Archives for June 2019

Industrial has been one asset class in the commercial real estate industry counted on for continued growth over the last several years. Supply, try as it might, has not been able to catch up with demand that has been fueled by soaring e-commerce activity. However, that may change in the next three years, according to a new report from Deloitte Insights.
It is predicting that demand growth will fall below 1% annually due to increased availability and higher cost of capital.

Cost of Capital

Although the Fed has signalled it is taking a pause with raising interest rates, it is widely expected, including by Deloitte, that there will be an increase in long-term rates as financial markets return to “normal” conditions. Deloitte is predicting that the cost of capital will increase from 5.1% at the end of 2018 to 6.4% by 2023.

New Supply

Deloitte’s model also shows demand growth tapering because the availability rate will likely rise from 7% in 2018 to 10.3% by 2023, largely as new industrial space becomes available. For instance, from 2019 to 2020, an additional 510 million square feet of new industrial real estate space is expected to enter the market, outpacing the 421 million square feet of expected additional demand, Deloitte says.

Other Developments at the Margins

In addition, alternative supply is coming online from a variety of sources, Deloitte says. “Some owners are repurposing vacant or near-vacant nonindustrial real estate spaces to provide more options for renters seeking warehouses in closer proximity to consumers….Retailers are converting stores into smaller showrooms and using the additional space as small warehouses for faster fulfillment [while] owners of some older office buildings are also converting vacant spaces into industrial real estate. The adaptive reuse extends to underutilized parking lots and garages and even erstwhile churches.”
And as with many other CRE asset classes, technology is beginning to have a disintermediating influence on industrial demand with many on-demand warehousing startups, such as Flexe and Flowspace, aggregating underutilized industrial real estate spaces to fulfill seasonal warehousing needs.

What Can Landlords Do

Deloitte has some advice for property owners that may be caught short by these changing fundamentals. Better use of technology is one—owners can now leverage newer data sources and analytics techniques to make smarter location decisions, Deloitte says.
“They could combine information about traditional factors with geocoded data points on regional online sales, consumer lifestyle and behavior, and traffic movement. Then, they could use analytics to understand the impact on the warehouse market and build algorithms to predict alternative future scenarios. Owners need not do this alone and can enlist the help of specialist vendors who offer data and analytics capabilities. For instance, firms like eSite Analytics and Esri use spatial analytics capabilities to provide diverse location-based data sets and predictive analytics capabilities to help with sales forecasting, customer profiling, and ensemble modeling.”
Other suggestions include developing smarter facilities to align with changing tenant needs—such as by providing connectivity within and outside their facilities and making spaces conducive to robot movement—and by improving efficiency within the warehouse to manage rising costs.
Read more about these trends in our slideshow above.
By: Erika Murphy (GlobeSt)
Click here to view source article.

New Mexico lawmakers came very close to legalizing the recreational use of marijuana in 2019. Just four senators’ votes stood in the way.

But that could change in 2020. Gov. Michelle Lujan Grisham is planning to put cannabis back on next year’s legislative agenda. If it passes, a new reality filled with unknowns will confront business leaders.

With the drug’s use still prohibited under federal law, legalization would compel companies to decide which law, state or federal, to follow. Attorney General William Barr has asked Congress to solve this dilemma by eliminating all discrepancies between the federal and state statutes. We’re cautiously optimistic that this will happen, but the dilemma will still be with business leader as we wait.

Another question yet to be settled has to do with workplace drug policies. If New Mexico were to greenlight recreational marijuana, would zero-tolerance policies still be legal?

Currently, a 2016 decision by the U.S. District Court of New Mexico indicates that employers may not be forced to violate federal law and could therefore set such zero-tolerance workplace policies. This could change if the federal government de-classifies marijuana or re-classifies it as something other than a Schedule I controlled substance.

But the number of workers able to pass a drug test is shrinking, and a zero-tolerance policy could narrow the list of qualified candidates. Companies have begun relaxing their marijuana policies in response, even as studies cited by the National Institute on Drug Abuse suggest a higher risk for injuries and accidents among users.

This raises another question. If an employee were to have an accident at work, test positive for THC and get fired, would the business owner have to provide unemployment benefits? The answer isn’t clear.

And what if a business owner were to suspect an employee of coming to work high? There’d be no reliable way to prove it, since our current testing isn’t able to detect marijuana impairment.

If New Mexico does legalize recreational marijuana, the new law is likely to answer some of these questions. Others will get sorted out in the courts, but the process could take years. In the meantime, here are some things that businesses can do to start preparing, just in case.

Craft a clear, defensible drug policy. Work with your employment attorney to develop a policy tailored to your specific business needs and operations. For instance, you may need to set stricter policies if your business has significant transportation or safety risks, or relies on federal projects and dollars. A cookie-cutter policy won’t do, especially as federal, state, and local laws are likely to change in the coming years.

Ask your attorney for guidance on the proper way to train and notice employees on these types of policies. And have the attorney review and update the policy annually, as laws will continue to change both in the state and in Washington, D.C.

Look to the 2019 act for clues. You’ll find the full text of HB 356, the Cannabis Regulation Act, at nmlegis.gov. Pay special attention to Section 24, which addresses employers’ rights and obligations. While next year’s legislation could be different, the act will give you a feel for the issues.

Stay informed. The legal landscape for marijuana keeps changing, and what you don’t know could hurt your company. For updated information, subscribe to the marijuanareport.org.

By: New Mexico Mutual (ABQ Business Journal)
Click here to view source article

How to build a model for the hold-versus-dispose decision.

A real estate investor, after acquiring an asset, must constantly make decisions during its ownership cycle. Issues such as property management, tenancy, and capital expenditures require attention and  careful consideration.
Throughout ownership, an investor must always weigh the benefits, costs, and opportunities of holding onto or disposing of a property. Saying “buy low and sell high” sounds like a recipe for success, but it’s nearly impossible to time the market to sell an asset in its most favorable conditions.
There is a process, however, that can help investors create a decision matrix to fully understand hold and dispose alternatives, along with the benefits of each avenue.
First, the investor must understand what is foregone by holding an investment. In other words, if the investor sells for cash, how much could then be placed elsewhere? This cash flow is the investment that remains in the decision to hold rather than sell the investment. To accurately judge its performance from this point forward, the investor must consider this amount as the initial investment.
Investors often make the mistake of judging a property based on its original investment, without consideration for the change in value over time. For example, say an investor acquired a tract of land for $500,000 cash 10 years ago that is now worth $3 million. The investor must consider the sale proceeds after tax from a cash disposition as the amount invested when deciding whether or not to continue owning that asset. Rather than having $500,000 in the land, the investor should make decisions based on $2.5 million as the investment amount. This calculation is the sale price minus the taxes on the long-term capital gain.
This alternative-use money is called the “investment base,” because it is used to examine your options to sell the property. Every investment alternative has an investment base. To quantify it, ask the question, “If someone chooses this alternative, how much money is that investor giving up the right to use in another investment?” This investment base can then be used to measure an investment’s performance from that moment forward.

Investment Base for Hold Alternatives

The investment base of the continue to “hold as is” alternative is the sale proceeds after tax realized if the property were sold for cash at the decision point.
This investment base is calculated as follows:

The money left invested becomes the cash flow for the end of year zero. Both the projected annual cash flows after tax and the projected sales proceeds after tax at the end of the holding period are the future after-tax benefits received from continuing to own the property. The investment performance of the “hold as is” alternative can then be measured by calculating the after-tax internal rate of return (IRR).
Another hold alternative is to retain the investment but to refinance and place some or all the refinance proceeds in another investment. This would reduce the investment base in the “hold and refinance” alternative.
This figure is calculated as follows:

The money left invested after pulling out the net loan proceeds of the refinance becomes initial investment. The after-tax benefits received are: 1) the projected annual cash flows after tax with the new loan in place and 2) the projected after-tax sales proceeds once the new loan balance is paid off at the end of the holding period. The investment performance of the “hold and refinance” alternative can then be measured by calculating the after-tax IRR.

Investment Base for Dispose Alternatives

To calculate the investment base of a potential sale and reinvestment in a new property, first calculate the available sales proceeds after taxes from the current investment. The investment base for the “sell and buy” other real estate alternative then will be the sales proceeds after taxes from the current property plus any cash added to purchase the other real estate investment, less any cash taken out from the sale of the current property.
The “sell and buy” investment base is calculated as follows:

The investment base for an exchange into the newly acquired property real estate is similar. The sales proceeds after taxes from the sale of the current investment plus any cash added in the exchange, less any cash taken out during the exchange is the investment base for this alternative.
The “sell and buy” investment base is calculated as follows:

In addition to IRR, these hold-versus-dispose alternatives can be compared using net present value and capital accumulation. The future capital accumulation and the net present value for each alternative can be calculated using the projected cash flows and sales proceeds from each alternative and then applying the appropriate reinvestment or discount rates.
By: Joseph A. Fisher (CCIM Institute)
Click here to view source article.