Global Viewpoints

News From the Road: “Keep the Faith” NAIOP Breakfast Forecast Provides Hope

Written By: Bruce A. Kellogg, MAI, FRICS

The Atlanta Chapter of NAIOP, the Commercial Real Estate Development Association, hosted a breakfast meeting that brought members and guests out to not only fill up on good food, but also on good economic input from Emory University’s prominent international business and finance professor who has been quoted and appeared on numerous news programs: Dr. Jeffrey Rosensweig, director of the Global Perspectives Program, Goizueta Business School.

Dr. Rosensweig primarily focused on where we are in the process of the recessionary environment we’ve been living with for over a year. Among his comments, he felt we had a 30% chance of being in a “W”-shaped recovery pattern versus the “V”-shaped pattern we experienced during the 1974-75 period. Another large part of his focus was that the economy is not growing fast enough to create more jobs, coupled with the fact that people today are not considering retirement at the age of 65 as in the past.

A positive point, however, is that the U.S. has grown at a rate of 2.7M people per year, with Echo Boomers leading the way in this unique form of mass production! Between this and the aging of Baby Boomers, it bodes well for the healthcare industry and education, especially for the former.

Some of the concerns presented by Dr. Rosensweig include that the unemployment rate is actually higher than the 10% being quoted, as approximately 6% of the labor force is not counted due to part time employment and other reasons. In addition, the expansion of products, as well as imports, has dropped, the trade deficit is growing, and consumers generally feel tapped out, resulting in fewer purchases. Alternatively, exports have grown for over six months, which leads to the creation of new jobs. Another plus may be that the dollar is cheap now, making real estate attractive to global investors, such as Japan and German, with many entering the Florida resort market.

As we were located in Atlanta, it was mentioned that tourism is expected to generate much activity in the future. Regarding inflation, we were advised that it will return within the next 18 months, although it is low right now. This should prompt us to create inflation hedges now to minimize its impact.

Globally, recession has not negatively impacted China and India as much as most other nations. Brazil has experienced a small decline, but Mexico and Russia have been more negatively impacted than many others. The good news is that all nations appear to be bouncing back. The final words by Dr. Rosensweig encouraged the audience to “keep the faith!” While there are still negative signs in the economy today, we are beginning to see some sunlight at the end of the tunnel. We were encouraged to abandon negativity. It makes sense to follow his advice, which will likely bring about positive change more quickly. Stay tuned!

It’s Escalation Season Again, Part One: Getting Prepared

Written By: William H. Brownfield, CRE, CCIM, EscalationAdvisors.com

This step revolves around collecting and organizing the right information. Boy Scouts, Girl Scouts and painting contractors are particularly good at getting prepared.

Read the Lease
At a high level, you can think of escalations as having a lot in common with the game, Monopoly. Both require that you first learn the rules, and then play by them. In Monopoly, the Instructions and the property cards define the rules of the game, how much the rent is and how you are supposed to calculate it. And as a player, you also get to learn what it’s like to be a tenant. Whether you land on Broadway, Baltic Ave., or a suburban office building in Houston, you’re going to have to pay for the privilege of being there. Escalations are the same, and the rules are hopefully fully outlined in the lease.

Just like Monopoly players, real tenants rarely enjoy paying rent. Audible groans are commonly heard when rent and escalation charges are invoiced. Re-reading the lease is a common reaction, as are debates about what the rules really mean. The lesson here is that your escalation preparations should start with reading and abstracting each and every lease in your building before doing anything else. For the purposes of escalations, the abstract should summarize all economic factors included in the lease, so those details are at your fingertips when you need them. When you’ve finished those, move on to the checklist of additional information you will need to assemble:

Checklist of Documents Required for Set-Up, Rent Roll (Tenants, Leases, Profiles)

• Rent roll showing each tenant's name, address, lease ID, escalation terms.
• Lease abstracts or copies of each tenant's escalation clause

Expenses (Chart of Accounts, Building Expenses)

• Chart of accounts – each escalatable account by major account group (e.g. Cleaning, Admin, R&M, etc.) with each Account # and Account Description (hard copy or electronic download in Excel)
• Current year expenses by account number (hard copy or electronic download in Excel)

Gross Ups

• Occupancy history by month, both Leased and Occupied, for current year and budget
• Standard management fee gross up - the current year’s management fee calculation including total income subject to management fee
• Alternate management fee gross up – the average quoted rate per square foot for vacant space
• The janitorial contract rate psf and the total cleanable square footage of the building
• Copies of the electric bills or a schedule showing the monthly billed amount and kWh usage
• Estimated kWh psf at full occupancy (from an engineering report or other source)
• Copies of the gas bills or a schedule showing the monthly billed amount and THERMS used (only needed if your building uses gas)
• Eevator contract vacancy credit (if applicable)
• The current property tax bill and your tax consultant's estimate of the building's assessed value at full occupancy

Capital Amortizations (For each job being amortized (both existing jobs and new jobs):

• Description of the work
• Cost
• Amortization begin date
• Number of years to be amortized
• Interest rate to be imputed (if any)

Miscellaneous

• The prior year's escalation worksheets
• A schedule showing the current year's escalation pre-bills for each tenant
• Tenants with expense caps will need the following prior info:
• Cumulative Caps – initial amount subject to the cap
• Annual Caps – last year’s amount subject to the cap
• Total electricity re-billed to tenants (to be deducted from Electricity Expense)
  Join us next week for...part two "Doing the Work." Yes, this is the hard part, but it can be fun if you actually do it during regular working hours.

AMB Leases 157,200 SF in Tokyo Development

Edited: Jennifer Brenner
Source: AMB Property Corp.

AMB Property Corp. leased approximately 157,200 square feet (14,600 square meters) at its AMB Tsurumi Distribution Center development in Tokyo, bringing the more than 687,400 square foot (63,850 square meter) facility to 93 percent leased.

AMB Tsurumi Distribution Center is a strategically-located multi-story facility situated on Tokyo Bay proximate to the ports of Yokohama and Kawasaki, Haneda Airport and major highways. The project was awarded an "A" ranking for an existing building by (CASBEE) Comprehensive Assessment System for Building Environmental Efficiency.

"Our development in Tokyo was designed and located to facilitate the rapid movement of goods and to reduce our customers' operational costs," said Michael A. Evans, AMB's managing director of Asia. "AMB partnered with our new customer to ensure their space requirements were met as they continue to enhance efficiencies in their distribution logistics network."

As of September 30, 2009, AMB's portfolio of operating and development properties in Asia totaled more than 16.1 million square feet (1.5 million square meters) of operating and under development properties, of which more than 10.5 million square feet (977,300 square meters) is located in Japan.

DC Multifamily Projects Gets $50M in Construction Financing

Edited: Jennifer Brenner
Source: CWCapital

CWCapital, a subsidiary of CW Financial Services and a full-service, national lender to the multifamily and healthcare real estate industries, announced it has provided $50 million in financing for the construction of Yale Steam Laundry West, a class-A multifamily property in Washington, DC. The loan was originated by Andrea (Dee) McClure, senior vice president in CW’s Baltimore, MD office and was financed through the firm’s FHA platform.

The project, scheduled for completion in 2012, is located in the historic Mount Vernon Square district of Washington. When completed it will consist of 218 units, a parking garage, roof deck, pool, clubhouse and fitness center. In 2006, CWCapital provided construction financing for its sister project, a 149-unit condominium complex. That project, completed in January of 2009, is currently 85% sold and included the historic preservation of two buildings, the construction of two 12-story towers, a covered parking facility, and onsite storage.

“We are very pleased to provide financing for this project,” stated McClure. “Despite a decrease in new construction nationally, the mid-Atlantic region is experiencing job growth, spurring demand for housing. With limited funding available in the current market, the FHA has been an attractive source of financing to an increasing number of experienced multifamily owners and developers.”

This loan is the largest of several new construction loans closed in 2009 for CW, in what has become a trend for the firm’s FHA platform. FHA construction loans originated last year included $23 million for The Lodge at Mallard’s Landing in Washington; $18 million for The Lakes of Millbrook in Alabama; $14 million for The Ridge at Midway in Washington; and $15 million for two assisted living facilities in Texas. In addition, the FHA has issued “Invitation Letters” to CW for several other large construction loans.

Ellen Kantrowitz, managing director of CWCapital’s FHA platform, credits the increased production, in part, to the flexibility of FHA’s construction programs. “The FHA construction program is more accommodating than construction programs typically offered by banks. There is generally no personal recourse and the LTVs are significantly higher, making it an appealing option.”

Michael Berman, president and CEO of CWCapital, added that the experience of CW’s lending team and the depth of their platform also played a key role in the growth in construction loans. “We’ve been pleased to see this increase in construction lending through our FHA platform. We believe, based on the current lending environment, it will continue into 2010. These are often complicated transactions and borrowers are looking for lenders with a deep understanding of the program parameters and a strong working relationship with the regional FHA offices, which CW has.”

Global Shopping Centre Specialist Expands in Europe and Brazil

Edited: Jennifer Brenner
Source: Sonae Sierra

In the scope of its international growth strategy, Sonae Sierra has just announced the beginning of Parque D. Pedro expansion in Campinas-São Paulo, Brazil, and the agreement with another important tenant for the Adora Mall in Craiova, Romania.

Owned and developed by Sonae Sierra, Adora Mall will represent the main shopping and leisure attraction in the city of Craiova with 59,000 m2 of GLA, 190 shops and 1800 parking spaces. Sonae Sierra has also recently inked an agreement for the presence of Cinema City for a 3,000 m2 theatre in the region. With more than 60% of its GLA (Gross Lettable Area) already pre-leased, Adora Mall will offer a unique combination of shops, services and entertainment for the biggest city in the south-west region of Romania, Oltenia.

The architecture of the new Shopping Centre is inspired by the Four Seasons, due to its location next to the landmark of the city, the Romanescu Park. Its architecture and decoration, will recreate nature in its different stages, reproducing different phases and images of the flora, which together recreate the feeling of nature's environment in each of the four seasons.

Located in the Central-Southeast area of town, facing one of the main streets in the city and connected to the Romanescu Park, Adora Mall has a privileged location in terms of access roads, and will serve a population of 420,000 inhabitants in its catchment area within a 30 min. distance.

Sonae Sierra Brazil also just announced the beginning of the expansion work of Parque D. Pedro Shopping, in Campinas, state of São Paulo. The € 9.1 million (R$ 23.6 million) investment will create a new area in the centre, containing 34 new shops in 5,400 m2 of GLA (Gross Lettable Area). The conclusion of this important expansion is scheduled for November.

The expansion of Parque D. Pedro is part of the strategy defined by Sierra Brazil for 2010, with a total of € 116 million (R$ 300 million) in investments, this year alone. "That value includes the expansion of Shopping Metrópole, in São Bernardo do Campo (SP), and the first construction stages of three new developments located in the states of Paraná, Minas Gerais and Goiás", explains the CEO of Sonae Sierra Brazil, João Pessoa Jorge.

The main innovation in architectural terms is the new Alameda Parque D. Pedro which is a new and totally innovative concept in the shopping centre industry in Brazil, since it's based on the architectural diversified solutions of the shops' façades. The architecture of this new area enables tenants to tailor, from pre-established criteria, brand implementation on the façades of their stores. Different levels in shop windows will lend the new space the look of a charming, open-space boulevard. Further to that, the landscape project includes exuberant plants and water mirrors, so that visitors can enjoy the experience of outdoors shopping, in a modern, attractive, and sophisticated environment.

Parque D.Pedro Shopping, inaugurated in March 2002, is one of the largest shopping centres in Latin America, with 389 shops and about 120,000 m2 of GLA. In 2009, Parque D. Pedro welcomed more than 20 million visits.

Sonae Sierra is an international shopping centre specialist. The company owns 52 shopping centres in Portugal, Spain, Italy, Germany, Greece, Romania and Brazil, with a total Gross Lettable Area (GLA) of more than 2 million m2. Currently, Sonae Sierra has 2 projects under construction and 10 new projects in different phases of completion in Portugal, Italy, Germany, Greece, Romania and Brazil.

Global Occupancy Report: London’s West End Remains Most Expensive Office Market

Edited: Jennifer Brenner
Source: DTZ

London’s West End is once again the most expensive location in the world to occupy office space, according to DTZ’s latest Global Occupancy Costs survey. Ranked fifth in last year’s survey, London’s West End has taken the number one spot, displacing Tokyo. It also jumps above Paris, Dubai and Hong Kong, which were ranked second, third and fourth. Paris and Dubai have now fallen from the top five to take sixth and eleventh place respectively, whilst Hong Kong stays put in fourth place.

The West End’s rise is due to it experiencing a short, sharp rental correction in 2008. This is in contrast with the other top-four locations, which saw their rents decline during the course of 2009. Overall, all the top ten global locations experienced either negative or neutral growth in occupancy costs during 2009.

The report, a guide to total office occupancy costs across 116 business districts in 47 countries and territories, is DTZ’s 13th annual survey and assesses the main components of occupancy costs in major office markets across the globe, ranking each location based on annual costs per workstation.

New entrants to the top ten
Emerging as new entrants within the global top ten were Zurich, Boston and Frankfurt, which ranked eighth, ninth and tenth respectively. The shift in position of these markets was due to more moderate rental decline in comparison to other locations.

Biggest fallers
A number of locations became much less expensive. Paris and Dubai dropped out of the top five in the global ranking, whilst Moscow became even more affordable after it shifted from 11th to 36th place.

However, the sharpest falls within the global ranking were recorded in those markets which have seen significant rental growth in recent years, most notably Singapore and Kyiv (Kiev), which both saw occupancy costs plummet by 51% year-on-year (in local currency).

Singapore felt the impact of the global economic crisis particularly badly, as weak occupier demand collided with a substantial amount of new supply to drag down rents and thus total occupancy costs. In Kyiv, demand for office space was severely impacted by the global recession, with take-up in 2009 less than half the volume recorded in 2008. Nevertheless, despite weak demand, the office market in Kyiv remains structurally undersupplied.

Karine Woodford, Head of Real Estate Strategy at DTZ, comments:
“In the current market, new occupiers will benefit from a wider and better pool of properties to choose from. As occupancy costs in prime locations become more affordable and space more available, a larger number of occupiers will be able to consider buildings in prime locations. Indeed, the silver lining for tenants actively looking for office space is that they may find rents quickly dropping to levels they cannot resist. With falling rents and more supply to choose from, the office market will offer tenants real value for money in the current climate, and we may see multi-national companies taking advantage of this shift and relocating their operations accordingly.”

Looking ahead to 2013
DTZ Research has started forecasting occupancy costs for the first time to assist clients in their longer term planning. Growth in occupancy costs is expected to be relatively muted over the 2010-13 forecast period, in contrast to the strong growth in occupancy costs experienced in recent years. This reflects the global economic outlook which is impacting on firms’ hiring decisions and consequent demand for office space, resulting in weak rental growth in the near term.

DTZ forecasts indicate that Asia Pacific will experience the strongest growth in occupancy costs over the next four years as the region’s economic growth is expected to continue to surpass that in Europe and the United States. The region features three of the world’s top five fastest growing markets in terms of occupancy costs per workstation – Hong Kong, Guangzhou and Bengaluru, which are expected to grow by 8.82%, 4.84% and 4.36% respectively between now and 2013 – with Hong Kong predicted to emerge as the most expensive location in Asia-Pacific, as supply constraints drive increases in rents.

London’s West End market is, however, expected to remain the world’s most expensive location in coming years, with Hong Kong, Tokyo, Washington D.C. and Paris (CBD) rounding out the top five by 2013. The steepest declines in occupancy costs over the forecast period (2010 – 2013) are expected in Singapore (-1.8%), Chennai (-1.4%) and Glasgow (-0.6%), with the declines being anticipated during the first half of that period.

Tony McGough, Global Head of Forecasts at DTZ, comments:
“While costs are forecast to be broadly stable on average, there is significant divergence within the regions. In Europe, most markets continue to see falling or stable costs; however the volatile London City market is expected to see a strong bounce back in occupier costs during 2010 due to a lack of supply and a returning demand for space running counter to the broader European trend. Singapore continues to be impacted from a huge influx of new supply leading to further rental declines, and thus lower occupancy costs.”