences the siting of distribution centers; major railroads expend huge amounts of money on infrastructure, greatly influencing their attention to growing markets.
At a session titled “The E-commerce Effect: How and Where Commercial Real Estate Will Next Develop,”Curtis Spencer, president, IMS Worldwide Inc., and Earl Wohlrab, product manager, Robotic, Intelligrated, discussed emerging trends, including increased absorption of e-commerce space, an increasing growth pace for online and omnichannel sales, and speed of delivery expectations that exceed what’s possible.
One emerging concept they discussed is “dark stores,” structures like closed K-Mart outlets that are “retail-ready” and can be turned into fulfillment centers for same-day (within 24 hours) delivery of merchandise. E-commerce also has resulted in a new term in industrial real estate: “spec-to-suit” buildings, defined as developer add-ons aimed at e-commerce tenants, including additional power and parking, HVAC, insulated roofs, super-flat floors and 36-foot ceiling heights. Other e-commerce disruptors include new forms of warehouse technology, as fulfillment centers rely on automation to unload trucks, store cartons and, ultimately, even open cartons to place items in totes for packing.
NAIOP Chairman Jean Kane and President Tom Bisacquino (at right) welcome Developing Leaders to the conference.
Health Care Trends
An aging population and the Affordable Care Act provide twin disruptors for the medical industry’s existing physical infrastructure. Moderator Craig Beam, managing director of healthcare services for CBRE, opened a session titled “Prescription for Change: New Look of Aging Medical Office Buildings” by noting that “hospitals got a huge windfall from the Affordable Care Act.” Yet one of the major trends underway in this sector shifts care from centralized acute settings — traditional hospitals and emergency rooms — into freestanding emergency rooms and surgical centers, clinics and other facilities. Hospitals must “think like a retailer” to survive in a new competitive market, panelists noted, adding that while some outdated hospital and medical office buildings may be transformed for new uses, many are functionally obsolete and should be demolished.
Everything Is Awesome
Jamie Fox, CRE banking southwest market executive at Bank of America Merrill Lynch, opened a general session provocatively titled “Everything is Awesome, Right?” He noted that “this is an amazing time to be in the real estate business … with a convergence of plentiful debt capital, economic growth that’s the envy worldwide, and institutional equity chasing real estate at the highest level since the crisis.” Fox concluded that “with the abundance and variety of debt capital, [there] has never been a better time to be a developer or owner of real estate.”
Economist K.C. Conway, senior vice president, credit risk management with SunTrust Banks Inc., who Fox described as “one of the most accomplished economists of our time,” offered a rapid-fire overview of economic and commercial real estate trends: “For industrial real estate, 3D printing will completely alter the supply chain and how we think about it,” he predicted, adding that the retail and industrial worlds will converge as retailers like Walgreens and Home Depot begin using 3D printers to manufacture products in their stores.
Looking at where things stand five years after the Great Recession, he observed: “Credit quality is back ... and if you come across a lender who has indigestion about the overbuilding of commercial real estate, have him come talk to me: We are not overbuilding commercial real estate.” Focusing on the impact of technology on real estate, Conway observed that there is an oversupply of bank sites, because “we can use our smartphones to do all of our branch banking.” He warned that the Federal Deposit Insurance Corp. estimates that about one-third of all branch banks will be closed in the next five years.
The meeting’s final general session provided conference attendees with words of wisdom from Mark Stapp, executive director of the Master of Real Estate Development program in the W.P. Carey School of Business at Arizona State University, and author/researcher Joel Kotkin. Speaking about the influence of social trends, workforce issues and population growth on CRE, Stapp observed that “disruptive business models are causing all sorts of change in the space market as well as the consumer marketplace.” He noted that technology such as the iPhone has become an “integral part of our life,” and that such technologies are driving rapid e-commerce growth. Concepts such as Uber, Car2Go, and Nest are disuptive because they embody rapid change, and “because they change quickly, you’ve got to worry about the space that they occupy.”
Kotkin added that “probably the best thing going for our country right now has been the reduction in our energy imports. This is also driving a resurgence of manufacturing because of the price of energy. So you now have German, Japanese and Korean companies wanting to establish themselves in the United States because the price of energy is so much lower. Watch the Germans; they are ramping up their operations here.” He added that “blue collar jobs that pay above the medium income … have actually grown more rapidly than the rest of the economy. This is a driver that is unfashionable but quite real.”
Reception in the Rockies
Reception in the Rockies, hosted by NAIOP Colorado, gave conference attendees a first-hand look at the newly reopened Union Station, a mixed-use development featuring a large, multimodal transportation hub that is at the heart of the largest voter-approved light rail system in the country. Speaking at a session earlier in the conference that focused on this unique public-private partnership, panelist Phil Washington, general manager and CEO of Denver’s Regional Transportation District, called it “the mother of all transit-oriented developments.” Ryan Stone, director of East West Partners, the master developer, attested to one early result of the partnership: more than $1 billion in private investment within a three-block radius.
For more highlights from Development ‘14, see many of the columns in this issue, including “A Look Ahead,” “The Entrepreneur,” “Strategically Green” and “New Voices.” And mark your calendar now for next year’s Commercial Real Estate Conference 2015 in Toronto, October 13-15.
Denver Project Tours
More than 400 Development ‘14 attendees participated in one or more of the nine project tours held during the meeting. On foot and by bus, they visited projects and neighborhoods ranging from the Fitzsimons Life Sciences District and the River North Art District (RiNo) to Stapleton, Union Station, the DaVita World Headquarters, Coors Field and Pepsi Center.
16th Street Mall
Development ‘14 attendees tour Denver’s 16th Street Mall.
A walking tour of the 16th Street Mall introduced participants to this innovative, visionary project, which has become nothing less than “the spine of the city.” An estimated 2.3 million visitors and residents enjoy the mall each year.
According to tour leader Celeste Tanner, a partner with Confluent Holdings LLC, the mall was the key driver in connecting different sections of the city that had been separated by physical barriers, including railroad tracks, highways and a river. The synergy of that connection spurred retail and office development along the 16th Street corridor and in neighborhoods around the mall.
The original scope of the project, which opened in 1982, focused on a pedestrian-only corridor with a transit shuttle and spanned nine blocks of 16th Street. It was expanded to additional blocks in the following decades and extended to Union Station in 2002 with the completion of the Central Platte Valley (CPV) light-rail spur.
Pei Cobb Freed & Partners won an architectural competition for the mall project with a streetscape design that tied the new urban setting with its old western roots and called for preserving historic buildings while welcoming new ones. The original proposed budget was $3.5 million; Pei’s fee for the master plan alone was $3.4 million and the total build-out eventually cost around $50 million.
The mall features free shuttle bus service known as the MallRide that provides transportation among the street’s outdoor cafes, renovated historic office buildings, new glass-walled office buildings, shops and restaurants. One of the mall’s most iconic structures, the Daniels & Fisher Tower, is the remaining architectural remnant of a five-story department store that was razed long ago. The 325-foot-tall tower was the tallest man-made structure between the Mississippi River and California when it was constructed in 1910; it was modelled after The Campanile (St. Mark’s Bell Tower) at the Piazza San Marco in Venice, Italy. The tower is one of 43 early 20th-century buildings on 16th Street.
Cherry Creek North
Development ‘14 attendees boarded buses to visit the urban “live, work, play” Cherry Creek North neighborhood southeast of downtown. Tour guides Dan Grooters, executive managing director, Newmark Grubb Knight Frank Capital Markets, and Amy St. Denis, principal, St. Denis Group, took participants through the vibrant mixed-use district, which is in the midst of one of its biggest construction booms in decades, with five major projects under construction or in an advanced planning stage. Cherry Creek North and the adjacent Cherry Creek Shopping Center, a regional mall, are the No. 1 tourist attractions in the state.
Tour highlights included:
The Fillmore Place block, with 77,000 square feet of remodeled and expanded retail space.
The ANB Bank Building, featuring 100,000 square feet of office space.
The Residences at Fillmore Plaza, 26 luxury apartments in an eight-story building constructed above
an existing parking garage.
By Ron Derven, contributing editor, Development
NAIOP National Forums Program Stronger Than Ever in Its 20th Year
NAIOP’s National Forums program provides members with opportunities for exclusive networking and experience exchange in an atmosphere of trust, openness and confidentiality. A visit to a meeting of the nearly 20-year-old Industrial Development I Forum during Development ‘14 made it apparent to this invited guest that the forums do that — and much more. Forum members spoke not only of the networking and deal-making opportunities that a forum provides, but also of the deep personal friendships, camaraderie and trust that have developed among members over the years.
Members of NAIOP National Forums meet to network and share insights during the conference.
W. Watt Neal Jr., a partner with Wilson Hull & Neal in Atlanta and a charter member of the group, could not be more pleased with the way the forum has functioned since it was first formed in July 1995. “I joined NAIOP in 1972 and attended its second annual conference in Atlanta,” he said. “At the time, I was a broker trying to build a building every other year. I later left the brokerage business to focus exclusively on development. I burned out on conferences and stopped going to some of the NAIOP Atlanta meetings after a few years.”
What drew Neal back to NAIOP about 20 years ago was a phone call from Shirley Maloney, then NAIOP senior vice president. “She advised me to look into the new [National] Forums program that NAIOP was launching, which I did.” He said that the program revived his interest in NAIOP. “I have not missed a forum meeting in the past 20 years. We usually have three meetings a year, so I have attended between 40 and 60 of our meetings.”
What initially drew many members of the Industrial Development I Forum was the fact that the group is limited to principal members with 10 years of experience in the business who are actively involved in industrial property development, ownership and investment. When members network at this forum, they know they are speaking with their peers.
Member Dan DeMarco, a partner with Campanelli in Braintree, Massachusetts, who also has been a member of the forum since it began, said that when the group gets together, “we always try to make it into a deal-making session. These meetings truly bring networking and relationships to the next level. As equally important as the deals to us is finding out what each member is thinking about the market and the business.”
“The forums are NAIOP’s best program, hands down,” declared Joshua Adler, a partner with Edison, New Jersey-based Adler Development. Adler, a member of the forum for the past 13 years, said what makes the forum an incredibly valuable experience for him is the way the group has bonded to conduct business and share knowledge. “I have learned a great deal from my fellow members, and I think I have brought new ideas, new ways of looking at things to the table.”
NAIOP’s National Forums program now features 35 different forums, including General Forums (those open to all members with at least 10 years of industry experience), Limited Forums (open only to principal members of NAIOP, whose company’s primary focus is property development, ownership or investment, and who also meet the experience requirement), and Developing Leaders (DL) Forums (open only to members 35 years old or younger who have at least four years of industry experience). The DL Forums provide rising industry leaders with opportunities to network and learn from their peers over a two-year period. After DL Forum members complete their two-year term, they can either stay together by forming a new forum or apply to join another established one.
New forums are created from time to time, as the industry changes and as additional NAIOP members become interested in joining. For example, an E-commerce Forum was created in spring 2014 to meet the growing desire of real estate professionals involved in this aspect of the industry to network within NAIOP. A Real Estate Law and Transactions Forum recently formed and met for the first time at Development ‘14.
Members interested in joining a NAIOP National Forum should visit the NAIOP website for more information. Applications are accepted twice a year, beginning two months before the spring National Forums Symposium (the next is scheduled for April 12-14, 2015, in San Francisco) and the fall Commercial Real Estate Conference. Multiple factors, including a member’s geographic and industry focus, skill set, and experience are considered when forum appointments are made. If you have any questions, contactBennett Gray, senior director, National Forums and NAIOP Research Foundation.
By Ron Derven, contributing editor, Development
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Pre-conference Commercial Leasing Course
More than 20 conference attendees arrived a day early to attend NAIOP’s full-day Commercial Leasing course, where they learned how e-commerce, global trade and telecommuting are changing the components of a typical commercial lease. The eight-hour course was designed for entry- to intermediate-level commercial real estate development professionals. Led by Bill Lawrence — who oversees development services, construction management and asset services for Transwestern in the Mountain and Western regions — it provided leasing agents, developers, asset managers, owners and others with a better understanding of the leasing process. The course covered the following topics:
- Lease types and structures.
- Lease economics and valuation.
- Tenant evaluation and underwriting.
- Property control issues in leasing.
- Legal issues in leasing for nonlawyers.
This course provides participants with the basic knowledge necessary to gain greater value for every commercial lease; its objective is “to provide increased knowledge for managing an efficient and cost-effective lease structure.” NAIOP offers one-day, in-person courses once or twice each year, as well as 10 online courses, all of which are part of a rigorous, structured curriculum. For course descriptions and a 2015 schedule, see the NAIOP Center for Education website.
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