Some very close friends of mine who currently are shopping around for a loan. They own a large vacant office building which is arguably worth about $3,000,000; it would require much more than that to replace it. The owners are looking for a $400,000 loan to replace some unfavorable, existing debt. That is all they owe on the building – something less than $400,000. Even with a very conservative appraisal of the property, a lender would be funding a very small percentage of the value. For instance, if the lender agreed that the building had a value of $2,000,000, their $400,000 would represent only a 20% loan to value. This is the very heart of how real estate lending is supposed to work. A borrower comes to a lender offering real estate as collateral for a loan. A commitment to lend is provided by the lender based on certain terms - rate, term, amortization, loan to value (LTV) and receipt of an arm’s length appraisal of the property. Done deal.
The problem is that over the last few years, property values have dropped. A loan that once carried a LTV of 75% in 2006 now may be a 90+% LTV. The value of the lender’s collateral has dropped in step with this trend. Borrowers are not the only oneswho can find themselves underwater. Consequently, asset loans, loans based on the perceived value of something are a little hard to arrange. Or am I being too subtle? Among many lenders, asset loans are toxic.
That’s why the news of the Gordon Food Service purchase of 1 3/4 acres on Kingston Pike for $1,000,000 per acre is so positive. Finally, we are seeing signs of appreciation, or at least stabilization of prices of prime real estate. Over the past few years, values have been dropping and licensed appraisers have had to use those dropping property values as comparables to fix values for newly appraised properties. Please understand that appraisers are not villains here; they are bound by the data available to them.
But think for a minute. Gordon Food represents a new trend – prices stabilizing, even increasing. Now we have a new comparable. A few more, similar transactions start to make a trend. Appraisals will reflect this trend. Bankers may decide that the risk of holding real estate as collateral has diminished and allocate a larger percentage of their funds to real estate loans. Think of it. Developers and investors fully engaged in their work. Architects and contractors fully employed. The possibilities boggle the mind.
When Gordon Food Service opens for business, I think I’ll go in and thank them.
This past Friday afternoon, I was visiting with a broker friend and three industrial developers over a beer when the subject changed to Kroger, Knoxville’s currently reigning real estate villain. As you may know, Kroger purchased a parcel of land adjacent to their existing Marketplace store on Kingston Pike near Cedar Bluff with the intention of building a new store (presumably abandoning the one they are operating now).
According to one of the developers, it is a scandal that Kroger would pave another greenfield site when there are so many vacant “big boxes” they could renovate and expand, if necessary. Besides, the Marketplace store is perfectly adequate, he opined.
I am not able to comment on the adequacy of the store or the internal operations of Kroger; however, my friend, the developer of industrial buildings, had completely overlooked the idea of fungibility. Subject to zoning restrictions, site functionality, transportation considerations etc., an industrial building can be sited anywhere. Kroger, on the other hand, must evaluate the additional requirements of visibility, traffic patterns, demographics and others to identify a successful location. Simply put, the location of a Kroger is non-fungible; the average industrial building is much less so.
Besides, I am firmly convinced that Kroger’s decision to purchase/ develop this property and move its store is largely a stratagem to safeguard market share by denying one of their competitors the opportunity to out position them. Kroger has long been the dominant grocer in Knoxville, but the expansion of FoodCity, Walmart, Target, Fresh Market. EarthFare and Aldi, and the rumored entry of Publix, Costco and TraderJoe’s, threatens their share of the grocery dollar.
Recently, a friend of mine, Pamela Treacy, brokered the sale of 1 3/4 acres of commercial property on Kingston Pike just west of Cedar Bluff to Gordon Food Service (GFS). The sale was reported in the newspaper. Omitted from the article was the fact that GFS paid $1,000,000 per acre for their site.
There have been other sales of a million dollars per acre - the site just west at Peters Road and Kingston Pike where Walgreens is located comes immediately to mind - but, in this time of reduced sales and lower prices, this transaction certainly raised some eyebrows. It is also a wonderful starting point for a number of conversations about real estate and its value.
Let's talk about fungibility. Everyone has heard the old expression that land is valuable because "they ain't making any more." Those of you who have driven across West Texas, New Mexico, Arizona, or from Nashville to Memphis for that matter, know that they may have quit making it, but the current need seems to have been adequately satisfied. What is in short supply is the "McDonald's Corner." Feel free to substitute "bank corner" or "national drugstore chain corner" or "gas station corner." These are the 100% can't miss retail locations in heavily trafficked areas at signalized intersections. Companies will pay large sums of money for them. That's where non-fungibility is important. A commodity is fungible if it is interchangeable with any other unit of the same commodity. A barrel of oil or an ingot of gold is fungible because it can be exchanged freely with any other barrel or ingot. Real estate is non-fungible, and values are set based on the fact that no two pieces of property are interchangeable. One property may be worth $1,000,000 per acre because of its location, zoning, accessibility, usability, traffic count etc. It is doubtful that the property located a three iron away enjoys the exact same valuation. It could be more or less valuable based on the variations in the metrics.
At the intersection of Peters Road and Cedar Bluff there is an Applebee's on one corner, Puleo's on another, a vacant bank building (soon to be Smart Bank) on the third and undeveloped land on the last. Why is there a vacant lot at the southwest corner of this intersection? Simply because traffic queuing at the stoplight in order to enter I-40 East backs up beyond the property boundaries making it very difficult and time consuming to access the site from Peters Road (Parkside) which currently is the only entrance point into the site. Functionally, the site is not as usable as the other three even though the location is identical. Would you trade the northwest corner (pre-development) for the southwest?
I happen to really like my house. I live across the street from a park, and I am close to work and a really good grocery. It is a small house, but it suits me. I would not have bought this house if it were moved two miles in any direction. That is the lesson of non-fungibility.
TDOT recently released the latest update to their three year plan outlining road building projects that have been approved to commence between now and fiscal year 2012/2013. Road building in East Tennessee has slowed due in some measure to the gargantuan size of the recently completed I-40 Smartfix project and reduced gas tax receipts because of the recession, increased CAFE standards and the growing popularity of hybrids. (Will electric cars be able to populate the highways without usage fees?).
Despite the slow down, there are some road projects that will affect our lives, most notably the rehabilitation of the Henley Street Bridge, which will be out of service for years.
If you are so inclined, the following link takes you to the entire list of projects statewide.
Last week I was invited to a broker open house at a Class A office building on Pellissippi Parkway. The owner occupies the top two floors of the three story building. The building and the location near the intersection of Pellissippi and Dutchtown are first class. I spoke to one of the principals, and he was understandably proud of his building. Interestingly, as we talked, the conversation drifted away from building amenities and construction. This gentleman started talking about the adjacent creek and the fact that an undeveloped ribbon of property would remain in perpetuity. He mentioned the animals that he had seen recently, among them coyote and turkey, and related that he was distracted sometimes by the flight of the hawks outside his window. I immediately wanted to help these folks lease the vacant space in this building; in fact, I wanted to move into the building.
The experience brings to mind a 1999 Commencement Address at VillanovaUniversity given by writer, Anna Quindlen. I hope that in this season of graduation, you will indulge me this longish meditation.
It is a great honor for me to be the third member of my family to receive an honorary doctorate from this great university. It’s an honor to follow my great-uncle Jim. Who was a gifted physician, and my Uncle Jack, who is a remarkable businessman. Both of them could have told you something important about their professions, about medicine or commerce.
I have no specialized field of interest or expertise, which puts me at a disadvantage, talking to you today. I’m a novelist. My work is human nature. Real life is all I know.
Don’t ever confuse the two, your life and your work. The second is only part of the first. Don’t ever forget what a friend wrote Senator Paul Tsongas when the senator decided not to run for reelection because he had been diagnosed with cancer:
“No man ever said on his deathbed, I wish I’d spent more time in the office.”
Don’t ever forget the words my father sent me on a postcard last year:
“If you win the rat race, you’re still a rat.”
Or what John Lennon wrote before he was gunned down in the driveway of the Dakota:
“Life is what happens when you are busy making other plans.”
You walk out of here this afternoon with only one thing that no one else has. There will be hundreds of people out there with your same degree; there will be thousands of people doing what you want to do for a living. But you will be the only person alive with sole custody of your life.
Your particular life. Your entire life. Not just your life at a desk or your life on a bus, or in a car, or at a computer. Not just the life of your mind, but the life of your heart. Not just your bank account, but your soul.
People don’t talk about the soul very much anymore.
It’s so much easier to write a resume than to craft a spirit. But a resume is a cold comfort on a winter night, or when you’re sad, or broke, or lonely, or when you’ve gotten back the test results and they’re not so good.
Here is my resume. I am a good mother to three children. I have tried never to let my profession stand in the way of being a good parent. I no longer consider myself the center of the universe. I show up. I listen. I try to laugh.
I am a good friend to my husband. I have tried to make marriage vows mean what they say. . I show up. I listen. I try to laugh.
I am a good friend to my friends, and they to me. Without them, there would be nothing to say to you today, because I would be a cardboard cutout. But I call them on the phone, and I meet them for lunch. . I show up. I listen. I try to laugh.
I would be rotten, or at best mediocre at my job, if those other things were not true. You cannot be really first rate at your work if your work is all you are.
So here’s what I wanted to tell you today: get a life. A real life, not a manic pursuit of the next promotion, the bigger paycheck, the larger house.
Do you think you’d care so very much about those things if you blew an aneurysm one afternoon, or found a lump in your breast?
Get a life in which you notice the smell of salt water pushing itself on a breeze over Seaside Heights, a life in which you stop and watch how a red tail hawk circles over the water gap or the way a baby scowls with concentration when she tries to pick up a Cheerio with her thumb and first finger.
Get a life in which you are not alone. Find people you love, and who love you. And remember that love is not leisure, it is work.
Each time you look at your diploma, remember that you are still a student, still learning how to best treasure your connection to others.
Pick up the phone. Send an email. Write a letter. Kiss your mom. Hug your dad.
Get a life in which you are generous. Look around at the azaleas in the suburban neighborhood where you grew up; Look at the full moon hanging silver in a black, black sky on a cold night. And realize that life is the best thing ever, and you have no business taking it for granted. Care so deeply about its goodness that you want to spread it around.
Take money you would have spent on beers and give it to charity. Work in a soup kitchen. Be a big brother or sister. All of you want to do well. But if you do not do goo,d too, then doing well will never be enough.
It is so easy to waste our lives: our days, our hours, and our minutes. It is so easy to take for granted the color of the azaleas, the sheen of the limestone on Fifth Avenue, the color of our kid’s eyes, the way the melody in a symphony rises and falls and disappears and rises again.
It is so easy to exist instead of live.I learned to live many years ago. Something really, really bad happened to me, something that changed my life I ways that, if I had my druthers, it would never have been changed at all.
And what I learned from it is what, today, seems to be the hardest lesson of all. I learned to love the journey, not the destination. I learned that it is not a dress rehearsal, and that today is the only guarantee that you get.
I learned to look at all the good in the world and to try to give some of it back because I believed in it completely and utterly. And I tried to do that, in part, by telling others what I had learned. By telling them this:
Consider the lilies of the field. Look at the fuzz on a baby’s ear.
Read in the backyard with the sun in your face. Learn to be happy. And think of life as a terminal illness because if you do, you will live it with joy and passion as it ought to be lived. Well, you can learn all those things out there, if you get a real life, a full life, a professional life, yes, but another life too, a life of love and laughs and a connection to other human beings.
Just keep your eyes and ears open. Here you could learn in the classroom. There, the classroom is everywhere. The exam comes at the very end. No man ever said on his deathbed that he wished he spent more time at the office.
I found one of my best teachers on the boardwalk at Coney Island maybe 15 years ago. It was December, and I was doing a story about how the homeless survive in the winter months. He and I sat on the edge of the wooden supports, dangling our feet over the side, and he told me about his schedule, panhandling the boulevard when the summer crowds were gone, sleeping in a church when the temperature went below freezing, hiding from the police amidst the Tilt A Whirl and Cyclone and some of the other seasonal rids. But he told me that most of the time he stayed on the boardwalk facing the water; just the way we were sitting now, even when it got cold and he had to wear his newspapers after he read them. And I asked him why. Why didn’t he go to one of the shelters? Why didn’t he check himself into the hospital for detox. He just stared out at the ocean and said, “Look at the view, young lady, look at the view.”
And every day, in some little way, I try to do what he said. I try to look at the view.
And that’s the last thing I have to tell you today, words of wisdom from a man with not a dime in his pocket, no place to go, no where to be.
There seem to be growing numbers of modest signs that the Great Recession is ending. KnoxCounty’s jobless rate dropped in March by .2 percent. Home resales (previously occupied homes) increased 7% last month, reversing a three month trend. My phone is ringing (more than it was) – particularly calls related to office, retail and industrial leasing. However, every opportunity presents new challenges, and one of the most significant challenges in the “new normal” is tenant improvement money. Tenant improvement (TI) is the work that is required to be completed in order for a space to be tenantable for a particular user. TI can range from none to substantial.
In most cases, there is some expense, if it is nothing more than repainting the premises. For instance, I am working on a retail lease for which the construction quote to complete the TI is in excess of $58.00 per square foot. At the negotiated rent, the tenant would operate in the premises for almost 3 ½ years before the Landlord would be fully reimbursed for the TI (and that is not factoring in the cost of funds or opportunity costs).
The truth is that tenant improvements represent a huge obstacle for both landlords and tenants. I believe this obstacle is rooted in the culture of loose credit we are currently being forcibly weaned from. Years ago, when I started in this business, TI was not liberally given. Legitimate anchor tenants were given construction allowances or turnkey spaces, but it was expected that just about every tenant would have a hard investment in the real estate. It may sound silly, but landlords and tenants were more like partners then.
As credit became easier to obtain, lenders allowed developers to borrow greater and greater sums which allowed them to attract and incentivize tenants with tenant improvements. Pretty soon, the TI incentives that had been previously the exclusive domain of anchor tenants, were being offered to all sizes of space users. Businesses did not have to preserve capital for hard construction in order to expand. They only needed capital for furniture, fixtures and equipment (FF&E) and inventory. In some cases, undisciplined expansion happened. The covenant of partnership and shared responsibility was broken. The result of this is my negotiating with a 1500 square foot weight loss clinic over a $58.00 per square foot tenant improvement allowance. There was a time when deals like this might have made sense; they don’t anymore.
This is why it is important to you:the age of loose credit is behind us. Underwriting of new construction (when that starts again) will be very tight. Landlords will not have the available funds to provide generous TI. Owners of existing real estate are unable or reluctant to spend for TI because they either do not have it or can not borrow it; they have had their cash flow squeezed by vacancy or rent reductions over the past year; or they have been burned in the past by tenants seeking TI dollars and not fulfilling their lease obligations. Now, tenants will be asked to invest hard dollars in construction or, at the very least, to scale back their expectations of allowances from the landlords. Some landlords are offering free rent and other creative ideas in lieu of TI. Many landlords have to pass on tenants with unrealistic TI requirements. Tenants would do well to remember that TI represents cash, a landlord’s most precious asset these days, and become partners with owners in arriving at sensible solutions to get deals done.
A few days ago, I met a gentleman who represented a large national company – what I call a new economy business – who was looking at a building I am marketing. He was looking for a 20,000+/- square foot customer call center to augment at least two existing call centers in United States. Initially, the company had identified 10 cities suitable for the location of this call center, and by the time this gentleman arrived in town, the list had been pared to three. The more we spoke the more it became apparent to me that the decision was between Knoxville or Nashville.
My contact was purely an operations person, charged with opening and running the facility. We spent time reviewing the floor plans, parking, presence of fiber, power redundancy, emergency power generation, etc. He indicated that there were three properties in Knoxville that might prove suitable. He also shared that it was his preference that the center be located in Knoxville, mainly because he felt that he would get a better and more reliable workforce here.
The reasons I choose to share this experience are two: First, everyone knows this company and what they do, and the company would be a fabulous addition to the community. Second, I wanted to relate what this gentleman told me because it raised many questions about our city. He explained that despite his preference for Knoxville, there is a bias in the corporate office for Nashville. It seems that the opinion “upstairs” is that Nashville’s image is more compatible with the progressive, hip image the company projects. I am not talking about the “progressive” tag that politicians lob at each other as a pejorative. Rather, the company thought Knoxville might be a little too provincial, lacking the entertainment, cultural and lifestyle options of Nashville.
Certainly, I am aware of Nashville’s many assets. However, I am being honest when I say that I prefer Tennessee Shines to the Country Music Awards and an Ice Bears v Havoc matchup suits me just fine when compared to paying up to 10 times more for a ticket to see the Predators. I prefer the Ryman over the Tennessee Theatre, but only slightly. SequoyahHillsPark is more user friendly than CentennialPark and the South Knoxville Urban Wilderness that is being promoted by the Legacy Parks Foundation (and others) will one day be a treasure that is equal to or better than Percy Warner Park. I wish Knoxville had the equivalent of the Steeplechase, or, if we do, I wish I knew what it was.
I began wondering if not knowing about our city’s assets may be the reason for our image problem. Recently, I have had to explain to numerous Knoxvillians about our very own Big Ears Festival which was covered and well received by Rolling Stone, The New York Times and Spin Magazine.
So, what are our best assets? Many would say that Knoxville is a great place to raise a family, which can be construed as both a negative and positive depending on your age, marital status, lifestyle etc. Personally, my fondness for Knoxville grows with every new business or development downtown. I love the Sundown in the City concert series, First Friday gallery crawls, and WBVX’s Blue Plate Special. My favorite neighborhoods are Maplehurst, Sequoyah Hills and Fourth & Gill.
In Knoxville, we enjoy the combined assets of the University of Tennessee, the GreatSmokyMountainNational Park and the Oak Ridge National Laboratory. In fact, the more I write, the more assets I think to include on the list, and my list would differ from yours. The key is that we need to do a better job of promoting our city and our brand of Appalachian hipness. I invite your thoughts and involvement.
These days, people are falling all over each other to repeat, retweet, recast and report dire predictions about the state of the commercial real estate business. They are the hysterical oracles of modern day, much like the Sibyls of Ancient Greece. Most often, they trot out the widely broadcast news that $1.4 trillion in commercial real estate mortgages are due to mature between now and 2014. I have no reason to doubt the figure, but I say, “So what?”. I am purely speculating, but I suspect that there was an equal amount of debt during the four years between 2006 and 2010. The problem in commercial real estate is not the size of the debt, it is the value of the underlying collateral. We appear to be under water. In fact, some borrowers are drowning.
Real estate loans are placed based on the appraised value of the property being mortgaged. In years past, a investor could borrow 80%, even up to 90%, of the appraised value. Recently, the loan to value (LTV) ratios available to borrowers have dropped to about 60-65%. Additionally, property values have dropped by 20-30% in many cases. Let’s do the math. In 2005, a borrower took out an $800,000 mortgage with a five year term on a $1,000,000 property (80% LTV). When the loan matures in 2010, the property is now worth $800,000 and the bank is willing to loan $480,000 (60% LTV). The borrower owes more than the bank is willing to lend. This is the dilemma that real estate investors, developers and business people are faced with in today’s climate.
However, some good news recently was delivered to my “in box.” Jim Collins is a mortgage broker with First Southern Mortgage in Knoxville. He had just returned from a Commercial Real Estate (CRE) Finance conference. Relating to the previous paragraph, Jim said, “There is plenty of long term, fixed rate money available (for the right deals). Our experience is that many loans originated in the easy credit times of 2005-2008 are overleveraged and we cannot take out the existing debt.”
The remainder of his comments clearly indicates a sea change in attitude toward commercial real estate lending.
“All in all, the mood was optimistic. With very few exceptions, Life (Insurance) Companies have CRE allocations for 2010 and are looking for business. The panic to hoard cash is in the past and everyone is looking to get back to the business at hand...investing money. While most everyone would like to do conservative loans in the 60% to 65% (LTV) range, a few recognize that there just aren’t that many low LTV deals in the market and pressure will drive leverage points up. A couple of Life Companies openly admitted, “If we are going to be doing 75% LTV deals by the end of 2010, then we might as well offer it now and try to pick off the best product in the market.”
“Conduits are gingerly reentering the market. Securitization is testing the waters again with loans up to 70-75% LTV.” Conduits, more formally known as commercial backed mortgage securities, are one of the main sources of funding for commercial real estate, along with life insurance companies and pension funds. I shouldn’t have to tell you that this is good news. It is not a silver bullet, but it should quiet some of the Sibyls.
The Central Business Improvement District’s (CBID) board of directors recently approved a $500,000 grant to support the location of an Urban Outfitters store on Market Street in downtown Knoxville. For the record, I fully support and commend the actions of the CBID Board and Tim Hill and his staff at Hatcher-Hill Properties who solicited Urban Outfitters to consider Knoxville for expansion. Downtown developers and boosters have long sought a “catalyst project” to spur additional growth and development in the city center. I agree with Mr. Hill’s statement at the CBID meeting that Urban Outfitters can be that catalyst.
What I found interesting was the example he used to highlight the catalytic possibilities. He talked briefly about the Third Street Promenade, a downtown redevelopment project in Santa Monica, California. Urban Outfitters apparently committed early to this project. He mentioned four additional retailers who followed UO’s lead – Old Navy, Barnes & Noble, Apple and Pottery Barn. No one thinks that national retailers of this caliber will blindly follow Urban Outfitters into largely unproven markets like downtown Knoxville; however, let’s assume that UO exceeds its sales projections downtown. Other retailers will know about their success and will want to locate there. That is the nature of a catalytic project.
My questions are, “What happens when Pottery Barn and Old Navy call? Shouldn’t we be discussing it now? And Who exactly should be leading the discussion?”
Look at it practically. Apple’s footprint of less than 6,000 square feet can be accommodated easily; however, Old Navy Stores are generally between 20,000- 35,000 square feet. Barnes & Noble stores range from 25,000 – 67,000 square feet. Pottery Barn is a modest 10,000 – 14,000 square feet. If Urban Outfitters is the catalyst for their potential interest, it can reasonably be assumed that these retailers would want to occupy space nearby. Is it beyond possibility that Market Square could be taken over by national retailers? Others have suggested Jackson Avenue, specifically the McClung Warehouses, as a possible retail corridor. Although, if you are a retailer whose impetus for being in Knoxville is the benefit of co-tenancy with Urban Outfitters, would Jackson Avenue be a viable location?
In a random and admittedly limited poll, I asked people what building downtown is suitable for the next large retailer. One hundred percent of the respondents chose The Penney’s Building . And what about the third choice for a large retailer? Most people did not have an answer. The Campbell Building? The Farragut Building? Marble Alley?
The point is that we should be planning now. The grant approved by the CBID was not a desperate attempt to save downtown. It was an endorsement of downtown’s vibrancy and acknowledgement that sometimes major steps forward require a little catalyst. Let’s start talking about what happens when our catalyst catches fire.
In the most recent Loopnet Pulse Poll, 1500 Owners, investors and brokers were asked to time the recovery, which was defined as the point in time when commercial real estate transaction volumes will increase.
45% of respondents answered 2010; 35% said 2011 and 20% said 2012. Data shows show that transaction volume increased 40% in Q4 2009 over Q3 2009. Although Q4 2009 was 24% lower than Q4 2008, that result was much better than the 65% drop in the Q1-3 2009 period as compared to Q1-3 2008.
When asked to name the biggest obstacle to completing transactions, 50% of respondents cited debt financing and 25% referred to high asking prices. Interestingly, 50% of the responses from the investor group said high asking price was the biggest obstacle.
60 % of the respondents believe that commercial prices will bottom in 2010. However, only 45% expect that transaction volumes will increase in 2010. This discrepancy suggests that there will need to be a period of stable pricing before buyers will reenter the market in earnest.
Note: Moody’s/ REAL CPPI (commercial real estate pricing index) ticked up slightly in November. Does this represent a change in sentiment that will result in buyers taking action?
Jim is a commercial real estate broker. He is a founding principal of Cornerstone Commercial Real Estate Services, LLC, the Cushman & Wakefield Alliance office in Knoxville, Tennessee. His experience spans thirty years and every facet of the business from, sales & leasing, valuation, property management and development. His cell phone is always on - 865-803-7777.
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