Don Tishman's Real Estate Development and Investing Solutions

Major design changes are taking place as a result of changes in government policy, the economic downturn, credit market crisis, and demographic changes. These effect the design of private developments of retail, residential, and commercial structures.  These changes can not be ignored.

Here is a good example of government policy that can result in huge changes in real estate development. The federal transportation program expires in September. There is a strong movement called Transportation 4 America that is calling for new federal transportation policy that calls for using at least 25% of the highway funds for mass transit. This group has the backing of health, environmental, historic preservation, planning, architectural, agricultural, state and local governments, open space preservation, neighborhood revitalization and more.    A recent Urban Land Institute (ULI) study, Growing Cooler, estimates that more compact land use patterns can dramatically reduce miles driven when compared to sprawl.   Transportation policy is intractably tied to land use issues, energy consumption, and climate change and it holds the key to mobility, economic competitiveness, and quality of life in the U.S. in this time of remarkable change.  As the Interstate highway building program changed the face of America, mass transit can make huge changes in how we live.

RETAIL

Retail performance is fundamentally affected by the consumer’s willingness and ability to spend. It is now very clear that the economic bad news has restrained consumers personal consumption expenditures. For the first time in 18 years, consumer spending fell by 3.1% starting in the 3rd quarter of 2008.  Even the hardest of shoppers, teen agers, have restrained expenditures. Loss of employment is another major source of consumer restraint with over 2 million jobs being shed through the end of 2008.  Another lost alternative source of capital for consumer spending is home equity loans as home values have fallen.  The transaction market for retail properties was off by 70% in 2008. The prospects for 2009 remain weak throughout much of the year.

Each year retailers look forward to Black Friday, the Friday after Thanksgiving, as the beginning of profit making for the year. This last holiday season was a major disappointment.

Vacancy levels at most retail shopping areas have increased as absorption falls well below the level of new supply due to store closings. This translates to about 1.2 Billion square feet of empty and abandoned stores and 100 square miles of empty parking lots. 

This trend will increase as retailers focus on investing in their e-commerce operations. Interestingly, on Friday while Amazon’s stock jumped 17%, Wal-Mart and Target’s stock declined.  Much of the new vacant retail is in newer shopping centers in outer suburban communities where housing construction has slowed to a halt- not in older obsolete space. The old rule that retail follows rooftops had become retail development followed the anticipation of future rooftops. A future that is now greatly delayed or might never come. This is true not only because of the short term housing bust, but also because of long term demographic changes of where people want to live. Each bust has been followed by a big surge in demand.

With the U.S. Census Bureau projecting 140,000,000 more Americans by 2050, what should new retail look like?  

Generation Xers and Yers are going to be the shoppers.  

Shopping Centers are trying to find ways to convince consumers to spend more hours shopping and to capitalize on the foot traffic that having entertainment options can bring. At the same time, Gen Xers and Gen Yers are expressing more interest in shopping centers with entertainment options than previous generations—and less interest in traditional department stores. 

Ever since the mid-1990s, the years when the entertainment/ retail trend picked up steam, devel- 

opers have been fine-tuning the mix, going beyond simply adding multiplex cinemas, themed restaurants, or bowling alleys. Success often depends on how well the developments tailor the entertainment offerings to the various markets that patronize their retail.  Much of the shopping centers success depends how their customers react to the offerings as being  meaningful and authentic.  Whether they draw repeat visits is the test. 

One way to do this is to incorporate substantial live performance components—shopping centers in Tokyo, Japan, and Rancho Cucamonga, California, have their own in-house theater companies, while classical ensembles such as the Finnish Radio Symphony Orchestra play at Shopping Centre Sello’s music hall in Espoo, Finland. 

Developing symbiotic relationships with major nearby sports venues is an option, as is providing top-notch leisure facilities such as an Olympic- sized ice rink—complete with a skating academy that offers lessons for all ages. Equipping cinemas with high-quality restaurants with bar service as well as upscale design gives adult patrons a reason to forsake their home high-definition televisions, and organizing entertainment tenants into well-designed pedestrian-oriented  districts—with spaces that encourage informal gatherings as well as programmed activities—can make shopping centers places to linger.

Another approach is that taken by Neiman-Marcus, the Dallas based high end retailer.  A feeling of comfort and quality environment upon entering the store is essential.  This is done with Clerestory natural light, cleanliness throughout the store, quality of building materials used in the interiors, merchandise presentation, effective use of art, and concentration of sustainability of energy efficiency, and green materials. Each new store design reflects the market and region it resides in.  The target market for Neiman-Marcus stores are females 40 to 60 whose annual  household income is at least $200,000.  To capture a different market, they have created Cusp for young professional females 25 to 45. These stores are more urbane in design with polished concrete floors, open ceilings and an array of artisan pieces and visual elements.  

The retail places have to be all about pleasing the consumers. They will take almost any form of payment the customer offers.

Location, location, location are still elementary. The demise of Circuit City and the survival of Best Buy has much to do with better locations. 

When mass transit becomes available, the definition of great location will change. As Gen Yers move into more close in urban locations, shopping habits will also change. We are in a constantly changing U.S., you must aware of these changes to have successful developments.

Metropolitan areas contain 80% of the U.S. population and a similar share of the U. S. wealth. Metropolitan regions have been haphazardly growing. According to the late Lewis Mumford, distinguished planning and urban critic, ” The form of metropolitan growth has been formless because of aimless expansion“.

The pattern has been first moving residences out of the traditional city, then moving the retail, and finally, the CEO moves his business headquarters near his new home.  Meanwhile the cities in the metropolitan area furiously competing for the retail and commercial development  to increase their much needed revenue from their tax base, These cities offer very enticing benefits to the retail and commercial developers. These enticements are without consideration of whether a market exists for the particular business being romanced. In most cases there are no regional  planning authorities with real authority.  There is very little effort made  to keep housing and jobs close to each other, thus only not reducing traffic congestion and pollution, but increasing traffic and pollution. 

Even in this quagmire, some growing communities have become beehives of of commerce, culture and opportunities- vibrant places that fire imaginations and have gravitational pull.

Vibrant communities seem to happen organically but, in fact, are developed through a systemic construct. As such, it becomes the challenge of developers, politicians, and civic leaders to imbue cities, villages, towns, and mixed-use projects with a sense of place and meaning.

Vibrant communities have vibrant belief systems. Once a belief system is constructed, it attracts people who share those beliefs. These people, in turn, develop a deep-skin sense of community that mere streets and buildings cannot account for. Belief systems determine how people feel about a place when deciding where to live, work, and play.

Vibrant communities have a brand narrative that is a compilation of origin, creed, context, symbols, and history that attracts people and commerce, and consumes resources. The brand narrative begins with an origin that relates the public saga and gives residents a role in the great continuum of community experience. “I lived in Rome where I was surrounded by history. The Coliseum, the Trevi Fountain, the Spanish Steps—”

Vibrant communities have icons. London has the Buckingham Palace, Paris has the Eiffel Tower, St. Louis has the Arch, and Washington, D.C. has the Lincoln Memorial. 

Vibrant communities have rituals. Santa Fe has the annual  Zobra burning which chases away the bad spirits for a year and  New Orleans has the Madri Gras. 

Vibrant communities have a leader. Sometimes these leaders—whether a mayor, a governor, or a civic leader—are so distinctive that they are celebrated the world over. While not every community can have a personality like New York City’s Rudy Giuliani, Chicago’s Richard M. Daley, or Omaha’s Warren Buffett, the leader is ultimately responsible for weaving together these strands of civic pride and responsibility

These elements— creed, history  icons, rituals, and leaders—are the strands of a community’s culture. Woven together, they create a fabric of human community and society. Cities with a rich cultural heritage relish all of these elements. Flush with growth and prosperity, sophisticated cultures enjoy rich clusters of icons, rituals, civic values, and leaders engaged in the civic, corporate, and cultural levels of society. 

These touchstones help define the meaning of community—a place of security, trust, and belonging: the warm embrace of what the late American author Wallace Stegner succinctly described as “a clean and pleasant town.”

Weaker, less-attractive communities have fewer—if any—of these cultural binding points. Thousands of villages, towns, and cities between New York City and San Francisco compete for people, jobs, education, and resources. They must continually engage and re-excite their populace and others who might do them good. As Chicago architects Adrian Smith and Gordon Gill recently suggested in defense of their planned billion-dollar Eco-Bridge on the Chicago lakefront, “Chicago must continue to develop and improve—or it will die.” Retaining residents and attracting commerce to sustain and propel the local economy is a must for cities, but never a certainty. Communities face anonymity if they fail to piece together a narrative that continually propels excitement, interest, and opportunity.

These elements create a belief system are the tools for engineering vibrant communities. Keeping these pieces vibrant is the responsibility of civic and business leaders, and it is where McMansion and strip mall developments fall short. Styled facades trying to mimic vibrant communities end up being like old scenery in Hollywood back lots because they  assumed ideals, but could not deliver them. Constructed as superficial icons, they do not contain the constellation of a belief system that develops communal values and meaning.

As people grapple with organic architectural contours, place making, scarcity of resources, and the other pains of creation, they need to keep in mind the intangible cultural touch points that ignite community spirit, a sense of belonging, and the thing that feels very much like soul. Creating resonant, compelling societies is as important for the continued prosperity of Chicago, Beijing, or New York City as it is for reviving New Orleans, or the Bengal coast.

Community has always been more than mere buildings. There is a sense of place that must be fed and nurtured. Recognizing the construct of community that embodies intangible emotional assets in addition to tangible bricks and steel is not merely a descriptive observation, but rather a prescriptive path for civic leaders and developers, large and small.

A source of for further study material can be found in the November-December issue of Urban Land.

This week I was in New Mexico, our UNM graduate seminar about real estate development  started this year on Tuesday. The new group is very impressive. I had  planned on being there once a month, but it will be very tempting to see this wonderful group more often. 

I joined Rotary in Livermore, Ca. last week also. A very friendly group that does superb community service locally and internationally. My father was a enthusiastic Rotarian. He urged me to join this great group.  I never joined because I was always traveling. Now I have made my deceased father very happy.

Major changes in commercial  real estate are happening.  A recent study by a research group estimates that corporate office use will decline by 40% in the next five years.  Alternative offices is term for designing offices that do not feature assigned, individual work stations because many workers do not work onsite every day.  

Mass transit is being revived, improved and expanded. This will change many retail  buying patterns. A Los Angeles developer is incorporating desks for internet sales organizations in their Centers. I wonder how their existing tenants will react to this? 

One thing I told the UNM  class is they have a great advantage in that they now how this Y generation thinks because they are part of this generation born since 1980. These Y generation folks are very different then past generations. They want to live in or near urban centers in multi-family units among their fellow Y’ers.

In order to have available, affordable housing, these Y’ers  will need smaller units. Maybe  these smaller units will have built ins to make these smaller living spaces more comfortable. Traditionally, space had a single use. Bedrooms for sleeping, etc. Living rooms for entertaining. Dining areas for meals. With a built in Morris bed, the space is a bedroom at night and can also be a living room when the bed is back in the wall. With a built in table, a space can be for meals, and maybe a workspace other times. If there is furniture on wheels, it can change the use of space easily. This is a challenge to developers and designers.

The cost of energy will be reduced by alternative sources. Today, Germany is making the most phenomenal progress in wind and solar alternative uses. This is going to happen here. Consumers demand “green” buildings. Developers who ignore this will do so at their peril. 

When the post WWII families decided to move to the suburbs, urban residential areas lost value. Now that the Generation Y folks want to move back to urban areas, far out suburbs may lose value like the urban areas of yesteryear did.

New retail in far out suburbs is suffering. Areas only about 40  miles east of where I live have suffered enormous amounts of foreclosures. As a result, not only is the retail failing, housing being abandoned,  but the local government and local schools are operating at serious deficits. 

Demographics are changing.  We must  keep abreast of these. Retailers will be hesitant to now develop new locations based on projected roof tops.  They have had an expensive lesson. As have home builders and their bankers.  New Hotels are almost empty.

More change-The feasibility studies that recommended these failed developments need a new set of priorities. An important part of real estate value that must be now included in determining value, is the ability of the real estate to be financed.

Let us say you broke your arm and are in pain. Taking aspirin will relieve the pain effect, but not heal the cause, your broken arm.  This is exactly what our government is doing about our sick economy, treating the pain, but ignoring the cause of the pain.  

Today the stock markets are closed for Martin Luther King’s birthday.

Let us look at high gas prices.  Friday, oil futures closed at $36 per barrel. It was not to long ago that oil futures closed at $147 per barrel. We have been driving less. This deals with the effect of gas prices. The International Energy Agency had predicted that world oil consumption as a result would drop by 600,000 barrels per day. The drop has been 1,600,000 barrels per day. To counter this, OPEC announced that they were dropping oil production by over 3,000,000 barrels per day. The OPEC oil producers have a surplus of oil. They are looking for places to store this excess oil in order to keep this oil off the futures market until the prices rise.  The wizards of Wall Street are predicting that oil prices per barrel  will increase to $65 this year.  The Obama Plan to expedite the use of alternative fuels to solve the cause of  of escalating prices  can alter this prediction.  Much depends on the success of the research to find alternate, affordable fuels.  We can only deal with OPEC by finding alternative sources of energy. They successfully  counter any solution based on effects.

Since the collapse of housing prices, the banking industry has been collapsing. The Feds answer to this failing banking industry has been to deal with the effects of the collapse. They have pumped billions of dollars into banks to prevent their failures. These massive infusions of capital in the banks has not stopped the  economic chaos in our economy because of no financing being available. Finger pointing will not solve the problem. All the banks in the world did not get together and decide they wanted to kill their business’s. They all operated on the assumption that real estate values would be constant and probably increase. Then the values went south. This is not only true in the U.S. for it is  worldwide.  The UK, China, India, Europe, et. al. have had these terrible drop in real estate values. As a result, their economies have needed government aid and have received huge capital infusions.  The resulting benefits to their economies have not been any better than ours. Meanwhile nothing has ben done to cure the cause, the collapse of housing prices. 

 The announcement by the Obama team that they attend to use some of the remaining TARF monies to buy up mortgages is the FIRST sign of dealing with the cause. Until real estate values are stabilized, the banks will continue to discover new liabilities. It is similar to a dam leaking. You can fix all the present leaks , then new leaks will continually appear. The only way to save the dam is to deal with the cause by relieving the pressure causing the leaks . That is exactly the problems of the banks, we must deal with primary cause, the collapse of housing prices.

Can we identify any solutions that will work? During the Depression, FDR created the Federal Housing Administration to increase home ownership in the US.  Some of the ensuing results were construction workers, architects, engineers, saving and loans, building products, furniture, carpet and appliances suddenly found a new thriving business. Every dollar spent on these houses had the effect of an additional  $9 infused in the economy. 

As an example today, overall unemployment is at about 7%, but in the construction industry unemployment is over 25%.  The Census Bureau predicts that by 2050, our population will increase by 140,000,000.  Over the next 40 years that is an average of 3,500,000 new folks per year. Let us further assume that this will be 1,250,000 new households per year. The present rate of home ownership is about 65%. Lets say this dips to 40% among these folks. That alone will create the demand for over 500,000 houses per year. Below are home building statistics from the National Association Of Home Builders from 2000-2007. The average selling price of a home in 2007 according to the American Housing Survey (done for HUD) was $266,480.   If we reduce this price by 25%, THE TOTAL ANNUAL SALES, just to these new folks, are over $100 Billion and the annual effect to the economy is close to $1 Trillion. This is more than the total CASH INFUSIONS by the government to the economy to date. Let us treat the cause and not the effects and watch the economy prosper.

What is the big mystery about the financial condition of these banks? Every days it seems that CitiCorp is discovering additional liabilities. This bank has had the reputation for many years as being one the most enlightened real estate lenders world wide. When I did business with them in the 1980′s, they were a superior bank. After the commercial real estate debacle of the 1990′s, they consolidated by letting go much of their very skilled real estate lending staff.  Now people I know that are doing business with them complain bitterly. Every month their loan officers are fired and they have nobody to talk to, Then a new person takes this real estate position. This person lasts a short time and then there is a repeat again and again. Banks do commercial  real estate  business based on relationships.  There is no way that these business practices can create business relationships that are based on trust and confidence. The entire bank is operating with frenzied nerves and short term solutions. The Federal government is the owner and must act like an owner. They must replace the executives with rational managers who have a long term perspective.

Bank of America(B of A) was the stalwart west coast financial institution that was at the heart of California’s fantastic growth.  I enjoyed doing business with them. They were one of the few banks in the same league as Citicorp. Then, believe it or not,  a North Carolina bank purchased B of A. I was a good customer of B of A at the time.  The new head of B of A’s real estate lending spoke  about what they would do for me. He said they were not like those New York banks. I was puzzled by this, what did that mean? What they did was take most of the discretion away from real estate officers. It was very difficult to get an answer,  Although this bank  no longer just  a Charlotte, North Carolina bank, it acted like it.  This failure to delegate authority was ridiculous.  We took our business elsewhere.  In the last year, this bank tried to prove how different they were. First, they purchased Countrywide Financial, the largest sub-prime lender. Then if that was not enough unknown liability. they purchased Merrill,Lynch, the largest syndicator of sub-prime loans. This was worst then the Madoff schemes. It sounds like a death wish.  The bail out money was supposed to help families in distress with foreclosures. Now if the Feds help B of A, they will be helping the perpetrators  who brought on the sub-prime avalanche and the ensuing economic disasters.

 B of A asking for a bailout, is like the son who killed both parents, and who  then asks the  Court for mercy because he is an orphan.

The Dow-Jones Averages declined today 2.94%. President Obama has his stimulus plan before the new Congress.  There is some question of its effectiveness by Senators of both parties. The package now includes about $300 Million in tax benefits for corporations and individuals. As I said before, many of the questions raised are that the tax refunds will not create any of the much needed  jobs. 

Almost 70% of the Gross National Product is consumer spending. Consumers are sitting on their hands and pocketbooks today. Any positive change in our economy will be lead by an increase in consumer spending. The unemployment rate is under 8%. Meaning 92%+ of our working force is drawing a paycheck.

The consumers are scared that this recession may finally hurt them. Until these consumers are more confidant of their economic future, consumer  spending will continue to decrease.  The Obama stimulus program must give consumers hope that things are quickly going to improve. With members of Obama’s own political party raising issues about his plan, it will be hard to have consumers encouraged enough by this plan to start spending again. Folks on Main Street can see no benefit to them from the last $700 Million bail out. They are suspicious of any new bail out plan. Many hope that Obama’s inaugural speech will generate this very important enthusiasm for his solving the recession downturn.

The Bush Administration leaves office early next week. Obama officially takes over Tuesday. Nothing is going to happen until after Tuesday.   The current bad stock market news places much pressure on the new Congress to act with great dispatch. Remember, the Bush Administration and the last Congress had a continuos battle over turf. The Bush argument was that the Executive power was not subject to review by Congress. Most Constitutional lawyers do not accept the Bush argument.  Will this struggle continue between the Obama Administration and Congress ? Anything Obama does to reduce this tension may be looked at as a concession to Congress of Executive powers. Will Obama recognize that the Executive and Congress have equal powers?  

Despite all of this, all parties must recognize that the Federal government has to act quickly and convincingly to end the recession.  Failure to so act will have dire results for the both the President and the Congress.

All of us must put pressure on the President and OUR Congressional representatives to provide a plan for a quick  and convincing  end to the recession ASAP.

January is the time for New Year’s resolutions.  There are many reasons can be given for the terrible decline of the economy and the real estate business  . These are anybodies guess. What counts is solutions, not autopsies.  There are many predictors of what will happen in 2009 real estate throughout the globe.  We must not forget that real estate has always been a cyclical business. We hope we are near the  bottom of this sine curve. Many predict that the first  quarter will not change, but the real estate markets will bottom out during the second quarter of 2009. Among these predictors are Jones, Lang, LaSalle , Cushman-Wakefield, and CB Richard Ellis. For instance CB Richard Ellis’s “Global Retail Rent Survey”,  ” of the top 25 fastest growing retail markets, the leaders are Tel Aviv, Oporto, Abu Dhabi, Valencia, and Lyon. The worst hit segment seems by some of the predictors are hotels. Then residential, office and industrial.   Another key positive is the widely held belief that 2009 will be, to use an English football-is “a game of two halves”. While investors are expected to be “as sick as parrot” in first half 2009, they are also expected to be “over the moon” (or at least somewhat happier) in the second half. The thing  is, if enough people believe the market finds its bottom in 2009 and starts to repair, it probably will. Such prophesies can be self fulfilling .  If you are going to make a move, it will be much cheaper to do it before many think the markets have bottomed out. 

Retailers had a terrible Xmas season. Strangely, the stores whose customers are high income were thought to be insulated from these retail severe drops in sales, stores  like Neiman-Marcus, Nordstrom’s, and Saks. These stores. in fact, suffered some of the highest % loss of revenue. 

But not all is doom and gloom. There are a number of opportunities for low leverage and cash buyers to re-enter the market. Sellers are providing attractive seller financing 

One thing we have learned in this present recession is that in determining real estate values, we  have always assumed that the real estate can be financed. Obviously, this has proved not to be true today. . If we do not include the ability to be financed as part of real estate values , we must characterize this period of non-financing as not having viable financial institutions. These financial institutions everyone assumed were closely regulated by the Federal government. Unquestionably, the regulation did not work. This will change.

No one who has studied real estate thinks that real estate values will constantly increase, nobody but except these same financial institutions that can not make loans today.

Today, there is about 12.5% vacancy rate or one out of every 8 square feet of retail. Much of these vacancies is in new retail space in outer suburban communities. – not in older obsolete space. The old rule that retail follows roof tops has become wildly distorted as retail followed the anticipation of future rooftops. This not only because of the short term housing bust, but because of long term demographic changes regarding where people want to live. 

Retail is among the best sources of revenue for communities. There is intense competition for this retail among communities. These communities are not concerned with the net demand for new retail. They need the additional revenue. They zone additional land for retail and provide incentives for the retail coming to their community.  The drive to spend more Federal money for mass transportation, will provide better and cheaper transportation for areas with high density. In the next forty years , the U.S. Census Bureau predicts our population increasing by 140,000,000. Where will they live and shop?

In Europe the strategy for transportation and economic development should be viewed in the context of shopping policy. Cities strive to provide good traffic flow and access to public transit to shopping centers. This has been demonstrated in Copenhagen and its neighbor, Malmo, Sweden, Warsaw, Lisbon, and Stratford, England by the use of railroad stations and subway stations.  

This return to urban areas in taking place in many U.S. cities with the  recycling of old warehouses. NYC, Minneapolis, Cleveland, St. Louis, San Francisco, Dallas, St. Paul, Los Angeles, Vancover and Pittsburgh are current examples.

Things are changing and will continue to do so. Your job is to stay ahead of the curve

President Obama presented his plan to spark the economy to members of Congress. Many Senate Democrats were critical of the plan as not being enough to provide the needed jolt to the economy. They feel that the present Bush Plan of helping the Banks and Wall Street firms has not produced the expected results and the only was to stimulate the economy is by creating new jobs.  This view was also stated by Paul Krugman, Princeton econimist, in his Friday  New York Times column. Krugman ended his article by saying: “–right now we seem to be facing two major economic gaps: the gap between the economy’s potential and its likely performance, and the gap between Mr. Obama’s stern economic rhetoric and his somewhat disappointing economic plan.”

The Obama plan calls for a $775 Billion expenditure, but only 60% is for new employment, the balance is for tax rebates to individuals and corporations. The Congressional Budget Office predicts that unemployment can increase by 35% this year. Although there may not be as many new construction jobs immediately available for new infrastructure projects as needed, there are other fields where new jobs can immediately be available, such as health care.

Businesses with fewer than 20 employees account for 90 percent of all U.S. firms and are responsible for more than 97 percent of all new jobs, according to a new report by the Small Business Administration

Howard Gleckmanof the non-partisan Tax Policy Center summed it up by saying: “Lots of bucks, but not much bang.”

Senator Tom Harkin, (D-Iowa), said:” There is only one thing we have got to do —how can we create jobs”.  Senator Kent Conrad, ( D-North Dakota)., who is chairman of the Senate Budget Committee, said :” Job creation is Job One”. and “investment, investment, investment has to be the cenrtal focus”.

In the 1930′s, FDR was able to turn the tide by both giving people hope by his speeches  and then following with his actions that reinforced what he had promised. Obama’s rhetoric is strong. Some of his critics point out that he promised solutions to the nations problems not from Washington, then many of his appointments are Washington residents from the Clinton Administration. Although Obama sought gay and lesbian support, he has an anti-gay minister, Rev, Warren, as his spiritual leader for his inauguration.  

Are to be judged by what we say or what we do?  Is the real test of the thought the act?  Today. our country is in economic peril. Our people will only remember whether or not they are  better off after Obama has been in office.