Tonight's class largely focused on the potential impact of technology on real estate. Specific topics included retail markets, the world wide web and technology, social networking, and software trends and issues.

Several issues arising from the discussion really caught my interest.

First, the role of the internet and social networking in the brokerage industry was interesting. From a residential real estate perspective, the vast amount of information available online for potential buyers has to affect the role of the broker. Articles submitted for class included information on the increasing depth of information available - to the point that a greater and greater percentage of potential buyers are searching online, and searching with more and more specific, "long-tail" searches. This search string includes very specific data about homes desired, including number of bedrooms and baths, school districts, and neighborhoods. With 80-90 percent of real estate searches starting online, is the role of the buyers broker being reduced as well?

The discussion veered into the territory of economic theory with Dr. Forgey noting that, in this economic downturn, the normal relationship between declining interest rates and increasing real estate prices is not manifesting. This raises the spectre of further and potentially dramatic declines in price as interest rates are inevitably raised. I wonder if, with the withdrawal of governmental stimulus from the economy, the continued pressure on personal incomes and wealth will combine with reduced real estate values and similar macroeconomic developments to produce deflation.

The next interesting discussion from this evening concerned current developments in the retail market. With lease rates declining in the area, and vacancies rising, the future looks turbulent. One trend discussed was traditional retail demand being displaced by more entertainment related business such as restaurants and bars. Arlington Highlands is an example of this, with the first phase primarily consisting of traditional retail with highway pad sight restaurants, while the second phase is entirely restaurant tenants.

This displacement could be happening because virtual stores are expanding their market share at the expense of brick and mortar locations. Class members noted that this seems particularly true in the case of mid-level retail. Upscale and premium stores offer more than their physical product. They offer an experience and/or a level of personal service that creates and maintains demand. Discount outlets also seem to be maintaining their market share.

The concept of retail centers offering an experience in addition to just physical products finds its expression in the lifestyle center. Whether the trend towards outdoor retail in an idyllic "Main Street" setting is long term paradigm shift or merely fashion, lifestyle centers seem to be all the rage. This development model has some good things going for it. First, the outdoor setting lowers the need for air conditioning and heating large volumes of public space, as in a traditional mall. Second, depending upon the nature of the anchors and big boxes associated with the center, there is an opportunity to approach genuine walkability and pedestrian friendliness. This can be problematic in practice. Witness the center section of Arlington Highlands in comparison with the outer portions of the center. Note the vast expanse of parking lot that dominates much of the Highlands aside from the middle row of buildings.

The future of the retail center is uncertain. Despite online retail, and growing importance of discounters, there will likely always be a place for the one stop shop, either as an indoor mall or a lifestyle center. I think it likely that people will always want to go out to "shop" for the experience and the interaction/people watching.

The 3 "E's"

Second Session (6/17/10):

We began the discussion this evening with three questions:
How do we become more efficient, effective, and equitable from this point forward?

What are the challenges

We discussed green buildings and LEED certification. One interesting point that was made was that the initial cost of a Gold Level LEED certification is approximately 2% over conventional construction, and the long term savings approach 35%, whereas the initial cost for Platinum level certification is 10% to 20% more than conventional, yet the operational savings are not over 45%. Thus, there is a much reduced marginal return on investment for a very high level of LEED certification. Businesses therefore should be seeking other goals, such as public relations or marketing, from a Platinum certification. There was further discussion of the constantly evolving and more stringent standards for LEED levels, and whether or not those standards become more stringent in tandem with technological advantages that might enable reaching those standards.

Class readings included discussion of the achievable market premium for LEED certified buildings becoming more prevalent. There are interesting elements to LEED design, and this website offers examples of LEED Platinum certified buildings: http://www.jetsongreen.com/2008/12/leed-platinum-p.html

Other interesting issues regarding green building and LEED include the role of underwriting (and education of underwriters and lenders) in including the value of LEED in either the LTV ratio or the risk premium, and the value of educating brokers about the value added for tenants by LEED. All these questions revolve around identifying and promoting the relative cost benefits of LEED.

Further discussion involved the value of transparency in terms of energy/utility costs for commercial buildings. Would ready availability of this information allow more rational decision making and improve sustainability over the long term? Certainly, to whatever extent a tenants as a whole value energy cost savings over other factors, energy efficient buildings would command higher occupancy as well as rent premiums. Over time, this could provide additional incentive for the development community to include ever higher efficiency standards in new development as well as remodeling projects.

Thursday night was the first session of REAE 5315. We went over the normal first class session housekeeping issues, including grading elements and topic lists for each session from the syllabus. Students suggested a few additional topics for the semester, including LEED certification, environmental contamination, CMBS/derivatives, lease accounting standards changes, and New Urbanist developments.

Class members introduced themselves, and I was interested to note that I was the only planning student in the class. I hope that will allow me to provide an alternative perspective to the topics, as appropriate. I also hope that my fellow students have not endured such an extended orgy of number crunching that their lives are devoid of all but internal rates of return and GAAP. For those class members in real estate and (especially) accounting, I include the following diversion:

(As a caveat, this short film is - for all I know - standard fare in MPA orientation sessions. On the off chance it isn't, please enjoy the Crimson Permanent Assurance. Finish with Part II.)

http://www.youtube.com/watch?v=KX61PUZ3xkI

By way of introduction to the course, and as a means of sparking class discussion, Dr. Forgey presented information on two intriguing projects: Subtropolis in Kansas City and the new LEED Platinum Bank of America tower in New York.

Subtropolis (http://www.huntmidwest.com/subtropolis/index.html) is a former limestone quarry/mine in Kansas City that was adapted for warehouse/distribution and storage space by Hunt Midwest. Hunt installed a concrete floor and utilities to the large underground space (nearly 5 million sqft. of leaseable space according to the brochure.) This kind of space offers several distinct advantages. First, it utilizes otherwise vacant space. Second, conversion is less expensive than new construction which, coupled with the enormous utility savings due to constant underground temperature and humidity, allows for low lease rates.

The class discussed these advantages. Dr. Forgey indicated that his interest was in the creative adaptation of the space as well. I was curious about how replicable this project would be. However, the space is not as unique as I thought. Some research quickly revealed that the room and pillar method was common for limestone production throughout the Midwest, so there are many other such mines around. They may not be in a high growth area of the country, but the cost advantages they offer could make for more Subtroplises.

The Bank of America Tower is the first skyscraper to receive LEED Platinum status. It is the second tallest building in New York (though it relies on a spire to beat out the Chrysler Building. This seems like a dodge to me. Still, its good for BOA to spend on bragging rights. They certainly aren't rewarding their shareholders lately, so I guess the pride of knowing they own a little piece of the second tallest building in Manhattan will have to do for shareholders, in place of actual dividends or share price appreciation.) Water handling systems throughout the building are interesting, as they save on pumping costs through cisterns at various tower levels. Also present are non-flushing urinals, radiant cooling and heating, and slag infused concrete used to lower the carbon footprint. I look forward to more discussion on LEED, especially as it relates to lease rate premiums for LEED certified buildings serving to price the utility savings into the market.

Sustainability is becoming a very powerful force in business and real estate development. There are few identifiable potential catalytic industries on the horizon. The US and the world need the "next great thing" that will spark sustained economic growth, and Green seems to be one of a select handful of trends that holds that kind of economic potential. That is why the US government has been investing in renewable energy and providing tax credits for energy star appliances. This economic downturn appears to be very fundamental in nature - meaning that some basic trends that have driven the economy over the past quarter century no longer seem to be viable. Therefore, something must catalyze a genuine recovery. Perhaps green industry and sustainability will be the catalyst.