Volume 35, Number 1
Originally Published: Spring 2010
By Peter C. Burley, CRE
My daughter Katy was three when we lived in St. Louis. I was working briefly at Washington University, helping to run a research and computing facility for the social sciences. One weekend, a group of faculty and students got hold of a block of tickets to a Saturday afternoon Cardinals-Pirates game at Busch Stadium. I got two—one for me and one for Katy.
We often watched the game on television, and Katy played three-year-old T-Ball, but this was her first-ever Major League Baseball game in a real Major League Baseball stadium. We sat high in the right field stands, but not so high that we couldn’t see the game well enough. And we watched as the Pirates creamed the Cards, with a score that was something like 8–1.
It was disappointing to see the home team lose so badly. But, the game was fun with good friends, peanuts and popcorn and sodas.
Katy was unusually quiet as we walked to the car after the game.
After I had strapped her into her car seat and started up the car, I looked at her in the rearview mirror.
“So,” I asked her, “how did you like the game? Sorry the Cards lost.”
“OK,” she answered, looking wistfully out the window.
“Just OK?” I asked. “Wasn’t it fun to see a real game in person, right here at the stadium, even though we lost?”
“I never got my turn,” Katy grumbled.
“You… never…got…your…turn?” I asked quizzically.
“I didn’t get my turn to hit the ball,” she mumbled, almost in tears.
I was speechless for a moment, then struggled to explain, without laughing. “But, this was….It isn’t…They don’t…” I stopped. I really had no answer for her. I did my best to choke back a chuckle.
All I could say was, “Well, maybe next time.”
The good news late last month was that U.S. gross domestic product (GDP) rose at an annualized 3.2 percent during the first quarter of 2010. The bad news was that U.S. GDP rose 3.2 percent in the first quarter of 2010. There are, I suppose, as many reasons to sneer at the news of growth in the U.S. economy as there are to celebrate. It was less than the consensus expected (3.4%). It was largely the result of heavy inventory investment. Final sales were good, but not good enough. Demand cannot recover until employment picks up. Employment can’t pick up until demand picks up. Plenty of reasons to sneer…
On the other, more celebratory, hand, GDP rose for the third consecutive quarter, indicating that the Great Recession likely ended sometime late last year. And, businesses have begun to spend again, on equipment and software at least, if not on structures. When added to the last couple of employment reports, for March and April, during which a few hundred thousand new jobs were created, the GDP report conveys news that, to me, is good. It is real, measurable improvement. And, it is worth a toast, if not riotous partying in the streets. It may be early in the season, but those green shoots of spring have begun not only to finally emerge, but to flourish, to take root, even to spread.
It has been a struggle for many of us, especially in this business, to get through the aches and pains of the last couple of seasons. It’s been hard enough just to get out of bed in the mornings, much less to throw ourselves into the game and keep swinging. Still, we have kept at it, despite the slump, the dismal news and lousy stats. As the stats—the GDP numbers, the employment numbers, the demand and sales figures, the NOIs, rents and vacancies—all continue to improve, the game starts to get good again. The stands start to fill up again. We may even see a few home runs in the early innings, who knows?
That so many have stayed in the game and kept on swinging is evident in the selection of articles in this edition of Real Estate Issues. Our contributors have been toning their game, looking at the field from new angles, testing new and better strategies, and swinging where others could have been caught looking. Reading these articles has made it quite clear to me that it isn’t that we are in a new game. It’s that we just need to become better, stronger, savvier players with a keener eye, faster out of the box and more agile on the field.
We lead off this issue with Ken Riggs, CRE, who surveys the current economic and investment landscape in “Emerging from the Rubble” to give us a clear view of the playing field. While there have been enormous pressures on the industry over the last two years, and many obstacles remain, there are signs that opportunities are, indeed, beginning to emerge. “This will be the year for resilient investors to resume the challenges of investing, managing and adding value to commercial real estate” Riggs tells us, “as we continue on the path to recovery.” And buyers “…should be preparing to make their move soon so that they can take advantage of the value and price increases that will follow.” He concludes, “…investors seeking to seize market opportunities will find 2010 to be the best time in some years to buy high quality, well-priced, long-term investments in commercial real estate.” Sounds like solid pregame advice to me.
Tony Colavolpe, CRE, takes a look at Corporate Real Estate from a retailer’s perspective in “Demystifying the Corporate Real Estate Process: The Retailer‘s Perspective.” While corporate retail real estate is a difficult proposition in the current environment, he tells us, “opportunities still exist” for skilled, savvy practitioners. Evaluating retail opportunities is partly science, he says, and partly art. Experienced and knowledgeable practitioners will use both the art and the science, although “…seasoned merchants and operators often have a “sixth sense” when it comes to picking the right location for a store…” which will, at times, “…override the scientific analyses.” In his carefully crafted discussion, Colavolpe offers advice and insight into the organizational and practical decision-making aspects of retail real estate and how one might build a successful retail real estate business in today’s environment.
Don Epley, Ph.D., of the University of South Alabama at Mobile, offers advice on using depreciation as an operating expense in “Value is Lower when Depreciation is an Operating Expense: A Current Issue.” Epley contends that the “…use of the non-cash deduction of depreciation as a real property operating expense lowers net operating income…” and causes any resulting estimate of value to decline. Using the depreciation figure inaccurately will lower the property’s overall capitalization rate, he tells us, and the lower value and cap rate estimates end up sending incorrect transaction figures to the marketplace. He suggests, instead, that depreciation not be included when computing a property’s income stream, and offers a practical guide to methodologies through which NOIs and capitalization rates are left largely unaffected.
Nicholas Ordway, J.D., Ph.D., of the University of Hawaii, and Jack Friedman, Ph.D., CRE, propose new definitions for real estate synergy in “Five Levels of Synergy Potential to Create Real Estate Value.” Further, they suggest some new ways to recognize how synergies that can be applied in a connected world require new thinking about new linkages in the real estate industry. Ordway and Friedman suggest that “…many real estate projects are affected by changes in a set of networked externalities that affect the internal economics of the project itself.” Real estate is, after all, more than just the physical property, they tell us, and recent innovations on the Internet, in globalization, securitization and other changes require new thinking about how those innovations affect the use of real estate and its value. The authors offer five levels of linkages that can affect the use of a property, the risks involved and, ultimately, the value of real estate.
“Despite the recent downturn in the commercial real estate market, the demand for green building space in office, retail and mixed-use projects continues to increase throughout the U.S.” In fact, as attorneys Katherine Oberle and Monica Sloboda point out in “The Importance of ‘Greening Your Commercial Lease,” the market for “green” space in office and mixed-use real estate has grown from two percent of nonresidential construction in 2005 to 10–12 percent in 2008, and is expected to rise upwards of 25 percent of the market by 2013. In addition to the environmental benefits, the authors note that tenants often seek to attract investors and customers with a “green” reputation with the space they occupy. Oberle and Sloboda offer some practical guidelines for developing “green leases” that can outline a variety of sustainable practices in the use of green space in tenantlandlord agreements, including specifications on the use of water and energy conservation, the use of alternative energy resources, the maintenance of indoor air quality, and the allocations of costs and benefits involved.
While the First-Time Homebuyer Tax Credit expired at 11:59 P.M. on April 30, 2010, there is, and will be, considerable discussion as to its ultimate impact on U.S. housing markets. There is not much disagreement that the Act helped to boost home sales, slowed the rate of defaults on existing mortgages and likely lifted sales in housing-related services. But, the tax implications for homebuyers will continue well beyond the Act’s expiration date. In their article, “Tax Credit for Principal Residence: Clearing the Housing Glut,” Drs. Mark Levine, CRE, and Libbi Levine Segev offer a brief rundown of some of the lingering details. “Because of the credit’s various time extensions, qualifier expansions, assorted requirements and computations, the details related to claiming the credit can be difficult to assemble,” they note, and the list of requirements will be daunting to homebuyers, even long after the Act expired. The question remains: will the pace of home sales, much improved under the Act, continue now that it’s gone?
David Lynn, Ph.D., CRE, offers his review of The Next Hundred Million: America in 2050, by Joel Kotkin. “By 2050 the population will have increased to approximately four hundred million—roughly 100 million more than today. Along the way, the U.S. will become a much more crowded and complex place. The composition of the population will change…”. Lynn gives credit to Kotkin’s lively reporting style for an interesting and readable discussion of the implications of population growth in the U.S. on the urban, rural and suburban landscapes over the next 40 years. Personally, I am intrigued.
Finally, Maura Cochran, CRE, reviews the much-anticipated Value Beyond Cost Savings: How to Underwrite Sustainable Properties, by our own Scott Muldavin, CRE, FRICS, the Green Building Finance Consortium and the efforts of a number of Counselors. Scott’s long history in underwriting and his prominence as an expert in “green” finance offer incredible detail and insight into the process of underwriting green properties effectively. Cochran concludes, “Muldavin’s book deserves a place on your bookshelf; the electronic version should be bookmarked on your computer.” I call it a home run.
“… it isn’t that we are in a new game. It’s that we just need to become better, stronger, savvier players, with a keener eye, faster out of the box and more agile on the field.”
This issue of Real Estate Issues demonstrates to me that a lot of people have been preparing smartly for the upcoming recovery, getting ready for the next several innings. There is, indeed, plenty of debris left on the field from the last disastrous season. But, as Ken Riggs says, “…most signs indicate that we have entered the recovery phase of this cycle, and while there will be more struggles ahead, economic activity continues to strengthen.” The efforts that The Counselors and others have put into understanding the implications of the last couple of years, sizing up the field, as it were, and practicing their swing, will benefit the entire industry.
The Counselors of Real Estate are at the top of the League. We are ready for the next season, well-toned, and well-equipped.
The game’s on. Bring your glove.