Archives for April 2019

Let’s face it. Those who manage brokerage firms understand that commercial brokers can be recruited, trained, and turned into productive assets for a period of time—and then they leave. Maybe your firm has lost brokers to other roles within the real estate industry: development, asset management, in-house real estate director jobs, or even a competitor. There is no easy way to make the process smooth and painless, but preparation, planning, clear policies, and—of course—a clear termination procedure, can help. Losing a key producer is never good news, so as a manager/owner of a brokerage firm, it is important to have well-thought-out documents and processes in place, so you are not faced with documenting the termination “on the fly,” at a time when you may not be at your best.
There are several components to carefully prepare:

1. Employment or Independent Contractor Agreement (ICA): Most states’ broker license acts require the existence of such a document. This is in the hope that a well-written agreement between the brokerage firm and its sales professionals will reduce the chance of disputes over compensation, at least during the term and hopefully after the affiliation ends.
2. Confirm that your ICA:
   1. Incorporates the company’s policies and procedures;
   2. Addresses termination;
   3. Refers to and incorporates the company’s termination policies and procedures; and
   4. Requires a post-termination agreement, addressing how commissions and other compensation are shared post-termination, including:

i. Who “owns” current listing and representation agreements;
ii. Who owns undocumented client and customer relationships;
iii. How work and compensation for transactions will be shared (if shared); and
iv. Equally important, which party is entitled to share in future commissions arising from transactions closed during the period of affiliation.

This last component can be a thorny issue. If your departing sales professional earned fees (shared with the firm) on a lease, is the departing salesperson entitled to share in commissions paid for lease renewals and extensions, lease expansions, even purchase of the property by the tenant if there was a purchase option contained in the lease?
This is why it is important to address—in your firm’s policies, procedures, and termination agreement—which party is responsible for naming/identifying these deals or potential deals/commissions, and most important, which party owns the right to commissions which are not identified in a termination agreement, a so-called “default” provision. That way, if a transaction, commission, and/or a future commission which arose from an inchoate right (the so-called “future commissions”) should fall through the cracks, your policy determines which party is entitled to the commission.
In my experience, the departing salesperson usually has the best information on deals in his or her pipeline. This information could include valuable insight on existing client and customer relationships, listings, or representation agreements he or she has been seeking. It makes sense that, prior to the departing salesperson having a right to share in the fee, companies should include a condition in the termination agreement that charges them with the duty of identifying prospective opportunities in the termination agreement as a condition precedent to that departing salesperson having any right to share in that fee.
Brokerage firms can help themselves by taking the initiative to identify these future commission opportunities as well. The firm should know or be able to list/identify all past commissions paid, as well as the transactions from which the fees came. The firm should also have access to—and the right to see—all of the salesperson’s correspondence, emails, and files. A review of that information should take place before the termination agreement is finalized.
I’ve heard it said that there has never been a real estate broker who did not leave one firm for another without a deal or two in his or her vest pocket. This is not repeated to malign any person or any firm; some just say that “it’s the nature of the beast.” Remember, however, that very few terminations or departures are 100 percent mutual and totally amicable. Indeed, the departure is usually stressful to one or both parties, especially if it is not mutual.
What are the takeaways from the column? Do you have:

1. A well drafted ICA?
2. A clear set of policies and procedures addressing termination?
3. A form of termination agreement that MUST be fully executed to protect both parties?
4. Language within that termination agreement that clearly states which party owns unnamed deals or opportunities?

More than one or two of you have likely spent time and money litigating issues and commission claims that could have been—and should have been—foreseen and addressed in your firm’s policies. The time and money spent on addressing the breakup even before the relationship begins is time and money well invested. Neil Sedaka was right. Breaking up is hard to do.
By: Jim Hochman (SIOR Report)
Click here to view source article.

The general consensus among commercial real estate professionals is that the economy has peaked—or, at the very least, has slowed its record roll. Now, before you go running to your bank with thoughts of stuffing your capital in your mattress, there’s a big difference between “passing peak” and “plummeting prices;” the same consensus dictates that the record-setting upcycle still has room to run.
All that said, investors are holding their water a bit longer to find deals that are closer to a slam dunk, which has major implications for leasing and investment brokers. “Success in today’s market means thinking outside the box,” says Mark Kolsrud, SIOR, Minneapolis-based senior vice president of Colliers International. “For investors, that might mean looking at product you might not have looked at before. It might mean looking at it in a new and different way, at the trajectory of income in a way that your competition isn’t seeing.”
That new way of approaching transactions is a lesson for investors best taught by their brokers, as Brad Kitchen, SIOR, president of Alterra Real Estate Advisors in Columbus, Ohio, explains. “The first step is to take into account the comfort level and the risk-tolerance of the client,” he says. Within those hard-and-fast guidelines, “we have to get creative sometimes to make a deal work.”
“We’ve represented investors whose price range made finding properties a challenge,” Kitchen continues. “If they’d expand that range by a few million dollars, we could find something that would fit their requirements.” It’s not a scenario that commonly flies, so that’s when the creative juices have to start flowing.
“Sometimes you have to structure the deal to make it work with the equity the buyer has available to them,” he says, “either through some seller financing or through a structured or mezzanine-debt scenario.” Introducing the client to the possibility of partnering in a syndication is another option for accomplishing their investment goals.
Jeff Castell, SIOR, executive director of Cushman & Wakefield in Indianapolis, agrees with the importance of focusing on client need. “It all starts with understanding the client’s investment objectives,” he says. “You certainly can’t take a one-size-fits-all approach. Once we have the deep understanding of the client’s investment objectives, we can produce a customized strategy based on the belief that every asset or group of assets is unique.”
Therefore, he continues, a customized plan has to fold in such specific considerations as “market conditions, capital flows, and local intelligence, and then that needs to be balanced against emerging trends.” The result, he says, is a holistic approach tailored to the client and the need at hand.
He provides the example of an offshore client of the firm planning a cold-storage facility in the East Indianapolis industrial submarket. A colleague called Castell and told him that the CFO was “getting ready to develop a 430,000-square-foot cold-storage distribution center on 45 acres. He said they had a third-party provider who had offered to build and operate it for them and charge them rent established by a yield of X on the cost, and they wanted to know if that made sense.”
The answer, he said, was no. In fact, the price was at a significant premium to where they should be, given local market conditions. “We told them that if they could afford us a little flexibility, they could construct this facility themselves, and we could sell it in the market at cost to an investor willing to accept the lowest return,” he explains. The result was a savings of “tens of millions of dollars,” Castell says.
“The CFO allowed us to educate them on current market trends,” he explains, “including the current, voracious appetite for long-term net-lease assets and the abundance of capital in the market. So we were able to drive the yield down about 350 basis points below where he was originally quoted.”
Similarly, one of Kitchen’s recent transactions began with a seller focused on an inflated number. He cites a recent warehouse sale in which the seller had his eye on a certain price “much higher than the rent justified. So, we had to create a structure that enabled the seller to get their price, the buyer to achieve their return, and make it financeable. We ended up doing a master lease with a prepaid component and a lease modification to make it work better for the buyer, and so the seller could get his higher price.”
For Kolsrud, a sample of out-of-the-box thinking comes in the form a new twist on the tried-and-true SIOR practice of partnering up. “A broker friend of mine [Gerry Norton, SIOR] had a relationship in a Central Iowa building,” he relates. “The owner/user wanted to monetize the asset and was looking for an investor, so they reached out to me.”
The colleague is primarily a leasing broker, while Kolsrud and his six-person team are investment sales specialists. “We collaborated and received 12 offers,” he says, ultimately choosing an institutional capital group “that otherwise wouldn’t have found that transaction.” This means that the seller wouldn’t have found that buyer, “and we would have left money on the table if we had only limited ourselves to the local market.” The 411,294 square foot industrial asset went for just over $21 million.
Sound self-evident? Such nuances make the difference between success and failure, says Kolsrud, especially as the market rolls into its late-stage cycle. “We’re probably post-peak now in some markets,” he says. “We’re not in a freefall, but we are seeing some diminishing interest in certain product types, especially assets like suburban office with no amenities.” In such cases, he says, even in properties with a solid tenancy, “we’re still seeing cap rates rising 200 bps.”
You can add some growing hesitation on the part of lenders who “aren’t as willing to loan as aggressively for certain product types,” he says. “And, of course, the interest-rate environment has taken some of the shine off cap rates generally.”
Kitchen agrees. “Investors are scrutinizing deals a little more closely,” he says, “because we’ve been in such a long expansion cycle, and they don’t want to get caught in a slowdown now. So they might be thinking twice about taking quite as much risk as they might have over the past three or four years.”
He adds another reality of this late-stage scenario: inventory: “There seems to be fewer products to buy at a reasonable price. So you do have to get a little more creative to either find more properties or appropriately structure the ones that you’re working on, due to the lack of supply.”
Yes, says Castell, there’s tighter inventory, but he’s not buying into the thought that an economic downturn is driving the need for more creativity in client relations. “Market participants, prognosticators, and pundits seem to agree that we’re late in the cycle,” he says. “Nevertheless, demand characteristics have created a supply shortage or imbalance, and we’re projecting that industrial rent growth in 2019 will be something on the order of 4.5 percent.
“So while we may well be late-cycle,” he continues, “there are other characteristics that influence market activity. I’d suggest that creative approaches to our clients’ needs are applicable irrespective of the market or cycle we’re in. Markets are always consistently competitive, and everyone is looking for that edge.”

No matter what happens with the upcycle over the coming year, the ability to get creative in shaping deals is a major competitive advantage. “Rather than simply saying, ‘we can’t find anything that suits your needs,’” says Kitchen, “we’d rather say, ‘Let’s try to figure out a way to get this done.’”
Differentiating yourself through partnerships with SIOR members beyond your sphere of expertise “makes a huge difference,” says Kolsrud. “I’ve found a great deal of success teaming with local experts and combining our different expertise to different markets, especially today when so much more institutional money is used pursuing small-market and smaller credit type transactions. But they don’t have the resources to go to every market and develop relationships with every broker and understand every tenant. That’s a perfect scenario for two SIOR partners to share their expertise.”
And then to serve, as Castell concludes, “as educators.”
By: John Salustri (SIOR Report)
Click here to view source article.

The last quarter of 2018 registered a solid increase in the volume of sales transactions in LCRE markets, closing the book on the year on a high note. Investment volume in the large cap space totaled $160.0 billion during the fourth quarter, a 20 percent jump from the same period in 2017, according to Real Capital Analytics (RCA). Deal volume advanced for all property types, except development sites.
In tandem with the broader investment trends in LCRE markets, small cap markets experienced a solid fourth quarter of 2018, with investors focused on growing local economies and markets. Sales in SCRE markets increased by 2.3 percent from the same quarter in 2017.
Download the full PDF here.
By: NAR
Click here to view source article.

All across time, transportation has stood as a major factor in shaping civilizations. A culture’s mobility effects not only the daily lives of those who live there – but also the region’s contextual building plan.
In our ever-advancing global society, new technologies are completely reshaping metropolitan and suburban design schemes. These trends extend all over the world, ushering in a massive industry-wide effort aimed at adapting to meet mobility’s new slew of demands.
The expanded array of vehicles intrinsically tie into the sphere of CRE, as they require specific accommodations, storage, and parking facilities. The current trends and technologies affect the planning and development of modern multifamily, office, and retail sectors.

Decentralized Parking

As of now, cities and popular areas have a high concentration of parking facilities. In both downtown and residential areas, it’s necessary for ample parking to be available and easily accessible for visitors, employees, and residents. However, implementations for autonomous vehicles are adamantly changing this reality.
Autonomous vehicles don’t need to be parked nearby the destinations. This means CRE will undergo a huge shift as large openings of potential downtown spaces provide for constructive and cultural opportunities.
All in all, experts are predicting a 90% decline of the current parking inventory in the next 15 years with a total of 6,500 s.m. of affected properties.

A Decline in Car Ownership

In today’s society, getting around is easier than ever. Mobility techs such as Lyft and Uber reduce the need for individuals to purchase and own cars, as commitments are becoming increasingly unnecessary for transportation.
In 2018, Uber’s former CEO Travis Kalanick told the World Economic Forum that “People will not own cars, they’ll have a service that takes them where they want to go.” Kalanick believes that personal car ownership in major cities will be generally extinct by 2025.
This high level of convenience delivered by ride-sharing companies is changing consumer behaviors across the board, which inadvertently effects CRE. Residential parking needs are expected to decline, and urban parking schemes will also feel the heat.

High Risk for Gas Stations

As electric vehicles continue to expand mobility, properties utilized for gas stations are at high risk. At the same time, a new frontier for CRE to explore will be electric-charging stations.
Experts in the field anticipate 140,000 US gas stations will become obsolete, but many of them will be transitioned into self-charging stations to fuel the future’s transportation module.
Aside from EV, the culture of ride-sharing reduces the utility of roadside shopping. Travelers who are simply entering in their destination are less likely to stop at strip malls, city centers, and other roadside destinations. These areas offer massive potential for CRE repurposing projects.

Reconsiderations in Lot Design

In order to keep up with the times, parking lots need to accommodate AV and EV. CRE will need to be renovating lots and ensuring that the flow, transitions, and spaces will be able to function according to the maturing mobile scene. Charging stations and autonomous sectors are basic requirements moving forward.
By: NAI Global
Click here to view source article.