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While commercial real estate has occasionally lagged behind other business sectors in use of emerging technologies such as three-dimensional virtual reality environments and real-time data mining, panelists at the ULI Fall Meeting said such advances promise to reshape how developers and property managers function.
“Developers haven’t traditionally allocated budget for software,” said panel moderator Jared Kushner, founder and chief executive officer of New York development firm Kushner Companies. “But now it’s exploding.” Kushner said he recently donned a helmet made by Oculus VR, a cutting-edge virtual reality gear maker acquired by Facebook, to take a virtual-reality tour of Related Companies’ Hudson Yards development. “It made me dizzy,” Kushner noted, “but it was cool.”
To executives accustomed to thinking of their business as bricks and mortar rather than data, such technology might seem like just a novelty. But Dave Eisenberg, founder and chief executive officer of 3-D modeling firm Floored, who convinced Kushner to put on the helmet, has closed 80 engagements this year with developers who see the value of being able to visualize and even explore projects before they are built. Eisenberg said his company’s software, which converts 2-D plans into a 3-D environment, allows viewers to look at everything from window views to how different sorts of flooring and ceilings would look. He said the software can even allow developers to see which trees could be put in landscaping.
Eisenberg said that while such emerging technologies “can go down a rabbit hole of being cool for cool’s sake,” a strong case can be made that 3-D visualization will make for better projects and control costs because design flaws can be spotted and fixed in advance. But it also promises to boost leasing velocity because it enables tenants to see how they would fit into a space and to adapt it to suit their requirements. “Shouldn’t every leasing presentation in the future be customized to the tenant you’re talking to?” Eisenberg asked. “These are things you can do with virtualization.”
Riggs F. Kubiak, founder and chief executive officer of Honest Buildings, touted his company’s web-based marketplace for various construction specialties, ranging from electrical contractors to structural engineers, which has been called a cross between Linkedin and Yelp for building professionals.
Kubiak said the site, which allows developers to find contractors who worked on various buildings and evaluate their backgrounds for relevance to a new project, has the potential to dramatically reduce costs as well.
“If I’m looking for an architect with experience in ground-up lobby work and renovation in Brooklyn, I can find him,” Kubiak explained. “I can make a decision based upon the relevant experience of that team.”
Honest Buildings’ database, which lists 10,000 contractors in the New York area, uses publicly available data from permits and other sources to build out the profiles. “We can see a very rich project history,” Kubiak said. “You also get price intelligence and efficiency. . . . We’ve really rethought the way decisions are being done.”
The site is valuable to contractors as well because it enables them to gain the attention of developers with whom they have no previous history. “Vendors have one thing in common,” Kubiak said, “they want to do interesting projects. But it’s challenging to get in front of those decision makers at a time when the decisions are being made. The vendor community spends time trying to access relevant deals. . . . But now they also can pick the owners they want to work with.”
Another company with game-changing potential is Hightower, which provides a platform allowing property managers to track marketing and leasing efforts in real time across their entire portfolios. Founder and chief executive Brandon Weber said the real estate industry was ripe for disruption because many firms still struggled to manage such data with simple tools like Excel spreadsheets. As a result, relevant data became trapped in the computers of local managers, and top executives were unable to see across the enterprise to analyze trends and look for problems or potential advantages.
But with Hightower’s product, executives can spot relevant data easily. “Why is this building getting 30 tours a month while this one is only getting 15?” Weber said. “You’ll be able to see that.”
Hightower tracks everything from proposal terms to demand and inventory. “We think of real estate as a data-driven industry that doesn’t know it yet,” he said.
In addition to software, hardware also can confer a crucial advantage, said Arie Barendrecht, founder and chief executive officer of WiredScore, which evaluates buildings for the quality of their internet connectivity and confers ratings that prospective tenants can use as a guide. Barendrecht noted that many property owners knew surprisingly little about their fiber-optic infrastructure and its possible weaknesses. “They don’t know the carriers, they don’t know the location of the fiber,” he said. “One landlord thought he had fiber in his building, but it turned out that it was out in the street.”
Barendrecht said property owners could turn strong connectivity scores into a marketing inducement because tenants know it makes a critical difference in workplace productivity. WiredScore also has migrated into the consulting business. Owners “are realizing, ‘Our connectivity sucks. What can we do?’ So we’ve created an advisory function.”
By: Patrick J. Kiger (UrbanLand)
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On the surface deflation sounds wonderful. Rather than rising prices, deflation results in declining prices. In this way, purchasing power rises, effectively giving everyone a pay raise. Better yet, deflation is accompanied by near zero interest rates making borrowing cheap. What on Earth could be better! It turns out, almost anything.
When people expect falling prices, they wait as long as possible before making large purchases, such as a car or a house because the longer you wait the cheaper the item becomes.   Similarly, deflation breeds a strong desire on the part of households and firms to hold cash as it continually appreciates. By contrast, inflation creates an incentive to spend since cash falls in value over time.
Deflation is not simply falling prices, which can be good, but is also characterized by falling wages, not so good. In a deflationary environment, due to a lack of demand for goods and services, firms fight for market share by slashing prices. By doing that, total revenue falls, forcing firms to pay workers less. However, since reducing wages of existing employees is hard, companies first hire fewer workers, then lay workers off, which leads to stagnant wages and eventually rising unemployment, which forces workers to accept lower wages.
Deflation also creates a reluctance to borrow, since loans have to be repaid in future dollars that are worth more than those borrowed. Think about it – if you have a mortgage payment that is $750/month and inflation is 4%/year and your income keeps up with inflation, your mortgage payment becomes a smaller and smaller percentage of your monthly income. But if deflation is 4%/year and your income falls by that amount each year, that $750 mortgage payment can quickly loom large and dramatically crimp spending.
As a result, borrowers find that the real amount of their debts rise over time. In response they save more to compensate and in the process spend less. Of course, lenders are better off, but they do not increase their spending by as much as debtors decrease theirs. As a result, overall spending levels decline more.
Exacerbating this problem, in a deflationary economy banks have little incentive to lend, as the only way to entice borrowers is to offer negative interest rates. But in this case, the more banks lend, the more they lose. As a result, banks do little lending, firms struggle to grow and many of both fail, causing wages to fall. In the end, consumers buy little more than essentials and everyone holds on to as much cash as possible. Not a pretty picture.
Lastly, deflation makes it essentially impossible for central banks to set interest rates low enough to stimulate demand. While central banks can set rates at 0%, it’s hard to get below zero. With inflation of 3%, a zero interest rate is a -3% real interest rate. But with -1% deflation, a central bank would have to offer an interest rate of -2% to achieve the same -3% real interest rate. While theoretically possible it’s impossible in practice.
Because of chronic falling wages, reduced spending and limited lending, deflation is something to be avoided. Once it takes hold, it’s inordinately difficult to get rid of. Japan has been struggling with deflation for decades and is now employing desperate measures to eliminate it, with limited success and high costs. We don’t want to wind up like Japan.
Have a wonderful holiday season and see you in January! (Remember, I will not be writing an article in December).
Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70 word economics and policy blog can be seen at www.econ70.com.
By: Elliot Eisenberg, Ph.D. (GraphsandLaughs)
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These growing hubs of economic activity aren’t just for tourists and transit anymore.

Once viewed primarily as gateways to cities, airports have emerged as economic engines in their own right—and are fueling rapid commercial and residential development in many parts of the world.
That assertion comes from Prof. John D. Kasarda of the University of North Carolina, who during a Nov. 9 session at the REALTORS® Conference & Expo in New Orleans pointed to a host of data about the impact airports are having on global commerce as evidence that “location, location, location” has given way to a new axiom: “accessibility, accessibility, accessibility.”
“If you think of an airport as transportation infrastructure, you’re so twentieth century,” Kasarda said. “The three As have replaced the three Ls in real estate.”
As Amazon.com and other companies increasingly rely on “just-in-time” models to move high-value goods and time-pressed executives place a high level of importance on the ability to efficiently travel between business centers, airports are serving as the cores of fast-developing commercial and residential zones that are giving traditional metropolitan centers a run for their money, said Kasarda, director of the Center for Air Commerce at UNC’s Kenan-Flagler Business School in Chapel Hill, N.C.
Airports are attracting companies that want quick access to air transportation, which in turn is pushing up demand for office space in those areas, Kasarda said. Demand for residential areas located near big airports, such as Dallas-Fort Worth and Washington Dulles international airports, is also strong, spurred by employees of companies with nearby operations who want to live close to work.
Kasarda uses the term “aerotropolis” to explain the phenomenon of population and business centers anchored by airports. “New urban forms are evolving as a result of these airports being business magnets and, in some cases, economic catalysts,” he said.
Kasarda also noted that the sheer number of people who use airports has transformed them from transit places to vibrant retail and entertainment centers. Hartsfield-Jackson Atlanta International Airport, for example, serves more people in a typical year than Disney World, Graceland, and the Grand Canyon combined, he said.
This means airport shops often generate more sales per square foot than comparable establishments located elsewhere. Some airports record more revenue from retail activity than from aviation-related operations, according to Kasarda. “They’re becoming urban realms in their own right,” he said. “The city airport is becoming an airport city.”
By: Sam Silverstein (REALTORMag)
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Triple-net leases have their risks, but the biggest investor challenge is simply getting one.
Your client just sold a small apartment building and is weary of the hassles of the landlord experience. While a capital gains hit is looming (tick-tock), the client sours on lackluster alternatives like parking the proceeds in a savings or money market account or risking it in the stock market.

These dynamics are fueling a surge in 1031 exchange buyers—both individuals and institutional investors—who are flocking to triple-net leases (NNN), which have all the perks and few of the downsides of being a landlord. Under the terms of triple-net leases, the tenant pays rent, property taxes, insurance, maintenance, and overhead; typical lease durations are 25 years. These dynamics, commercial brokers report, are creating a demand for exchange properties that they are struggling to satisfy.
The perceived safety of triple nets contributes greatly to their appeal. “Net-lease properties have bondlike attributes and, as a result, are more connected to the bond market and interest rates than other types of real estate,” says Gary Ralston, CCIM, CRE, with Coldwell Banker Commercial Saunders Ralston Dantzler Realty in Lakeland, Fla.
It is these bondlike and passive landlord attributes that make triple-net leases appealing destinations for risk-averse investors—and especially alluring alternatives to 1031 exchange buyers—seeking to defer taxable income. And, as Ralston notes, “Leases in excess of a decade in duration bridge real estate and economic cycles.” And that’s a highly desirable sweet spot for many investors.
The New Residential NNN
Although triple-net leases have been the exclusive domain of commercial real estate, the same low rates of return on fixed-income investments are spurring interest in structuring residential properties as triple-net leases.
Jonathan Hipp, founder, president, and CEO of Calkain Cos. and coauthor of The Little Book of Triple Net Lease Investing, concurs. “There is a tremendous amount of capital sitting out there, and net leases are very attractive when looking at other fixed-income alternatives. A triple-net lease is really a corporate bond wrapped in real estate,” says Hipp.
Ralston cites the 1031 buyer as the biggest influence on the current triple-net market, in terms of demand and pace, noting that 1031 buyers must identify a replacement property within 45 days of the sale of the relinquished property. “Net-lease properties are easier and simpler to underwrite,” says Ralston, largely because the tenant is responsible for most expenses, including, in many cases, the roof and the structure of the building.
1031s Driving Cap Rates South
Geoffrey Faulkner, ccim, managing partner at NNNet Advisors in San Francisco, observes that cap rates are the lowest he’s seen in his career. “At the beginning of the year, everyone was wondering how they could go any lower, and the last two quarters, they have,” he says.
“It’s a tale of two property types. What’s driving cap rates down are the better credit deals with 10 or more years on them,” says Faulkner. “These are your household names—McDonalds, Wells Fargo, Walgreens. (In general, the higher the tenant’s credit rating, the lower the cap rate.) On the other side, deals that maybe have a bit of hair on them, whether it’s a lesser credit deal or shorter lease term, those are trading at a higher premium.”
Faulkner and California brokers are challenged by a lack of supply in part because the state’s NNN product is held by families and trusts. “The better West Coast product rarely trades,” says Faulkner, which means California 1031 exchange buyers are seeking higher yields outside the Golden State. As many as 50 percent of 1031 exchange buyers originate from California.
NNNet Advisors represented a California 1031 exchange buyer in the acquisition of a Christian Brothers Automotive in Sandy Springs, Ga., for $2.5 million. The lease had 14 years remaining on it and terms included a 15-year sale leaseback option. The company also represented the seller of a drive-through Starbucks in Oklahoma City. This short-term lease (three-and-a-half years) fell out of contract a couple of times due to financing. “That’s what dragged out the deal. The price per square foot on a drive-through is very high. We had to comp that out,” Faulkner explains.
“I deal with buyers and sellers all over the country,” he adds, “and they always say, ‘I cannot compete with the California exchange buyer, because they will pay the most because they have to.’ ” Faulkner has noticed that institutional buyers and REITs that historically do not buy below 7 percent have settled for low cap rates. “Lately, I’ve seen them dip into the 6s, because they need to pay a dividend and their overhead.”
Deborah Vannelli, CCIM, director of net-lease sales for Upland Real Estate Group Inc. in Minneapolis, has observed the same scenario. “There have been quite a few 1031s, but even the 1031 buyers, as of late, have been competing with the family trust investors and the institutional buyers, and that’s primarily due to lack of product and demand. The institutional buyers and REITs need to achieve the goals they’ve set for Wall Street.”

Recent deals for Vannelli include a McDonald’s ground lease that the investor acquired from a developer: $1.6 million sales price, with a new 20-year lease that included 10 percent rent increases every five years and a 4 percent cap rate. “It is a ground lease so investors don’t have depreciation, but they definitely do have appreciation of the property, and the building would revert to their ownership at whatever time McDonald’s does not renew the lease. Many buyers prefer ground leases because the price point is lower, since they are not paying for the construction cost of the building. Even though it is a 4 percent cap rate, if they have rent increases every five years, it gives them a nice return overall.”
Vannelli points to the retailer “at the corner of Happy & Healthy” as a benchmark for NNN cap rates. “Walgreens is a good reference point throughout the years,” she explains. “For 20 years the stores have been selling pretty consistently, depending on location or timeline,” says Vannelli. Cap rates for the stores ranged from 8.25 percent to 9 percent in the 1995–1997 era, she notes, with the rates trending incrementally downward since then. The retailer’s high creditworthiness is coveted by triple-net investors, because regardless, the chain will pay its rent. Earlier this year, Vannelli closed a Walgreens with 18 years left on a triple-net lease at a cap rate of 5.85 percent. “Today, Walgreens is trading at a 5.5 percent cap rate. Investors who acquire a Walgreens treat it like a bond with real estate.”
Vannelli confirms that exchange buyers are driving down not only cap rates but also due diligence timelines. The high demand from all buyer types—1031s, family trusts, and REITs—drives higher prices and lower cap rates. Buyers of 1031 exchanges are tax-motivated and willing to pay more aggressive prices to ensure they satisfy their 1031 deadlines. Many triple-net lease properties have multiple offers with the investors offering a due diligence timeline of 14 days versus 21 or 30 days if paying cash for new construction properties. “Deals are closing at near or full asking price,” says Vannelli, “and some sellers will not provide a financing timeline because there are several cash buyers waiting for every 10 buyers that need financing.”
Another recent sale for Vannelli was a Caribou Coffee with seven years on the lease term and rental options with rent increases. The buyer, a 1031 investor with financing, put 50 percent down. “The 6.5 percent cap rate worked because interest rates were low. The investor felt comfortable that the tenant would renew beyond the seven-year term,” she says.
The strong demand for triple-net lease properties keeps Vannelli prospecting—reaching out to developers and tenants she’s had relationships with for the past 10 to 15 years, as well as constantly calling developers of new properties. Not surprisingly, commercial brokers are reporting a lack of inventory. “It’s a seller’s market,” says Calkain Cos.’ Hipp.
Triple-net Fundamentals

• When cap rates decline, listing prices increase
• Cap rates are an inverse measure of risk
• Cap rates track Treasury interest rates
• Longer lease terms mean lower cap rates
• Tenant’s creditworthiness + lease term affect the cap rate

 
A Generational Asset
In June, Calkain Cos. closed a record-­setting lease on a newly constructed CVS drugstore in Tysons Corner, Va. The drugstore chain constructed the building, which sits on one acre of land. “It’s not uncommon for the tenant to build the building to get the depreciation in the triple-net lease world,” Hipp explains. The property was listed in the fourth quarter of 2013, but as interest rates rose, several 1031 buyers’ deals fell apart and the sellers took the property off the market. The property was relisted in early 2014 and garnered 10 offers, which were whittled down to three before the sellers opted for a buyer from the Middle East. The property garnered a staggering $24.7 million, or $1,915 per square foot, a record for CVS drugstores and a record low cap rate of 4.97 percent. “It’s a generational asset,” Hipp explains. This prized NNN will be “passed down to other family members,” adds Hipp, who along with two Calkain advisers represented the sellers.
The CVS deal follows on the heels of a March transaction in which Calkain Urban Investment Advisors completed the sale of the Dupont Circle Starbucks Building in Washington, D.C., a mixed-use net-lease investment, to an institutional private equity group, for $1,672 per square foot and 4.3 percent cap rate, another record low cap rate for this sector.
In Florida, Ralston recently represented a 1031 exchange in which a parcel of family-owned land sold for $3.5 million and the sellers were motivated to avoid a $1 million tax hit. There is an inherently narrow window for these deals, but they are “simple and easy to understand,” says Ralston. “If you live in Florida, you can buy a Walgreens in Texas—you don’t have to see it—and just collect the rent check. All [the buyer] cares about is the rent and how long the tenant will be there.”
Still, triple-net leases are not without risks. For instance, an unfavorable environmental report may sink financing, or a tenant may go bankrupt. But as Calkain Cos.’ Hipp says, “The reason triple-net leases work is you have real companies with credit ratings behind them.” Against a backdrop of those what-if scenarios and a confluence of lack of opportunities and alternative fixed-income investments, the biggest challenge brokers face is finding enough product to satisfy the demand.
By: Paula Hess (REALTORMag)
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