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
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June 9-10, 2015 (Pre-con June 8)
Marriott Rivercenter | San Antonio, TX
UPCOMING REALCOMM WEBINARS
In-Building Wireless - The Long Hard Journey Continues - 4/26/2018
Many emerging countries have the benefit of not having to manage existing telecommunication infrastructure. In developing countries such as Korea, China, and India they have gone straight to the most current infrastructure and as a result have extraordinary coverage outside and inside buildings. Today, in many iconic as well as average buildings in North America, cell coverage is not guaranteed. With the world becoming more mobile and device dependent, unreliable coverage inside buildings is a growing problem. This webinar will provide an update on emerging technologies as well as overall strategies designed to address this important issue.
Ted Maulucci is the President of SmartONE Solutions, a company committed to advancing the digital living experience in communities. He assumed the role of President at SmartONE after a 26 year career as the Chief Information Officer of a leading Toronto based multi-family real estate developer. He was recognized as the Private Sector Canadian CIO of the Year in 2016 for his achievements in connected buildings.
Marc Gittleman oversees 3rd Party Services throughout Rising's 3+ million sq. ft commercial real estate portfolio, business development of integrated verticals, and Rising's energy, sustainability and technology initiatives. Marc has also participated as a GP investor in over $600M of transactions. Marc is also CEO & Co-Founder of 5x5 Telecom, a fiber optic ISP and smart-building platform located in Los Angeles. He is a noted expert in real estate innovation.
Brian Schwartz is responsible for Smart Building Infrastructure at over 50 centers portflio wide. He oversees the installation and support for CCTVm Wi-Fim Energy Management, shopper counting, and DAS. Brian support digital marketing initiatives including digital signage and property websites.
Richard J. (“Dick”) Sherwin has been involved in wireless communications and radio frequency transmission for the past 30 years. Together with a number of telecommunications veterans, he founded and funded Spot On Networks, LLC, a provider of wireless telecommunications for the Multifamily Residential and Multitenant commercial building industry. Previously, he was CEO of Metromedia International Telecommunications Inc. and as a member of the Board of Directors of Metromedia International Group, Inc. since its inception. He was instrumental in establishing approximately 47 wireless and wired telecommunications ventures in Eastern Europe and the former Soviet Union Republics in wireless telecommunications including cellular telephony, cable television and radio paging.