Design helps LPL make the I-77 commute worth the hassle

By David Mildenberg

Atlanta architect David Brown may be a little-known name in Charlotte real estate, but few have had a bigger impact on the city’s look.

The principal at TVS Design played a key role in designing the TIAA-CREF campus near UNC Charlotte, the Duke Energy Center office tower downtown and most recently, the Sealed Air headquarters in southwest Charlotte and, now, LPL Financial Center in the Kingsley Park development in Fort Mill.

Each project has had a different mission, reflecting changing tastes of employers and their staffs, says Brown, who was hired for the four projects by Charlotte developers Childress Klein Partners, which was started by Atlanta-based Don Childress and Charlotte’s Fred Klein.

The TIAA campus was started in 1999, when there was limited focus on connecting shiny new offices with surrounding retail and housing projects. (The UNC Charlotte area is a mishmash of strip-center and big-box developments.) Twenty years later, LPL and many other employers want attractive buildings that connect with greenways and bike trails and are in walking distance of bars, restaurants and retail shops.

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Managing 21st-century Cyberrisk Before It Manages You

By Tom Ridge

Commercial real estate industry leaders must understand and be prepared to respond to the challenges presented by global terrorism and cyber risk.

SUCCESSFUL BUSINESS leadership today requires more than a great vision and financial management skills. Of course, those abilities remain very important. But an increasingly complex 21st-century threat environment is changing what it means to be a business leader, whether you run an established Fortune 500 corporation or an entrepreneurial startup.

Today’s business leaders can be sure of two permanent conditions. The first is the scourge of global terrorism. The attacks in Paris, San Bernardino, Brussels and Istanbul are just a few of the most recent stark reminders that the ideology that produced the September 11, 2001, attacks has not abated.

The second permanent condition, with trends of increasing complexity, is cyber risk or what I call “the digital forevermore.” The cyber domain offers criminal organizations, hacktivists (those who break into computer systems for politically or socially motivated purposes) and even terrorists and nation-states new methods of attack, new tools to communicate and new weapons to carry out their plans to steal, attack, disrupt and destroy.

Commercial real estate is not immune to the challenges that these conditions pose. Industry leaders who understand and prepare for the potential impacts of both of these conditions will not only better protect their tenants, customers and investment partners; they will put themselves at a competitive advantage in the marketplace.

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67,000 Robots in Use in China in 2015; Expected to Double by 2018

Robots are increasingly playing a bigger role in Chinese factories, where technological advances have lowered the cost of robot parts significantly, with some now costing 88 percent less than they did in 2006. These lower costs are giving manufacturers the incentive to invest in these technologies as worker salaries rise and the labor force ages, according to an article in CBRE’s “Viewpoint,” written by David Egan, Americas head of industrial and logistics research, and Matthew Walaszek, senior research analyst, global industrial and logistics research.

“China is going through a robot revolution,” according to the report, “prompted by demand for automation in its manufacturing sector. There are two important driving forces behind the trend. First, China’s population is aging—its workforce aged 16-59 is shrinking, having dropped by a record 4.87 million last year, to 911 million, according to China’s National Bureau of Statistics (NBS). That’s significant growth from 2014’s decline of 3.71 million. The United Nations forecasts that China’s workforce will fall below 800 million by 2050. This will coincide with a drop in the number of migrant workers. According to NBS, rural-to-urban migration of workers has decreased for the first time in 30 years, having declined by 5.67 million in 2015, to 247 million.”

The cost of labor is the second key factor. Labor costs more than doubled between 2000 and 2015. That has caused China to become less attractive to manufacturers. China, according to the report, is non-competitive in low-cost industries such as textiles and garments, compared to other Asian countries such as Vietnam, Bangladesh and India.

‘Grab and Go’ at Amazon’s 1,800-square-foot Grocery Store with No Checkout

Amazon has opened a grocery store with a twist: Customers can shop to their heart’s content and then leave the store with their purchases without stopping at a checkout line, according to Wired.

“You just grab the stuff you want and walk out; the order posts to your Amazon account afterwards,” according to the article. “There are no cashiers, no lines, no fumbling for a credit card. And while experts agree that Go looks very much like the future of retail, it’s less clear whether Amazon has all of the pieces in place.”

At present, there is one 1,800-square-foot Go store open in a beta test in Seattle, but only Amazon employees can shop there for now. Regular civilians will have to wait to stock up on the bread, milk, cheese, pre-made snacks and fresh meals until sometime in early 2017.

When that times comes, all you’ll need to get into the store and begin shopping is the Amazon Go mobile app. Although Amazon will not share how the process works, according to the article, it appears that it uses artificial intelligence, RFID, sensor and machine learning technologies. “No one’s put all of the pieces together in the way Amazon appears to have done—but then again, nobody else is Amazon,” the article concludes.

Funding Bill Signed, Bringing Lame-Duck Congress to a Close

The Senate cleared a stopgap spending bill on Friday, funding the government through April 28, 2017, and bringing the lame-duck session of the 114th Congress to a close. The bill, signed by President Obama on Saturday, means President-elect Donald Trump is likely to face a spending battle in Congress in the first 100 days of his administration. The House had passed the spending bill on December 8, but the Senate delayed passage over a dispute regarding health benefits for coal miners.

Congress concluded without a conference committee reaching agreement on a comprehensive energy bill, which contained provisions affecting the development of energy-efficiency building codes. NAIOP has worked closely with the sponsors of the Portman-Shaheen legislation – the Senate version of the energy bill – to ensure it included language requiring that codes are economically and technologically feasible, but the conference committee could not agree on a number of other provisions of the energy legislation before Congress adjourned for the year. The members of the 115th Congress will return the week of January 3 to be sworn into office.

The Post-election Outlook for CRE

By Aquiles Suarez

NAIOP’s Government Affairs staff held a post-election webinar for our chapter executive directors, presidents and government affairs committee chairs to discuss what we believed would be the impact of the 2016 elections on NAIOP’s public policy agenda and the commercial real estate industry. The following is a summary of the major issues covered:

Tax Reform: While running as a candidate, President-elect Donald Trump’s tax reform plan had broadly stated goals of substantially lowering tax rates, including on businesses, while expanding the tax base by eliminating existing preferences and “loopholes” in the current tax code. Specificity was lacking, however, as to whether certain provisions affecting our industry would be maintained, and therefore questions remain as to where tax reform legislation could lead. Such questions include whether tax deferred, like-kind exchanges for real estate (also known as Section 1031 exchanges, for the relevant IRS code section) will be continued; whether depreciation of real estate assets would be radically altered (including replacing the current system with immediate expensing of buildings); and whether the interest on business borrowing would remain tax-deductible. On these issues, the Trump administration will be negotiating primarily with House Speaker Paul Ryan and House Republicans, who have put forth their own tax policy agenda.

Candidate Trump was specific on one tax matter important to NAIOP, saying that he would eliminate capital gains tax treatment for so-called “carried interests” (also known as a “carry”, “promote” or “promoted interests”), an issue that has been on NAIOP’s agenda for several years. Changing the tax treatment of carried interests from capital gains to ordinary income would have resulted in more than doubling the taxes on many real estate partnerships under the current tax code, creating a disincentive for many potential entrepreneurs who would not undertake the substantial risk involved in a real estate development project as a consequence. But under Trump’s proposed tax plan, businesses would have a reduced income tax rate of 15 percent, which Trump has said will also apply to partnerships. Depending on other changes to tax rates brought about by the final legislation negotiated through Congress, the net impact on our industry of eliminating capital gains tax treatment for carried interest may be substantially less than under the higher-tax regime contemplated under the prior code.

Comprehensive tax reform is a top priority for both the president-elect and House Republicans, and will be the focus of legislative activity in the first 100 days of the new administration, during which time NAIOP’s advocacy and involvement of its membership will be critical.

Infrastructure: Candidate Trump promised to spend $1 trillion over the next decade on infrastructure investment. How this will be paid for is unclear, because the source that the Trump campaign identified (revenues gained from repatriated overseas corporate earnings) has also been identified by House Republicans as needed to pay for lower tax rates. As a result, many expect much of this to be financed through borrowing, increasing the federal deficit. Trump has argued that lower interest rates provide an opportunity for the nation to invest in infrastructure, so increased borrowing may not deter him. But it will cause friction with deficit-hawks in the House. Thorny issues will arise in the debate, including increased use of private-public partnership (“P3s”) for infrastructure projects, as well as Republican efforts to provide relief from Davis-Bacon prevailing wage requirements.

Energy: NAIOP has always promoted responsible, sustainable commercial real estate development. To that end, we have worked with elected officials and their staff in congress to ensure that legislation promoting energy-efficiency building codes for commercial buildings included requirements that these be economically and technically feasible. Legislation sponsored by Senators Rob Portman (R-OH) and Jeanne Shaheen (D-NH) included language negotiated with NAIOP, but failed to make it out of a Senate-House conference prior to the election. Candidate Trump promised an aggressive push on expanding energy production, and to the extent that any energy legislation advanced by the new administration affects energy-efficiency building codes, NAIOP will be active in lobbying on behalf of the industry.

State and Local: Beyond lobbying our lawmakers at the federal level, the policy decisions reached at the federal level will have repercussions on NAIOP chapter advocacy efforts at the state and local level. For example, the fact that advocates for stricter energy-efficiency commercial building buildings will find it more challenging to attain their goals through federal mandates means they will increasingly shift their advocacy to passing local ordinances that achieve the same goals. We have already seen these efforts begin in earnest in major cities such as Denver and Orlando. Similarly, national housing groups unhappy with federal funding are calling for cities to look to commercial real estate fees as a revenue source to build affordable housing. NAIOP chapters will face increased challenges as a result.

Predicting Office Space Demand in 2017

By Dr. Joshua Harris

Net Absorption of Office Space Forecast to Decline but Expected to Remain Positive

As the final quarter of 2016 unfolds, Dr. Hany Guirguis, Manhattan College, and Dr. Joshua Harris, University of Central Florida, project that the U.S. office market will post approximately 33.0 million square feet of positive net absorption for the year.

Over the coming eight quarters, net absorption is projected to range between 3.7 and 9.6 million square feet each quarter, down from the quarterly range of the previous forecast, which was 8.4 to 13.1 million square feet. This lower range is due predominantly to increased variance in two of the model’s five key variables: GDP and office-using employment.

The U.S. economy expanded through most of 2016. The first estimate of third-quarter GDP growth registered an annualized rate of 2.9 percent, the highest reading in more than a year. Still, GDP is not likely to grow by more than 2.0 percent for the year. As core inflation has been at or near 2.0 percent for several years, the probability is very high that the Federal Reserve Board will increase key rates at a faster pace, beginning in December.

The net effect of rising rates and slow overall growth have led to a 2017 net absorption forecast of roughly 32.0 million square feet, very similar to the 2016 level. What is noteworthy about this forecast is the increased variance of the upper and lower boundaries of the confidence intervals, which indicate that sporadic quarters of negative absorption are possible in 2017, though not very likely.

Overall, the office sector is better positioned for expansion than some of the other real estate sectors. Office-using employment growth has continued at a robust pace, and both the model and consensus forecasts project that this will continue. Overall, year-over-year, non-farm employment in the U.S. grew at an average monthly rate of 1.7 percent between May and September 2016, compared to all office-using employment sectors, which averaged 2.4 percent growth over the same period.

Among office-using jobs, two NAICS Supersectors — “Professional and Business Services” and “Financial Activities”— have been the strongest, with average year-over-year growth rates (i.e. May to May, June to June, etc.) between May and September 2016, of 2.8 and 2.0 percent, respectively. Barring unforeseen circumstances, the model assumes that this job growth will continue and should support positive net absorption of office space. Still, the risk of a downturn in the macro economy is arguably higher today than it has been in recent years, but the risk of a true recession remains relatively low. Moving forward, it will be critical to monitor interest rates, as sudden spikes could harm corporate profits, which would likely reduce hiring in the office sectors and thus demand for office space.

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