Valuing Southern Multifamily: GE Capital Sells, Blackstone Buys Big

 

multifamilyThe recent $2.7 billion purchase of approximately 30,000 apartments across the Dallas, Atlanta and other southern markets by private equity giant Blackstone has some multifamily sector observers scratching their heads.

At first glance the sell side makes the most sense: GE Capital appears to have corporate cultural issues with real estate.  But more interestingly,  while multifamily dwelling demand remains solid nationally, the idea that apartments in many metro areas are underperforming or offer a ton of upside in other ways just does not appear to be  the most popular view at the moment.  Owing perhaps to a national follow-on effect of the housing crisis, multifamily nationally has a lot of boom in its recent history and perhaps not as much in its future. The debt that has converted single-family homeowners into renters may have done most of its work already, says the conventional wisdom.  Apartment construction is up and declining vacancies have stalled out to post-crisis lows.

The great Llenrock blog had an interesting take on Blackstone’s head-scratching strategy.  With a shrug, Eric Hawthorne suggests stability or general energy-boom chasing as possible aims of the deal, noticing that Blacktone’s recent history in single-family might make their play more about market and less about asset class:

After years of high demand and value creation, the multifamily sector appears to have reached something of a plateau, which will no doubt continue as more and more apartment buildings open and fill. Multifamily development has outpaced the rest of the CRE world since the recession, and the market will soon have to catch up with all the new inventory.

It could be this deal is simply a bid for stability. Whether they gain value or not, no one can deny multifamily communities offer their landlords stability. More likely, I think, Blackstone’s sudden shift from single-family to multifamily is less about the asset class than the market. According to RTTNews, the 30,000 apartments (give or take) Blackstone acquired are in Atlanta, Dallas, and other parts of the Southeast and Texas. Dallas, of course, enjoys a great deal of activity from the energy sector and is a major growth market. Atlanta, on the other hand, has lagged behind many other cities in the economic recovery, so its values are yet to reach the levels of other comparable markets. All of this is to say that multifamily may indeed have some value-add opportunities left–in certain cities, anyway.

Further suggesting Blackstone’s idea is about future rent raises in a rising market is Marcus & Millichap’s recent report on the Dallas /  Fort Worth Metroplex, celebrating the new inventory pipeline and low vacancies with unrestrained enthusiasm.

Time will tell, but it looks to me like Blackstone’s DFW bet is on the location more than anything else.

 

Source:  Commercial Source

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Could Proposed Accounting Rules Throw CRE Investors Off Balance?

accounting

Even as new accounting rules propose to bring property and equipment leases onto company balance sheets, the new rules will leave certain other financial obligations, namely service contracts and leases with terms of 12 months or less, as off-balance sheet items, according to a report from Fitch Ratings.

In some cases, Fitch reports, extension options and variable lease payments may also be excluded from being capitalized as a lease liability under the new proposed accounting rules.

While the proposed rules are intended to more accurately reflect the economic substance of leases, the value of the rules hinges on whether they are successful in increasing – or at least not further obscuring — financial transparency for investors and analysts, said Fitch analysts John Boulton, Alex Griffiths and Frederic Gits.

With the Sept 13 deadline fast approaching for public comments on the new proposal, CRE groups and other stakeholders are weighing in, and in some cases doing battle in the court of public opinion, over what they believe will be the dramatic effects the new accounting rules will have on landlords, tenants and the broader CRE market.

While almost all parties agree that it is vital for companies to divulge information about cash payments and the nature of leased assets in ways that allow investors to make judgments in asset financing decisions, how best to do so remains a point of disagreement.

Corporations often adjust their balance sheets in an attempt to reflect a fair estimation of implied debt from leases, however, critics claim that these adjustments are inconsistent, and frequently understate the lease obligations.

Companies implementing the proposed standard will face a heavy administrative burden since they will have to collect and input a substantial amount of data and perform complex calculations to determine the amount to be capitalized. Most companies have not developed a corporate strategy to address the issue or have been slow to start their transition plans, according to a recent white paper by Boston-based tenant representation firm Cresa.

“The bottom line is the need for transparency, and the biggest hurdle is how companies will maintain comprehensive, comparative and valid information in order to perform this analysis,” said Michael Hetchkop, senior vice president of lease auditing at Cresa Washington D.C. “It’s going to be more of a challenge for companies to make sure the information they have is complete.”

Reaching a solution has proved difficult for accounting standard setters, who are faced with conflicting and sometimes contradictory definitions of what exactly constitutes a lease, defining the lease term, and measuring payments, the Fitch report said.

“Add political sensitivity due to the size of the lease market and you have a potent mix. It is no surprise that progress towards a solution has been slow,” Fitch said.

Cresa’s Hetchkop agreed.

“This has been a gut wrenching process since it started four years ago, with 800 comment letters [for the previous exposure draft], then going back to square one. And now, another comment period, and who knows what will happen at the end?”

A recent letter to the FASB and IASB from a diverse group of more than 30 trade organizations, including the Roundtable, International Council of Shopping Centers (ICSC), CCIM, American Trucking Association and Equipment Leasing and Finance Association expressed their displeasure with the latest proposed leasing standard.

“In its current state, it is our opinion that the proposed leasing standard may result in substantial costs to businesses, lack any benefits for investors … will increase complexity, drive economic activity rather than reflect it and will create adverse unintended consequences and pressures upon financial reporting systems. Further, the proposed leasing standard will not result in more decision-useful information compared to that currently available. If our concerns cannot be addressed, then it is our belief that the proposed leasing standard should not be finalized.”

FASB/IASB will begin a month-long series of public roundtable discussions on four continents on Sept 10, starting in São Paulo, Brazil. After weighing the feedback, a final standard is now expected to be issued in early 2014.

The new standards would be effective no earlier than annual reporting periods beginning on January 2017, but would include a two-year look back provision.

 

Source: CoStar

New Idea: Third-Party Solar Finance For Commercial Property

solar

With recent announcements by the White House reinvigorating solar energy goals through the Department of Energy’s SunShot initiative, the costs of solar are expected to continue their trend downwards to eventually meet those of conventionally generated electricity.

The most recent initiative makes it a goal for solar to get there by the end of this decade.

These goals don’t come only from government offices.  Laboratories too are leading the way: technological advances are also helping along the trend, as silicon may be able to be replaced as the main ingredient in solar panel construction.  A recent discovery that a light-absorbing material known for a century may work in solar panels and dramatically increase their efficiency has the industry talking.  Thanks to the combined developments, the cost per watt of solar-generated electricity may fall to the 10-20 cents per watt range where fossil fuel-generated electricity resides.

All that said, the opportunity for commercial space users to take advantage of these new technologies and for commercial landlords to convert their properties into energy-producing ones remains mired in the financial barriers and customs of an industry that views (and pays for) property improvements for multi-tenant buildings in very specific ways.  To answer the question of how the costs and benefits of solar improvements are apportioned usually needs to begin with how such improvements are paid for.

One California company says they have used real estate legal norms to address this problem. Working with a leading law firm, EPR Squared, a real estate firm specializes in cracking the tough problem of opening commercial rooftops to solar.  In solar improvement,  as with most other features of commercial property usage, the all-important capital source is the third party financier.  But the territory is new and forms and deals have little precedent to work with.  Establishing revenue flows on a tenant or space subdivision basis to cover construction costs and to apportion energy-generation benefit requires a new kind of real estate deal. EPR Squared says they’ve constructed such a boilerplate.

[…] 90 percent to 95 percent of commercial building rooftops remain essentially beyond the reach of third-party financing, according to real estate research firm data cited by Energy Producing Retail Realty, Inc. (EPR Squared, EPR^2) Founder/CEO Chris Pawlik.

“When you have a commercial building with multiple tenants,” Pawlik said, third parties “can’t technically finance those unless the owner takes it on, [and] commercial owners won’t do that.”

Third-party financiers, he explained, “can get an agreement signed or financing in place because they have the credit of the off-taker that takes care of the risk.” With a twenty-year commitment, third-party financiers have certainty that their loan will repaid.

But, Pawlik said, “owners typically own properties five to seven years and tenants are typically in properties five to ten years. You can’t have a ten- to twenty-year agreement in situations like that.”

EPR Squared’s idea is to create a real estate interest on the property and have it be a separate interest from the improvements and from the land.

 It is similar to agreements with property owners for cell tower and billboards, though, Pawlik stressed, the solar legal structure is not identical.

DLA Piper, which Pawlik called “the gold-standard, top-tier law firm” for commercial real estate, “has finalized the form documents we need to take to the owners to show them how this structure would work.”

EPR^2 has “a dozen or so deals in the pipeline with groups that have either portfolios of properties or single properties,” Pawlik said. The first deal, he explained, must be one that demonstrates to the 60,000 California real estate brokers, agents and mortgaging agents that “this is almost identical to a real estate transaction.” When they see commissions in it for themselves, he said, “we can really scale the idea and bring it to a size at which pension funds and insurance companies will start looking at it.”

Source:  Commercial Source

VIDEO: Jerry Anderson, Matt Rotolante Talk Florida Ports Real Estate

Jerry Anderson, Regional Director for the State of Florida and Matthew Rotolante, CCIM, SIOR, Managing Director of Sperry Van Ness talk Florida Ports Real Estate in an interview with Douglas Dennison, the radio show host of the Florida Commercial Real Estate Show.

 

Demand For Cold Storage Space Heating Up

floral warehouse

Floral Logistics of Miami Inc. occupies one of Miami-Dade County’s largest cold storage facilities with more than 250,000 square feet under refrigeration in a 350,000-square-foot building.

Yet, company executives including sales and marketing director Linda Nunez are pondering how to increase the volume of flowers and produce Floral can store at the 3400 NW 74th Ave. building about a mile west of Miami International Airport.

Floral, which picks up imported products from the airport before cooling and distributing the goods, has enough room in its facility to avoid taking on another lease.

“We definitely have to maximize the number of pallets we have and also utilize existing space,” Nunez said.

But other cold storage users who want to expand face significant challenges.

The county’s shining tourism and trade industries, growing population and resurgent economy are generating heavier demand for perishable goods. That puts pressure on companies that store and ship the products to expand their businesses.

Cold storage represents 5 percent to 8 percent of Miami-Dade’s industrial inventory, according to Sperry Van Ness LLC managing director Matthew Rotolante. That range is likely to increase as more perishables are imported into the county, which already has the nation’s largest floral import business with more than 90 percent of U.S. flowers passing through the airport.

“What we see is a lot of demand from hotels and cruise ships” for refrigerated and frozen goods,” Rotolante said.

Nunez notes the volume of produce handled by Floral has significantly increased to account for about 45 percent of the company’s inventory. She cited a boost in tropical food items like yucca that are sold in South Florida supermarkets throughout the year.

No Spec Market

Cold storage supply space is limited, and vacancies are rare in the sector. Real estate firm Transwestern reports a vacancy rate of less than 5 percent for Miami-Dade’s 8 million square feet of refrigerated and freezer space.

“The market is very tight,” Transwestern managing director Ben Eisenberg said. “Our team represents a company looking for space, and we can’t place them right now.”

Earlier this month, Eisenberg and Transwestern brokers Thomas Kresse, Walter Byrd and Carlos Gaviria represented RREEF in a 40,000-square-foot long-term lease with seafood producer and distributor Marine Harvest USA LLC at Beacon Centre-Building 22 in Doral. Marine Harvest had been subleasing the facility. But when the previous tenant’s lease expired, the company moved quickly to sign a direct deal with the owner of the 8500-8550 NW 17th St. building.

“Obviously that was a great benefit to the landlord with no downtime” between leases, Eisenberg said.

Supply is also being constrained by a lack of new construction. Cold storage facilities are too expensive for a landlord to build speculatively. Converting traditional warehouses to refrigerated or freezer facilities is also costly.

“It’s still four to six times more expensive than building regular industrial space,” said Zac Gruber, senior vice president at Miami-based Easton Lynd Management LLC.

“That limits the market too much for industrial landlords,” Gruber said. “If you see anything built on spec, it would be for an existing user, a build-to-suit.”

Jones Lang LaSalle Inc. managing director Steve Medwin estimates a cost increase of $30 to $100 per square foot to build out cold storage facilities. That doesn’t mean industrial landlords should ignore the niche, however.

“There is demand,” he said. “If someone made an investment in that, they may be rewarded. But meeting the exact needs, trying to anticipate that, would be difficult.”

Rent Premium

The long-term rental returns for industrial landlords could still outweigh the additional construction expenses.

Gruber estimates an owner could receive a $2-to-$3 per square foot premium on rents for refrigerated space.

“That depends on the quality of the cooler, sophistication of the landlord and how much work is done in there,” he said.

Potential rent appreciation was the driving force behind a California investor’s $8.75 million acquisition of a three-property freezer facility in northwest Miami-Dade in May. Rotolante represented the buyer, Miami Business Park LLC, in the purchase of 6960 and 6831 NW 36th Ave. and 7007-7025 NW 37th Ave.

The facility was more than 40 percent vacant when Miami Business went under contract, Rotolante said. Before closing, the company received lease offers from several large national tenants willing to pay substantially higher rents than existing tenants.

“That shows the demand for this product is popping right now,” he said.

For Floral Logistics, the solution to its growing space needs could be racking.

Nunez said the company plans to have racks installed at its facility by December. The building has numerous temperature “zones” and 38-foot tall ceilings, which is well above the norm for South Florida industrial facilities.

“We can have a pallet on the floor and triple our space by racking,” she said.

In rare instances, users like Preferred Freezer Services LLC opt to build their own cold storage facilities. Preferred began construction this month on a 118,000-square-foot facility in Hialeah Gardens. Once completed in March, the facility will be the company’s third in Miami-Dade.

Preferred and other companies have to take such measures because institutional landlords are “more conservative and not comfortable spending money on these improvements” despite the potential rental revenue, Eisenberg said.

 

Source:  DBR