Lesson 1: Commercial Real Estate (Part 1) and (part 2)
Terms in this set (84)
CCIM Institute (CCIM)
Counselors of Real Estate (CRE®)
Institute of Real Estate Management (CPM®)
REALTORS® Land Institute (ALC
Society of Industrial & Office Realtors® (SIOR)
National Association of Realtors® (NAR)
REALTORS® Commercial Alliance (RCA)
International Council of Shopping Centers (CSM, CMD, CLS)
Building Owners and Managers Association (RPA)
Urban Land Institute (ULI)
Commercial Real Estate Women (CREW
National Association of Industrial and Office Properties (NAIOP
Geographic Information System
U.S Census Bureau (www.factfinder.census.gov)
American Fact finder is the portal to decennial census, American Community Survey and a wealth of specialized reports. It includes data on population, age distribution, household and family characteristics, mobility and income. Summary tables and customized data searches are available as are census tract maps.
This system provides decennial census data, estimates of current- year population, household, age, and income as well as five-year projections. It also provides more detailed age-by-income cross-tabulations. Information is available for states, counties, MSAs, municipalities, ZIP codes, and customized geographies defined by the user.
ESRI (www.esri.com) (Fee)
is similar to Claritas and provides decennial census data; current- year population, household, age, and income estimates and five-year projections including age- by-income cross-tabulations. It is also available in stores, counties, MSAs, municipalities, ZIP codes, and customized geographies, and also includes Tapestry lifestyle clusters.
Woods & Poole (www.woodsandpoole.com) (Fee)
This service provides state, county, and metropolitan area forecasts for 900 demographic and economic variables to the year 2040, and is updated annually.
U.S. Department of Labor, Bureau of Labor Statistics (www.bls.gov)
This is a significant portal to data on labor force by place of residence, unemployment rates, at-place employment by industry, as well as wages and location quotients. Data is available by state, county, and MSA, and in some cases for larger municipalities.
U.S. Census Bureau (www.census.gov/epcd/cbp/view/intro.html)
This is the portal to County Business Patterns showing establishments and employment for counties, larger municipalities, and ZIP codes, by NAICS industry codes.
InfoUSA (www.infousa.com) (Fee)
This platform provides employment and descriptive information for businesses and is available for census tracts, ZIP codes, municipalities and counties. Additionally, the data is sortable by NAICS industry codes.
Tenure status can include
a variety of rental arrangements (i.e., market role or rent assisted) as well as ownership as a condominium, cooperative or some form of fractional regime (i.e. time share). In some cases, the same building type could mix tenure status as in a second home or destination resort setting where condominium and fractional ownership could be accompanied by rentals, including those of a very short term nature (i.e. daily to weekly). To some extent, the tenure and tenure mix of housing may be dictated by its development or locational context. Some of these contexts are considered in material which follows.
are common development types which usually include a range of housing types along with recreational amenities, supporting retail, and other commercial activities
Large master- planned communities could encompass
several thousand acres and include schools, libraries, other public facilities, and a substantial amount of office and retail space so that they become recognized as cities or edge cities in themselves. Irvine, California, and Reston, Virginia are two such master-planned communities from the 1970's and 1980's. More recent examples are Summerlin, outside Las Vegas, and Anthem, near Phoenix. In these communities, the amenity packages are a consideration for potential buyers and usually represent significant up front infrastructure investments.
Both urban and suburban occurs increasingly, as prime developable land becomes
scarce and developers turn to passed over sites for new projects. Infill parcels may have been leap frogged over during previous phases of development because they may have been physically difficult to develop, lacked full utility service, had delinquent tax obligations, ownership could not be clearly traced or owners could not be convinced to sell or was subject to some type of environmental contamination that had to be remediated. These parcels may be entirely vacant or have derelict buildings that need to be removed before redevelopment can begin.
The advantages of infill development include
fewer competitors, the ability to use existing infrastructure, community services, and facilities and a market of residents in the surrounding neighborhoods. Infill sites are typically smaller than suburban greenfields, so absorption periods may be shorter and thus less risky.
Infill development can be difficult as developers
are challenged to establish a legal justification for redevelopment, assemble small parcels that may have multiple owners, remove environmental contaminants, demolish existing structures and possibly provide additional public services and infrastructure. Existing residents may object to redevelopment activity that increases housing density, traffic or put additional strain on community services such as schools.
depend on discretionary buyers who can afford the cost of owning more than one home. Second home property types include luxury single-family homes, condominiums in beachfront or ski communities, lakefront and oceanfront properties with boat slips, golf course communities and modest cabins in rural locations.
Demand can be regional, national, or even international in scope and is typically made up of households headed by someone in their 40s and early 50s with incomes in the top 10 of all households. In general, only a small portion of affluent middle-aged households actually buy second homes, with accessibility being a major factor in the purchase decision. At the upper end of the market, access by air and thus proximity to small airports that serve private planes are important considerations. For most second home buyers, however, driving time from their primary residence is a pivotal consideration.
Among the target age and income segments, the motivation for buying a second home varies and may include: buyers drawn from large metropolitan areas looking for a relief from the stress of everyday life; families with children who want to pursue outdoor sports or hobbies or have a getaway place for weekends and vacations; or buyers expecting to use their second home as an eventual retirement location.
is a category of the residential market where the definition of eligible population segments is based on criteria dictated by government funding programs. The federal low-income housing tax credit program (LIHTC) produces the largest number of new and rehabilitated rental units and works in concert with HUD's Section 8 Voucher program. Occupancy is limited to households whose incomes are less than 60 percent of a metropolitan area's median income, adjusted for household size, although some units with such projects may be restricted to households with incomes as low as 30 percent of the area median. In some cases, LIHTC projects are targeted to households age 55 or older, while others target requiring those, age 62 or older, or the disabled supportive living services.
State housing finance agencies oversee
their LIHTC programs and competition for an award of credits that provide the greatest subsidies is intense in most locations.
States and local governments also have affordable or workforce housing programs for prospective homeowners, particularly first-time buyers. Projects vary n scale and can include a mix of housing types and households at different income levels. In mixed income communities with for sale units, buyers must have incomes that fall between 80 percent to 120 percent of area median income and also may be eligible for down payment assistance. The nature of incentives provided to both developers and buyers is determined by state and local policies, programs and funding resources.
Age-Restricted Housing or housing for seniors who are able to live independently can include
both rental and for sale units. Rentals for seniors available in the private market generally include one or two bedrooms and full kitchens in buildings that have lounges, libraries, and activity and meeting rooms. Services can range from scheduled transportation to social and recreational activities, wellness programs, and sometimes meals and housekeeping, either optional or included in the rent. This product is targeted primarily to middle- and upper-income households age 62 and older, although most residents are generally over age 65 and in good health. Properties with affordable rents developed using LIHTC or other government programs may have income as well as age restrictions.
In the for-sale segment of the market, active adult communities offer traditional homeownership in single- family detached homes, townhouses or multi-level condominiums targeted to households that have at least one member age 55 or above. These communities often have extensive recreation amenities, such as tennis courts, biking and hiking trails, and clubhouses with a pool, gym, and space for social events. Some may also have golf courses.
Older seniors may be drawn to congregate housing or continuing care retirement communities (CCRCs)
that include a range of housing types and the same mix of facilities and services found in active adult rental or ownership communities. Congregate properties usually offer personal care, laundry services, housekeeping, emergency call systems, and at least one daily meal, at an additional cost. They may require an entry fee or endowment. Many congregate buildings are affiliated with local hospitals and nursing homes. Typical residents in congregate housing are single (usually a woman), age 75 t 85, who is generally in good health, able to live independently, but who may require periodic medical care.
Market-Rate Rental Communities
can take many forms, ranging from two-story walkups to mid-rise and high-rise buildings in urban areas or suburban area. Due to the high cost associated with installing elevators, mid- and high-rise properties tend to locate in areas where multifamily sites are scarce, land prices are high, and rents justify the costs. The supply of apartments includes older properties, many of which are rated as Class B or C and would not be truly competitive with new products. Renovating older properties, however, sometimes brings them up to current standards, making them competitive with new buildings. Units in the newest communities may be smaller than those in older complexes, but new apartments have more amenities and features, both inside the unit and in common areas shared by all residents. Typically this may include an outdoor swimming pool and a clubhouse with exercise equipment, party room, kitchen, fireplace, and business and media centers. Upscale apartment communities usually feature covered parking in either a single-car garage or carport offered at an additional cost to the tenant.
Retail commercial space
also comes in a variety of shapes, sizes and "flavors" which are usually dictated by geographic scope of the market they are intended to serve, the location of the property itself and the mix and type of businesses that become tenants. In general, the tighter the geographic reach the smaller the property and thus the more constrained the tenant mix and thus the more limited the variety and mix of products and services offered by tenant businesses. Retail and consumer services business can be found in a number of locational venues ranging from the individual freestanding building to a superregional mall with over 200 other business tenants to a mixed use property encompassing residential, office and retail space and very often a hotel and multi-level parking garage.
Since about the late 1950's, the shopping center has emerged as a dominant property type to house retail establishments. This was driven largely by suburbanization as residential development pushed farther from traditional urban cores along growth corridors defined largely by the unfolding of the Interstate highway system. The system itself
was not designed to encourage suburbanization but was established as a Cold War mechanism to facilitate evacuation from the cities in the event of an enemy attack and to accommodate the rapid movement of military assets and personnel from one region of the U.S. to another. Thankfully, enemy invasions in the traditional sense did not materialize and the threat of nuclear attacks largely subsided as the Cold War fizzled following the collapse and dismantling of the Soviet Union. Construction of the interstate highway system continued and the emergence of the post-WWII baby boom fueled unprecedented levels of new housing demand which could be readily accommodated by new supply built on increasingly accessible "greenfields" in the rapidly expanding suburbs. As the roof tops grew so too did the demand for more conveniently located consumer goods and services. The real estate industry readily responded with the introduction of suburban shopping districts and centers. A pioneer in this regard was the Country Club Plaza Shopping Center developed in the 1920's by J.C. Nichols in the suburbs of Kansas City. This concept was quickly copied and the rest is history.
gross leasable area
Retail Business Sectors are generally classified as
either GAFO or convenience. GAFO refers to stores selling General merchandise (discount and conventional department stores, warehouse clubs, supercenters); Apparel and accessories (including shoes); Furniture and home furnishings (including electronics); and Other goods (specialty shops which carry books, toys, luggage, jewelry, sporting goods, and a wide range of other items. On the other hand, convenience stores include supermarkets and other food stores (such as bakeries, fruit and vegetable markets and the like) and drugstores. Home improvement, hardware, and building supply stores are also classified as convenience stores, but this is evolving with the increasingly varied array of merchandise sold at stores such as Lowe's, Home Depot and other home improvement superstores.
Restaurants and bars and other such establishments are also classified as a convenience outlet and include two sub-categories of restaurant. These are full service (where customers are served by wait staff and pay after finishing their meal) and limited service (where customers place orders and pay before eating). The former has further categories, such as white cloth fine dining, family, etc. While the latter covers a wide range of full food options.
Neighborhood center business tenants
typically sell convenience goods such as food, drugs, toiletries, cards, flowers or provide personal services like dry cleaning, banking, package, shipping, hair and nail care, shoe repair, and video rentals. These products and services meet the day to day living needs of households living in the immediate surrounding trade area. Take-out food and small sit down restaurants may also be found in neighborhood centers. This is particularly true in neighborhoods with high ethnic population concentrations which can support restaurants with specialty menu offerings. Neighborhood centers tend to be under 100,000 square feet in size and are usually anchored by a supermarket. Larger neighborhood centers serve a two to three mile radius and require ten to fifteen acres of land to accommodate the building footprint and parking. A convenience center with less than 30,000 square feet, serves the same purpose but does not have a full size grocery store, but will be anchored by a minimarket (usually under 3,000 square feet) offering limited assortment of staple items, snacks, beverages, prepared foods, and deli items. In many urban areas these minimarkets may also offer special food for targeted ethnic groups. Some larger convenience centers may also include gasoline service stations selling soft drinks, snacks, a limited selection of groceries and other convenience items.
Community or super community shopping centers
also provide for daily necessities but include more apparel and specialty retailers. They do not include traditional full-line department stores and they generally serve a smaller trade area than a larger regional or super regional mall. A typical community center's mix includes many of the convenience tenants found in a neighborhood center but also includes a wider range of hardware, home furnishings and other specialty stores not otherwise represented in the trade area. Many community centers are anchored by a discount department store, as well as a supermarket or drugstore. Home improvement, hardware, lawn and garden, and gift stores, as well as banks, professional offices, and larger eating establishments also tend to locate in community shopping centers. Also some stores, service outlets, and restaurants may locate on out parcel pad sites within the parking lot. Community centers typically range from 100,000 to over 300,000 square feet of GLA and usually occupy 30 or more acres. Trade areas for these centers usually extend from three to five miles, but this can vary widely depending on the local market.
were developed primarily between the mid-1980s and early 2000s and are also referred to as super community centers. They can range in size from 250,000 to over 1 million square feet of GLA, and include at least three to four big box or "category killer" stores, each with at least 20,000 square feet of space. Such stores offer in-depth merchandise selection at discount prices. Relative few power centers include small stores and many have no in-line space at all. These open-air centers tend to be in locations near large malls and draw shoppers from a radius of five to seven miles or more.
are groupings of discount stores directly operated by brand manufacturers or store chains selling non seasonal items and production overruns. Many outlet centers also include discount stores or closeout or liquidator operators. Most are new construction, single-story, open-air strips, although some occupy renovated older buildings. Outlet centers usually have under 400,000 square feet of GLA and no traditional anchor tenants. Some outlet malls, however, have grown to over 1.0 million square feet, particularly those serving large visitor populations in or near vacation or resort destinations. Outlet malls may also include a food court or a collection of restaurants in its tenant roster, with a few having an entertainment component. Although most factory outlet centers were focused on tourist destinations and busy highway locations distant from regional malls, they can now be found on the fringes of many large metropolitan areas or strategically placed between two or more relatively nearby urban market areas.
focus primarily on general merchandise, apparel, furniture and home furnishing and are typically enclosed, with two or three department stores serving as anchors. They may also include movie theatres and food courts, restaurants and other entertainment venues and typically range from 250,000 to over 900, 000 square feet of GLA. Anchor stores typically have at least 50,000 square feet each, but very often reach 100,000 to 150,000 square feet.
Regional malls usually serve a trade area of five to ten miles, depending on population density, the transportation network and location of the nearest comparable agglomeration of retail facilities. Trade areas in smaller cities can cover a much larger geography again based on the presence of competing facilities. Regional shopping centers are being transformed, as smaller two or three anchor malls are redeveloped as open air centers or becoming hybrid centers that combine traditional enclosed mall tenants, big box stores, entertainment and eating establishments.
Super regional shopping malls
usually have at least 800,000 square feet of GLA, three or more anchor department stores, as well as a range of entertainment and food outlets. These centers usually have 1 million square feet, and very often expand to over 2 million in larger metropolitan regions. Each department store contains 75,000 to 100, 000 square feet of space. Most super regional malls require over 100 acres of land to accommodate parking demand and large anchor tenants may require more parking than is required by local zoning. Trade areas for super regional malls can be as small as five miles to 10 miles in somewhat densely populated regions, but often reach ten miles when located on an urban fringe. Many super regional malls now include a variety of retail offerings as vacated department store space is taken over by big box stores as non-retail uses. Extensive surface parking is now being used more intensively and creatively in conjunction with retrofitting strategies for many obsolete and underutilized mall properties. The addition of decked parking at more successful centers frees land for out parcel uses, such as movie theatres, restaurants, office space, housing and medical services.
Value-oriented or "hybrid" malls
combine large discount and off-price anchors with smaller factory outlet stores. These centers emerged as popular formats in the 1990s and early 2000s and can be as large as 2 million square feet, although most are smaller. The better hybrid malls are usually enclosed and can draw shoppers from an hour or more away. Typically, however, their primary trade area extends to about a 30 to 45 minute drive.
are a somewhat newer variety shopping venue offering upscale apparel, housewares, and gift shops, as well as restaurants, specialty food stores, movie theatres, music venues, and community gathering space. They generally do not have a traditional department store anchor, but are visually anchored by bookstores, movie theatres and large restaurants. They appeal to shoppers who do not want to walk through a large mall to reach one or two stores and thus are designed to reflect a more appealing pedestrian-oriented neighborhood business district. Lifestyle centers range in size from 150,000 to 500,000 square feet and need about ten acres of land at a minimum. Their primary trade areas can extend for 10 to 15 miles from the location and may include office space in the second floor of some buildings.
are basically open air, walkable neighborhood business districts, suburban downtowns, and small town retail cores that contain many of the store types found in lifestyle centers. They may also include pharmacies, hardware store, dry cleaners, florist, banks, post offices, as well as plazas and similar public space. These shopping venues are very often incorporated into transit oriented development (TOD) strategies and also include professional offices of doctors, attorneys, insurance agents, stockbrokers, real estate agents and the like. In many cases, upper level office and residential uses accompany the retail space in the town center.
are typically not anchored by a full-line department store, but offer a concentration of apparel shops, boutiques, and custom specialty shops carrying merchandise that is usually high quality and high priced. Their target market segments are attracted by quality, taste, status and price. Fashion centers may include one or more small specialty or "resort" department stores, as well as gourmet food and food service outlets or a "gourmet" supermarket. High fashion centers also draw from a wide rather than limited trade area particularly when high income neighborhoods are more geographically scattered. Fashion centers can in fact scale themselves in such a way to serve a neighborhood, community, or regional center size trade areas. When they serve trade areas of neighborhood or community scale, they will include small clothing and gift shops, while the traditional supermarket might be represented by a gourmet food specialty shop, a butcher or fresh market grocery. When such centers reach community and regional size, they very often have as an "anchor tenant" a group of small specialty department stores. Very often these centers also serve some tourist and conventional trade.
were first created by the Rouse Company with opening of Faneuil Hall Marketplace in Boston. A limited number of festival centers were built in the 1970s and 1980s and because of their significant dependence on tourist visitors, their success was confined to large markets such as Boston, New York, Baltimore, and San Francisco. By and large they are forerunners to urban entertainment centers, and some of their characteristics have been incorporated into this newer form of shopping center. As its name suggest, this type of shopping center was intended to create a special, festive experience, with a high percentage of festival center GLA devoted to specialty restaurants and food vendors. Food vendors typically are concentrated like they are in typical food courts, but with much greater emphasis placed on ethnic authenticity and distinctive offerings. Retail goods at a festival center tend to be impulse and specialty items including artwork, collectibles, jewelry, pottery, leather goods and unique home furnishings. Festival centers also include a strong entertainment component with regular informal events featuring street mimes, jugglers, dancers, strolling musicians, and other "oddities". The trade area for festival centers must be large, since a significant portion of its business activity is generated by tourists as well as conventions, professional meetings and commercial travelers. As such, most festival centers are categorized as being regional due to their scale of the market and then as festival centers since they do not include department store anchors. Typical of the festival center are their unique architecture and relationship to other significant land uses, as well as to waterfronts, historic areas and the like.
Free standing shopping venues have become
have become more important to retailers over the past 10 to 20 years with the rapid expansion of chains such as Wal-Mart, Sam's and Costco offering the more traditional lines of food and general merchandise. This has been mirrored somewhat by the expansion of specialty chains such as Bass Pro Shops and Cabello's offering one stop destinations for every imaginable sporting good item one could want or need. Although some of these stores may serve as an anchor to say a resort destination located lifestyle shopping center, they typically maintain some degree of physical separation and thus identity from the rest of the shopping environment.
Festival Centers - Continued
Three other emerging trends among free standing retailers involve the near explosive growth of "dollar" variety stores (a throw-back somewhat to the five and dime stores of the 1950's and 1960's); the proliferation of specialty restaurant chains and franchises that prefer out parcel locations on shopping center property but at a distance with their own designated parking; and the maturing of the drugstore into a shopping venue offering limited lines of supermarket and household cleaning and hardware items, as well as an ever expanding variety of health and beauty products. Dollar stores cater to price conscious customers with limited income to spend on necessities such as food, paper products and personal care items. Dollar store business models respond accordingly by offering specially packaged merchandise that limits quantity while satisfying price points for the customer. In some cases, large drugstore chains are copying elements of this strategy as reflected by the type and quantities of merchandise offered in locations more likely to draw from low to moderate income neighborhoods. Restaurants on out parcels typically achieve better highway visibility and are typically assured of having sufficient parking space to accommodate customers at peak periods during their business day.
Office commercial space
is very different from retail space, but in many instances is impacted by many of the same forces relevant to warehouse and industrial space. While support for retail space is driven by household income growth and consumer preferences, demand for office and industrial space is inseparably linked to economic and employment growth in local regional and even national markets. Like retail space, office buildings also come in a wide variety of sizes, locations and qualities, serving a diverse mix of users requiring a range of amenities. In essence, the characteristics of office buildings tend to run the gamut and are categorized by a series of characteristics or qualities that are not always mutually exclusive. Generally, office buildings are categorized according to their class (i.e. A, B, C), location (CBD, suburb, etc.), size and flexibility (multi-story, multi-tenant vs. single-story, single tenant), use and tenure (owner versus renter) and features and amenities.
The class into which an office building is placed is typically determined by
assessing its age (both chronologic and actual), its location, the quality of its finishes (particularly in its common areas), its systems for climate control and security, amenities offered, services provided, lease rates and its tenant profile. Based on these criteria, office building inventories in local markets are classified as A, B or C. It is important to note that while the criteria are somewhat specific, how they are applied in evaluating buildings is largely a matter of personal interpretation and thus somewhat subjective. As such, what one person rates as a Class A building might actually be closer to a Class B in another's estimation or vice versa. This has also led some to attempt a finer tuning of the classes by applying plus or minus signs to the letter grade. Whether this adds anything useful to the evaluation is subject to debate but at least it makes the nitpickers in the business satisfied if not entirely happy.
Class A space includes
professionally managed office buildings in an excellent location with superior access that are occupied by prestigious corporate and professional tenants. Increasingly, Class A buildings are characterized by environmentally sensitive or "green" building materials and operational systems that save on energy and water costs, while providing a more healthy work environment for workers. Most, but not all, Class A buildings are under ten to twenty years old or they have been extensively renovated to bring them up to current market standards. Building materials and amenities are high quality, and the property communicates a high-status image for its tenants. In essence, Class A space is the best available space in a local market in that it is the best building available at the time in the best location. It is a relatively new building with modern architecture that projects an image of success with a large open entrance, often with a dramatic eye catching atrium. Class A buildings also have amenities such as shops or restaurants, health clubs, child care facilities, a cafeteria, package delivery stores and the like. Security will be obvious and the building will be exceptionally well maintained. Tenants in Class A buildings are typically paying the highest rents in the local market and thus for the prestigious image that the building projects. Tenants are making a statement to their customers and want to impress their clients and their competitors. Companies typically locating in Class A space include law firms, office of Fortune 500 companies, corporate office of banks and insurance companies, stock brokerage firms, and large advertising, public relations and lobbying firms
Class B buildings are generally
once Class A buildings that have good locations, are professionally managed, are of high quality construction, and have an impressive tenant mix. Although they are not new, these properties usually show very little deterioration, but may lack state of the art HVAC, lighting, or mechanical systems. Generally, they suffer from modest functional obsolescence that can be feasibly cured within current market rent levels. In essence, Class B buildings are the "tired" Class A buildings which time has not entirely treated fairly. In one way or another, every Class A building becomes a victim of the passage of time and thus subject to the intrusion of functional obsolescence which reflects changes in market needs and preferences as well as the march of new and ever-changing technology which renders some building systems inefficient and marginally useful. Since Class B rents in many local markets are not significantly lower than Class A rents, insufficient HVAC systems, for example, could very well produce higher monthly utility charges and thus result in total occupancy costs comparable to Class A buildings. Many Class B buildings can be restored to Class A status by reducing their effective age and introducing strategic improvements that represent money well spent on efficiency and tenant occupancy cost reductions. Class B buildings cater to corporate and professional businesses that need to impress clients and customers and that require locations in good relative proximity to the concentrations of Class A building tenants in the same market. In many cases Class B buildings are able to accommodate the needs of those in the medical professions as well as consolidated concentrations of local, state or federal government agencies.
Class C buildings are typically
the oldest and most functionally obsolete structures within a local market's office space inventory. They also suffer from locational obsolescence and usually are found in portions of urban areas and cities that have as they say, "seen better days". They tend to be isolated from cores of primary business activity along aging commercial corridors desperately in need of a major facelift. Many very old Class C buildings (i.e. 50+ years) are sometimes architecturally attractive and even historically significant. This is particularly true in the traditional cores of many older cities and major metropolitan areas. Having passed their prime as office buildings and being too functionally obsolete to feasibly be brought up to current market standards, many Class C buildings have become (and continue to be) prime candidates for adaptive reuse. This process preserves the architectural and historic significance of the building's exterior and possibly being rewarded for doing so with federal and state preservation tax credits, while repurposing the interior space for new uses such as apartments or hotel rooms. In many cases, adaptive re-use strategies have also taken advantage of Low Income Housing Tax Credits (LIHTC's) by including a mix of various affordable housing products in the development plan. Class C buildings can also be modestly refurbished to make them more appealing to tenants who are not so much interested in an image as they are in a cost-efficient place to do business. This could very well include new business startups graduating from the spare bedroom in the home as well as those who typically do not meet with client/customers at their place of business. This would include, but not necessarily be limited to back-office support operations of larger corporate enterprises, bank processing centers, telemarketing companies and sales offices of manufacture representatives, brokers and the like.
Size and flexibility of office space is generally categorized by
the vertical nature of the structures themselves. In this regard, office buildings general fall into three size categories: high rise (16 stories or more), mid-rise (four to 15 stories), and low-rise (one to three stories). Floor plate or footprint size is an important consideration, with some tenants requiring large floor plates so that they can occupy fewer levels, thus reducing the time employees spend traveling from one level to the next. Others prefer smaller floor plates so that workers have more natural light. Floor space flexibility is important as more tenants opt for open-floor layouts and more efficient use of space. Interior columns or odd angles that make it difficult to lay out space will render a building less desirable and contribute to its loss of functional usefulness more quickly. Office floor plates in new Class A buildings generally range from 18,000 to 30,000 square feet with 20,000 representing a safe design target for most tenants.
Corporations often occupy an
entire office building and may own it or lease it from an investor-owner. Single-user buildings are typically not included in a market's office space inventory until they are vacated and marketed for multitenant occupancy. Documenting the extent of owner occupancy in office buildings is made difficult by the widespread use of sale-leasebacks, whereby a corporation sells one or more real estate assets (usually to an institutional investor such as a pension fund or REIT, and then leases them back from the new owner. These transactions allow corporations to free up capital by removing expensive assets from their balance sheets and generate what might be some strategically needed liquidity with which to operate the core functions of the business. Also, as tenant corporations receive the tax benefit of being able to show rent as an expense, at the same time the new owner/investor obtains a high-quality property leased to credit-worthy tenants usually for a period of at least ten years and possibly longer. Sale-leasebacks are also popular with owners of manufacturing, warehouse and distribution space.
Features and amenities offered by office buildings include tangible elements
such as parking and proximity to transportation as well as less tangible items like cleaning, maintenance and security services that are equally important for the tenant's use and enjoyment of the space occupied. Very often, the issue is not only whether or not a feature or amenity will be offered but how will it be paid for and by whom. These are issues usually negotiated and embodied within a signed lease agreement and can be somewhat complicated depending on the location, type, size and age of the building
Security is critical for
government agencies and many private firms in the lobby, at the entrances to individual office suites and in most publicly accessible rooms. New buildings are equipped with key-card entry systems, coded keypads, as well as with extensive security camera and monitoring networks. Larger buildings usually provide a staffed security desk along with scanning equipment. Smaller buildings typically provide voice intercoms and possibly cameras as well.
Energy-saving and environmentally sensitive "green" features
are becoming even more essential in Class A office buildings. Tenants are attracted to buildings with design features that reduce water and electricity use that lower utility bills that are typically passed through to them and that foster a healthy workplace for their employees. Indoor air quality, temperature and noise controls, and the use of non- toxic building materials have become, in some cases, more important than dramatically designed lobbies. New buildings are being developed and built to satisfy one of several Leadership in Energy and Environmental Design (LEED) ratings. These ratings require specific design attention to site planning that maximizes natural light, installing windows that actually open, using recycled carpet and incorporating under floor heating and air conditions systems. Focusing on securing LEED certification requires close attention to evaluating anticipated benefits (i.e. energy savings, possible tax credits, etc.) against the somewhat higher initial cost incorporating LEED design features and products. Existing buildings where possible, are being retrofitted with conservation and even LEED certification in mind. Doing so also requires close evaluation of the benefits versus the cost, but in some cases can help move an older building up from say Class C to Class B and thus make it more competitive within the local market. Improvements would include, but not necessarily be limited to using non-toxic paint, replacing traditional lighting with low energy-use fixtures, installing better controls for HVAC and interior lighting systems and possibly changing windows and roofing materials to reduce energy consumption. Some research has shown that making such improvements enhance worker productivity and reduce illness- related absenteeism.
Adding to this downward bias for net office space demand is the emergence of "collaborative office consumption".
This emerging force in the office market is a response of usually major building tenants who have come to realize that on any given day, 30% to 40% of the space they lease is vacant because employees are either traveling on business, working from home or otherwise away from their assigned office or cubicle. The collaborative consumption strategy focuses on short term (sometimes very short term) subleasing of space to temporary users on very small scales with leases of very short durations. Leased space can range from a single desk or sparsely used conference room to an entire floor footplate. Assuming security and access issues can be adequately addressed, this approach to space use increases intently without increasing quantity. As such, per worker square footage usage is reduced while "excess" space is more efficiently and economically put to use. By one estimate, there are over 5,500 collaborative consumption spaces marketed on various websites throughout the U.S. and the number of spaces being advertised is growing rapidly. These and other trends are important for those brokering office space.
Industrial space building types usually fall into one of four categories
these are manufacturing, including light, heavy and assembly; warehouse and distribution, including very basic to highly mechanized and automated; flex space which combines office and showroom or display area space; and research and development (R & D) space which may include wet labs, clean rooms and other technology-specific areas
Several other forces are also at play that will influence warehouse/industrial space market dynamics over the next two to three years. One is the resurgence of interest among foreign investors. Once again foreign capital is searching for safe harbor investment opportunities that provide
attractive yields with fairly predictable risk profiles. Warehouse and distribution facilities occupied by strong credit tenants on long term leases with favorably structured conditions provide an attractive alternative to such investors. Initially, major port markets on the West Coast (Los Angeles, San Francisco, Seattle-Tacoma) and in the midlands (Dallas and Chicago) are likely to attract the most interest. But if past history is any indicator, this interest will spread to other coastal markets (both Gulf and East) as well as to inland intermodal areas such as Atlanta and Kansas City. The Gulf Coast region could very well attract a fair share of this foreign investor interest with the unfolding effects of the expansion and anticipated sharp increases in cargo/shipping volumes fueled by the opening of a much improved and wider Panama Canal. The canal is undergoing a $5.2 billion upgrade and expansion to allow greater traffic flow and to accommodate the new generation of "Super Post-Panamax" vessels that generally exceed the size limitations of the existing canal system. These new vessels carry significantly large quantities of cargo, usually containers, and will fuel demand for both improved handling facilities and more storage and distribution space in a variety of physical environments and security contexts.
nother major force impacting demand for warehouse/industrial space over the next few years is
the unfolding "re-think" of the global supply chain and the return of U.S. manufacturing to the U.S., rising labor costs throughout Asia, particularly China combined with volatile fuel costs and monetary exchange rates, are forcing U.S. companies to re-evaluate their supply chain networks. When these forces are considered within the context of spreading hostilities focused on U.S. interests by radical extremists of various types and dispositions and the rapidly growing supply of readily available natural gas to power manufacturing facilities, it is becoming increasingly apparent that bringing production capacity home is an attractive alternative. This puts U.S. manufacturers in closer proximity to their customers thus accelerating speed to market times, reduces inventory carrying and freight costs, helps reduce overall levels of operating risk and improves customer service. This return or re-shoring of manufacturing combined with the resurgence of rail transportation has significant implications for warehouse/industrial space throughout the U.S. but particularly along traditional rail corridors that also serve intermodal infrastructure hubs. This will include both coastal and inland intermodal distribution facilities which service existing and emerging manufacturing centers throughout the U.S.
The explosion of e- and m-commerce (mobile) in the U.S. and globally is also a force that will fuel demand for
warehouse/industrial space for the foreseeable future. According to recent surveys, industrial sectors accounting for the largest share of increased demand for warehouse and distribution space include food and beverage, e-commerce and traditional retail, with an estimated one-third of demand for big box space (400,000 SF) linked to the multi-channel retailers or e-tailers. The emergence of e- commerce and m-commerce is revolutionizing the sector as retailers increasingly tap into multiple channels to sell merchandise. It is, for example, more cost effective to increase on-line logistics operations as opposed to opening more traditional stores. This trend necessitates an entirely different distribution network and has obvious implications for the retail space sector going forward. Retailers opening new outlets are in many cases shuttering a like number in marginally productive locations while at the same time evolving their regional distribution networks to include e-commerce distribution centers.
In some cases these are cutting edge facilities encompassing the latest technologies including increased reliance on robotics to handle merchandise movements and order fulfillment. This allows these facilities to operate with more predictable cost structures, particularly labor, side-stepping many expenses associated with healthcare and unionization. Robots do not go on strike nor do they call in sick.
What is Community Development Finance?
Before answering this question, it is probably important to address what community development finance is not. Most fundamentally, it is not a mechanism, tool or strategy for making a poor, fundamentally flawed project a good one. All the community development finance enhancements or incentives available cannot fix a faulty business model; a dismal location; or a concept with low to no possible market support. In short, community development finance cannot fix a project with an unreasonably high risk profile. This is called "putting lipstick on the pig" and hoping nobody notices it is not a beauty queen. The market generally punishes these kinds of attempts and does significant damage to the community that may take many years from which to recover. The damage can be financial, in that, the community may be saddled with non-performing assets or financial obligations that create a serious drain on its operating resources. More importantly, manipulating conditions to ignore stark market realities creates credibility gaps for community leaders. This erodes public trust and confidence; impedes future efforts as potential financial partners steer clear; and fosters a sense of frustration and hopelessness. In essence, forcing a poor or ill-conceived project through a community development process is a "no-win" proposition. The goal of community development finance is to take those fundamentally sound projects that almost but not quite work and make them a "win-win" proposition for the financial stakeholders and the community at large.
The primary focus of community development finance is fundamentally twofold:
1) To fill the all but inevitable private capital market gaps and 2) To ensure capital availability to viable projects when private sources are either unable or unwilling to provide the full extent of the financial resources needed.
Federal agencies that provide direct funding sources for community economic development include
the U.S. Department of Housing and Urban Development (HUD), the Economic Development Administration (EDA) of the U.S. Department of Commerce, the U.S. Department of Agriculture (USDA), the U.S. Environmental Protection Agency (EPA), the Small Business Administration (SBA) and the U.S. Treasury. Agencies playing a more indirect role in providing resources for community economic development include the Federal Home Loan Bank System and secondary market intermediaries such as the Federal National Mortgage Association (FNMA or Fannie Mae), the Government National Mortgage Association (GNMA or Ginnie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac). In some cases, funding is passed through to states or local communities as a block grant to support development initiatives.
Most important to community development initiatives are
the New Markets Tax Credits (NMTC's), Historic Tax Credits (HTC's) and Low Income Housing Tax Credits (LIHTC's). Each of these tax credit programs are designed to attract equity to community development projects. This is accomplished by allowing the developer/owner of a project to sell tax credits to one or more third party investors who use the credits to reduce their federal tax liability. Very often the purchasers of tax credits are large multi-national businesses or financial institutions such as large commercial banks. In some cases, these banks are also providing a layer of debt financing for a project.
State governments play an important role in community development finance, particularly in
small towns and rural communities. State agencies serve as conduits for federal block grants from agencies such as HUD with its Community Development Block Grant program. Very often states also offer a wide range of other programs which piggyback on agencies such as the U.S. Small Business Administration (SBA) and the U.S. Department of Agriculture (USDA) in providing some form of guaranteed business loan or with the U.S. Department of Housing and Urban Development (HUD) when offering programs to promote affordable housing. In some cases, state funds are used as credit enhancements when federal program guarantee limits leave a funding gap or take the form of direct loans through a Revolving Loan Fund (RLF) program. RLF's themselves may be capitalized with a combination of resources with funding contributions from federal agencies (i.e. EDA), state appropriations and private banks. Some state programs also provide equity capital and subordinated debt structures to fill financing gaps for economic development initiatives in local communities.
States also encourage community economic development initiatives using target tax credit programs.
These tax credits may also be piggybacked with federal tax credits (i.e. HTC's, NMTC's and LIHTC's) or they may stand alone to encourage development and investment in specific industries or clusters such as film and video, performing and visual arts and the like. These sector specific tax credits usually link to the state's economic development strategic plan and are usually limited in amount on an annual basis by legislative mandate. Securing such credits usually requires demonstrating that the state's investment in foregone tax revenues will result in direct job creation and net new capital investment. The use of some state tax credits may also be limited to businesses or projects in state designated Enterprise Zones (EZ's) or other targeted depressed communities or neighborhoods.
States also have the ability to offer favorable (below market cost) financing for community economic development projects by issuing bonds. This is particularly true for Industrial Revenue Bonds (IRB's that are issued by an authorized state agency (including local economic development entities). IRB's are federally tax exempt and thus investors or holders of the bonds pay no federal taxes on interest earned. This results in a lower debt carrying cost for local projects that qualify of IRB financing.
There are three major groups of private sector players:
Commercial Banks and Thrifts; Investors, both individual and institutional; and property owners themselves. Although each is driven largely by the profit motive, there are some who understand clearly the benefits and potential value of community economic development.
Many local institutions are attracted to community development initiatives because it is good business and because they are strongly urged to do so by regulatory mandates such as the
Community Reinvestment Act (CRA).
Community Development Corporations (CDCs)
act as conduits for public and private investments that are focused on community economic development and revitalization projects. They are very often formed as an outgrowth of work undertaken by community groups at the local or neighborhood level whose focus is improving the public good through housing renewal and commercial revitalization. Their motivations are job creation and the attraction of private and government resources to upgrade the quality of life and build wealth within their target areas of influence.
National entities such as the Mott, Ford and Calvert Foundations are
important investors in community economic development initiatives. Also, most major corporations have charitable foundations that support community development projects and programs. This includes companies in just about every sector such as banking (Capital One, Wells Fargo and Bank of America), communications and technology (Sprint, Microsoft and AT&T) and insurance (Prudential, Hartford and Allstate). Two excellent sources of foundation information is the Council of Philanthropy (www.philanthropy.com) and the Foundation Center (www.foundationcenter.org).
Demand for office and industrial space is linked to
Economic and employment growth on both regional and national levels
Which of the following does not typically impact the class into which an office building is placed?
The building's size
Generally speaking, __________ building were once a higher class building that have good locations, are professionally managed, are of high quality construction, and have an impressive tenant mix. Although they are not new, these properties usually show very little deterioration, but may lack state of the art HVAC, lighting, or mechanical systems. Generally, they suffer from modest functional obsolescence that can be feasibly cured within current market rent levels.
Today, warehouse and industrial space most closely parallels __________ in terms of physical characteristics, classifications, and market forces. This is because many businesses now require flexible space to accommodate a growing range and mix of activities
Which of the following statements regarding industrial space is TRUE?
Rents and occupancy of industrial space tends to remain steady with modest increases and declines
TRUE or FALSE: In one way or another, every Class A building becomes a victim of the passage of time and thus subject to the intrusion of functional obsolescence which reflects changes in market needs and preferences as well as the march of new and ever-changing technology which renders some building systems inefficient and marginally useful.
Which of the following statements concerning community development financing is FALSE?
a. Community development financing makes poorly designed projects with unreasonably high risks into sound investment opportunities. Correct
b. The goal of community development finance is to take those fundamentally sound projects that almost but not quite work and make them a "win-win" proposition for the financial stakeholders and the community at large.
c. Bad decisions regarding community development financing can erode public trust and create credibility issues for community leaders.
d. The community may be saddled with non-performing assets or financial obligations that create a serious drain on its operating resources.
Community development financing makes poorly designed projects with unreasonably high risks into sound investment opportunities.
Which of the following statements concerning community development financing is FALSE?
a. Depository institutions are highly regulated at both the federal and state level. Some of these regulations may discourage investments in risk prone community development projects.
b. Community development finance interventions may not eliminate regulatory barriers but they do help to mitigate them by reducing a project's risk profile from the standpoint of the conventional lender.
c. Community development finance interventions often involves working with private financial institutions to adapt their conventional lending and investing activities to the challenges of financing community development projects by reducing market imperfections.
d. Improvements to a community's infrastructure (streets, sewers, water, etc.) are not necessary to attract other community development investments. Correct
Improvements to a community's infrastructure (streets, sewers, water, etc.) are not necessary to attract other community development investments.
All of the following have lowered demand for office space EXCEPT:
Corporate job growth and an increase in hiring
Sources of public funding for community economic development projects include all of the following except:
a. Local governments (possibly in the form of bonds)
b. Federal agencies such as the U.S. Department of Housing and Urban Development (HUD) or Small Business Administration (SBA)
c. Depository institutions such as commercial banks Correct
d. State government agencies (these may include tax credits)
Depository institutions such as commercial banks
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