Good technology can improve real estate deal making. This article describes my experience with Geographical Information Systems (GIS) and how it has become a fundamental tool for my business.  At its simplest, GIS programs are a visual adjunct to database and contact management programs.  However, if used to its fullest, GIS can crystalize multiple property relationships to monetize real estate information by traditional forms of deal making, solve complicated problems and create new business models.

So far, in the traditional real estate industry, retailers have taken the most advantage of GIS programs by making strategic location decisions.  On the other end of the spectrum, new place-based businesses, like Yelp and Four Square use location data to build profitable, mobile enterprises. To put mapping in their proper technological perspective, consider the furor when iPhone tried to replace Google Maps with its own inferior Apple Maps.  Mapping has not only become ubiquitous in everyday life, it should be an essential part of every real estate business.

 Creating robust GIS applications has never been easier. There are inexpensive open source programs, a quantity of excellent data, and many ways to host and share applications. It’s easy  to connect to other good mapping programs through  Application Programming Interfaces (API) and Web Map Services (WMS) that when used together create powerful mapping programs.  Is this perhaps a little too technical?  There are now graduate level GIS programs being offered in 160 universities teaching great consultants to adopt mapping technology to your everyday business life. GIS is used in all sorts of industry and government departments to make critical business and marketing decisions.  Hedge funds and financial institutions are using GIS and data warehouses as a backbone to trade mortgage backed securities and real property assets, hopefully more prudently than they did in the past.

GIS combines spatial data or geographical information with non-spatial data, for example, market information (comps, tenants, owners, etc.). Many of us simply keep market data in our heads or in very basic databases. Few of us use complex algorithms to tackle complicated market problems.  Programming languages are not part of our vocabulary.  But as you are reading this article, there are computer scientists that are using the entire universe of property and geographical data “to crunch the numbers” and create very lucrative real estate businesses. 

The most obvious examples of companies using universal property data are information providers that many of us rely for our daily work. For instance, Co-Star, NAR, Niteowl, and Exceligent all have products that combine data servers and mapping capability. There are other firms like REIS or Real Capital Analytics that collect property data for extensive statistical, reporting and analysis purposes. The question is how many of us use very commonplace data analysis and mapping tools in our daily business?

I’d like to say that I do.  Alas, I’m barely one step above using Google maps and Excel spreadsheets.  But in my own rudimentary attempts at mapmaking and watching the powerful effect it has had on customers relationships, I see how GIS and data management will play a larger role in our industry.

My personal experience has been to create an application, called MAPP, designed for the way I work. Because my biggest deals have been finding “off-market” development sites, I’ve created a very simple GIS program that is able to identify infill land and older teardown buildings.   In other words, I have designed a program to meet a set of customer objectives by identifying and segmenting various property data from the entire universe of possibilities.  It’s one area where GIS is uniquely capable.

One concrete example is multiple properties I sold for self- storage development over a several year period. The majority of sites were “off-market”.  My MAPP program allowed me to match all other existing self-storage properties owned by competitors on the same map so we could immediately create a trade area of the entire universe of self-storage buildings and instantly see “off-market” locations that had ideal spacing.  By querying the owner database I created a target list of likely properties that resulted in deals.

A more recent example is a customer who purchases underdeveloped land near light rail stations.  By writing a basic radius query that identifies all property within 500’ of a rail stop, I have identified and sold several sites.  My next goal, in keeping with economic recovery, is to put the application to use by identifying large buildings in and outside of my traditional market to see if MAPP can locate ideal purchase opportunities.

GIS has its own intrinsic logic that answers questions about location and property data. If you have the right data sets, you can write a query much like an algebraic equation. Here are a few queries I have used:  Compare warehouse locations based on how much fuel will be used for customer deliveries.  Return a list of every large warehouse on a BNSF line that is within 5 miles of the Port of Los Angeles. Search for corporate owned Brownfields in the final stage of a work plan. Name every non-institutional landlord who owns buildings larger than 200,000 with extra land.  All these queries can be answered manually, but by writing a little code for GIS logic, the answer is fast and thorough.

Technically, I started my odyssey with an open source program called Map Window. The program originally resided on my local computer. I hired a GIS expert I found on Craigslist and an offshore database programmer. Parcel and ownership data is available for purchase from most counties. Municipalities offer shape files that depict all forms of urban infrastructure including rail, utilities, zoning, and of course geographical features.  I have since migrated the system onto a web server so the application is cloud based. The data I collect runs on a MYSQL server that runs independently from the map program. Because I use open source software and hire programmers located mostly in southern Asia, costs to build and maintain the program are modest.

While the technology part is important, the ability to create a specific environment around map information and to provide a solution for the customer has been the greatest benefit.   It’s by problem solving and collaboration that creates strong relationships.  Perhaps it’s no surprise that most clients are not very interested in using or understanding the MAPP application, they just want to see the selected reports and deals that can be generated. And that’s fine by me.

Even though I’ve been developing my MAPP program for several years, I’m only just starting to learn. GIS programs can be used to collect, analyze, and deal with the world’s property data in sophisticated ways. As more people begin to realize how relatively easy it is to build, I expect GIS will also start playing an important role in your business.  Because GIS is part of a large user community, I look forward to helping others as they have done the same for me.

)This article was published in SIOR Professional Report – Spring 2013)

http://kleincom.com/wp-content/uploads/2013/03/Jim-Klein-Real-Estate-Deals-in-the-GIS-and-Data-Universe.pdf

March 2013

Dear Industrial Building Owner,

Things have changed over the past few years. It used to be that the User was the best buyer to purchase your property. But that’s no longer true. Investors will now pay a higher price and they have much better skills in getting the deal closed. I’m not talking about every investor but particularly the ones that have all cash and are financed by pension funds and REITs. Lucky for you and I, there are many of them out there right now. In fact, at almost every real estate meeting, there are 10 or 12 top tier buyers all vying for deals.

At one time these top tier institutional buyers were very selective and only wanted the newest and best buildings. While that’s still the case, they are so needful for product that they will buy many lower grade properties than ever before. The ability to install loading doors and to park trucks is a strong criterion. However, if the buildings are leasable and are located in prime markets, these top flight investors are buying.

Before the recession, institutional buyers were buying because of the famous port/gateway story. Any buildings that can serve the Ports of Los Angeles/Long Beach were in their sights. But after the Great Recession, this trend greatly magnified. For one thing, leveraged entrepreneurial buyers were knocked out of the market because of their inability to qualify for bank loans. This left the field primarily to those buyers that manage real estate investments for pensions, insurance companies and REITs.

Something else crazy happened. Monetary policy ran interest rates down to almost nothing, so all of a sudden a 5% or 6% yield on real estate looks good. And as you know, the lower the yield, the higher the purchase price.  Plus, most pension plans are underfunded so the plan operators need to find yield and fast. That explains why industrial real estate prices have rebounded quite nicely. It’s a market quirk, related to Federal Reserve market distortions, that I haven’t seen in thirty years of brokerage.

When you look over the broad industrial building landscape, many building owners have already succumbed to the allure of institutional buyers. And why not? They have a ton of cash, know how to work through problems, will purchase vacant, or with short and long term tenants. The best live by their word and although every nuance is documented, they are repeat buyers who preciously guard their reputations. Perhaps their only fault is the need for size. Bigger is better because of the amount of funding that needs to be placed. 50,000 Square feet is a general cutoff, although some insist on much bigger.

While deals are never simple, having a large pool of tremendously qualified buyers is great for business.  It simply comes down to finding the deal and that is much easier said than done.

Kindest Regards,

Jim Klein, SIOR

310-451-8121

For More: http://dealbook.nytimes.com/2012/12/03/for-buffett-the-long-run-still-trumps-the-quick-return/?ref=todayspaper

Deal Book –  Anfrew Ross Dorkin

The next chapter in the real estate recovery is well on its way. Many segments are showing good signs of stability. Housing is improving.  Class A industrial is inundated by fierce bidding.  User demand is robust for buildings to purchase. Developers are active with many spec developments coming online.  My non-real estate friends even know about multi-family housing. We are ready for a long period of smart buying for the long term.  I call this period The Golden Age because it will consist of reasonable prices, excellent prospects for growth and minimal downside risks.  All through the Great Recession, purchases have been made. But as low as these prices were, they were risky deals because the outcome was still uncertain. Now that the worst is behind us, we are at the start of a new cycle. This also means that Property Owners who did not want to sell at the bottom will fulfill their long delayed plans to part with good real estate. In other words, we are entering a stable period with less risk and the ability to create lifelong investments in real estate.

The Golden Age is characterized by stability, modest income returns, and careful location selection.  Investors will start buying for the following reasons: 1) Better yield than available in other investments. 2) Position the investment so it can benefit from improving demographics and infrastructure investment. 3) Manage the debt with low leverage. 4) Begin to profit from buying at the bottom of the cycle.  As a note of caution, although I use the phrase Golden Age positively, there will still be many pockets of stagnation when it comes to the effects of globalization, regulation, and an unbalanced economic recovery.

Because there will be a wide field to play in, decisions will need to be made where to start.  The most obvious are solid buildings that are functional and well located.  Locations near downtowns, transit infrastructure, industrial centers, and along major boulevards will be particularly attractive.  Buyers should keep an eye on repurposing the property as occupancy trends change.  Locations with growing demographics mean there will always be demand. Buying right is essential. And make sure there are not a lot of long term owners nearby who can undercut your rents.

Properties with future development potential are excellent vehicles to create long term wealth.  They will be purchased with a view to land value even if there is an added residual cost for marginal improvements. If underwritten correctly, there will be a pop in appreciation after receiving a steady cash flow in rents. The purpose is to control a strategic location whether as a critical industrial property or in an area of improving demographics.  Properties like these take work to find, but new tools, which I will discuss in a forthcoming SIOR article, are making the job of acquisition managers easier.

The biggest hurdle is lagging rents.   Particularly in B buildings, rents are nominally the same as they were 20 years ago. But if deals make sense on current income, its unlikely rents will drop any lower.  In fact with a growing economy and a short supply of good buildings, rent increases are the greater likelihood. Many new purchases are yielding a minimum 5% return on a relatively safe industrial building.  5% is not great historically but it’s very respectable in comparison to other investments.  Professionally managed investment groups should easily exceed this benchmark with their higher levels of skill and experience. No one is anticipating a resurgent economic rebound. In fact, more slow growth is ahead with the possibility of recession. The emphasis should still be defensive. This means adequate returns, stability, and a proven location for better times.

The Golden Age is also good for property owners. They will be able to sell the properties they’ve been clinging to since before the dark days. Rising prices and more activity will give the Seller more choices. New investment groups are forming as conditions improve and this will lead to competitive bidding. If the property is near major infrastructure investments or development projects, these may cause values to rise. Often, new infrastructure leads to a new zoning plan that will allow more development rights.  However, do not expect to collect the development profit without doing any of the work. And remember, lending is still tight for most properties.

Perhaps the most pertinent point for my client base is that when they purchase a property for their business they should select sites like an investor. This means avoid secondary locations unless you are purchasing substantially below market.  The Great Recession proved that obsolete buildings located on cul-de-sacs are virtually unsalable. Try to stay on major boulevards, corners, and busier streets.  But Users should not fear paying more than investors because the risks are much different. As long as the mortgage is close to rent, it’s a good buy.

Beginning next year, investment plans will start to take shape. But do not expect a fast start. The damage has already been so great the turnaround will only unfold slowly and it won’t be how most investors envisioned a rebound. Extreme bargains were rare and most are gone. But an even better table has been set – a Golden Age of real estate for intelligent investors.

SIOR held their Fall Conference in Los Angeles recently.  One panel made a lasting impression. They pointed out the spreads and prices between A and B warehouses are the widest it’s ever been.  While no one spelled out the specific reason, a combination of low interest rates, Quantitative Easing, flight to quality, and the Port/Gateway story has revived the investment market for A Industrial.  Cap rates of 5% are the current norm for A property in the best industrial markets.  Lower grade (non-institutional) sell at 200 to 300 basis points higher. Returns climb in secondary markets. Why aren’t more investors buying up the sub-institutional real estate where returns are greater? It will happen soon and this will be a turning point for dormant industrial markets around the country.

Since the Great Recession, the non-institutional industrial market has been sleepy. With low confidence in the U.S. turnaround story, ominous signs for another downturn and scarce entrepreneurial financing, there is no driving force to purchase Class B property. However, the case for action is slowly changing the same way the economy is grudgingly moving forward.

Cyclically, we have seen the economic bottom.  Much of the contraction, downsizing and corporate deleveraging are behind us. Fears that the Fed has been artificially creating an asset bubble by its QE program  is true, but the priming effect has been felt a lot less in the lower quality property than in higher quality industrial.  Financing and credit has not been widely available in the middle and lower end of the market

There is also a large organizational challenge. Companies that have a focus on B property have limitations, not in terms of success, but in scope. These investment groups tend to be locally oriented in one specific region or they are opportunistic in the deals they find.  Both lack a comprehensive roll out strategy.   For instance, there is no large branded business seeking spread differences in the same way the larger REITS or national developers are searching for A.  For one thing, funding on a large scale is difficult in the lower grade world. After all, Friends and Family financing can only carry an idea so far.  Personnel factors are also a hindrance when the territory gets too large for the properties to be seen by trusted eyes.  But if major investment groups can run a business purchasing and managing thousands of depressed single family homes, money and talented people will soon be available in a larger scale for non-institutional industrial.

By early next year, if the economic indicators continue their slow but upward climb and our long term fiscal issues get addressed, we will start to see more focus on buying up the lower grade industrial in a more concentrated fashion.  I’m not sure who will lead but it makes sense that some of the larger players who already have a national brand will have a head start. For instance, Prologis or Trammel Crow can use their name to gain instant recognition. Other investment companies already in the A space will begin looking for higher returns. Finally, local companies, who have already developed core competencies in turning around older buildings, will begin to expand geographically.  

The non-institutional property market is very tricky when trying to balance location and quality.  The early crop of buyers will do so methodically and first try to capture the best of the sub-class. The most organized will likely be more direct than they have been in previous buying cycles. For instance, they will simply pick out the best properties from independent research and try to acquire them directly without waiting for the buildings to go on sale. These were techniques that were developed before the Great Recession and will be revitalized with better technology, people, and relationships.  In other words, the acquisition teams will be aiming directly at off-market strategies and not waiting for shop worn offerings to be emailed.

Real estate investors are sitting on large amounts of capital just like large corporations. Both are looking for signals that we are entering a new growth phase before they make large commitments.  So far, there have been some good buys by the early adopters. But it won’t be long until we see new fund raising packages on the street targeting the B property market in much more comprehensive way.

(In the next installment I explain what Buyers will be looking for in the B space and what that means for Building Owners)

Soon there will be a new and very comprehensive tool to assess communities, developments and industrial projects in the State of California.  The name of this tool is the CalEnviroScreen (CES) and it is a compendium of socioeconomic, health, and environmental resources that is publicly available for the first time in one location. One controversial use of the CES is to judge a project’s potential harm or assistance it will provide to an already stressed community. While the CES provides critical information, if not used properly, it can easily impede new development to communities in need.

Currently CalEPA is conducting a road trip around California to obtain community input to see if any changes are needed prior to final implementation. I received a draft of the report and attended the meeting in Wilmington. The draft version contains a host of indicators to measure such factors as cancer, poverty, asthma, educational attainment, contaminated properties, and waste facilities to name just a few. Each indicator is scored and communities are graded on their healthfulness.

For instance, the meeting in Wilmington was attended by many in the community who complained about refineries, the ports, chemical plants, trucks and other local industry. Wilmington is also ground zero for many severe health problems. Maps that were generated by the CES program showed that Wilmington is one of the worst locations in California for a majority of the critical indicators

The CES is a tool the Environmental Justice Community can use to protect their communities from the negative effects of industrial and other real estate development. For years, these community leaders have fought the development and expansion of potentially harmful projects with very limited resources. Now with the CES at their fingertips they will be able prove what, in the past, was difficult to substantiate. If a project needs to go through an environmental review process under CEQA, developers will need to address the concerns raised in the CES. Many large businesses have already instituted policies to do so. For instance both the Port of Los Angeles and LAX have placed environmental staff in high, decision-making levels to implement environmental policy. More companies will be doing the same.

Developers and businesses seeking special permits or who fall under CEQA guidelines will need to be conversant in issues affecting Environmental Justice.  Job creation will no longer be enough to sway public opinion. Communities are already willing to accept the closing of industry if that would improve local health conditions. New projects will, at minimum, need to be neutral in the area of contributing factors. But the new benchmark will likely be an improvement in at least some indices to obtain local support. The CES will begin an entirely new dialogue in the approval of major projects.

For many developers who are able to show their project will have a positive effect on the community, they will likely obtain an easier approval. This additional requirement may spawn a new expertise in the entitlement or legal professions.  However, many other businesses will find this additional layer in the development process just one more reason to expand or relocate outside of California and that is the exact thing many of the supporters of the CES fear.  The promoters of the CES want the availability of this data to help steer need resources to affected communities and not be used to scare off development.

While there are varying purposes for this health and environmental data, the CES identifies real health problems that will not going away.  This is only the beginning stage of a new approach to environmental review.  Now that the CalEnviroScreen will be widely available, the larger question is how it will be used to improve California.

Link to Draft Report: http://oehha.ca.gov/ej/pdf/DraftCalEnviroScreen073012.pdf

Business conditions are bad but 2012 is shaping up to be good for me.  It could be best year since 2007.  But not just in my core business.  I sold land in New York and North Carolina; A $3MM warehouse sale in Savannah, Georgia and a $9MM apartment community in Central Los Angeles.  My Gardena/South Bay Industrial core is also solid with 85,000 SF of building sales and 7 acres of land.

Several things are coming together at the same time.  My 30-year presence in Industrial Los Angeles has given me trusting relationships and extensive market knowledge.  The investment in a sophisticated GIS database (MAPP) helps to locate property with exacting criteria. The New York State Real Estate License gives me another large market to find infill land.  Strong national and international ties through SIOR substantially widen my geographical scope. Although I go to work in Gardena every day, I’m looking everywhere for opportunity.

Older Industrial

Bad news has a way of bringing out the dealmakers, many who are collecting multiple sites. While their goals differ, the property types are similar. Older industrial that can be purchased for land value is still my favorite. A few Buyers want to demolish and rebuild to higher value property types.  Another popular strategy is to take the rental income while waiting for a capital gain down the road.  I’ve invested a lot of time and resources in older industrial and it’s paying off.

Why old industrial? There’s no competition from the institutions pushing down yields because it’s too hard to build up the required mass.  Imaginative repositioning is generally beyond the abilities of Users so there’s no fear of competition from plentiful SBA financing.  Plus, there’s a macro story benefiting from extensive infrastructure improvements like light rail and port expenditures to support  long term demographic growth in Southern California.  Finally, these buyers have a realistic plan. Pay $30 per foot for land, rent at $2.40 per, and wait for other parcels to develop nearby. Or take advantage of low construction costs and build.

Poor Fundamentals and High Sale Prices

Investment is occurring in a weak Southern California. The region has poor economic performance, high joblessness, municipal bankruptcies, rampant corruption, and poor leadership.  State and local programs are being cut on a weekly basis. The Great Recession has finally ended the American Dream of good jobs and generous entitlements.  And it’s no more disheartening than in Los Angeles.  As the economy worsens, the deals look even better.

Another peculiar contrast is as rents get lower, sale prices climb higher. There has been no rent growth in 20 years which is a clear sign of business stagnation.  Nominal rents are the same as they were in the 1990’s and substantially lower after adjusting for inflation. In contrast, except for a momentary dip in 2008-2009, sale prices have remained steady.  After a four year recession, sale prices should be at rock bottom.  But low interest rates are distorting the normal relationship by keeping payments low and prices high.  Stocks, bonds and savings accounts are yielding less, so real estate looks more attractive. Finally, foreign and domestic investors still consider Industrial LA, a safe place to invest money and a welcome home for flight capital. Finally, one quirk is many industrial locations house a vast underground economy selling cheap imports for cash to a largely immigrant population without paying taxes.  If you can find the right pocket, these bazaars have very high paying tenants.

Distribution Centers and the Old Industrial Core

Another paradox is the geographical disruption that is being caused by big distribution centers.  Large DC’s are the predominant focus of most large corporations, big developers and institutional investors.  As goods move throughout the global supply chain, residing for a short time in the exurban warehouses, it leaves the old, central manufacturing districts (CMD’s) underutilized. These CMD’s are at the center of  population densities and because of their locations they are ideal to serve the needs of City residents.  But because the marginal value of many of these older buildings is just enough to preserve low end manufacturing and municipalities are loath to upgrade the zoning for fear of losing valuable industrial zoning, the industrial core goes to rot. Take a look at Goodyear Tract, East LA, Alameda, and many of the “Gateway” Cities.  While the majority of industrial investment occurs away from population density, the best located industrial in the CMD’s faces both obsolescence and government restrictions to higher uses.

One solution to creating a limited industrial resurgence in central cities is to capture more high value manufacturing.  It’s doubtful that mass production will return to a high wage, heavily unionized Los Angeles. The large manufacturing enterprises prefer Right-To-Work states in parts of the Midwest and South.  However, specialized, skilled production does have a role to play. Aircraft and precision machining are examples. Creative design and finishing are also L.A. stalwarts.  Unfortunately, more needs to be done on an institutional level as far as training and creating an identity. Los Angeles has both the industrial infrastructure and the workers to create better industrial jobs. However, if left to companies themselves, they will parse global production centers, load up containers and move their various parts of production to the cheapest destinations.

Conclusion

The Great Recession has brought us the Great Transition. Real estate simply mirrors the global, technological, and bottom line initiatives.  Long term trends occur at Internet speed.  Capital wants immediate returns and not long term goals. Management is often quickly replaced.  Production plants move on pennies per item.  Everything is calculated to stay ahead of a recession that is still taking victims. The policy maker’s dilemma is what works for the individual is not often beneficial for the greater good.

As for my business strategy, I’m focused on infill industrial, land, good clients, and long-term relationships.  A poor economic climate is a fertile time to buy. There are many tenants who want low rents in central locations.  Many major cities continue to be vibrant destinations and Los Angeles will remain one of the best. Meanwhile, I’m keeping one foot squarely placed in the old farm area, while looking to improve my capabilities and contacts across the globe.  My strengths with infill development, tenacious representation and the knowledge I derive from the MAPP Program can be replicated anywhere. The goal is to find meaning and value behind the contradiction.

(August, 2012)

15401 S. San Pedro Street, Gardena, CA 90248 – Unic LA County

25,300 Square Feet of Buildings on 60,000 Square Feet Of Land

For Sale – $1,950,000

4 Separate Units each with Power, Offices, and Bathrooms – 2 Lots

Can Be Used As One Facility or Divided

8400 SF BLK, 8400 SF BLK, 6,000 SF CTU, and 3000 SF Metal

400 Amps/240 V Power; 13' Clr, 10×12 loading doors (some larger)

3 Tenants in Place on Mo-to-Mo; Large Rear Yard

Unic LA County; Near 91,110, and 105 Freeways

For More Information, Please Contact

Jim Klein, SIOR

310-451-8121

jimklein@kleincom.com