Reducing Development Risk
A recent survey conducted by ARGUS Software shows solid growth in U.S. Commercial Real Estate (CRE) construction activity. In addition, terms are becoming more favorable for developers as investors have more capital to place and few high yield options. 83% of respondents indicated a larger development pipeline compared to 2008. In conversation, many said they are seeing stronger demand than at any time in the last fifteen years. Given the longer term trends, this makes sense. In broad terms, the 2007 construction levels which represented the peak of the last cycle, where just at the thirty year average across all property types for the U.S.
As we enter a new cycle of development, we owe it to our partners to learn from the past, and institute better controls, reporting, and overall transparency, thus building increased confidence, and in time, lower yield requirements. Lower investor yields due to lower risk premiums mean higher developer profits and volume. Managing the process of a development project is key to realizing expected returns. The tools needed to manage that process have improved since the last cycle.
The Global Financial Crisis (GFC) was a collapse in confidence. Consumer Confidence dropped to the lowest levels recorded since the survey began. The most recent report finally brought the number back above the benchmark level of 100. Coupled with this measure was a palpable lack of confidence in investments including commercial real estate. Risk premiums measuring the required investment yield compared to U.S. treasuries soared. While now back in line, the premiums demanded for CRE remain higher than other investments. This is due to the manner in which investors measure risk. In simple terms, risk is higher if volatility is higher. That makes sense of course, but risk is also measured as higher in investments with less frequent reporting periods. Quarterly reported values and cash flows, often lagged by weeks or months, increasing the amount of yield required by investors in CRE compared to other asset classes.
Following the GFC, many large institutional investors forced clawbacks of management fees from their general partners. These clawbacks were then written into many new limited partnership agreements (LPAs) to codify the expectation that large scale losses of investment capital would result in a similar repayment of fees earned by money managers, operators and developers. ARGUS Software’s survey showed a 60% drop in clawback clauses with the remaining developers surveyed indicating never having had such a provision. This can be seen as a return in negotiating leverage to the hands of the developers rather than the investors. Still, 55% of survey respondents reported more complexity in their investment structures for current projects compared to pre-2008. With more complexity, comes a greater likelihood of errors in complex spreadsheets. Errors in spreadsheets given to investors, do little to instill confidence.
With this thinking in mind, ARGUS has been hard at work over the last few years adding powerful new features to ARGUS Developer. With the release of ARGUS Developer version 7 at the end of February, the new Snapshot module will allow the import of project accounting actuals to compare to the budgets created in ARGUS Developer. The many thousands of existing ARGUS Developer users appreciate the rich project builder capabilities which help them model the cash flows from multi-phase development projects. The industry leading structured finance module manages the mission critical task of defining investor waterfalls, tied to those budgets. Now with version 7’s Snapshot module, the monthly project accounting actuals can be compared to budget, variances spread, and the resulting forecasted cash flows instantly understood with real time KPIs and, most importantly, updated investor return reporting.
With more frequent, timely and accurate reporting, ARGUS Developer clients will be able to increase their investors’ confidence, resulting in a higher likelihood of repeat investment at lower risk premiums.
This Week’s Sponsor
For over 25 years, ARGUS Software has led the commercial real estate industry and served clients in over 60 countries. By developing exclusively for the commercial real estate industry, we constantly make sure that our leadership supports your ability to stay ahead of the game with a complete solution for managing portfolios. ARGUS Software is about maximizing returns, simplifying business processes, and saving valuable time and money for your organization. www.argussoftware.com
SAVE THE DATE!
June 9-10, 2015 (Pre-con June 8)
Marriott Rivercenter | San Antonio, TX
UPCOMING REALCOMM WEBINARS
Controlling a Building from Your Phone – OCCUPANT EXPERIENCE Platforms Arrive - 2/28/2019
The initial focus in mobile technologies was on meeting room reservations; then came lighting, heating and cooling, then access control. Over the last 24 months it has become apparent that there are many more occupant experiences that can be delivered via mobile phone. Managing parking, reporting maintenance issues, ordering coffee, scheduling an exercise class, viewing security cameras, and other applications were quickly added to the list. With so many options and approaches available, what are the best strategies for occupant experience? Build versus buy, functionality selection, solution integration and ongoing support are just some of the topics to be addressed by the industries’ most respected professionals.
Chuck Niswonger has over 30 years of successful leadership experience in technology-related roles that range from operating his own consulting company (www.nicenets.com) to directing the IT strategy of a real estate investment management firm to manufacturing and technology-enabled education. Chuck has also been the chair of the Realcomm Investment Management (IM) Advisory Council for the last ten years, managing content selection for the conference educational sessions, IM forums, workshops and webinars.
Matthew Lennan has been integrating IT and building system technologies for more than 30 years. He has developed and implemented computing infrastructures for global financial firms, major healthcare facilities, manufacturing, entertainment complexes and traditional smart buildings. Most recently, Matthew has been working in software development to refine the customer experience for smart buildings in Office, Retail and Residential environments. He is currently responsible for driving Innovation across Oxford Properties’ portfolio.
Jared Summers is a motivated execution-oriented high performance individual who has extensive experience managing large-scale global programs. He brings a unique ability to understand and articulate complex technologies in a relatable way while rapidly fielding innovative capabilities. Currently Jared is the Data, Analytics & Technology Manager at ExxonMobil, delivering on the promise of transformational change enabled by digital technologies across the entire global real estate portfolio.
Elizabeth Dukes is the Co-Founder and CMO of iOFFICE, the leading workforce-centric IWMS software and the first 100% SaaS platform designed for the Digital Workplace. Dukes drives strategy for iOFFICE and advocates for the confluence of people and technology that unleashes the full potential of the workforce and the workplace.
Matt leads the product development and roadmap strategy for Modo Labs. With broad experience across mobile and audience engagement, along with a customer-centric mindset, he is the company’s product leader for both Workplace and Campus solutions. Matt and his development team continue to enhance the Modo no-code platform, empowering higher education and enterprise organizations to quickly create personalized applications and ensure students and employees have access to the information they need most.
Joshua has over 15 years of successful leadership experience with early-stage disruptive companies. He has an extensive background in property technology, focusing on amenities that drive tenant experience across commercial real estate, multifamily residential and student housing. Josh has lead national sales and support teams with an emphasis on customer success, brand recognition, and occupant experience.
As Head of Sales, Nick is responsible for leading the sales organization including domestic sales, product implementation and customer success. Nick’s 20+ years’ involvement with technology dates to the 90s when Peapod did its best to teach him UNIX. Nick’s IT responsibilities over his various positions have included End User Support, System/Platform Administration, Business Continuity Management and Project, Facilities, Procurement, Contracts & Maintenance. Most recently Nick served as Vice President at Environmental Systems Design (ESD).