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The Counselors of Real Estate is committed to illuminating issues which impact real estate and the capital markets. Due to the diversity of its membership and the role of CREs as objective problem solvers, the organization does not take official positions on issues. Rather, through The Counselors’ External Affairs initiative, we seek to elevate and encourage dialogue on property related matters. The Counselors’ regular External Affairs Alerts address six key areas:

Capital Markets
Public-Private Partnerships
Professional Practice
Land Use, Energy, and the Environment
Real Estate Trends

White papers on these subjects are regularly posted, and we encourage comments from CRE members and the industry public.

External Affairs Alert - June 2015 - The CRE 2015-16 Top Ten Issues Affecting Real Estate

External Affairs Alert - January 2015 - Water’s Emerging Role in Real Estate Investment

External Affairs Alert - August 2014 - Energy and Real Estate

The CRE 2014 Top Ten Issues Affecting Real Estate - June 2014

External Affairs Alert - Professional Practice Perspective - February 2014

External Affairs Alert - Trends and Outlook Perspective - December 2013

External Affairs Alert - June 2013 - Public-Private Partnerships Perspective

The CRE 2013 Top Ten Issues Affecting Real Estate - June 2013

External Affairs Alert - April 2013 - Land Use, Energy, and the Environment Perspective

External Affairs Alert - February 2013 - Capital Markets Outlook

External Affairs Alert - August 2012 - Land Use, Energy and the Environment Perspective

External Affairs Alert - July 2012 - International Perspective

The CRE 2012 Top Ten Issues Affecting Real Estate - June 2012



External Affairs Alert - June 2015 - The CRE 2015-16 Top Ten Issues Affecting Real Estate

The CRE 2015-16 Top Ten Issues Affecting Real Estate:

1. Demographic Shifts
2. Excess Capital Supply
3. Rising Interest Rates
4. Global Instability and Currency Devaluation
5. Urbanization
6. Energy
7. The Gap Between Rich and Poor
8. Infrastructure
9. Real Estate Technology and Crowdfunding
10. The Changing Retail Model

Descriptions of each of the 2015-16 Top Ten Issues:

1. Demographic Shifts: Two key groups – large numbers of retiring “Baby Boomers” (born between 1946 –1964), and the next large population wave, the Millennials (born between 1980 – 2000) -- will have the greatest impact on real estate through the lifestyles they choose in coming years. This casts a spotlight on housing in all its forms: for seniors, the homes in which they choose to age-in-place, downsized homes, senior communities or assisted living; for Millennials, the decision to buy or postpone buying, and location most often being driven by amenities, such as urban walkable communities. The real estate and service sectors targeting each group are adapting, too – medical facilities, retail, office and entertainment venues, to name a few; as well as infrastructure and distribution. Overall, demographic shifts will drive decisions across virtually all real estate sectors this year and for the foreseeable future.

2. Excess Capital Supply: Funds continue to flow from outside the U.S. to purchase U.S. real estate. The supply is driven by economies that have high savings rates, a shortage of mature financial markets and few safe assets. The investment rate is approaching record highs, presenting the potential for pressure on investments in the future. While investment in major cities continues, some non-gateway and edge cities are also experiencing higher levels of investment. Multifamily continues to be very attractive, but investment is not limited to commercial property -- residential investment is on the rise, as another form of the secure, transparent asset class that makes U.S. real estate particularly attractive to investors across the globe.

3. Rising Interest Rates: Interest rates have been at near-historic lows – and the general view is that they will stay that way, for a while longer. But savvy investors and homebuyers alike are preparing for rising rates. When it happens, it will devalue future cash flows, thereby devaluing assets. An interest rate rise could spur short-term commercial development and slow home sales. Rising rates will cause higher mortgage payments, thereby decreasing homebuyers’ choices. But if Millennials jump in and buy before interest rates rise too far, it could create a second wind for the residential market.

4. Global Instability and Currency Devaluation: The U.S. dollar remains strong – but the global economy is being affected by currency devaluation in many other countries. Investment from non-U.S. sources helps fuel the U.S. real estate market, but event risk should be considered -- “hot spots” of conflict are continually in the news, as is cyber security -- and the global economy is psychologically linked. Investors and consumers alike should take such factors into consideration as they make real estate decisions.

5. Urbanization: Urban population growth is a global phenomenon. An increasing desire to reside in “live-work-play” and “walkable” communities is not limited to young professionals; older generations are also drawn to such locations, which affects housing choice for all age groups. Shopping malls must adapt; many have skewed to one of two successful models – luxury or discount offerings. Urban vertical shopping configurations are gaining traction. Some suburbs are feeling residential pressure, with home resale not easy when younger families don’t want the kinds of homes that are in plentiful supply from a past generation of suburbanites. The past few years have also seen a rise in corporate relocations to cities from the suburbs as a strategy to attract younger, urban professionals.

6. Energy: Oil price drops this year due to increases in non-U.S. oil production have negatively impacted large and small U.S. producers. Workforce reductions, and the associated decrease in residents’ buying power -- while primarily occurring among workers in oil exploration and production – impacts the greater community, from retail to housing to professional services. Last year’s “boom towns” are now the opposite; the length of this duration is unclear. As a result, alternative energy forms are becoming more attractive. Investors are rethinking their energy investment plans, but the high demand for energy in Japan may change the dynamics.

7. The Gap Between Rich and Poor: because income inequality is widening worldwide, this issue deserves a close look relative to real estate. On the commercial side, it drives new opportunities to serve diverse markets with discounted retail offerings, while at the same time, contributing to a rise in luxury retailers. There are also development opportunities in high-density multi-family and affordable housing, and in “placemaking”-- which can transform a vacant lot or an undesirable neighborhood into an appealing urban “destination” to serve diverse populations. Yet the gap has arguably impacted purchasing power, diminishing housing choices and home ownership -- and contributing to the delay in new household formation among Millennials and certain immigrant groups. The shift from home ownership to renting, and a decline in local small business ownership, contributes to fewer jobs and a lack of investment in communities, increasing the potential for the social unrest, we are seeing in cities and towns throughout the world.

8. Infrastructure: The condition and development of U.S. infrastructure lags behind that of a number of other countries. Aging roads, bridges, and power/gas/water lines no longer satisfy the needs of a highly connected populace, let alone businesses and world economies. Communities and cities do not have the available capital to invest in infrastructure. Public/private partnerships may be the answer. However, in the short term, adaptive reuse is often constrained. This impacts existing buildings and entire neighborhoods, where energy or water infrastructure cannot be readily improved. Development, too, can be limited because existing streets and bridges cannot accommodate increased traffic flow if denser housing or mixed-use development are built. The situation is further complicated by citizens unwilling to live in locations where the distance is too great to travel to work or shopping on crowded roads in disrepair.

9. Real Estate Technology and Crowdfunding: Real estate is one of the most dynamic sectors for technology innovation, positioning the real estate industry for disruption. While venture capital has poured into real estate technology startups, crowdfunding could increase opportunity for smaller investors as well. Diverse audiences, including investors and lenders benefit from new technology, as it speeds information gathering and expedites transactions. Technology has also dramatically changed the way real estate professionals do business.

10. The Changing Retail Model: The retail sector faces continued challenges. Merchandise offerings are subject to the preferences of demographic groups in transition. The sector is skewered by decreasing consumer purchasing power, often hampered by aging infrastructure, subject to steep declines in spending if an adverse event (think terrorist attack or cyber security breach) occurs. And yesterday’s best location may be today’s or tomorrow’s worst as urbanization draws more households into cities. On the bright side, despite steady increases in online shopping, there is still a role for physical presence, where shoppers can browse and try products. Retailers that incorporate e-commerce elements, including fast delivery options, are well positioned, at least in the short term. There is continued pressure on existing properties to keep occupancy strong and adapt logistics. Store sizes -- particularly within live/work/play, walkable, and transit oriented developments -- are shrinking, but many of the attractive amenities of such “urban” shopping districts are now being incorporated into suburban shopping areas.

External Affairs Alert - January 2015 - Water’s Emerging Role in Real Estate Investment

“Water, water, every where,
And all the boards did shrink;
Water, water, every where,
Nor any drop to drink.”

(From The Rime of the Ancient Mariner by Samuel Taylor Coleridge)

Water is emerging as a foundational consideration in real estate investment. Vital to our survival, but taken for granted in most developed countries, a convergence of factors has moved water up to become a critical consideration when building, buying or leasing real estate. This “Alert” summarizes why water has emerged as an issue today, identifies some of the key real estate implications, and outlines ways to integrate consideration of water into property investment due diligence.

Water’s Rise As Investment Issue

The diminishing supply of water is the fundamental issue driving water’s emergence as an investment issue. Global demand for freshwater is projected to exceed supply by 40 percent by 2030 (in 16 years), according to the Water Resources Group, with potentially calamitous implications for business, society and the environment. Water scarcity is already a tragic problem for much of the developing world, where 780 million people have no access to clean water, 2.5 billion have no access to modern sanitation, and over 3 million people die each year – primarily children -- due to water, sanitation, and hygiene-related causes. Future projections are even more challenging--by 2025, 1.8 billion people will be living in countries or regions with absolute water scarcity, and two-thirds of the world's population could be living under water stressed conditions.1

In addition to severe problems in developing countries, other key international concerns include the dramatic reduction of glaciers in the Himalaya’s, whose water melt run-off is critical to over 2 billion people; severe water shortages in the huge Brazilian population centers of Sao Paulo and Rio de Janeiro; and historic water shortages in arid regions throughout the world. The Indian Planning Commission stated that the country’s existing approach to water jeopardizes its economic growth and political stability. In China, home to 20% of the global population but only 7% of its fresh water, former premier Wen Jibao said water shortages threaten “the very survival of the Chinese nation”. In Peru, violent protest from communities fearing for their own water supply has led to the suspension of a US$ 4.8 billion gold and copper mining project.2

Per Capita water use is also expected to increase as world economies grow, and related risks regarding the ability of countries to fund the huge infrastructure investments needed to service these demands, and related political risks, further elevate water’s prominence as a global real estate investment issue. Scarcity issues and crisis are more severe in “developing countries”, but recent water supply crisis/concerns occur in the US and other “developed” countries and are also affecting investment. According to a May, 2014 report from the US Government Accountability Office, 40 out of 50 state are already experiencing -- or will experience within the next ten years -- freshwater shortages which will affect growth and development.3 Severe drought in California has hurt agriculture and required broad rationing. Similar severe droughts have occurred in Atlanta/Georgia, Texas4 , and other regions in recent years. Las Vegas, Arizona and other cities in arid regions have had on-going concerns. Hurricanes Sandy and Katrina threatened water supplies and highlighted water and other infrastructure vulnerabilities.

Part of the rising stature of water as an investment issue is due to uncertainty about future supplies in some developed countries. As a result of drought and years of unmanaged use, US ground water supplies are dropping at alarming rates. A recent study covering groundwater depletion in the US from 1900 to 2008 revealed that “the rate of depletion from 2000 to 2008 was nearly three times greater than the average rate of depletion for the 108 year period covered by the study.5 Decreasing snow falls and more volatile precipitation patterns further complicate matters. While there is still debate about the cause of such volatile precipitation and storms, there is growing consensus of continued volatility and intensity of such weather events.

There is also uncertainty about the fiscal and political will of traditional governmental capital sources to address growing water infrastructure deficits, adding to investment risk. Water systems average over 100 years old and many need constant repair and/or replacement. Water leakage is also a huge contributor to water scarcity and risk. According to the website, there are 850 water main breaks each day in North America.6 On average, utilities worldwide lose more than 30% of the water they distribute to leakage.7 Future supplies are further challenged by forecasts of growing populations—much of it in water scarce regions, and increasing per capita water consumption over the last decade.8

The growing recognition of the interdependence of water use and energy has also highlighted the importance and scarcity of water. The severe drought that affected more than a third of the US in 2012 limited water availability and constrained the operation of some power plants and other energy sources.9 Moving water and treating drinking and waste water take huge amounts of energy—19% of California’s electric energy load is related to the pumping, treatment, and consumer end use of water; 32% of the state’s gas load is related to the heating of water10 and 2 to 3% of all energy consumed in California is used by just one project: the State Water Project to move water over the Tehachapi Mountains into Southern California.11 The substantial water required in the production of bio-fuels and natural gas12 has highlighted scarcity issues that could force game changing water allocation decisions that will influence regional real estate winners and losers. These water-energy issues have been largely ignored to date at all levels of government, and needed programs, policies, and research have been identified.13

Another key factor in water’s rise as an investment consideration is the enhanced attention by regulators and governments on water supply and use issues. Governments are increasingly regulating the use of water through land-use restrictions, building codes and other mechanisms. As new strategies for conservation, repairing/replacing existing water infrastructure, and developing new water supply are promulgated, property owners can expect to play an increasingly key role in funding and executing the strategies. Water offset land use ordinances are already in place in some water-scarce regions, according to a report released by the Alliance for Water Efficiency, and more activity in this area is anticipated.14

Perhaps the most direct and important factor contributing to water’s rise as an investment issue is that it has become a critical investment issue for many businesses (tenants). Major corporations and large businesses, as well as most small businesses, rely on raw materials and/or production in countries spread throughout the world. As water scarcity and other supply problems increase worldwide, threats to critical suppliers and supplies increase. Additionally, water scarcity impacts regions and businesses differently, creating real estate investment opportunities and risks as businesses and governments begin to manage and mitigate water concerns.

Businesses are also drawn to water concerns due to their critical importance to the people they serve in different regions around the world. Water has become an important consideration in corporate social responsibility reporting and related third-party rating organizations like the Carbon Disclosure Project, the Global Reporting Initiative, GRESB, and ULI Green Print. Sustainable use of water in some regions is moving far beyond a cost issue towards a foundation of their commitment and sensitivity to critical community concerns.

Real Estate Implications

Many of the key real estate considerations arise from the types of solutions that are being planned or implemented to address the water supply and volatility concerns highlighted above. The importance of these considerations will of course vary based on the specific investment, but should be considered as part of any investment due diligence.

Water as a Cost Issue

It is inevitable that water is going to cost more and real estate professionals will need to factor this into every development/operating budget. Capital costs can go up as a result of increased regulatory requirements that could be triggered by execution of new leases or sale, or at any time in the event of droughts or other crisis. Operating costs can increase due to price increases (new taxes, fees, or higher water rates) required to fund the repair or replacement of existing infrastructure, or to pay off bonds for new infrastructure. Costs can also rise as a result of regulations to encourage conservation in existing and new assets.15 New developments are particularly likely to be allocated an even larger portion of potential new infrastructure costs.

Desalination is an example of a solution with higher costs. Desalination is employed in over 100 countries, but the amount of drinking water produced is less than 1% of the total world consumption. Prominent in arid countries, desalination plants have been slow to gain acceptance in the U. S. because of opposition from environmental groups due to the brine disposal and energy issues and the high development and operating costs. As of 2010, Florida had the most municipal desalination plants with 148, followed by California at 45, Texas with 30, and North Carolina with12.16

Water as a Business (tenant) Issue

Businesses (tenants in a building) will be subject to varying risks related to water that end up affecting tenant demand and real estate investment performance. Businesses can be influenced by local water costs and availability. Some businesses, like agriculture or energy companies, will be directly affected by cost and availability. Other businesses will be affected by reliance on suppliers or customers in regions with water supply or quality problems. Businesses with active measurement and monitoring of corporate sustainability practices may also be highly sensitive to building water use—resulting in the most direct threat to property investment. Businesses are also increasingly concerned about supply crisis and disruptions resulting from droughts, floods, hurricanes and other weather or natural events.

The growing importance of water to business was highlighted in a 2013 report by Deloitte and the Carbon Disclosure Project that analyzed the water disclosures of 148 of the S&P 500 companies.17 Over 80% of respondents have water management plans in place, and companies reported nearly 800 actions, targets and goals to reduce their impact on water resources. Nearly half of US respondents (46%) had already experienced detrimental impacts related to water, with costs for some as high as US$400 million and projected impacts as high as US$1 billion. Over 90% of respondents could identify if their operations were located in water stressed regions, but only 43 percent knew if key inputs or raw materials come from regions subject to water-related risk – potentially leading to a lack of a necessary response due to risk uncertainty.

Key business impacts include :18

• Increased costs for pre-treatment to obtain desired water quality.
• Increased costs for wastewater treatment to meet more stringent regulations.
• Regulatory restrictions for specific industrial activities and investments.
• Increased health costs for employees in the countries that are impacted.
• Increased responsibility (and costs) to implement community water or to offset new development water needs.
• Cost of infrastructure and watershed restoration projects to mitigate reputational risks.

Water as Geographic Differentiator

The fastest growing states are ones where water scarcity is the most serious issue (California, Nevada, Arizona, New Mexico, and Texas)19. Water access and cost may become a big enough factor in regional economies to influence geographic real estate investment allocations. US Environmental Protection Agency (EPA) recognizes these threats and has just released a study titled “The Importance of Water to the US Economy” which finds that “negative impacts to the quality and quantity of water...have significant ripple effects throughout the economy.20” A 2012 U.S. Intelligence Community Assessment on Global Water Security argues that "during the next 10 years, many countries important to the United States will experience water problems-shortages, poor water quality, or floods-that will risk instability and state failure, increase regional tensions, and distract them from working with the United States on important US policy objectives." 21

While water cost is primarily an issue for water intensive businesses, whose concentrations in an economy can be measured, water access and uncertainty considerations, brought on by weather related events, loss of water rights, growing resource scarcity, and lack of political/fiscal will to build, repair, and replace needed water infrastructure is more difficult to analyze. Measurement and monitoring of regulator and tenant concern and action regarding water issues are possible and may lead to profitable national and international investment allocation decisions, helping to manage downside risk.

Small Water Market Issues

Water issues are not limited to developing countries or large cities. More than 97 percent of US 157,000 public water systems serve fewer than 10,000 people, and more than 80 percent of these systems serve fewer than 500 people. Many small systems face unique challenges in providing reliable drinking water and wastewater services that meet federal and state regulations. These challenges can include a lack of financial resources, aging infrastructure and high staff turnover.22

Coastal Real Estate Concerns

Coastal real estate is some of the most valued and desired in the world. The threat of storm surges and rising seas is increasing the cost to develop in these most coveted locations. Total economic losses from Super Storm Sandy have now reached $70 billion, according to market estimates.23 The commercial real estate community’s immediate response to the effects of mega-catastrophes and rising sea levels includes moving mechanical, electrical and plumbing equipment to higher ground and rooftops and aboveground-only new construction. Proposed long-term solutions under consideration are sea walls, levees, improved storm water management including green infrastructure, and in some areas simply abandoning development with state and city funded purchase programs.

The City of Philadelphia has received high praise for its innovative green infrastructure program. Located on the banks of two rivers, the Delaware and the Schuylkill, Philadelphia faced mounting challenges with storm-water runoff. Many articles have been penned lauding the program and the link to a 2012 article in National Geographic is listed below.24


Water’s rise as a real estate investment issue is based on many structural factors unlikely to change in the near term. While improving technologies and scarcity mitigation strategies will improve water problems in many areas, the level and success of government and business response to problems will vary dramatically by community and country, introducing both investment risk and return opportunities for the astute investor.


1 Charting our Water Future, Economic Frameworks to Inform Decision-making, Water Resources Institute, 2009.
2 From Water management to Water Stewardship, Deloitte and Carbon Disclosure Project, November 2013.
3 US GAO, Freshwater: Supply Concerns Continue, and Uncertainties Complicate Planning, May 2014
4 The 2011 Texas drought caused almost US$8 billion in agricultural damages, making it the costliest drought in history http://today.agrilife. org/2012/03/21/updated- 2011-texas-agricultural- drought-losses-total-7- 62-billion/
5 US Geologic Survey_Groundwater-Depletion-in-the-United-States-1900-2008.pdf
7 Water Ninja’s, Blomberg’s BusinessWeek, Global Economics, January 8th, 2015.
8 EPA Watersense, “Water Efficiency in the Commercial and Institutional Sector: Considerations for a Watersense Program, “
9 The Water-Energy Nexus: Challenges & Opportunities, US Department of Energy, June 2014
10 California Energy Commission, 2005 Integrated Energy Policy Report
11 Water-Energy Connection, EPA Region 9 Website, January 2015.
12 Recent expansion of hydraulic fracturing—“fracking”--uses a substantial amount of water in the production of shale oil and natural gas.
13 Alliance for Water Efficiency and the American Council for an Energy Efficient Economy, Addressing the Water-Energy Nexus: A Blueprint for Action and Policy Agenda, May 2011
14 Alliance for Water Efficiency: Water Offset Policies for “Net Zero” Community Growth: A Literature Review and Case Study Compilation, January 2015
15 Deep retrofits can result in water savings of 40% or more in existing properties. EPA WaterSense, “Water Efficiency in the Commercial and Institutional Sector: Considerations for a WaterSense Program,”
16 According to research by water sector consultant Mike Mickley that was published in 2012 in the IDA Journal of Desalination and Water Reuse, the journal of the International Desalination Association.
17 “From Water management to Water Stewardship, Deloitte and Carbon Disclosure Project, November 2013.
18 “Water Scarcity & Climate Change: Growing Risks for Business & Investors”, CERES, 2010.
19 DOE/NETL, Water Resources and Population Growth, 2000-2020, M.Chan, July 2002
20 action/importanceofwater/ upload/IOW_Synthesis_ Highlights.pdf
21 Global Water Security, US Intelligence Community Assessment, February 2012.
22 US Environmental Protection Agency News Release, April 3, 2014
23 1 Year After Superstorm Sandy: Quick Economic Facts, October 29, 2013, Insurance Journal

Please Submit Comments on this Alert

External Affairs Alert - August 2014 - Energy and Real Estate

For most of the last 40 years, the mention of “energy” and “real estate” in the same sentence evoked discussion of conservation and efficiency. Today, generation and transmission of power are coming to be viewed as critical real estate intensive activities. How we fuel electric power creation is coming to affect all facets of property use and development.

As background, we revisit the birth of the Environmental Protection Agency (EPA) in 1973. The EPA confirmed a growing consensus that US dependence on fossil fuels was no longer sustainable. Burning gas and oil both depleted a finite resource and led to visibly damaging air and water pollution. For a solution we looked to policies supporting conservation and efficiency.

Of course demand for energy only increased as prices rose with constrained supplies. By the turn of the new century, a growing number of middle-class consumers in emerging economies now demand the same energy intensive products and lifestyles the West has long enjoyed. Going forward, by some estimates, the incremental energy demand from China, alone, is projected to equal the combined existing energy demand from the US and Japan today.

As for what fuel(s) for power to use, the consensus has echoed President Obama’s stated policy of an “all of the above” strategy. This means oil, gas, coal, nuclear and renewable energy are all in the mix.

Traditional fossil fuels still retain a substantial subsidy advantage, worldwide, over renewable energy alternatives. Yet, the full range of renewable sources: solar, wind, hydro-power and biomass, have emerged as real contributors to meeting electricity demand. Renewable energy sources now account for 13% of total electricity generation in the US, and are expected to grow. However, coal (39%) and natural gas (27%) will continue to provide at least 60% of US fuel needs well into the foreseeable future. Oil contributes only 1% to electricity generation, but is a dominant fuel source in the transportation sector. (see US Energy Information Administration,

So, since the 1970s, the nexus of public policy and public utilities came to support the concept of “renewable” energy as the panacea to both sate global consumption and mitigate global warming. But really, just since the recovery began from the 2008-9 recession, this consensus has been disrupted by the phenomenon of hydraulic fracturing (“fracking”). Fracking has unlocked heretofore unimagined reserves of natural gas in the US. While not technically a “renewable,” abundant natural gas may displace coal as a cleaner thermal alternative. According to a recent PIRA Energy Group study:

The reshaped character of U.S. natural gas supply will generate a commensurate revolution in demand along with wide-ranging pricing implications. PIRA identifies a U.S. natural gas demand “super cycle,” marked by annual growth of nearly 4 billion cubic feet/day (BCF/D) for a period of several years later this decade, spawned especially by gas-intensive manufacturing and liquefied natural gas (LNG) exports.

(see: )

How “Fracking” Alters the Energy Landscape
Fracking is the often-controversial process of injecting chemicals and large volumes of water at high pressure into subterranean rocks, boreholes, etc., so as to force open existing fissures and extract oil or gas.

Fracking gas has emerged as a major energy source that is changing the US, and to a lesser degree, worldwide, energy supply outlook. Fracking is not an overnight sensation, having first been tried in 1947. What is new are technological advances that enable horizontal drilling. This technology has allowed economic extraction of gas, if not oil, from extensive shale beds that underlie much of the central and eastern continental US.

While coal is still the largest source of electricity generation capacity, in the 10 years between 2000 and 2010, over 80% of new electricity generation was derived from natural gas, a dramatic shift from prior decades. Renewable energy sources also contributed incrementally to electric generation capacity as coal’s contribution dropped.

Some have termed the prevalence of fracking, a “revolution.” Indeed, the implications of a paradigm shift can be widespread. Some of the economic implications include:

1. Natural gas (“NG”) has become the top source of new electricity generation. Environmentally, NG is preferable to coal because it burns substantially cleaner and its extraction is considered less obtrusive than coal mining. This is good for gas turbine manufacturing, pipeline and railcar interests, but a mixed blessing for railroads as tonnage of coal transport threatens to shrink

2. The availability and price of natural gas have the potential to slow the development of renewable power generation. How big of an issue is this to the renewables industry, and what policy responses are likely?

3. With substantial natural gas price differentials worldwide, how far and fast will US natural gas exports grow? What metropolitan regions will win as the exports markets grow, and what environmental and other problems might result?

4. Will natural gas prices stay relatively low in the US, and if so, will lower natural gas prices really increase manufacturing? Which industries and regions are likely to benefit?

5. “Fracking” and related increases to natural gas energy development has generated substantial direct job growth (even when offset by coal job losses) and the potential for substantial indirect growth from consumer spending, lower cost energy supplies for businesses, increased state tax revenues, and other sources.

6. “Fracking” benefits are not free, with potential contamination of ground water, the depletion of fresh water, possible degradation of the air quality, local noise pollution, the migration of gases and hydraulic-fracturing chemicals to the surface, the contamination of the surface lands with spills and flow-back, and the possible health effects of these environmental risks upon people as often cited concerns.

7. How will states and cities react to fracking’s competing potential for job and economic growth and the related environmental and health concerns? Answers will affect potential long and short-term real estate prospects in these geographies.

Real Estate Implications of Energy Changes
Energy has always been an important part of our economy–the US energy spend in 2010 was $1.2 trillion, about $4,000 per person. However, the implications of recent US energy trends on real estate investment and patterns of land use will be profound in varied and unique ways not seen historically. Not only will the transitions and changes in mix create lots of spatial use and reuse issues, but the strengths and weaknesses of states, cities, and even buildings will be fundamentally altered depending on the magnitude and timing of changes now underway. Some of the key questions we confront include:

• Which states and cities will be the winners and losers in energy related employment growth? Will fracking related employment be a short-term boom with long-term negative consequences on quality of life, or a sustainable foundation of the economy?

• How will state regulatory controls influence the magnitude and timing of fracking related growth benefits?

• How will land and real estate prices be impacted by energy siting decisions? Will the biggest winners be participants in local economies not directly contiguous to energy extraction, transmission or distribution facilities? Is this an area of future litigation as value is taken from some and transferred to others?

• However widespread fracking activities become, the industry remains fragmented and begs for consistent environmental regulation. Land is typically leased and royalties paid once the resource is extracted. Will fracking leases prove as sustainable as traditional oil plays? Will they trade and how? How will the often short-term duration of fracking wells affect local community and individual economics, health, and culture?

• NG is best conveyed by pipeline. Are current corridors and right-of-way adequate? Where will surface conveyance by tanker-truck or rail tanker be expanded or extended?

• As with oil refining, US capacity for processing LNG (liquefied natural gas) has been constrained by environmental regulation and hence cost. Where will new plants be built to create necessary scale to process supply?

• Coal-fired power plants were often built close to the loads they serve. In spite of our dependence on that fuel, few plants have been built in last 30 years. The existing coal fleet is acknowledged obsolete and prone for replacement. How can these sites be reused or adapted to different fuels such as NG?

• Reduced cost if not mere availability of fuel such as NG changes the economics of off-shoring some manufacturing. Where will the new factories be built? Can rust-belt infrastructure be adapted? Or will population shifts to resource rich areas accelerate?

• How will the growing availability and improved pricing of natural gas affect the development of alternatives such as coal, nuclear and renewables? How will states, metropolitan areas, and even buildings whose economics emphasize research and production of these sources fare?

• Aside from electric power generation, is the complex issue of power transmission. The US power grid is fragmented, regionalized and heavily regulated. In many places it is at capacity, yet building new transmission is profoundly encumbered with environmental protection process. Resolution of this conflict is a real estate question about location, value and impact.

May the discussion begin.

The External Affairs Committee welcomes feedback on these issues as well as identification of issues you think are critical to real estate and/or of interest to Counselors and the broader industry.

Please Submit Comments on this Alert

External Affairs Alert - June 2014 - The CRE 2014 Top Ten Issues Affecting Real Estate

Energy, jobs, and the far-reaching influence of the Millennial generation are the issues that will have the most significant impact on real estate both near-and long-term, according to The Counselors of Real Estate® organization. The CRE Top Ten Issues Affecting Real Estate, developed annually by The Counselors of Real Estate External Affairs Committee, considers independent research; qualitative interactive feedback from members via polling at the association’s spring conference; and a member survey. David J. Lynn, Ph.D., CRE, CEO and Founder, Lynn Capital Management and K.C. Conway, CRE, Chief Economist USA, Colliers International, lead The Counselors’ External Affairs Committee and led development of the 2014 Top Ten Issues Affecting Real Estate list.

The CRE 2014 Top Ten issues Affecting Real Estate

1. Energy: The U.S. is becoming increasingly energy independent. Changes in U.S. energy production are impacting jobs, income growth and the quality of life – key determinants of real estate value and successful investment. The mix of energy types produced–crude oil, natural gas and alternatives such as wind and solar energy–provide investment opportunity and risks. The impact of energy production changes varies by state and community depending on access to resources, regulatory trends and other factors; however, many communities involved in increased energy production are experiencing a jobs boom with related housing and services growth for workers. Uncertainty in the energy sector created by dueling reports from environmentalists and the oil and chemical companies provide investors with opportunities. The potential for relatively low natural gas prices (now one-fifth the cost of Europe and Asia) in combination with other factors has improved the outlook for manufacturing and could significantly advance the expansion of rail, shipbuilding and related industries should gas exports increase.

2. Jobs: The job market is expected to remain strong in 2014. If the U.S. economy grows by the forecasted 2.8%, the number of new jobs likely to be added will continue to number 200,000 to 250,000 per month. Strong job creation is expected to have a positive impact on the residential and multifamily sectors. The types of jobs being offered should move up the quality scale, raising average wages and boosting purchasing power for consumers as well as the ability of landlords to extract rents. Demand for office space may also increase, but employers continue to pare per-employee space requirements, carefully considering space needs because of changing technology and noting the younger workforce’s preference for living in cities and working in open format workspaces. Job reductions, however, in retail and branch banking, largely due to changes in consumer behavior and online technology, will take a toll on housing, may benefit the apartment sector and could negatively impact commercial real estate. Service sector jobs may absorb some of those displaced. Communities and neighborhoods that once valued big-box stores may be well served by courting schools, physical therapy services and even independent and assisted living facilities for senior citizens drawn to a retail/lifestyle/entertainment environment.

3. The Millennials: The Millennial generation, born after 1980, represents 27% of the U.S. adult population–and their influence is far-reaching. This group is the first to fully embrace new technology, including the Internet, eCommerce, mobile communications and social media. Their practices are poised to change the way society interacts, receives information, shops and lives. Millennials show a strong preference for urban living and working, value mass transit, and “work, live, play” communities where residents of all ages, ethnicities, and income brackets live side by side. They carry high levels of student loan debt, drive fewer cars, marry later, and often choose smaller living spaces than the typical homes in the suburbs that appealed to their parents a generation ago. Their preferences are already having an effect on both city and suburban residential, multifamily, office and retail sectors.

4. Healthcare: A wide range of newly constructed healthcare facilities will be needed to treat the large numbers of newly insured Americans under the Affordable Care Act. Providers will increase market share by constructing specialized consultative care or treatment facilities, many in non-urban locations, providing wide-ranging services at a considerably lower cost. Some big-box stores are being converted to house clusters of medical offices in “medical malls.” Considerable consolidation of hospital and healthcare organizations is underway, with an enormous impact on real estate – mergers and acquisitions create both excess properties and an increased demand for updated facilities. These new entities are building satellite healthcare centers, urgent care and diagnostic facilities. Pharmacy chains are installing wellness clinics in stores and some large employers are building health clinics within their companies. All of these factors will spur development of different forms of housing and expanded retail centers, serving not only an aging population but those seeking access to the medical assistance and products to which they are now entitled.

5. Globalization: In the next five to ten years, expect a remaking of the global supply chain emanating from eCommerce and expansion of the Panama Canal; advancing technology; availability and cost of energy; and political strife. As traditional pathways for goods and materials change – decoupled from political boundaries and increasingly automated – the resulting “efficiency” will potentially cause widespread labor strife from Europe to Asia, and even to the U.S. west coast. Energy will continue to influence globalization as energy dominance by the Middle East decreases. More U.S. energy production could disrupt manufacturing activity in Europe and Asia, adding to labor strife and a possible return to protectionism. Historically, political strife has been the primary impediment to globalization. Unresolved wars in Afghanistan and the Middle East, the situation in Ukraine, and continued volatility in resource-rich nations, such as Africa, could put globalization into hibernation. An additional factor is increasing manufacturing technology, which has the potential to revolutionize production, warehousing and purchasing over the next decade. The reality of 3-D printing technology is perhaps the most significant development, with its ability to produce on-site goods and materials to exact specifications without manufacturing plants or inventory warehouses.

6. Water: Global demand for fresh water is projected to exceed supply by 40% by 2030. While water scarcity is a reality in much of the developing world – where 780 million people have no access to clean water; 2.5 billion have no access to modern sanitation; and over three million die each year from water, sanitation and hygiene-related causes – the U.S. will likely experience serious water shortages as well. Aging water infrastructure, droughts (particularly in the southwest) and reduced water deliveries to agriculture have the potential to cause water-related economic problems. A number of states face severe water challenges; Las Vegas’ Lake Meade, which supplies 100% of the city’s water needs, is projected to have a 50% chance of drying out by 2025. A 2013 U.S. government report showed that groundwater depletion in the U.S. for the years 2000 to 2008 was nearly three times greater than the average rate of depletion for the preceding 108 years – from 1900 to 2008. Some future projections project 1.8 billion people living in regions with confirmed water scarcity by the year 2025. The implications for real estate are enormous – affecting land value, community desirability, future viability and investment. Consider also that China is home to 20% of the world’s population, but only seven percent of its fresh water. Water may become a political issue as well as a health issue in a relatively short timeframe.

7. Capital Markets: This issue is included in the Top Ten list for the second year in a row. The availability of capital to commercial real estate from 2014 to 2017 will be vital to the health of the industry. The enticement of riding a high-yield wave is luring capital back into real estate, with investment in a wide variety of choices, from agricultural land to commercial mortgage backed securities. A new round of commercial refinancing will begin this year, with an estimated $360 billion in permanent securitized loans needing to be refinanced by year end 2017. While the sheer numbers are larger than the volume that matured between 2010 and 2012, the quality is different – with much of this wave suburban in nature where there is an oversupply of properties. Action by the Federal Reserve will affect the market as investors await extraction of Quantitative Easing, scheduled to be completed before year end. The question is whether or not we are headed for another “bubble.”

8. Housing: The housing market appears to be in recovery mode, but home ownership continues to lag. While Case Schiller reports home prices rising by about 13% over last year, not all areas of the U.S. experience encouraging price increases. Despite moderate growth in the economy, U.S. Census data reflects the lowest rate of home ownership since 1995. Credit is again tight, but as the job market improves, home purchases are expected to increase. The multifamily sector may feel downward pressure caused by transition from renting to buying – at the same time an avalanche of new multifamily units is becoming available as a result of boom development in that sector over the past few years.

9. Manufacturing: Robotics, self-service kiosks and 3-D printing technologies are dramatically transforming manufacturing. The effect on commercial real estate is accelerated at a more rapid and dynamic pace than previously thought, with unintended consequences. Manufacturers, ports and supply chains are embracing automation to increase efficiency and reduce labor costs – for example, a modern auto or textile manufacturing facility utilizing new technology may employ just 20% of the labor force of a predecessor plant a decade ago. Robotics applied to retail services and self-service kiosks are replacing workers in call centers, banks, fast food and retail locations, resulting in erosion of the Labor Participation rate and a smaller working population in the U.S.

10. Agriculture: Agriculture debt is near all-time lows, which has helped push farmland prices to all-time highs. Livestock prices are at similar highs with “producing” animal numbers near all-time per-capita lows. The outlook for land values is mixed, with “more productive” farmland, primarily irrigated, expected to show moderate increases. Ranchland prices are expected to strengthen after lagging behind the feed grain and vegetable producing lands. High water yielding, irrigated farmland areas such as those found in the northwest Panhandle of Texas, Brazos River Bottom and in Kansas and Nebraska appear to hold long term opportunity, but investors should note the strong land prices in the heartland and Midwest, as valuations cannot continue to increase at the same pace. The recent passage of the Agricultural Act of 2014 (“Farm Bill”) will help stabilize agricultural returns as well as rural property values. Currently, U.S. consumers spend an average of 6.8% of their income on food, lower than in many other countries, partly due to higher average wages in the U.S. – for example, in Canada it is 9.6%; in Pakistan 50%.


Many other issues were suggested, but, of course, we have limited our list to the ten issues we believe will have the greatest impact on real estate in 2014 and the years that immediately follow. We hope identifying these issues and their implications motivates productive discussion of how individuals, companies, and governments should respond to these and other changes in the investment environment that simultaneously challenge our industry while creating opportunities for growth.

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External Affairs Alert - February 2014 - Professional Practice Perspective

FASB-IASB Lease Accounting Saga Moves Into a Fourth Year

The US Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) have been working together on a Lease Accounting project since late 2009/early 2010. The original proposal was released in August 2010 and created significant controversy in the real estate community.

After multiple meetings and discussions with key stakeholders, FASB issued a revised Exposure Draft on May 16, 2013 entitled Leases (Topic 842): a revision of the proposed 2010 Accounting Standards Update, Leases (Topic 840). FASB and IASB held more than 35 separate meetings with more than 220 investors and analysts to obtain feedback between May and September of 2013. Interested parties submitted 598 comment letters.

The current plan of action calls for FASB and IASB to “…consider all feedback and begin redeliberations of all significant issues in the first quarter of 2014.”

Counselors interested in or impacted by this issue can follow the status on the FASB website ( under Projects/International Convergence/Overview (scroll down and click on “Leases”). The Project Managers within FASB are Danielle Zeyher ( and Nicholas Cappiello ( The Technical Principal within IASB is Patrina Buchanan (

For Counselors Who Provide and/or Use Valuation Services

2014-2015 Edition of USPAP: The Appraisal Standards Board (“ASB”) of the Appraisal Foundation has published the 2014-2015 Edition of the Uniform Standards of Professional Appraisal Practice (“USPAP”), effective January 1, 2014.

The ASB did retire Standards 4 and 5 (Appraisal Consulting) and the related references and definitions as noted in prior Professional Practice Sector updates. For Counselors who provide valuation services, the following phrase can be used to avoid any confusion in written counseling reports in non-valuation assignments: This is a real estate counseling service outside the scope of the Uniform Standards of Professional Appraisal Practice. Make sure that any certification included in the report of a non-valuation counseling assignment eliminates any reference to compliance with USPAP.

First Exposure Draft for 2016-2017 Edition of USPAP: The ASB has circulated a First Exposure Draft of proposed changes to the 2016-2017 Edition of USPAP. The comment deadline is February 17, 2014. The ASB expects to issue two more Exposure Drafts after reviewing the initial comments. Final changes will be adopted in early 2015.

Two issues of potential interest to Counselors are addressed in the Exposure Draft:

1. Revision of the Report definition and considering definitions of Draft Report and/or Draft are proposed.

2. The ASB is also seeking opinions on whether to retire the remaining Statements on Appraisal Standards and eliminating Statements from the document.

Interested Counselors should make comment to the ASB by the deadline. The First Exposure Draft including the complete text of the proposed changes and instructions for submitting comments is available at by clicking on ASB Exposure Drafts.

Rocky Mountain Institute (RMI) Releases Guide for Valuing Energy Efficiency and Sustainability in Owner-Occupied Space and Seeks Collaborators for a Guide Addressing Investor Space

A new RMI practice guide released during the week of January 27-31, 2013, represents a milestone in the industry's quest to provide a practical and more easily accessible foundation for properly integrating value and risk into sustainable property investment decisions.

In this first practice guide, RMI chose to focus on owner-occupants because they own a substantial portion of commercial real estate and often lease overflow space. Investors will also benefit from the guide since understanding how their customers (occupants) value building energy efficiency and sustainability is fundamental to their business. For service and product providers, the guide will help them understand how sustainable investment creates value, enabling them to improve sales through refinement of products and services to better meet customer financial objectives.

For consultants, appraisers, and advisors involved in real estate and sustainability, the methodology presented in the practice guide provides a strong basis for the development of new products and services to improve decision-making to assist clients in maximizing the value they create from their investment in property-related sustainability.

How to Calculate and Present Deep Retrofit Value for Owner Occupants can be downloaded at no cost using the following link:

RMI is actively seeing sponsors and collaborators that have an interest in supporting their forthcoming work to produce and distribute a similar guide tailored for Investors. This work would focus on multi-tenant investor-owned valuation issues critical to pension funds, investment managers, and other owners. Counselors interested in supporting or contributing to this effort should contact Scott Muldavin, CRE, FRICS, Senior Fellow of RMI at 415-235-5575 or

The External Affairs Committee welcomes feedback on these issues as well as identification of issues you think are critical to real estate and/or of interest to Counselors and the broader industry.

Please Submit Comments on this Alert


External Affairs Alert - Trends and Outlook Perspective - December 2013

Impacts of Technology on Office Space Demand

Office Markets on the Front Lines of a New Economy:

At the Crossroads of Technology and Demographics

Number Two on The Counselors of Real Estate list of the “Top Ten Issues Defining the Future of the Real Estate Industry” in 2013 was the Impact of Technology on Office Space Demand. Considerable attention has been paid to shifting technology and the future of office markets. Numerous research projects and media reports have focused on how office space utilization is changing as new technologies emerge to change how we work in a typical office environment. The immediate conclusion is that the modern office is shrinking.


That may be true. A recent industry study suggests that the current estimated 200 square feet per worker could shrink to as little as 50 square feet for some tenants in the next few years. In part, that shift has been hastened by recessionary and post-recessionary forces, as business seek to maximize productivity in smaller – and less expensive – quarters. After the recession and during the long, slow recovery many businesses have adjusted their space requirements and their costs by downsizing not only high overhead staffing, but also by reducing office expenses, by reorganizing offices from rows of cubicles and offices into open, often common, work spaces.

In part, the shift in office space usage is the result of technological advances that have changed the shape of and demand for the space being used. Cathode ray computer monitors have been largely replaced by flat screen LCD monitors. Bulky desktop computers have been replaced by smaller, sleeker laptops, tablets, and smartphones. Administrative workers have been replaced by PC-based information technology. Fax machines are becoming rare, if not extinct. And, rooms filled with file cabinets have been replaced by high capacity disk drives, thumb drives, and ‘the cloud,’ just as libraries are being replaced by Kindles and Nooks. Technological innovation – and the adoption of new technology – has only accelerated in recent decades.

Source:Catherine Mulbrandon,Visualizing Economics

In addition to technology, demographics are also playing a significant role. Younger, tech-savvy workers require less personal work space in today’s office, as communal office spaces grow in popularity and as worker mobility increases. Work can be done in a small office space, at home, or on the road with equal efficiency. And, younger workers are demonstrating far less inclination to stay in place or to stake out personal space as they begin their professional careers.

While different office-using professions use space differently, the trend is expected to continue. Whether one works in a law firm or an accounting firm or a technology start-up, the likelihood is that one’s office footprint is smaller than it would have been a decade ago. And, it appears likely that the same business will use less space a decade from now than it does today.

Recent Media Reports and Professional Presentations

A recent article in the Chicago Tribune states that, “In a handful of years…shared workspaces have spread across Chicago, offering a new lower-cost model of office space and a breath of fresh innovation for (new) businesses, saving on office overhead – or simply renting space on the cheap for the exposure to sympatico freelancers in adjacent fields, the exhilaration of working around new ideas, and for the shared culture of nimble creation.” The phenomenon has become a wave in “the Windy City just as it has in New York, California, London and elsewhere…” [Inside views on Chicago's coworking spaces, James Janega, Chicago Tribune, December 3, 2013,0,0.storygallery ]

At the 2013 Annual Convention of The Counselors of Real Estate in San Francisco this past October, Martin A. Barkan, CRE, First Vice President of CBRE in Los Angeles, highlighted changes to the CBRE office space. Fully reflective of a rising trend, Barkan showed a high-level audience of real estate professionals how CBRE is transforming its own office space to accommodate new technology, telecommuting, and the changing nature of the workforce.

An October article in the Los Angeles Times focused on the changes in the CBRE office. Deemed the “tetherless office.” “CBRE’s goal was to reduce rent costs by using its office space more efficiently and to create a template for other CBRE offices around the world…If it worked, company officials figured, the downtown L.A. office would also be an example for other conservative white-collar firms pondering how to reorganize their workplaces to make them more efficient and appealing to young employees weaned on wireless technology.” The article points out that “(e)ven Chief Executive Robert Sulentic books an office by the day and sheds many of his possessions as part of the big move…” [The concept of an 'untethered' office takes root, Roger Vincent, Los Angeles Times, October 30, 2013,0,424426.story#ixzz2mWhGTMrP ]

At the same CRE Convention session, Victor Calanog, CRE, Vice President of Research and Head of Economics at Reis, Inc., in New York discussed the effects of changing office space demand on market fundamentals. In his presentation entitled, “The Office Space is Dead. Long Live Office Space!” Calanog shows that office space per employee in New York has fallen from about 250 sf in the mid-1990s to less than 220 sf in 2012. For the US, on average, the allocation of office space per employee has declined 3.5 percent since 1990. While the recession left many office markets with considerable unused space as employers reduced payrolls, leaving some markets with increased nominal square footage per employee, the overall trend since the 1990s has been to shrink per employee space. Office vacancies have not improved significantly across the country, falling just 10 basis points in the third quarter to 16.9 percent. And there remains little new construction.

Market dynamics suggest that, with an ample supply of space available and very little new construction occurring, landlords are finding that to keep an existing tenant they have to provide the same types of incentives as they provide to new tenants, leading to significant rent concessions and generous improvement allowances.


We should consider the implications to investors, owners and practitioners (brokers, tenant reps, and property managers) when discussing changing space demand and utilization. A recent article from Technology Executives state that practitioners must now know the costs of designing, migrating, and implementing new technology into the office space so that they can properly account for it in their overall relocation budget. In some circumstances, those costs can influence a client’s choice of location. It is to the practical benefit of practitioners to understand whether, as some analysts suggest, conventional office space in certain markets “will languish” as functionally obsolete in the new economy or if other factors might come into play to influence office use in those markets, particularly as recovery and investment move out into smaller secondary and tertiary markets.

The External Affairs Committee welcomes feedback on these issues as well as identification of issues you think are critical to real estate and/or of interest to Counselors and the broader industry.

Please Submit Comments on this Alert


External Affairs Alert - Public-Private Partnerships Perspective - June 2013


State and local budget constraints and the continuing priority of job creation have created a tumultuous environment for public private partnerships, generating a host of issues and opportunities. These fall principally in the areas of community development and “city-building,” the traditional realm of our professional involvement. The emerging “P-3” of private development, ownership, and financing of infrastructure and public facilities is also an area of growing importance.


California Redevelopment – A Cautionary Tale in which expansive success at redeveloping California cities and towns, including major support of affordable housing, led to what might kindly be called a perceived imbalance in the availability of public resources in the face of fiscal crisis and state responsibility for school funding. With the abolishment of redevelopment, the development community is scrambling to find alternatives to address core public-private development issues. Ehud Mouchly, CRE, shares his perspective.

A Bill Authorizing Redevelopment Without Eminent Domain Moving Forward In New Jersey to help redevelopment proceed in a post-Kelo world. Eminent Domain continues to be constrained in state-after-state, refocusing on public uses rather than the public interest, even as it relates to removal of blight as part of redevelopment. Anthony DellaPelle, CRE, brings us up to date on a fascinating New Jersey initiative.

New Markets Tax Credits, 2012 and 2013: A Bit of Help in a Difficult Environment comes with approval of two more years in the American Taxpayer Relief Act of 2012 (fiscal cliff bill) at year end. While very limited in total dollars, the distribution of credits supports projects in severely distressed communities throughout the country. Credits can be used for private projects as well as community facilities and have played a key role in commercial, industrial, and mixed-use properties; as well as charter schools, health centers, energy efficient investment, and training centers. Now is the time to investigate using such credits for projects. 2012 allocations recently have been made, and Community Development Entities (CDEs) are both looking to complete deals and line up projects for their next application. Steve Friedman, CRE, and his colleague Tony Smith provide an update.

What's Old Is New Again—Using Traditional Planning Tools to Foster Redevelopment: Good Planning Is Always A Good Solution and more and more communities are integrating development economics into planning teams along with land use, urban design, and transportation. Partly encouraged by federal initiatives to integrate transportation, land use, and environmental considerations in support of sustainable communities, the number of multi-disciplinary planning efforts that include “development economics” has increased. Growing opportunities with sub-area or corridor plans and developing areas needing infrastructure, and transit-oriented developments offer an opportunity for CREs to apply their unique real estate and development expertise. Maura Cochran, CRE, profiles a recent and typical assignment.

Creating and Restoring Major Urban Parks and Open Spaces Via Public/Private Partnerships has taken off in the face of constrained public funding. This brings a renewed commitment from the private and philanthropic sectors to create fabulous public spaces which often drive development and value – or simply provide opportunities for fun and inexpensive ways to enjoy quality leisure time. Richard Ward, CRE, profiles Chicago’s Millennium Park (everything you see was paid for privately), as well as three other examples from St. Louis – all of which represent the “tip of an iceberg” of a renaissance in public spaces using private money.

Wisconsin’s NEW Economic Development Initiatives: Job Creation programs pursued by controversial Governor Scott Walker are profiled by Fred Campbell, CRE. Governor Walker has initiated major structural changes to shake up a moribund bureaucracy in an effort to create jobs. The lessons will apply to other states and cities as competition for retention and growth accelerates.

Texas/Southwest offers a slightly different perspective. Traditionally benefitting from federal spending on military and other programs, the area is less pro-active in the traditional state and local sense. But an interesting public/private space travel venture and other nascent projects suggest that, as circumstances change, this area too may begin to explore other options to accomplish key public and community goals. Pete Sellers, CRE, and his colleagues Mark Lautman and Sam Noble, CRE report.

Maryland’s New Public-Private Partnership Legislation takes a dramatic leap forward in streamlining its ability to create public-private partnerships for development of infrastructure and real estate. The legislation allows for creative thinking and does not wait for public offerings: developers and contractors are encouraged to submit unsolicited proposals. Bob Aydukovic, CRE, reports on a new framework that is worthy of consideration in other states as well.

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The CRE 2013 Top Ten Issues Affecting Real Estate - June 2013

The Counselors of Real Estate Top Ten Issues in 2013

The growing integration of global and local economies, rising economic and political uncertainty, and the need for thoughtful analysis of industry trends inspired The Counselors of Real Estate to initiate its first annual Top 10 Issues Affecting Real Estate report in July 2012. The Counselors, an international group of high profile professionals, includes principals of prominent real estate, financial, legal and accounting firms as well as recognized leaders of government and academia.

Our 2013 Top Ten Issues Affecting Real Estate report is based on surveys of our members worldwide, independent research, and spirited deliberation in an effort to stimulate thought, debate and progress in moving the industry forward.

1. Low Interest and Capitalization Rate Risks

The Fed has signaled that interest rates will remain low through 2014. Historically, low interest rates have propelled capital to leave bank accounts in search of high returns. Real estate has benefitted from low interest rates because it employs a lot of debt. Cap rates continue to decline in primary, secondary and tertiary markets, but are especially low in global gateway markets, posing a serious risk to equity values were cap rates to rise significantly. There is fierce competition for core assets and so much capital chasing them that cap rates will likely remain low in the near term. However, inherent risk of equity investments premised on the continuation of low interest and capitalization rates could be a risky proposition in 2013 if higher rates lead to cap rate decompression.

Key implications of interest and capitalization rate risks are that investors should be locking in low interest debt, reconsidering strategies based on significant price appreciation, and focusing and refocusing on meeting tenant needs and operating their properties more efficiently.

2. Health Care

While it is too soon to gage how The Obama Health Care Plan will affect the American economy long-term, demand for medical services and facilities nationwide is expected to increase, including a need for more hospitals, more clinics, and more health care professionals. While there is always some chance the program could be rescinded or altered, the President’s re-election and the Supreme Court’s affirmation of its constitutionality seem to have quieted voices urging repeal, making the increased demand and related real estate consequences a likely reality.

As the Program moves toward implementation, drugstores such as the Walgreens chain have announced plans to expand their role in the communities they serve, offering basic diagnostic services, in addition to filling prescriptions and providing simple inoculations. It is estimated that an additional 50 million Americans will be covered under the new plan.

An associated factor also increasing the demand for health care services is the aging of the “Baby Boomer” generation which, with longer life expectancies, is rapidly increasing the need for assisted living communities, day-care facilities geared to the elderly, and modifications that enable senior citizens to remain in their homes well into their 80s and 90s.

All of these factors will spur development of a variety of new healthcare facilities, different forms of housing, and expanded retail centers serving not only an aging population but those seeking access to the medical assistance and products to which they are now entitled.

A significant challenge of the increased demand, and cost for health care, will be the burden it places on younger Americans, already saddled with enormous college debt, a weak job market, and aging parents who will rely on them for various forms of support.

Of one thing we can be sure: a myriad of changes will occur as a result of expanded health care coverage and demographic change impacting the property markets (both residential and commercial), America’s fiscal environment, the delivery of medical services, employment opportunities, and the role of Generations X and Y in contributing to payment of the bills.

3. Capital Market Resurgence

Capital markets surged in 2012, with ample debt and equity in most major markets. Transaction volumes rose dramatically over those experienced in 2011. A major question in 2013: will the resurgence continue and grow even stronger or will growth be constrained by economic and fiscal problems at the Federal and State levels as well as financial issues and uncertainty in other parts of the world?

Debt markets have fallen in love with real estate again and money is pouring back into the industry to finance new properties and refinance those that already exist. Debt is becoming widely available to borrowers in the form of whole loans, mezzanine debt and preferred equity financing. Underwriting requirements are becoming less stringent and LTVs are increasing.

Secondary and tertiary markets are back on investors’ market screens as they seek yield, less competition and higher capital value growth. Capital is being drawn to attractive cap rate spreads that can be 400 to 500 basis points between primary, secondary, and tertiary markets. It is no longer only a coastal economic recovery story, but a heartland growth story with energy, agriculture and manufacturing leading the way. There is also more money for development projects (particularly multifamily), raising concerns of a return to the period from 2004-2007 where bad underwriting and overleverage prevailed.

4. Event Risks Dominate Today’s Headlines and Real Estate Risks

“Event Risks” as a group–such as the terrorist attacks on September 11, 2001, and more recently the tragedy in Boston, weather or natural disaster catastrophes, financial meltdowns exemplified by the recent situation in Cyprus, the U.S .and European financial crises—always make the Top Ten List…often in hindsight. In 2013, the potential for a world-altering event with major consequences for real estate is so high, it ranks as a Top Ten Issue without having yet occurred. North Korean aggression and potential responses, continuing problems in Italy, Greece and other parts of Europe, continuing uncertainty and inability to compromise on fiscal issues in the U.S., and the ongoing threat of natural disaster are just a few of the events which could emerge. What and when? Without a crystal ball, we cannot know…yet it is likely that a major event will occur that will significantly affect how we think, live and invest.

5. Implications of Climate Change /Weather on Coastal Property Markets

Weather patterns have become increasingly unpredictable as of late, resulting in more frequent, more severe storms catastrophically impacting coastal cities and leaving extensive long-term damage in their wake (i.e. Super Storm Sandy, which immobilized parts of America’s Northeast and Middle Atlantic regions and Hurricane Katrina, which virtually leveled much of New Orleans). This extreme weather, regardless of its cause, has rendered some coastal areas more dangerous and less desirable (on a bluff overlooking the water is still good) -- lowering the value of many coastal assets and reigniting intense debate about how new building and investing requirements will adapt to new realities.

Whether or not one believes in climate change, potential tenants and buyers -- and a majority of local governments -- are taking seriously forecasts predicting significant water rise and weather turbulence in the next 10 to 50 years. As a result, these groups are taking action to properly position themselves and their communities to withstand the atmospheric conditions they expect. What this will mean to infrastructure, tenants, homeowners, businesses, and affected cities as a whole remains to be seen. Yet, change is in the works, precautions are being taken and cities and towns, particularly those in coastal areas, no longer have the luxury of thinking “it can’t happen here.” Realizing it can, the emphasis is on preparedness -- geographically, fiscally and legislatively.

6. Echo Boomer Housing Demand Defines Winners and Losers

The largest generation of young people since the ‘60s is called the “Echo Boomers" because they are the genetic offspring and demographic echo of their parents, the “Baby Boomers.” Born between 1982 and 1995, there are nearly 80 million of them, and they are having a huge impact on entire segments of the economy. Echo Boomers are drawn to the urban lifestyle, unlike their parents and grandparents, who fled cities for the suburbs. Typically, Echo Boomers gravitate to the urban core with access to diverse activities, cultural amenities, restaurants, and perhaps most importantly greater employment opportunities. They are willing to trade size for location and are moving into smaller housing units proximate to employment and affordable mass transit options. In many locations (such as the San Francisco Bay Area), Echo Boomers continue to work in the suburbs, yet choose to commute from the City. This generation tends to be renters and is not necessarily seeking, or financially capable of buying a home. A highly mobile generation, they are not chained to their automobiles, as were their predecessor generations. Walking, bicycling, and car sharing are in their DNA.

These and related Echo Boomer trends are exacerbating many of the current problems confronting suburban locations due to decreased housing and retail demand, transportation problems, a shrinking tax base, and a variety of related issues. Yet suburbs are not standing still, as they reinvest in parks, bike paths, and mass transit, and identify creative new uses for obsolete shopping malls and other antiquated symbols of a suburban lifestyle -- which, for a younger, less possession-driven generation, has lost its appeal and affordability.

7. Implications of Increased Natural Gas and Reserves on the US Economy

New technologies have enabled access to vast reserves of natural gas in North America, resulting in an economic boom throughout America’s heartland with strong potential growth in California and other states. This trend is marked by low unemployment and increased investment options in many secondary and tertiary markets where drilling is prevalent, creating an array of real estate investment opportunities associated with housing, offices, retail, hotels, and industrial warehousing. Natural gas exploration is not without risk and cost, including increased carbon emissions due to methane leakage, groundwater contamination from the fracking process, reduced economic activity in alternative energy sectors, and the potential for boom and bust local economies susceptible to rapid declines in production.

8. Global Real Estate Growth and Risk

U.S. investors are becoming confident again, focusing not only on residential real estate in the U.S., but emerging markets such as China, Brazil and India, which reflect potential for higher growth and return. Investors are also looking to Europe, purchasing distressed properties and distressed debt. While, for many, the world remains a scary place to invest, U.S. investors have become accustomed to a permanent state of potential crisis and have not let uncertainty curb their appetite for investment abroad. At the same time, foreign investors, despite U.S. fiscal balance sheet woes, are finding the U.S. an attractive investment destination because of strong yields and returns, and the legal and institutional environment that protects property and individual rights -- offering a level of transparency uncertain in many parts of the world.

9. The Impact of Technology on Office Space

The development of increasingly sophisticated and innovative technologies coupled with growing acceptance of flexible, less conventional workspace models have greatly reduced the demand for physical office space in the traditional sense—a trend that is likely to continue. The 21st Century worker is electronically connected 24/7 to the boss, one’s co-workers, clients, and prospects with the ability to effectively participate in “virtual” meetings, from home, the local Starbucks, the airport, or any location with a “Wi-Fi” connection. Workers are more interested in collaborative space and the flexibility to move their computers to the areas that best support their work that day, rather than fixed offices or cubicles. Collaborative meeting spaces, not individual offices, have become more prevalent. All of these trends have led to dramatic reductions in dedicated space per office worker from about 225 sq. ft. in 2010 to 176 sq. ft. in 2012, according to CoreNet Global.

There has been some push back recently to getting rid of personal offices and cubicles, as certain research has shown that creativity and innovation are often best fostered in quiet contemplative work spaces. In some cases, employers are concerned that more chatting is going on than productive work. Like most trends, the best space configuration will depend on a company’s particular business and people, and the debate will continue, but trends towards reduced space use are forecasted to continue.

Another, perhaps more important trend is the change in the workforce. As a greater portion of the work force moves from salaried to independent contractor status (an estimated 30% in 2013, forecasted to reach 50% in 2020, and a whopping 80% by the year 2030), will the home office become the “new normal” as the corporate headquarters becomes a smaller, more streamlined version of its former self? Countering this trend are recent announcements by companies such as Yahoo that have changed policies to encourage people to work at the office, believing that face to face collaboration and relationships are essential to firm productivity.

Have we finally reached the point where forecasted declines in office space are a reality? How widespread is this phenomenon? Smart investors are examining these questions and taking action to both protect their portfolios and carefully consider new acquisitions.

10. Retail Malaise and Repositioning

The rapid ongoing growth of Internet retailing has reduced overall demand for physical stores, reshaping the type and amount of physical retail space tenants need. This has been particularly acute for retailers specializing in electronics, music, and books, but it is quickly affecting the way consumers purchase clothing, shoes and just about everything else.

Retail space is becoming smaller with more attention to innovative display and “order capability” which is fast and user friendly. In this environment, retail that provides a rich, interesting, multi-faceted shopping experience is thriving. Successful shopping centers are designed with the pedestrian in mind, catering to an adventure the whole family can enjoy. It is increasingly imperative that the “physical retailer” not only provide an appealing selection and high quality product, but an engaging, pleasurable “in-person” experience unavailable to the online retailer.

Rapid change has created losers, as many retail centers are dead or dying. Yet, opportunities abound for developers and investors with the vision and property savvy to create an appealing shopping and entertainment experience in the right location. Repositioning and even new construction opportunities exist for those investors who understand the trends—and are willing to take risks.


Many other issues were suggested, but, of course, we have limited our list to the ten issues we believe will have the greatest impact on real estate in 2013 and the years that immediately follow. We hope identifying these issues and their implications motivates productive discussion of how individuals, companies, and governments should respond to these and other changes in the investment environment that simultaneously challenge our industry while creating opportunities for growth.

Please Submit Comments on this Alert

External Affairs Alert - April 2013 - Land Use, Energy and the Environment Perspective

Resource Competition Escalates, Highlighting Imperative for Sustainability Strategies to Look Beyond Energy

Number Eight on our CRE hit parade of the “Top Ten Issues Defining the Future of the Real Estate Industry” in 2012 was sustainability. Much of the attention to sustainability in the real estate realm centers on energy efficiency and the efficient use of materials and resources that comprise a particular piece of real estate, a development or a community. LEED certification requirements, corporate sustainability initiatives, government regulation and mandates have focused mainly on doing more with resources onsite and nearby.

However, an environment of resource conflict continues to emerge across the country as population bases grow, pitting municipalities against each other, private owners versus public interests, commercial versus residential real estate, cats versus dogs, and so on. What is emerging is an environment where strategy and planning for real estate interests increasingly involve projections of costs and obligations associated with essential resources tied to, but not directly controlled by, the real estate itself.

After scores of years where wise and efficient use of water and waste disposal resources was not encouraged, and long term societal costs of water and waste use were not properly included, waste and water issues have become critical variables adding cost and uncertainty to project developments. Current water and waste management examples highlight some of the problems we see arising.

Water Accessibility

“Water moratorium limits housing development”Bismarck Tribune, August 28, 2012

  • Much press has been given to the rise of the Bakken Shale oil and gas patch around Williston, North Dakota. An energy industry has arisen from the energy resources of this rural area, simultaneously creating both a need for resources and for workers. The speed of development has been a bit of an anomaly, but the resulting competitive pressure for other finite resources, like water, is not a new issue.

    A major water supplier, R&T Water Supply, initiated its own water moratorium on serving new housing developments in order to meet its existing commercial customer demands. The availability of water provided by R&T got so tight last summer that two large man camp developments for employees were shut off for a period of time. The underlying issue is not R&T’s ability to run the water lines needed; it is that it bumped up against a ground water allocation of about 1.2 million gallons per day under its State Water Commission permit. As a major water supplier, R&T continues to weigh the profitability of servicing private versus public customers from one common resource. Existing commercial customers are taking precedent over potential new residential developments. Without changes to its permit allocation, this is likely to remain unchanged. The broader issue for the area will be the allocation of its water rights between all potential resource users. The resulting supply/demand conditions will become factors in all future development in the area.

“Georgia pols ramp up campaign to shift Tennessee border, siphon water supply” –, February 17, 2013

  • In the current “mother of all water fights”, although some in California may argue this point, the state of Georgia is reigniting an 1818, pre-Civil War era boundary dispute in an attempt to gain direct water access to the Tennessee River, gaining a bit of land and approximately 30,000 new Georgia residents in the process. As one might guess, Tennessee is rigorously refuting Georgia’s claim. This time, water access is the culprit. The Georgia House of Representatives voted 171-2 to adopt a resolution seeking a thin strip of land linking to the Tennessee River. In this area of Georgia, any future population growth is heavily dependent upon water access. For real estate in the area, increased water costs and rationing can be expected in the future and there is concern that this will erode the viability of future development and increase the cost of existing ownership.

Waste Management

While waste is not a resource, the ability to dispose of it has much the same impact as access to an essential resource like water for a piece of real estate. The following example highlights the potential impact on disposal costs for real estate of the struggle between an area’s sustainability and environmental initiatives and the need for cost effective waste management.

“Operator wants to ‘disconnect’ its landfill site from Chicago and attach to Dolton” –, March 23, 2012

  • The City of Chicago has a 30-year ban on any new or expanded landfills. The neighboring City of Dolton, Illinois does not and it has supported attempts by landfill owner, Land and Lakes Company, to essentially transfer or annex an existing 84-acre landfill to Dolton. The loss of existing disposal fees are at risk for Chicago and the city is fighting the annexation attempt. Land and Lakes has also begun to charge Dolton for disposal of residential waste to the tune of about $1.9 million in new costs. The company has historically allowed free disposal by Dolton, but in light of the statewide moratorium on new or expanded landfills, Land and Lakes, along with other landfill owners, is seeking to maximize the profitability of existing operations. Dolton stands to negotiate its most favorable rates by being supportive of the switch from Chicago to Dolton by the landfill site.

    In a supply-constrained environment, demand drives up price. The result is for companies to seek out the highest paying customers for limited landfill capacity. The struggle here between an area’s own sustainability and environmental initiatives and the necessity of waste disposal is resulting in increased disposal costs. This was anticipated by most, but the city and state constraints are creating a longer-term sustainability issue for the state of Illinois relative to where disposal can occur, pitting neighboring towns against one another.


There have always been resource struggles impacting real estate and associated costs and use. However, examples like those presented highlight that stakes are increasing relative to access and use of resources by communities and real estate owners and users. Forecasting cost assumes access, but as these examples underscore, access cannot always be assumed and scenario planning and sensitivity analysis must also extend to these more non-traditional elements of real estate.

While the emphasis of new sustainability initiatives by governments and companies promises more efficient use of water and waste resources, reducing the costs of purely capital budget oriented solutions, developers and real estate owners will face growing uncertainty—and costs—related to these issues and should plan accordingly.


The External Affairs Committee welcomes feedback on these issues as well as identification of issues you think are critical to real estate and/or of interest to Counselors and the broader industry.

Please Submit Comments on this Alert


External Affairs Alert - February 2013 - Capital Markets Outlook

Capital Markets Further Unlocked in 2013

  • Right-10: CMBS property delinquencies remaining below 10%;

  • Left-250: The 10-Year Treasury not rising above 2.5%;

  • Right-150: Aggregate new office, industrial and retail new construction  remaining below 150msf;

  • Left-6:  Average Cap rates for Class A commercial real estate assets in core MSAs not rising above 6% as interest rates rise in 2H2013 with the end of the Bernanke FED; and

  • Right-200: The housing recovery remaining intact with 200 plus MSAs remaining on the NAHB Improved Housing Markets Index.

  • Left-75: New CMBS issuance climbing out of the under $50 billion doldrums and rising to at least $75 billion.

Capital and Property Market Conditions are presenting “The Combination” to unlock Capital Markets even further in 2013.

What is better than improving property type fundamentals to open up the capital markets to commercial real estate?  The answer for those that purchased any of the 10,000 plus investment-grade office, industrial and retail properties that traded in 2012 is availability of capital.  Domestic and foreign sources of capital are flush with liquidity ready to invest in tangible assets, like real estate, that can offer 2.5x to 3.0x the yield offered by the U.S. government’s 10-Year Treasury bond (ended 2012 at approximately 1.9%). 



Debt Markets Poised to be Life of the Party in 2013

The CMBS debt markets are opening up again after four consecutive years of less than $50 billion annual new issuance.  Underwriting terms and pricing spreads have also compressed in favor of borrowers.  Together with improving market conditions in most markets even properties with elevated vacancy rates have become financeable again due to the low DSCR hurdle provided by sub 5.0 percent interest rates and 80 percent LTVs.
Declining CMBS delinquency rates have further aided new issuance interest. The lower delinquency rates have CMBS investors enthusiastic about 2013’ new issuance increasing 50 percent over 2012’s $50 billion level to $75 billion.  If you have tenants and can meet a 1.4 DSCR using a 4.5% loan coupon, the capital markets are once again open to refinance your “leased” commercial real estate asset.

CMBS Delinquency Rates January 2011 through January 2012
Courtesy of fellow CRE Tom Fink @ TREPP

Source: Trepp – January 2013 CMBS Delinquency Report

Behind the Statistics & Beyond the Basics:

According to Colliers International’s Q1 2013 North American Office and Industrial Outlook reports, the final tally on 2012 net office and industrial space absorption is one that was not in the cards at mid-2012. By the end of 1H2012, it appeared that tenants and businesses were pulling back from leasing activity with 1H2012 absorption down 6% over the prior six-month period (2H2011).  However, despite the market’s November 2012 election and pre-2013 Fiscal-Cliff anxiety, CY 2012 net office and industrial space absorption turned in its best performance since the 2008-2009 financial crisis.  This continuation of improving commercial real estate fundamentals is critical to the capital markets rediscovered favor with commercial real estate.  The improved office and industrial fundamentals paint the following “perfect storm” investment picture for debt and equity capital investors heading into 2013: i) healthy net leasing activity; ii) limited new supply; and iii) declining vacancy rates.

Source:  Colliers International, KC Conway, CRE


Commercial real estate is persevering to return to a state of balance.  However, the factors that have influenced recovery over the past 12 months, as well as the markets that have participated in the recovery thus far, are broadening.  No longer is the recovery confined to the CBDs of the “sexy-six”/core MSAs - New York, Boston, Chicago, Los Angeles, San Francisco and Seattle;.  Rather, the recovery is expanding to secondary MSAs.  While a dearth of assets in the core MSAs, as well as a search for yield resulting from Fed monetary policy and Cap rate compression, have primarily been behind this broadening of investment interest, it has been job growth in technology, energy and primary-education concentric MSAs (what KC Conway, CRE coined as the ICEE markets in 2011) that has been the distinguishing factor in defining which secondary markets were participating in this broadening of the capital markets.

In 2013, two other influences will positively impact the broadening of the capital markets expansion to secondary MSAs.  Those two influences are the housing recovery and growth in healthcare.  Both these factors are broad based across the U.S. and will have more of an impact on office, industrial and retail real estate.  Why? First, the housing recovery is one where professional services tied to rising new home construction and existing home sales activity will rebuild in proximity to this increasing housing activity.  Second, our health care delivery model is shifting from one concentrated around expensive urban hospital campuses to less capital-intensive, suburban outpatient facilities in or near retail centers. Third, servicing the unique distribution and warehousing needs of the health care industry is one of the fastest growing new niches in industrial real estate.

United Parcel Service (UPS) has jumped out front as a leader in developing a healthcare distribution network.  With approximately 6.0msf of distribution space dedicated to healthcare distribution in the U.S., Canada and Europe, UPS is adding 800,000 more square feet in 2013 – the largest portion of that in Atlanta.   With an aging U.S. demographic and a rapidly growing healthcare industry, healthcare distribution is a niche to monitor; however, it has unique design (temperature controlled facilities) and regulatory requirements that create barriers to entry to those lacking capital and knowledge of the healthcare industry. These search-for-yield, ICEE, housing, and medical office factors add up to M.O.T.S (More Openness to the Secondary MSAs) for the capital markets in 2013. 

The External Affairs Committee welcomes feedback on these issues as well as identification of issues you think are critical to real estate and/or of interest to Counselors and the broader industry.

Please Submit Comments on this Alert


External Affairs Alert - August 2012 - Land Use, Energy and the Environment Perspective

Philadelphia Pioneers New Infrastructure Investment Approach – a Case Study

The inaugural Counselors External Affairs Alert (EAC Alert) identified infrastructure funding and the integration of sustainable practices as two of 10 critical issues society must address. Philadelphia’s ground breaking – or better, wave-making – storm water approach provides a creative example of how regions can address these issues.

Like many older cities, Philadelphia has a combined sewer and storm water system that can dump sewage into waterways – in its case, over 60% of the system. To meet state and federal clean water regulations, Philadelphia initiated plans starting in 1997 and culminating in the “Green City, Clean Waters” plan approved by the state in 2011. The plan includes code and water billing changes that improve water quality through retention and infiltration rather than through constructing parallel storm and sewer systems. The plan requires phased provision of 10,000 acres of new pervious surfaces at a cost projected to be $1.67 billion over the next 25 years – estimates for comparable installation of separated storm systems were “billions” higher. The driving force behind the plan was the simple economic fact that Philadelphia could not afford to build separated systems. Plan requirements and their consequences include:

  • On-site retention required for all new construction: All new or redeveloped projects with a footprint over 15,000 square feet are now required by code to retain the first one inch of rainfall on site, and to allow this water to infiltrate into the soil. While this code has many exceptions and qualifications, in general it has caused new projects to employ a variety of new approaches. At the new Curtis institute of Music Lenfest Hall, for instance, there is both a green roof and a detention tank under one of the sidewalks; the detention tank partially restricts flow into the storm sewer and partially infiltrates water into the earth. This approach is expected to provide approximately a quarter to half of the required new green surface.

    • Implications: Clearly the requirement for on-site detention increases construction costs, already high in Philadelphia, and thus makes new development more difficult for both private and public entities and may lower land value. Additionally, many urban developments such as Lenfest Hall abut historic properties with stone and rubble basement walls; there is a concern that this may result in flooding of neighbors.

  • Increased public pervious surfaces: To provide the remaining half to three-quarters of required pervious surface, Philadelphia’s plan includes projects in sizes from pocket parks to sidewalk tree trenches to new pervious asphalt paving. Because streets and sidewalks comprise 38% of impervious surfaces in the city, addressing them is key. Dozens of tree trenches, downspout planters, rain gardens and similar projects have been completed and many are underway. Many are planned in distressed neighborhoods in “concentrated early action areas” to provide more equitable access to healthy neighborhoods for less wealthy citizens. Additional projects are also planned at the time of other street or sidewalk work, limiting overhead costs.

    • Implications: These improvements are being paid for by increased and recalculated water bills: the city’s water department is phasing in billing based primarily on a property’s impervious coverage as a “revenue-neutral” way to pay for storm drainage. Properties with large parking lots (think big box retail) or roof areas (think industrial or manufacturing businesses) will see a many-fold increase in their water bills: for American Box Co., the bill went from $200/month to $4,000/month. This is essentially a new tax on these businesses, which, although accurate in that their impervious areas clearly contribute to the problem, was not anticipated by the businesses in making their plans to locate in Philadelphia. This may cause some businesses to leave the city limits and its tax rolls, or more likely, it may cause industrial or big box users to avoid locating in City limits. Neighboring communities are advertising their water rates already.

    • Offsetting the cost: The water department is attempting to offset the impact by offering tax credits, free designs, low interest loans, phase-ins, and rain-barrel give-aways – but some business may still feel the need to locate elsewhere, although water costs still remain substantially less than 1% of business costs for most if not all businesses.

Other important parts of the program include funding operations and maintenance in addition to first costs, tracking, testing, and quantifying progress, and focusing on improving school yards for their educational value as well as for their surface area.

Philadelphia calculates that over 45 years it will see a return on its investment through energy savings in cooling due to tree and plant shading, increased property values due to the presence of trees, lowered healthcare costs for asthma due to cleaner air from trees, and higher tax revenues and lower assistance needs due to employment in building the infrastructure. Time will tell whether this calculation is accurate, but it is clear that most of these benefits would not result from providing the much more expensive parallel system. A final benefit is the positive press Philadelphia is now receiving as the city with “the most comprehensive network of green infrastructure in the United States.” Not inconsequentially, being known as a City that can solve big problems may be the lasting legacy.

The External Affairs Committee welcomes feedback on these issues as well as identification of issues you think are critical to real estate and/or of interest to Counselors and the broader industry.

Please Submit Comments on this Alert


External Affairs Alert - July 2012 - International Perspective

An International Conference of The Counselors of Real Estate was recently held in Vienna, Austria from June 3rd to June 5th. We thought it appropriate that our first International Alert focus on a summary of key insights and observations that were forthcoming from that conference.

The major take-away from the conference was an indisputable awareness that the economic linkages between the US, Europe, and the rest of the world grow stronger each day. The tight linkages of the capital markets and multi-national corporations continue, but the linkages have evolved to include smaller companies, temporary workers, consultants, and economic activity. No major economy can isolate itself and ignore the financial and economic shockwaves that come from other parts of the world. Prudent investment decision-making can only be made with a strong knowledge of the global economy.

Since the beginning of the European Debt Crisis, member countries of the European Union have not agreed on the best way forward to resolve the crisis. Germany, the economic engine of Europe, believes that any future funding of sovereign debt, or funding to recapitalize banks, must be coupled with guarantees of steep budget cuts by those countries receiving a rescue package. On the other hand, many of those countries who are seeking emergency funding contend that the austerity programs are too severe and are pushing the entire continent into a recession. As one contemplates the wide-ranging viewpoints of so many different countries that are so culturally diverse, one recognizes the tremendous challenges that lie ahead to arrive at solutions that will be acceptable to such a varied group of interests. One thing is certain: an acceptable plan of action to solve the European debt is going to take time, patience, and a degree of flexibility on the part of key stakeholders.

Despite the concerns surrounding the European crisis, the conference highlighted some very positive trends and events taking place on the continent. While most economists agree that Europe is in a recession, there are areas of Europe that are flourishing. Of course, Germany has the strongest economy. However, the conference helped “illuminate” the fact that there are other geographic markets that are performing very well despite the overall slowing of the region’s economy. One such area is northern Italy. Hugh Kelly noted that during a visit to Milan last March, he “saw an amazing amount of development occurring there, particularly as financial and insurance giants like Allianz and Generali seek to move operations from centuries-old buildings into more modern offices.” He went on to state that “The Italians, in particular, caution against any ‘quick’ reading of economic statistics for Italy for two reasons: first, Italy’s economic strength in the north continues to flourish, even as the regions from Tuscan southward struggle; second, as much as 30% to 35% of Italian economic activity is in the ‘gray market’ of off the books commerce.”

Vienna is another market in Europe that should not be overlooked; the city is a vibrant urban center with significant new development underway. One of the most impressive projects under construction is the Vienna Central Railway Station, one of the largest railway stations in Europe. The architecture is world class; the signature design feature is a new translucent roof that will cover, and provide natural light over all of the train platforms. The Central Rail Station is the focal point of a new mixed use transportation oriented development that will ultimately include 5,000 apartment units and office space to accommodate 20,000 people. The project is expected to be completed in 2015 and will be, by most accounts, among the most impressive new development initiatives in Europe.

Turkey was also identified as another rising economic star of Europe. Turkey’s GDP grew by 9.2% in 2010 and by 8.5% in 2011. While economic growth in Turkey is forecasted by the European Commission to slow considerably this year to 3.3%, it is projected to rebound to somewhere between 4.1% to 4.6% by 2013; it will be among the fastest growing economies in Europe. According to the European Commission, “Turkey’s fiscal condition in the past decade has been an impressive success story. In the wake of the 2001 financial crisis, the government managed to cut the public debt to GDP ratio from 75% to 40% currently.”

The state of the European capital markets was discussed at length during the conference. Art Pasquarella, CRE, noted that what struck him most about capital market conditions in Europe was how in many ways they mirror the trends and preferences in the U.S. property markets. He specifically noted the bifurcation of European capital markets with both debt and equity capital focused on stabilized assets in primary highly liquid European cities, while noting a dearth of investment capital for properties in secondary European cities. European banks – as was the case with U.S banks at the peak of the financial crisis – are under enormous pressure to deleverage, and as a result, are extremely reticent to make new property loans.

The conference was highly successful and will set the benchmark for future global forums.

The External Affairs Committee welcomes feedback on these issues as well as identification of issues you think are critical to real estate and/or of interest to Counselors and the broader industry.

Please Submit Comments on this Alert


External Affairs Alert - June 2012 - Top Ten Issues Defining the Future of the Real Estate Industry

In this inaugural issue of the Counselors External Affairs Alert (EAC Alert) publication, we summarize a handful of the broader structural issues that will define the real estate industry in the next 10-30 years. (Many of the issues have strong interrelationships.)

The issues below were collected at the Chicago Meeting of the External Affairs Committee. Going forward, EAC Alerts will be circulated monthly, and more frequently as issues of importance to Counselors and the industry emerge.

Top Ten Issues Defining the Future of the Real Estate Industry

1. Aging Population: The aging of the population will broadly and dramatically affect the real estate markets from housing, retail sales, health care, and the myriad of factors that define the success of different geographic areas. Aging will most directly affect the demand for real estate, but will have scores of less direct impacts such as potential capital impacts as the pensioners by the scores of millions move from being net contributors to net users of capital.

2. Funding of Public Employee Retirement Systems: Underfunding of State and Local Retirement Systems in the trillions of dollars provides extreme challenges to the provision of basic local and state services critical to real estate properties and markets. Real winners and losers to emerge.

3. Student Debt Burdens: Student college debt averages more than $20,000 per student with a total that exceeds consumer debt for the first time. How will such burdens change the patterns of spending, household formation, and growth of this generation of graduates?

4. Infrastructure Funding and US Competitiveness: Local and state governments, and creative public-private partnerships are needed to fund the next generation of needed infrastructure improvements and cover the trillions of dollars of deferred maintenance of existing assets. (See issue 2 for insight on budget limitations.)

5. Changing Office and Retail Demand: Radical reductions in office space usage by larger occupants due to increased use of technology and acceptance of alternative work systems and similar changes in retail as Internet buying changes the role and purpose of physical retail space will define winners and losers going forward. How long until such trends reach smaller properties and markets?

6. Real Estate Capital Markets Liquidity: Capital limitations on banks as a result of Dodd Frank legislation and existing overallocations to real estate, concerns about the scale of the return of the CMBS market, hundreds of billions of dollars of real estate loans that must be refinanced in the next 3-7 years, as well as growing capital demands by other sectors of the economy will create continuing uncertainty over access to capital. Smaller properties; properties in secondary or tertiary markets; and properties with weak borrowers, substantial vacancy, high rollover of tenants in early years, or other risk factors are already experiencing a severe capital shortage.

7. Global Change and Uncertainty: The political gridlock and budget crisis in the US, the European financial crisis, the pending (now underway) slowdown of China's economy, uncertainty and slow growth in the Middle-East and continuing expansion of global interconnections make uncertainty about the future a certainty-what does this mean for real estate investment in the US and abroad?

8. Integration of Sustainability: Sustainability has moved beyond a gimmick and become part of corporate governance, management and reporting systems, supply chains, and the basic functioning of many companies-increasing the value of sustainable property investment. How must real estate businesses adapt to keep up?

9. Low Cap Rates: Cap rates for core properties are back to troubling 2007 levels. What happens if interest rates increase and cap rates decompress? Has the industry set itself up for another disastrous value decline?

10. Civil Discord and Political Gridlock: The runaway winner as the most important external affairs issue was Civil Discord and Political Gridlock. This is easy to understand because the solutions to many of the key issues and problems identified above require us to come together as a society, make difficult choices, and work together to execute solutions upon which we agree (or at least decide) upon.

The External Affairs Committee welcomes feedback on these issues as well as identification of issues you think are critical to real estate and/or of interest to Counselors and the broader industry.

Please Submit Comments on this Alert


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