Monthly Archive for: ‘February, 2011’

  • Best Practices: Run

    “I run because it’s so symbolic of life. You have to drive yourself to overcome the obstacles. You might feel that you can’t. But then you find your inner strength, and realize you’re capable of so much more than you thought.”
    –Arthur Blank

    Allow me a word of advice: Run. That’s it. Just go run somewhere. I will not bore you with all the details about why running is great for your physical and mental fitness. Just trust me that they are both legitimate.

    But aside from the physical and mental benefits, there also can be a business benefit.

    If truly you want to get to know a local submarket or area, try jogging/running it.

    Throw on your Mizunos and your running shorts, drive to a nearby parking lot and jog around the area you are trying to get to know.

    Running not only allows you to release your tensions from the day, but it also allows to observe the trends and rhythms of the area if you pay attention and know what to look for.

    Who is driving in and out of the parking lots? What is traffic like? How does the architecture fit with the area? What type of landscaping do the properties have?

    These are all questions that you can answer while jogging that you may miss when blowing by in your Jeep.

    When you casually jog by at 5mph you can take time to notice the landscaping around each property and how they compare to the others in the area. You can see that neoclassical architecture of Building A vs the renaissance style of Building B.

    Why does this apartment building have Corinthian columns while each of the other 5 on this street have Ionic columns?

    Why are there no cars in the parking lot at lunch time?

    There are literally thousands of questions you can ask about an area while jogging through it. I have found that when I do that, I don’t need any music to keep me going. I am usually working through these questions in my head and trying to figure out if there is a potential deal to be done on the property I just passed.

    You can certainly do most of these things while driving, but, as I said before, you go by much faster in a car and have very little time to stop and think about what you are seeing and the trends you have noticed.

    So, take the time to jog around. Take different routes. Go at different times of day, month, and year. I guarantee that if you do that for a year you will become an expert in that particular submarket.

    – Duke

  • My 10 Favorite Things About Commercial Real Estate in Atlanta

    It seems like everything you read nationally and locally about ATL CRE is negative or pessimistic. I would like to remind everyone that it isn’t all blood-and-guts/doom-and-gloom and is actually a very rewarding industry. So, below is the list of my ten favorite aspects of Atlanta Commercial Real Estate and the reasons why I got into and have stayed in this business.

    10. Passive Income. To me, the aspect of having passive income at some point in my career is extremely appealing. If I play my cards right and invest in the right deals, then I do not even have to go to work at a certain point. If I bought the right properties for the right price, then I can just sit at home and watch Oprah while my cash flow checks come pouring in every month. If I want to travel with my family, watch my kids’ sports, visit my relatives, or do anything else that takes time outside the office, then passive income is essential. Obviously there is a ton of hard work and sacrifice between where I am now and that point, but that is the carrot that I keep chasing every day.

    9. The Schedule. Most people know how to kick it into high gear when a deal is on the line or when a bid/quote deadline is approaching. But you can still make a good living in this industry just working 8:30 to 5:30 every day. That allows you to have a life and hobbies outside of the office. CRE professionals can afford to be balanced and I value that highly.

    8. Market Knowledge. By simply doing deals in your area you get to know that market intimately. I like when I can go out to dinner and tell you who owns the building, when they bought it, and how much the tenant is paying in rent. Because I have seen so many deals locally, people from outside the city will come and ask me about Atlanta and its submarkets even though I only know one or two of them very well. I am a knowledge junkie and love knowing so much about the buildings in my home town.

    7. Travel. This doesn’t have to be international or even national travel. If you are in our industry, you will be getting into your car (or plane) frequently and visiting properties, owners, brokers, etc. You are NOT glued to your desk and a large part of the business is done on the golf course at the lunch table or on the softball field. I love that I don’t have to sit at my desk for the next 40 years to be successful.

    6. Tangibility. I love the bricks-and-sticks of CRE. I had the opportunity to trade commodities, derivatives, or commercial paper out of undergrad, but I like working on projects where I can see and touch the asset I am trading, building, or financing. There is something satisfying about being able to see and touch the assets you spend years of your life working on.

    5. $$$. Yes, you can make a ton of money in CRE (approximately $1Buttload) and that was a consideration for me when I was assessing my career path. I am going to bust my butt in anything I do, so I might as well be well compensated for it. Notice that this is not #1 on my list. It helps, but it isn’t my motivation (See #1).

    4. The Variety. Every day is different. Like every other male on this planet, I am unofficially ADD and I prefer to have several different things occupying my mind rather than just one repetitive task. If I came into the office and did the same thing in the same place every day for every year of my career, then I would probably want to hurt myself. Variety keeps me interested and makes me want to get up every morning to face the new challenges of the day.

    3. The Events. We know how to party. Every week there is some type of broker luncheon, networking event, happy hour, birthday party, or whatever. If you are in this business, you can find a way to socialize with your peers . . . often. I may not partake in all the events, but I appreciate their availability and always enjoy the events I do attend.

    2. The Impact. Cities, states, and countries are just collections of people. Where those people spend their time when they are not at home is essentially commercial real estate. All the office buildings, shopping centers, industrial parks, event facilities, parks, etc are real estate projects. So we have the opportunity to change and improve the city we live in by creating places where people want to spend their time. How many other professions can say that they positively impact the shape of their city and state like CRE does? I think when I retire in 40 years I would like to be able to say that I left Atlanta better than I found it. That is something I can tell my grandkids.

    1. The People. In case you haven’t figured it out yet, this is a people business. When you reach a certain age everyone has roughly the same skill set and knowledge base. One owner/developer is usually not appreciably smarter or “better” than the owner/developer next door (despite what he may tell you!). What distinguishes people here is the relationships they have and I have found that the people who tend to do the best in this business in the long run are just good people. They are ethical, intelligent, and well-spoken and they treat everyone with respect. As I have been networking and growing my contacts in this city, I have found that 9 out of 10 guys that I meet are just genuinely good guys. They actually care about you and want to help you. And that 10th guy you can smell from a mile away. He has developed a reputation as someone who is difficult or greedy or whatever and you will hear that from 15 different people before you ever meet the guy. You also hear about all the great guys in the business. I got into CRE for several of the reasons above, but I have stayed in the business for this reason. I find it very satisfying to talk business and do deals with my friends from around the city as opposed to some hedge fund manager from NYC. I like the people I deal with and meet and that makes any hardships or difficult deals THAT much easier. It is much easier to make up in the morning  at 5am knowing I am going to work with my buddies today.

    So, that’s my list. What is yours? What are some of the reasons why you chose CRE over another industry?


  • End of an Era

    The McKinsey Quarterly recently published an article entitled “The era of cheap capital comes to a close” and described how the global economy has enjoyed an continually increasingly flow of capital in both developed and developing markets.


    The authors, Richard Dobbs and Michael Spence, argue that the trend of “easy capital” and “hot money” has already begun to reverse and that we may see an era of financial protectionism on the horizon.

    I agree with the authors that extremely cheap capital will most likely be a phenomenon of the past at some point within the next 5 years, but how and when it happens is up for debate. Let’s start at the top . . .

    The Federal Reserve is going to have to raise interest rates at some point. There doesn’t seem to be much debate about that. The Federal Funds Rate and Discount Rate are each below 1% and have been for several consecutive quarters. Essentially, that means that banks can borrow money overnight from each other and from the Fed at just above 0%. This allows them, in theory, to allocate more of their cash as loans of some sort. I say “in theory” because in practice only a few banks have been able to completely reopen the spigot of debt that borrowers seem to demand.

    In practice, we have seen a case study of East Egg vs. West Egg. The “Haves” are bidding on deals aggressively and the “Have-Nots” are not even getting to bid on transactions.

    Borrowers able to obtain debt financing on their properties have been able to pay very aggressively for the right properties and we have seen a rejuvenation of the CRE market that some might call too frothy. That is why we have seen buyers in the commercial real estate market paying for Class A office and apartment space on a 5% cap rate. A 5 cap would have been aggressive in 2006 and seems almost silly in 2011, but that is the effect that cheap capital (in this case debt capital) has on transactions. If you borrow the money cheaply, you can pay more for the same property.

    Bernanke and the Fed haven’t stopped at low interest rates to induce spending. They also use Quantitavive Easing (QE) to pump more cash into the economy. QE is basically when the Fed prints money in order to buy government bonds and other financial instruments in order to give the economy a substantial cash infusion.

    Well, let’s go back to Economics 101. What happens when the supply of dollars increases substantially and the demand for dollars doesn’t? INFLATION. It’s gonna happen. Get used to it. Because there is such a huge supply of dollars and there is not an equivalent demand for dollars, the value of our currency is going to drop relative to other currencies (particularly the Euro).

    Bernanke knows this but he also believes that he has the Ace up his sleeve. He seems to believe that incremental adjustments to the FFR and the DR will be able to keep inflation in check. That is, raising rates will restrict the flow of capital enough to offset the impending devaluation of the dollar. A dollar that is harder to borrow is a more valuable dollar. I would be willing to bet that at the first sign of substantial inflation in the CPI (Consumer Price Index), you will see the FFR and the DR jump by 25 basis points. As the CPI continues to creep up, so will the Fed’s rates.

    (Editors note: This also involves the concept of “The Velocity of Money,” but those are deeper waters than we need to get into here and we will assume velocity is constant for this article.)

    Intuitively, no one wants a devaluation of their currency, but why not start the process now and stop inflation before it begins (like China has failed to do.)? The answer is that the Fed fears something more than inflation: a longer recession. Conventional wisdom is that even a slight increase in interest rates will cause bankers to clamp down on lending and borrowers will be completely left out in the cold. Even the mighty East Eggers will have no access to debt capital, the economy will shut down, and the current recession will drag on and on and on . . .

    While that scenario is certainly possible, I don’t think it is very probable. In my opinion, creditworthy borrowers/investors will have access to capital regardless of interest rates. Investors with a long track record of success and prudent investment will always find capital available. If no debt is available, equity will enter that space and require similar returns. That is why we have still seen deals trading hands over the past three years. The best borrowers still have money and want to deploy it in sound investments.

    The problem the Fed and the President have is that, in that scenario, not everyone is spending as much money as they can. There is a large amount of capital on the sidelines waiting to be deployed. My question is: Why is that bad? That seems like slow, cautious growth to me. That is a scenario where prudent deals get done and fringe deals are hit or miss. Again, why is that so bad?

    I have seen our president try to spend his way out of the recession. All that I can see that he has accomplished is $1.6 Trillion in debt that me and my children are going to have to pay for and headline unemployment remaining around 9-10%. So, as a borrower, why should I try and do the same? Why should I just try and spend a bunch of money to boost the economy? Why should I go out and invest gobs of money on fringe deals and assume everything is going to be better because we are “spending money?” Again, the core, vanilla deals are being financed right now with ease. Why do I need these low interest rates to chase fringe deals that probably shouldn’t been done in a shrewd investment portfolio?

    By now you can probably guess that I am in favor of raising rates. I think the Fed should start boosting rates by 25 basis point every quarter for the next several quarters. That way, the deals that should get done still get done and fringe deals with razor sharp margins that require a 1.75% interest rate on debt will not.

    Maybe I am the only one, but I think we should return to growth patiently and cautiously. We should make our capital available but not free and we should fight inflation before it takes over our currency. I want our country to continue to grow and progress, but I want it at a sustainable and intelligent pace. Let’s not just grow and spend for growth and spending sake. Let’s be smart and intentional and our children and grandchildren will know a better economy and better quality of living than we can even imagine. Let’s try and plan our policies based on the success of the economy for the next 100 years not the next 2 years.

    So, back to Mr. Dobbs and Mr. Spence, I certainly hope their prognostication comes true. Let’s hope that countries are protective of their capital and that money is lent and spent on strong and attractive endeavors that promote growth and not bubbles.


  • Grandpa Lost His Shirt Too

    “Why Age and Wisdom are Separate Concepts”

    I have noticed a bit of an unsettling trend as I have been meeting with people in commercial real estate. We have been worshiping at the altar of experience. That is, it seems like most people believe the single most important characteristic a real estate executive can have is experience and more is always better. People imply that, without fail, older (more experienced) CRE professionals are better decision-makers than younger professionals.

    I beg to differ and I am going to tell you why. I will save my opinion on the most important characteristic of CRE executives for later, but for now let’s focus on the logic behind the “EXPERIENCE IS EVERYTHING” argument.

    First, if I were to interpolate from that theory, then I would make it as granular as possible. Let’s take the idea that more-experienced (usually older) professionals make better decisions than less-experienced (younger) pros. If I were to apply that logic to a small level, say one day, then someone who has been in the business for one single day more than you would be a better decision-maker than you are because they are more experienced. Most people would agree that a 65-year-old CRE executive is probably a better decision-maker than a 25-year-old executive. But are you so sure of that logic that you say that someone with ONE more day of experience is a better decision-maker? I wouldn’t. It has to be several years, right?

    Well that brings up another point. Even if I were to grant you that more experienced professionals always make wiser decisions than less experienced ones, I would ask you to define how much more experience is necessary? Is a 62 year old executive substantially better than a 52 year old executive? How about a 42 year old executive? Tell me the number of additional years experience necessary to distinguish an exceptional decision maker.

    Let’s use an example to illustrate. Company X is going to interview you and your coworker, Joe, for the role of Managing Director of this office. You and Joe have the same role currently. You got in the business in 1995. Joe got in before that. You have outperformed Joe for each of the past 5 years and you almost doubled his revenue last year. Your network of contacts is probably three times Joe’s. Everything else about you two is exactly the same (age, height, looks, personality, skill set, etc.). First, let’s say Joe got into CRE in 1994. Who gets the job? Probably you, right? What if he got into CRE in 1990 (Making him a 20-year veteran and you just a 15 year veteran)? Does Joe get the job then? What about 1985? 1975? Does your company turn down the 35-year veteran for you? How many more years of experience for Joe will cancel out the fact that you are clearly the better candidate?

    Hopefully you will recognize that everyone’s answer to that question will be different. That’s because there is no magic number or formula for the “right” amount of experience. It always depends on the situation, person, and company. Experience is no silver bullet.

    Don’t believe me? Then let’s look around the city.

    What companies around Atlanta (and the country, for that matter) have struggled mightily through the recession? Which firms have had massive layoffs, property defaults, bankruptcy filings? Now, how old is the senior executive of that firm. Each company has a head guy that has to sign off on every major decision and new development and he or she is ultimately responsible for the successes and failures of the company. So, are the executives of all these struggling companies in their twenties? Thirties?Fifties?

    I would say the distribution is pretty even. I do not have any objective data in front of me, nor have I run a regression analysis that included executive age as an independent variable. But I am fairly certain that companies run by 60-year-olds had just as much trouble as companies run by 30-year-olds. Grandpa lost his shirt in the great recession just like everyone else did. So, all that fancy EXPERIENCE didn’t save investors from losing tens of millions of dollars on bad deals.

    Now, I am not saying that experience doesn’t matter. In fact, it may be one of the more important tools a CRE professional can possess. But it is not the silver bullet/cure-all that people seem to think that it is. You can’t simply go out and hire the most experienced people in the city and assume you are going to make huge wads of money. It is much more complicated than that. My theory is that wise people will make good decisions regardless of their age. Old people DO NOT have a monopoly on wisdom and there is no magical age where you all of the sudden become wise.

    I guess it comes down to human nature. We as humans tend to classify the people we meet. Since there are 7 billion people on the planet it would be physically impossible to know each one personally, so we classify people. For instance, if you are an Atlantan and you go and visit NYC, the people you meet will have opinions about the food you like, the sports you watch, the clothes you wear, the car you drive, the price of your house, or whatever. The point is, they have an idea of what people from Atlanta are like and they classify you in that group of people.

    The same is happening with experience in CRE and it shouldn’t. Haven’t you heard people say “He’s fresh out of school” or “She is a 3 to 5 year experience girl” or “He is a junior VP type” or “She’s one of those 20 year veterans who lost her job in restructuring?” I bet you have. That bothers me because I believe (perhaps naievely) that more than anything else in our business, people matter. Your team and the people you work with are what will ultimately determine your success in this business. Surround yourself with winners, and you’ll win. Surround yourself with losers . . .

    So, since people are the most important aspect of my business, I always try and take the time to get to know someone personally. I never look at resumes. I would rather have a nice, detailed conversation with someone about who they are than glance at where they went to school and what their first two jobs were. That will come up eventually. I want to know what type of person this man or woman is and where they see themselves in 10 years. That will tell me if it is worth my time to get to know them well. Some number (age) doesn’t really tell me anything.

    Here is my request: Take your time to get to know people in the industry. Get to know them well. Don’t even waste your time with a resume because you will start to classify people in your head. Rather than classify someone as young or old or tall or a property manager or whatever, get to know someone’s current skill set, personality, hobbies, and wisdom. The people you meet who have a knack for relationships and tend to be great decision-makers (even with small decisions) will be the ones you will be reading about in the Business Chronicle sooner or later. In my opinion, people are the most important piece of our industry and the most important time you spend in your career won’t be visiting property or sitting in front of a model or going to county hearings or calling a broker, it will be the time you spend getting to know the people in your industry.

    So please, let’s back away from the altar of experience and see if we can judge each professional on who they are and what their skills are, because if experience were all that mattered then we wouldn’t have hundreds of empty $500,000 townhomes in Villa Rica, Conyers and Eastpoint.

    Am I wrong?


  • Serenbe: From the Source

    I had the pleasure of meeting with Steve Nygren this week down at the Blue-Eyed Daisy Cafe at Serenbe. For those of you who do not know who Steve is, he was a highly successful restaurant entrepreneur who sold his portfolio of restaurants several years ago. He made a nice profit on the sale and has since moved down to the southwestern suburbs of Atlanta. Using the land he bought, he has created Serenbe.

    Serenbe (pronounce Seh-Rin-Bee and not Suh-Rin-Bee) is a 900 acre master-planned community in Chattahoochee Hills (near Palmetto). It is just a few miles from the airport and a few more from downtown.

    When I say “South of Atlanta,” what images come to mind? Foreclosed homes in Clayton county? Run down apartments near the airport? Dozens of broken commercials deals along Tara Blvd? Whatever your mental picture of “South of Atlanta” is, it usually isn’t favorable. But Serenbe is a horse of a different color.

    For whatever reason, suburban development has largely bypassed the southwestern suburbs and much of the land remains, well, land. You don’t see grocery anchored-strip centers on every corner and an apartment complex every 20 feet. In fact, on the trip out to Serenbe on South Fulton Pkwy, you will drive by several miles where there is literally nothing built on either side of the road. It’s just land.

    So, you drive through the country and arrive at a small, unassuming entrance that you probably wouldn’t even notice if you weren’t looking for it (just the way Steve likes it, by the way). You turn right onto Selbourne Lane and after about a half mile and past a HUGE barn you run across a pristine little cluster of single family homes. There are probably 15-20 of them clustered together. All unique, but also somehow cohesive. They all evoke the same sense of comfort and community. Open windows and inviting porches let you imagine passing the afternoons sipping sweet tea and chatting with your neighbor.

    Next to this cluster is a small group of town homes and some ground level retail. Same story here: each TH is unique but still seems to fit the atmosphere of the place.

    The next little hamlet is Serenbe’s equivalent to Main and Main. Here you will find the restaurants, cafes, retail spaces, and European courtyard. This is where Blue-Eyed Daisy is and where I met Steve for lunch. Here you will also find several local retailers, an art gallery and the Hil Restaurant (which I recommend as a dinner option).

    The rest of the property has undeveloped lots for sale, a large meeting facility, the famous B&B, animals, a greenhouse, miles of walking trails, and much more. This is, after all, 900 acres.

    Which brings me to my next point. One of the best aspects of Serenbe is the greenspace. By using density and tightly clustered homes, Nygren has been able to keep a huge % of the space as dedicated green space. This is not, and will never be, a concrete jungle. Yes, there are several buildings and the master plan calls for many more to be built, but you get the impression that Steve always wants this to be a peaceful, tranquil, and organic experience for residents and visitors. So he will be keeping as much of the natural space as possible.

    Speaking of the master plan, I have seen it. It is ambitious . . .

    Steve is envisioning a self-sustained community that will include schools, meeting centers, office space, gyms, farms, a movie theater, a hotel, retirement communities, and much more. Again, density is the key. Serenbe has setbacks off of Atlanta-Newnan Rd and Hutcheson Ferry Rd of 300 feet. So even when all phases are complete and the site is completely built out passersby won’t have any idea about the expansive community hidden behind the trees. When and whether he will be able to pull off all this construction is up for debate. I am told he has a strong relationship with BB&T and I am sure they will help him decide the appropriate time for new construction.

    This I do know: Lot sales and development were at the same level in 2010 as they were in 2007. That makes Serenbe one of the few commercial/mixed-use projects to be able to maintain momentum through the recession. So, extrapolating from that fact, I wouldn’t bet against Steve building his oasis before any of us expects.

    So this is my little tip-of-the-cap to Steve Nygren and all of the people at Serenbe. They have created something special just south of us and people are starting to take notice. Don’t take my word for it. Go check it out yourself.

    If you happen to be strolling by Blue-Eyed Daisy on a sunny Saturday afternoon, pop your head in and ask if Steve is around. Chances are he will be sitting there sharing his vision with a prospective client or simply sharing an apple pie with one of his daughters. Either way, he will be smiling and enjoying the peaceful life at Serenbe and you should too.

    (For more info on Serenbe, visit


  • Why I like Multifamily Investments

    Over the first few years of my career I have had the good fortune of working on several different types of projects in several different markets. From office projects in SoCal to retail centers in Miami to apartment communities in D.C., I have had a fairly wide breath of transaction experience and at least some exposure to each of the four food groups (office, industrial, retail, multifamily).

    For my own personal investment, I prefer apartments. And here is why:

    Rollover:   If an anchor tenant blows out of a retail center, the value of the property is cut in half. If you lose a few major office tenants . . . same story. An industrial building can lose 1 TENANT and go from 100% occupied to vacant. In an apartment complex, you will lose a few tenants every month, but you will also gain a few tenants every month. So if your complex is 95% occupied and 7 tenants do not renew their expired lease, you may drop to 90%. But then you have a good weekend and 5 new tenants sign leases and you jump back up to 93% occupied. Long story short: the down side is much more manageable.

    Demand:   With the proliferation of online retailers like eBay, Amazon, and Netflix, retail is shifting more and more to online sales with fewer physical locations. We have discussed before ( how the demands for office space are changing and may be falling. But at the end of the day, everyone needs a place to rest their tired bones and not all of us can (or SHOULD!!!!) buy homes. Long story short: no matter what happens in the market and economy, there will always be a demand for multifamily housing.

    Lack of Institutionalization:   In the office, retail, and industrial arena, there is a huge number of institutional investors and management companies. Barriers to entry in these investment markets are high and access to capital can be difficult. Multifamily has its share of institutional investors, owners, and managers, but I would argue that there are fewer relative to the other three. In my experience, it is much easier to find a family owned and managed multifamily property than retail, office, or industrial. That is changing with every year, but as of now apartment are still accessible to beginning investors. Long story short: If I am interested in buying apartments, I can usually find and contact the owner within a day. In the other three food groups I would have to go through a lawyer, broker, assistant, Junior VP, and Senior VP before I actually got to the decision maker.

    Simplicity: Let me be clear, I am not asserting that apartment deals are easy or unsophisticated. But I would say that if you have enough knowledge to build a nice home, then you probably have enough knowledge to build and apartment complex. The process and strategies for building a single family home are very similar to those of multifamily developments. The same can’t be said about office buildings, retail centers, or industrial buildings. Long story short: John Q Public (a homeowner) could probably figure out how to build a decent apartment complex with the right architect and GC. I doubt John could build a high rise office building.

    There are other reasons that I am attracted to multifamily investements, but the 4 listed above are the main ones. Did I miss any? Disagree with me? Tell me why in the Comments.


  • Views From the Top

    In case you didn’t attend the “Views From the Top” event on Tuesday (sponsored by REIAC and GSU Real Estate Alums), here are my notes:

    Mitchell Brannen received the Georgia State Distinguished Alumni award from the director of the department at GSU. Any of you who know Mitchell know that he is highly deserving of the recognition and is just a great man in our business. So, congrats again to Mitchell.

    The next act was Dr. Rajeev Dhawan of G State to give an economic forecast.

    For anyone unfamiliar with these types of presentations, economists are somewhat infamous for having dry material and presentation and relying too much on data a graphs. I thought Dr. Dhawan, however, presented very well. He had enough good information and data to validate his claims, but didn’t glue himself to a podium and and stare at his notes for 30 minutes.

    A few highlights from his comments:

    You should care about the turmoil in Egypt. Ignoring the humanitarian and philosophical reasons, you need to understand that Egypt is a crucial ally because of its control of the Suez Canal. 15% of the oil that goes to Europe runs through the Suez. If that transport is disrupted or discontinued, then the turmoil will spread to Europe and subsequently the U.S.

    China is taking a proportionally larger share of the world’s oil even though global demand has remained relatively constant for the least several years. Because this seems to be a continuing trend, plan on $90 per barrel going forward.

    No employer seems to want to be the first to ramp up hiring. everyone is waiting on someone else to take the first move and then others will do so as well.

    Home prices are still 20% above the historic growth rate, but are also 20% below the regression mean (aka, values are still uncertain).

    Keep an eye on US Treasuries because China has historically been our largest buyer of Tbills and they have been decreasing their volume every year for a few years.

    The biggest red flag over the Chinese economy is the fact that 50-60% of their GDP is concentrated in construction. Once that bubble bursts, no one knows how the Chinese economy will respond.

    After Dr. Dhawan, the group got to listen to a group of three panelists about global trends in CRE into and out of Atlanta. The panelists were Ambrish Baisiwala of Portman Holdings, Jorge Fernandez of the Metro Chamber of Commerce, and Greg Michaud of ING Investment Management. The Moderator was Mark Elliot of Troutman.

    Mark asked them a series of questions about business inflow and outflow regarding Atlanta.

    Each had several interesting comments, but I will summarize the most interesting here:

    Ambrish: RE fundamentals are still the same and each company needs to have renewed emphasis on due diligence. Portman tries to JV with a local player for their market knowledge whenever they embark on a new project. Each opportunity is unique and should be treated so. Portman is very comfortable with China (particularly housing) where others have been slightly gun-shy.

    Jorge: Compared with other gateway cities, Atlanta is under-marketed. Europeans tend to like NYC and Chicago, Latin Americans like Miami, and Asians like LA and San Fran. Western Europe and Japan seem to have the most interest in expanding into Atlanta and our main issue in landing new companies is infrastructure.

    Greg: Atlanta is still scary to outsiders because of lackluster job growth numbers. Most people want to have a presence in Atlanta but it tends to fall short in relative comparison to other gateway cities. If you are investing internationally, scale matters. If you have a large sum of cash you will be pushed into office investment for the returns. It may not always be possible to buy and entire building abroad. Some economies lend themselves to condo-style office space. Many Europeans still blame Americans for the global recession due to failures in the CMBS market. So, US CRE investment doesn’t have the luster it once did.

    Overall, I thought this was a worthwhile event and I would go again next year. It was held on the 20th floor of Phipps Tower, which was a little odd considering there was no buildout of any kind in the space. The view was great, but sitting in a cold, dark shell office space talking about Atlanta’s relative value in the CRE world was a tasty piece of irony.

    Enjoy your weekend.


  • The Future of Office Space

    Mark Elliot wrote an interesting piece in today’s Real Talk on the ABC. He talks about why office space is changing and how office space will look in the future. (

    First of all, let me say that I think Mark does a great job on Real Talk. Not to take away from Ray or Abe or Wes, but I always seem to enjoy his posts the most.

    Secondly, Mark raises a valid point here, but I think he may need to include a few more variables.

    He argues that large office spaces will be shrinking over the next several years due to the shrinking corner of office , reduction of on-floor amenities (large lobbies, breakrooms, etc.), and increased layout efficiency.

    I would agree that all of these factors are legitimate and are probably already taking place. As backlash against what was perceived as lavishness of Wall St executives in the PGR days (Pre-Great Recession), executives and managing directors have seen their compensation and benefits heavily scrutinized and cut back. I would say that a vast corner office with room for a chipping green would fall into that category.

    As for on-floor amenities, I am sure that most offices will continue to have breakrooms and work rooms with printers, faxes, mailboxes, etc. What I expect to see falling in greater numbers is the storage or file room. With the increased availability and efficiency of cloud-computing and online storage capabilities, why do you need a paper copy of old data in a huge filing cabinet down the hall? Sure, you may want to keep a hard copy of deal info on your current deals and maybe the deals you have done in the last year or two. But that 250-page appraisal from the deal you closed 8 years ago can probably take a vacation to the shredder.

    Don’t get me wrong; I think there will always be a need for some on-site storage. But I think I could get away with a two drawer file cabinet at my desk and have all the storage I need (given that I have plenty of online storage).

    As for efficiency, I think you will see a slight bifurcation in the market. I think creative companies will continue to demand unique (odd?) layouts and typical service providers will go for the vanilla, uber-efficient space. To Mark’s point, I would argue that a larger portion of office users are service providers that want the vanilla space.

    Another factor that Mark omitted is the telecommute option. What do you need to do at work that you cannot accomplish with your Blackberry and laptop at home? The answer is usually “very little.” I’m going to assume that there will always be a space for employee interaction and conference rooms, but we are seeing increasing numbers of telecommuters with every passing year. That trend alone may lead to a slight drop in demand for office space.

    So I agree with Mark’s point, but I’m not sure the shift will be as cataclysmic as some have opined. To paraphrase Malcolm Gladwell, there will be a tipping point. At least there will be a tipping point in Atlanta.

    The fact is, Atlanta is a growing and expanding city and job market. Strategically located in the heart of the Sunbelt, Atlanta has long been known as the Capital of the South and seems to be the market to beat in terms of corporate relocations and expansions. Simply put, if you want a presence in the Southeastern U.S., Atlanta is usually your first choice. (Take that Miami!)

    More people continue to move into our city and demand white collar (office-occupying) careers every year. So, since the office space equation has two components, available office space (supply) and demand for office space (demand), the two components can balance each other out.

    That is, I agree with Mark that office users will demand less space and be more efficient with the space they do occupy. But I would also argue that Atlanta is going to continue to attract its fair share of corporations and companies that will demand new space. These new companies will, in theory, occupy the spaces left vacant by downsizing firms that already occupy space in the market (aka, Positive Absorption).

    The crux of the issue will fall to the office developers of the city. If developers can keep from oversupplying the market with product, I would assert that the office space market will remain healthy and may even tighten (15% overall vacancy instead of 20%). If (more likely) developers get a little overzealous and chase the margins, we may see perpetually high vacancies.

    Which will it be? I guess we will have to wait and see . . . .


  • “No, sir, I don’t need a vile of blood or glamour shots. Just a rent roll will be fine.”

    What a lender wants in your investment package.

    So, you bought your building with cash and now you want to free up some capital to use elsewhere. Or you bought and financed a building 10 years ago and the loan is coming to maturity. Cool. No problem. Now all you have to do is convince the lender that your property is worth what YOU think it is worth and life will be wonderful.

    In 2005, that was pretty easy. Credit was flowing freely to almost any project in almost any location. We discuss elsewhere the merits and causes of that phenomenon, but my point in mentioning it is to contrast that credit environment with today. In 2005, if you had a heartbeat and a clear title, you could get a loan. Now you need cash flow, iron-clad leases, continual stabilized occupancy, and it seems like there are dozens of hoops to jump through just to get the big, bad lender to even look at your loan package.

    Keep in mind that lenders are busy just like you are. They have piles of loan packages and documents on their desk and have to prioritize their time. (Work becomes a game of triage for almost everyone after a certain point.) So, in order to simplify the process I am going to give you a quick guide to creating a loan package that will make your project get pushed through the pipeline.  We will discuss the property and borrower fundamentals elsewhere. This is how to create the best loan package to represent your project to a busy lender . . .

    (Please note: This guide is for a permanent/stabilized loan and NOT a construction loan. You remember those construction loan things, right?)

    1.       GATHER THE DATA. Get together every morsel of information you can possibly attain on the property, its operations, the borrowing entity, etc. Borrowers are often hesitant to give up information and I would say that of 100 projects that reached my desk when I was a lender, I probably had to call back 95 of those borrowers to request more information.  That was annoying and not a good use of my time.  If you want a quick turnaround on your loan, give me ALL of the information I need.

    2.       INCLUDE THIS:

    1. Executive Summary – What am I looking at? Where is it? What does it look like? What is the occupancy? What kind of loan terms and proceeds are you looking for? (This is the 30,000 ft summary of your deal. Let me know what it is and what you want. If it is a good looking deal on the Executive Summary, I will dig deeper.)

    2. Financial Statements – I need Income & Expense statements (also known as P&L or Cash Flow Statements) for the Trailing 12 months and the last 3 or 4 years. (This is always the 2nd item I look at after the executive summary no matter where it is in the loan package. Most everything else in this package is additional. This is essential. If your cash flows do not add up, I kill the loan right then and there. I need the T12 to look at monthly trends and 3-4 years of operating history to validate that the current cash flows are roughly the same as historical cash flows. Or even better, they may show a general trend upward in property performance. In that case, this project goes to the top of the pile.)

    3. Rent Roll – Who is in the building and what do their leases look like? (If occupancy is below a certain threshold, we kill the deal. If this is an Office, Retail, or Industrial deal and all of your leases expire in 2 years, the deal is dead. Make sure you include expense reimbursement structure for EVERY TENANT.  I want to see occupancy at or above 90%, depending on the market, and commercial leases with 10 years of term left. That will push a deal to the top of the pile.)

    4. Borrower Information – How is the borrowing entity structured and who are the guarantors?  What are their net worths and what kind of liquidity positions do they have? **Note: I am treating this hypothetical loan as non-recourse**.  (This seems to be the one that I never got. I always had to bug people to get this. If you are asking for a $5 Million loan, and the guarantor behind the borrowing entity only has a net worth of $3 Million, it aint happening.  Just go ahead and send all of it because we will ask for it sooner or later anyway.  If the guarantors behind the borrowing entity have strong financial positions, the loan package goes to the top of the file.)

    5. Other info – This will be anything property-specific that you did not include in your executive summary. (It may include construction materials, parking spaces, elevators, capital expenditures, etc. This is just the added “color” to the picture of your loan so I can fill out my model. You will find that different credit officers have different hot buttons and this is where they will be looking after the loan has passed the original sniff test.  One CO was really big on parking spaces and parking ratios. Another wanted to know exactly what Cap Ex the property had gone through before he ever submitted a term sheet. As I said above, more information is generally better, with a couple exceptions . . . )

    3.       DO NOT INCLUDE THIS:

    I.                    Your projections or your broker’s projections. (I’m not going to look at them. Ever. So don’t waste your time. Brokers have developed a reputation for “massaging” numbers and giving best case scenarios in the projections. All that will do is discredit them.)

    II.                  10,635 Photographs. (Five or Six is plenty. We can get a good enough idea of the condition of the property from those and Google Earth will help us establish location and nearby amenities. We will figure the rest out during due diligence after you have accepted our terms.)

    III.                An Old Appraisal. (What some appraiser said your property was worth in 2006 means about as much to me as your Grandmother saying you are the most handsome man in the world. If you have current photos of the property and decent property data, an out-dated appraisal adds no value.  If, however, you don’t have photos or supplemental data on the property, an appraisal can help me fill in the blanks.

    The above list is just what I was looking for when I was a lender. I am sure that other lenders will have certain items and data that they need to complete their analysis, but if you include the above items I would bet that you get fewer phone calls from your (frustrated) lender looking for additional information.


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