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November 2013 Newsletter
November 2013 Number 3

Lots of Land?

The housing recovery is boosting values for parcels in many markets.
by David Moore, CCIM

Land prices in many areas of the U.S. are on the rise amid increasing demand, but the level of demand and the reasons behind it vary from market to market. Land values increased an average of 13 percent in 2012, the first annual gain since 2005, according to housing research firm Zelman & Associates. Improvements in the housing market, modest employment growth, and population expansion in some markets are making land more attractive to investors than it has been since the housing market crashed more than four years ago. Housing demand in some markets is the single most important factor influencing land prices.

Who Is Buying?

The greatest demand is for well-located land that is ready or near-ready for residential development. Most sought after are finished lots for single-family or multifamily sites that already have roads, sewer, electric, and other infrastructure in place. Builders often find these properties to be in short supply as home construction increases.

As the housing market improves, retirement markets in the southern u.s. are heating up as many retirees - who deferred their plans due to the poor economy – can now sell their homes and relocate to new areas for retirement. For example, in Hilton Head, S.C., Stratford Land is on track to sell twice as many lots in 2013 as compared to 2012 - and at higher prices.

The U.S. Census Bureau reported in April that builders were on pace to sell 417,000 homes in 2013 and new-home construction rose l3.1 percent in the past year. The housing market has been in a slow recovery since spring 2012, but the level of recovery depends on the market.

Land investors today are combing through inventory looking for off-market opportunities with infill land for residential and commercial development. These opportunities often allow for the purchaser to have shorter hold periods and quicker returns. The Canyon in Oak Cliff, a mixed-use development in the Dallas area, is a prime example of fast-selling in fill land. By proving market demand in nearby surrounding areas, Stratford Land quickly recruited multifamily, retail, hospitality, medical, and entertainment developers to serve the needs of the fast-growing local community.

In addition to a rise in homebuilding activity, land prices are being driven up in some markets by large equity funds and foreign investors. Many foreign and sovereign funds from Europe, Canada, and China are buying large U.S. land portfolios.

Farm and timber land prices are also increasing due to renewed investor activity, and Timber Investment Management Organization groups are emerging to aid institutional investors in managing their timberland investments. Timber funds are actively buying up land, particularly in southeastern states such as Georgia, Alabama, South Carolina, and Arkansas, in anticipation of rising timber prices as homebuilding continues to increase.

Demand for farmland has been strong in the last year, as high crop prices attract institutional investors. Buyers are especially interested in midwestern land: Global financial services company UBS bought 9,000 acres in Wisconsin, and financial services firm TIAA-CREF now owns 600 farms in a $4 billion fund.

Resort properties are also getting a fresh look from investors, boosting those land values, albeit more slowly than other real estate. Resort markets continue to lag behind major population centers, and land values typically remain well below their boom market peaks, but sales are picking up. The lack of new resort development over the past few years is helping to aid the more recent increase.

Hot Land Markets
The greatest factor influencing rising land prices is housing demand, which is favoring U.S. Sun Belt cities such as Dallas, Houston, and Austin, Texas, and secondary markets with strong economies such as Orlando, Fla., Nashville, Tenn., and Charlotte, N.C.

The Texas economy has remained stronger than most of the u.s. throughout the downturn, and the prospects for land investment offer compelling opportunities in all the major markets. For example, national homebuilder Lennar is building in a number of Texas and southeastern markets.

Austin continues to be a winner in all real estate categories, and home building remains strong. For land buyers who want to hold, well-priced deals are hard to come by.

Dallas-Fort Worth is experiencing strong demand for well-located land, with 44 commercial land sales of up to 25 acres during the first two months of 20l3. As demand for single-family housing is strengthening, Dallas has less than three months of finished home inventory, while Fort Worth has only four months of inventory.

In the glow of an energy boom, Houston land prices are high and heading higher, due to both apartment and single-family home construction in many areas, as well as the highest rate of 2012 housing starts in the U.S., according to the Real Estate Center at Texas A&M University. While less robust than other Texas cities, San Antonio is projected to see significant employment growth.

Several regional homebuilders, such as Ashton Woods, Taylor Morrison, NVR/Ryan Homes, and Ryland Homes are active in the Southeast markets of Nashville, Raleigh, N.C., Charlotte, Orlando, and Atlanta, focusing on major cities that have stable economies and strong employment. Orlando's economy is benefiting from a tourism rebound and the retirement market. For example, Hamlin, a 600-acre residential development located just north of Walt Disney World, is experiencing strong sales due, in large part, to a new tollway that provides a gateway into western Orange County, Fla., for builders and developers.

Interest in the Charlotte market has grown with its improving economy and job growth. In the past two years, 37 companies have relocated to the city, bringing 8,000 new jobs. This trend is expected to continue as the city plans to add as many as 30,000 new jobs through 2014.

Atlanta, where the economy has historically been heavily focused on development, is just now recovering from job losses and a glut of residential inventory. Although metro Atlanta home prices continue to rise, they have yet to recover to their pre-2008 levels, creating a strong affordability index for companies choosing to relocate. In comparison to other cities of its size, Atlanta has not bounced back as quickly, and more accelerated job growth will be required to absorb the large supply of lot inventory that remains on the ground.

Elsewhere in the U.S., reports of surging housing prices don't necessarily Signal strong markets. Cities such as Detroit, Las Vegas, and Phoenix are rebounding from huge declines but still face challenges with large foreclosure inventories, high vacancy rates, and slow-to-no growth economies.

However, even in some of these weaker markets, discerning investors can find pockets of land value. For example, while the overall statistics show Phoenix as a lagging housing market, Vistancia, a 7,100-acre development located just north of Phoenix, opened an additionaI3,450-acre section in response to pent-up demand. Potential buyers are anxious to view new-to-market lots in high-quality developments that had suspended growth during the bust.

In Southern California, good opportunities for longer-term land investments are possible, but they are rare and require equity positions. For example, Stratford is the lender for the Blue Sky development, a 440-unit multifamily project that recently broke ground in downtown San Diego on land the developer has owned since 2004. In 2011, Stratford became an equity partner with the developer of Millenia, located south of San Diego, to develop the $4 billion, 2l0-acre master-planned community over the next 20 years.

Closing Land Deals
Unless investors are cash buyers, closing land deals is challenging. Few traditional capital sources want to fund land investment, and many banks are still trying to offload land loans from their balance sheets. Some hedge funds, sovereign funds, and other institutional buyers are able to buy with all cash. Timing and availability of capital has been - and continues to be - the best way to acquire land. The ability to close quickly remains key to purchasing the best deals.

While large groups with cash are able to purchase significant tracts of land and portfolios, local purchasers looking to acquire smaller tracts have a harder time finding capital. With the absence of adequate capital to finance land transactions, smaller buyers continue to turn to private debt to close the gap. Stratford has been able to close this lending gap by providing nonrecourse land financing to a number of groups that fit this profile.

Land investing in 2013 will be active primarily for those who intend to begin construction on single-family residential or multifamily developments. The demand for these asset classes is strong in most markets, particularly those that exhibit clear signs of recovery. Land investors who are able to close sizable acquisitions during 2013 are likely to be cash buyers or the few well-capitalized investors who can secure financing.

David Moore, CCIM, is senior investment manager for Stratford Land in the southeastern U.S. and based in Atlanta. Contact him at

Trends in Corporate Real Estate:

The Role of the Strategy

By Brady Mick

Corporate real estate (CRE) teams are changing. Traditionally, CRE teams have been divided into three focus areas: portfolio planning, design and construction, and facilities management. Working together like the legs of a three-legged stool, each approaches real estate from their own unique expertise. Until recently, this three-prong method sufficiently addressed the space needs of traditional companies.

Today's work environment is more complex. With increased collaboration and innovation required, human interaction becomes more important than who gets the bigger office. Advanced work processes are freeing employees from their desks, leaving offices and workstations significantly empty. As a result, companies are viewing space differently. Partnering their CRE teams with HR and IT, they are creating a workplace strategy leg to address essential issues, such as company vision, workplace effectiveness, worker performance, and employee engagement. In turn, the workplace strategist is becoming the CRE integrated expert focused on connecting the people to their workplace.

Change of this nature can be challenging, but the resulting reconfiguration is beneficial. By examining the workplace from the process, culture, technology and brand dimensions, strategists expand the value of the workplace to include business transformation. With the addition of the workplace strategist, real estate teams are addressing company needs which far exceed location, housing and maintenance.

Traditional Corporate Real Estate
Providing adequate space for work is an essential concern for changing companies. In the past, this has been accomplished by increasing square footage to accommodate the sum total of the required projected people. Typically, these considerations would include, but are not limited to offices, workstations, conference rooms and common spaces.

Like a baton in a relay race, the process from initial consideration to the completion and care of the final product is passed from one group to another, often with little overlap. In this scenario, there is a three-tiered approach where 1) portfolio sets the wheels in motion and designates the location of the building and/or expansion; 2) design and construction step in to determine what the design will look like and fulfill the construction; and 3) facilities management takes over to maintain the life of the building for the occupants.

This traditional delivery model, though efficient in the global delivery of workplace, is not as effective as it could be. Yet, restructuring of the CRE team is not always easy and is often met by reluctance in the ranks.

Challenges to Moving Strategy Forward
Challenges to CRE team changes can take various forms but often stem from human nature. Human beings as a whole have a tendency to be protective and territorial. For instance, the different segments of the CRE team may see the delivery of space expansion from its own perspective. Design and construction may view creating the new space within a specified time frame as the primary goal. Consequently, plain and simple building policies are preferred, such as standards that drive decisions on which employees receive offices. Adding new strategies such as employee spaces that align with work process can be seen as muddying the waters and making design and construction less efficient.

Change in itself can be a hindrance, especially when it challenges an established routine. Facility managers appreciate consistency, predictability, and most of all meeting their customer's needs. For example, when it comes to replacing light bulbs, the fewer types the better. At face value this might seem trivial. But for a group that is responsible for keeping the lights on in a multi-level building with hundreds of rooms, workplace designs that require several types of bulbs can add frustration to an already thankless job.

Sometimes change is hindered by a knee-jerk response-to economic conditions. For instance, following a recession, portfolio planning may be reluctant to give approval to a new building or new space, even though the location better suits the needs of the people. Even if money is available, the group may decide to play it safe and recommend staying in the current location.

Too often the real estate team is perceived as a "sunk cost." This belief not only diminishes the value of the team but furthermore discourages all CRE change by inferring that getting a job done faster, easier and cheaper is always the best solution.

Addition of a strategy expertise
The idea of a real estate strategist is not new. For years, design and construction teams have introduced a "strategic" expertise to drive space reduction and realignment into the workplace. Recently in larger CRE teams, strategists have been budgeted for and brought on as a unique component of the real estate team.

Because strategists focus on how space impacts group dynamics, their initial value is to align the people aspect of work with the real estate needs. In looking beyond the basic requirement for more space, they focus on employees' behaviors-necessary considerations in today's people-focused work culture. The strategic goal is to envision a workplace as an integral tool designed to drive company results. This is accomplished by creating space that will enable employees to work more efficiency, expand productivity and create a stronger collaborative and innovative work experience.

Initially, strategists facilitate the development of a stronger CRE team by posing different questions than the rest of the team asks. This approach kicks the conversation up a notch, and ultimately broadens the real estate decision-making process. For instance, a company may decide adding a remote work program is a good idea because of low space utilization. The assumption is the more employees that opt into the program the less assigned desk spaces are needed. The strategist, however, determines the complexity of people working at multiple locations in a day is what really causes assigned seats to be empty. The real solution would be to create activity settings which better align with the behaviors of the people working.

With the addition of a strategy component, CRE teams champion space as an integral part of the business delivery. Because strategy is change-driven and people-driven at its core, strategists align the organization with the future by incorporating issues important to the company as a whole and the employees specifically. Strategists add a strong alignment between the business and the CRE team, focusing design expertise to the real estate alignment with people at work. They provide the essential link that becomes the glue that pulls everyone successfully together. The overall effect is a more comprehensive real estate process.

A New Education in Workplace Strategy
A sure sign that the role of the strategist on the CRE team is increasing is apparent in the rise of advanced educational opportunities in this field. In 2011 CoreNet Global brought together subject matter experts to develop and deliver a new Masters of Corporate Real Estate specialization in Workplace Strategy (MCRw).

The program, which recognizes that strategists work to drive business value from considering both the behaviors of people working and the vision of the business, focuses on seven competencies: Engagement and Enrollment, Visioning the Future, Critical Business Process Translation, Program Development, Leading Change, Program Management and Continuous Improvement.

Through the MCRw program, which offers a comprehensive approach to corporate real estate management, strategists can further hone their skills. Incorporating this enhanced workplace strategy allows the CRE team to effectively combine their expertise to create a more valuable work environment for the business.

The New CRE Integrated Team
The pressure of business change continues to change the CRE strategy to meet the needs of a people at work. Increased demands on employees, the need for more advanced technology and a shift in how work is defined require businesses to view the CRE team in a new light. The future of the CRE team is Strategy.

Many of today's potential employees are seeking employment with companies that offer a greater sense of purpose and community experience in their work environment. Workers seek truth and trust within their companies before they can attain the desired level of engagement. Businesses that create integrated design strategies will drive their company's relationship with employees, opening the door wider for high levels of engagement and success in the future.

Strategically designed workplaces have the responsibility to develop a stronger sense of belonging, employee loyalty and contribution, which leads to greater value for the company. The people-focused strategist integration of the CRE team is responsible for putting this chain of events into motion in the workplace.

Over the last 20 years, the strategy world has matured. In response, strategists are becoming key contributors to CRE teams. By presenting different questions and seeking smarter answers essential to corporate real estate they are enhancing the value of the Corporate Real Estate team. Overall, they are helping companies make the necessary business transformation to succeed in today's more complex work environment. Companies that adopt a balanced, strategically integrated approach to corporate real estate are moving forward and expanding not only their space, but the value of the places where their people work. Workplace strategy's role is to become the fourth leg of the team to integrate CRE into the business as a transformational leader.

About the Author
Brady Mick
is an architect, workplace strategist and client leader for Cincinnati, Ohio-based BHDP Architecture. Established in 1937, BHDP is an experiential design firm that focuses on creating environments tailored to the client culture and work process. For more information, visit or call 513-271-1634.


Technology’s Influence on Industrial Real Estate

By Lewis G. Feldman, JD

The market for industrial real estate is changing rapidly due in part to consumers’ use of emerging technologies. The cost, speed, and mobility of retrieving information -- and new infrastructure to quicken the pace of transporting and delivering goods to consumers worldwide -- are affecting the location and usage of industrial real estate throughout the East and West Coasts and the Gulf of Mexico.

Markets near rail lines, airports, seaports, and inland distribution hubs are attracting large warehouse/distribution centers to service retailers’ growing e-commerce sales. Same-day delivery models are being adopted by some forward-thinking retailers and are boosting demand for infill industrial development and driving site selection and development demand for warehouse facilities.

Other factors that are having an impact on the changing industrial real estate sector include the widening of the Panama Canal and changing shipping routes. Rising costs are also serving to stimulate development in the logistics and industrial sectors outside of traditional port areas.

More changes are on the way: By 2016, the U.S. is expected to realize a 61 percent increase in e-retailing over 2011 levels, with projected sales reaching approximately $327 billion. Mobile commerce, social commerce, and quick response codes will continue to allow consumers to research, compare, verify, locate, acquire, and receive goods and services over the Internet with speed and efficiency not previously imagined.

The backbone of a successful e-commerce operation is its logistics and distribution strategy. The need to quickly and accurately receive, process, and ship each sale places unique demands on e-commerce facilities. Modern online purchase fulfillment centers are a blend of large spaces, high technology, and 24-hour operations.

Amazon, for example, has announced projects in California, New Jersey, and Texas totaling more than 25 million square feet. This is in addition to the 37 million sf Amazon already owns or leases across the country. Similarly, Nordstrom recently purchased a 700,000-square foot facility in Rancho Cucamonga, Calif., to meet the demands of rising online sales.

Capital is migrating toward industrial real estate, banking on the access to technology and consumer demands for faster online order fulfillment. Shipping route alternatives are also a factor given the widening of the Panama Canal and the cost dynamics associated with transporting goods from Asia and Europe to and from the U.S. The confluence of these factors is accelerating the pace of change in the U.S. industrial real estate sector and will continue to have an impact in the future.

Lewis G. Feldman, JD, is a partner in Goodwin Procter's Business Law Department and a member of the Real Estate, REITs and Real Estate Capital Markets Group in Los Angeles. Contact him at

Legal Briefs

Gov’t Issues

What should owners know about federal tenants?

By Suzanne D. Reifman

You are an investor who has just snapped up a distressed property that includes a lease with the federal government. In the best scenario, you gain a desirable tenant with a long-term lease, and the U.S. General Services Administration wants to lease additional space in your building.

In a sadder tale, you review the lease and learn that the terms are not as favorable as they originally appeared. You also receive notice that the GSA will be vacating half of its space in the building — moving out the Securities and Exchange Commission and moving the Social Security Administration into the balance of the space.

The GSA represents more than 400 federal agencies and has more than 7,000 leases in properties throughout the U.S. In effect, it is the nation’s largest tenant, but one with many faces: Not all federal agencies use space in the same manner. For example, while the SEC might be a quiet corporate office, an SSA office may have greater public contact. With more people wandering through the building, your security costs increase.

Because the federal government plays by its own leasing rules, this exchange of tenants and many other aspects of government leases can be a rude awakening to those who purchase foreclosed properties without realizing the complexity of leasing to government tenants. In a perfect world, GSA leases can provide “government-insured” stability to properties, but these days, who lives in a perfect world? These tips will help identify some of the issues that GSA leases present to property owners.

Lease Issues
A surprising number of buyers of foreclosed properties do not realize that the property includes a government lease. Property due diligence needs to specifically address whether there are government tenants and what agencies are involved.

Federal government tenants will not agree to use a building owner’s lease document and will demand that the building owner use a standard government form, which contains literally hundreds of pages of unique government requirements. As a result, GSA leases require substantially different — and more robust — due diligence than leases with commercial entities.

In addition, some new owners fail to understand the financials of a GSA lease and end up with an investment that is significantly less advantageous than they thought. GSA leases also afford the government unique rights not found in most private-sector leases, so solicit assistance from a professional with GSA expertise.

Perhaps more significantly, government leases contain many onerous compliance requirements. Has the previous building owner provided the required supplies and services or have there been performance problems? These could result in the government performing the work (and charging you) or possibly terminating the lease for default, among other consequences.

This is most important in cases involving possible violations of the False Claims Act or certain other criminal laws and regulations. Government enforcement of FCA violations is at an all-time high. Moreover, the government has certain mandatory disclosure requirements for violations of the civil FCA and for other civil and criminal violations.

The GSA’s “subordination, nondisturbance and attornment” lease clause provides that, in the event of a foreclosure, a purchaser/transferee of the lease automatically acquires all of the obligations of the lessor under the lease. In other words, when the building owner agreed to the original lease with the government, it committed you to providing uninterrupted services to the government.

Novation Agreements
The GSA and many other federal agencies will issue a “supplemental lease agreement” in which the new owner certifies to various requirements. In addition, all government contracts, including leases, are subject to the Anti-Assignment Act, which prohibits the assignment of the contract to a third party without the government’s consent. This means the government will not recognize the property transfer unless it enters into a “novation agreement,” under which the new owner agrees to assume the responsibilities and liabilities of the former owner.

It may be tempting to simply avoid the issue, especially since many new owners intend to re-sell the building as soon as possible. However, once the government realizes there is a new owner, it usually will place all rent payments in escrow until a novation agreement with the new owner is finalized.

Once you have executed the SLA and the novation agreement, you are now a government contractor subject to the stringent requirements of the lease. As a result, you need to take all necessary steps to immunize yourself from liability. First, assuming you determined the overall compliance of the former building owner before this point, you will need to stay on top of lease administration activities to avoid your own compliance problems. In particular, make sure that any invoices for payment are accurate.

Federal government leases contain various socioeconomic clauses that require certain government landlords to subcontract a certain percentage of their supplies and services to small businesses and to “flow down” various government requirements to their subcontractors. This usually requires modifying standard subcontracts and possibly changing subcontractors if a vendor cannot or will not meet the government’s flow down requirements.

There is no doubt that leasing to a government agency can be an extremely sound investment, particularly in times of economic uncertainty. Although these recommendations represent only the tip of the iceberg in terms of issues to consider when leasing space to a government tenant, they should increase the possibility of a happy ending over a horror story.

Suzanne D. Reifman is a partner in the Washington, D.C., office of Vinson & Elkins, with previous experience as a GSA contracting officer. Contact her at
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