Branson Powers, Inc.

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Moore’s Law at the Urban Land Institute

Posted on | May 26, 2015 | Comments Off

Moore’s Law and Real Estate: Shrinking Demand for Physical Space Still Means Opportunity

Posted March 6, 2015 on the Urban Land Institute Triangle website  - click here to go to the original posting:

16518491572_da3880b2cf_zBy Archana Pyati

According to strategic marketing guru Gunnar Branson, real estate is facing a shrinking demand for physical space as a result of Moore’s Law, a prediction made in the 1960’s by Intel co-founder Gordon E. Moore that the computer power of micro-chips would improve exponentially every two years and take up less physical space as time over time.

As a result, so much of what we consider essential now fits on the smartphones or thumb drives in our pockets or on servers and databases accessed by cloud computing.  No longer do consumers require libraries and bookshelves to store their magazines, books, and CD’s. Companies no longer require as much office and storage space for documents that are now all digitized.

“This is not an opportunity to sell more square footage,” Branson said. “We want people to pay more for less square footage.”  President and CEO of the Chicago-based National Association Real Estate Investment Managers, Branson delivered his remarks as part of the ULI Carolinas’ Second Annual Meeting held in Charleston, February 9-10. Three district councils – ULI Triangle, ULI Charlotte, and ULI South Carolina – received an Urban Innovation Grant from the ULI Foundation to support the conference.

16493505666_3c30a1f45f_oAccording to Branson, the reduction in physical space presents an opportunity – rather than an obstacle – for the real estate industry. Place-making should still be the priority of real estate developers and should be pursued according to three principles: density, diversity, and shared ownership.

“The denser people are, the more money we can make,” Branson joked with the audience that seemed ready to agree with this conclusion.  Diversity doesn’t just mean ethnic and gender diversity, but diversity in retail rents, price points, services, and housing types. The more variation, the more interesting and engaging your development will be. Regarding shared ownership, Branson predicted that renting would continue on an upward trend with Millennials shy about homeownership. Car-sharing services like Zipcar, Lyft, and Uber are here to stay with fewer and fewer urban dwellers interested in owning their own vehicles.

Finally, Branson urged the industry to follow the “desire lines” of consumers – to observe consumer behavior and design product types and services that reflect what people are actually doing instead of trying to mold preferences to outdated paradigms.

 

– Archana Pyati is an impact writer on the Strategic Communications team at ULI headquarters in Washington, DC. Reach her at archana.pyati@uli.org.

what surprises you?

Posted on | January 29, 2015 | No Comments

These are good times for real estate, so why do we all feel so anxious?  2014 was a banner year with lower unemployment, lower cap rates and higher purchase prices than anyone thought possible.  Capital from around the world is flowing into real estate even though projected yields for assets purchased today are a shadow of pre-recession pro-formas.  Gateway cities continue to absorb very high pricing – above pre-recession levels – while secondary markets are warming up.  Investment managers are raising capital, growing their teams and enjoying the fruit of their considerable labor.

And yet…things aren’t exactly the same as they have been in the past.  There are new disruptive business models, new real estate usage patterns, new regulations, and new institutional capital that is actively changing how the game of real estate is played and won.  Meanwhile the overall economy isn’t exactly boring either. It’s difficult to predict what might happen in the next month, much less the next year or decade.  In the midst of a recovery and growth cycle, we all continue to be surprised by what happens.

And the more surprises there are, the less likely our original assumptions are correct…hence, our collective anxiety in a strong economy.

But what if those surprises could be turned to our advantage?  What if surprise can help us better understand what is happening and what might happen in the future?  Julia Galef, the President of the Center for Applied Rationality recently wrote about how surprises help us discover deeper truths and understanding – that surprise is key to the scientific process.  As she pointed out, Isaac Asimov once said that, “The most exciting phrase to hear in science, the one that heralds new discoveries, is not ‘Eureka?’ but, ‘That’s funny…’”

So, in the spirit of Isaac Asimov and Julia Galef, here are three things that surprised me in the last month:  three surprises that are forcing me to question my assumptions and perhaps will help develop a more accurate picture of what is to come in 2015.

  1. Oil prices are half what they were six months ago.  This surprised a lot of us, but we should have seen it coming.  What else happens when there is more supply of something and no increase in demand? Will lower oil prices change the growth patterns of cities and suburbs?  Will geopolitics change when oil based economies like Russia run out of money?  How many investment strategies assume stable or rising oil prices whether they know it or not?
  2. Baby boomers are not downsizing.  According to recent research by Nielsen, only a third of baby boomers plan to move to a new home in the next ten years.  Of that third, half plan to increase the size of their homes, while the other half may decrease the size of their home, but increase the cost of that home through better finishes and better neighborhoods.  How many economic predictions rely on the assumption that baby boomers are winding down?
  3. Interest Rates and Inflation have not gone up.  Over the last few years, January has become a time when everyone predicts that rates must go up.  And every year, that has not proven to be the case.  Will it happen this year?  How many portfolios rely on interest rates staying the same?  How many strategies rely on them rising?

We live in a time of surprise whether we like it or not.  This is a time when growth doesn’t happen evenly, and where loss or can happen in an instant.  The mistakes we make today will likely come from our own cognitive bias:  the assumption that what has always been true in the past will continue to be true. Look at your assumptions the next time you are surprised. Are they right?  What might happen if they aren’t?  Do you need to change them?

And the next time you catch yourself thinking, “that’s funny…” there is a possibility that you are looking at the seeds of your next brilliant investment strategy.

Keynote Speech at U. of Colorado: Moore’s Law of Real Estate

Posted on | December 10, 2014 | No Comments

buy vs. own – a strategic question.

Posted on | August 30, 2014 | No Comments

How many times, after an extensive planning session, have you or someone else in the room said, “Let’s see if we can get ‘buy-in’ from our clients, colleagues or the market?”  I’ve always found the concept of “buying-in” somewhat problematic.  If a strategy is bought into by whatever constituency you wish, will it actually be supported?  Will a “buyer” own the success or failure of your strategy?

People buy quite a few things that they never use, never care about and quite often forget about.  How many interesting tools, articles of clothing or various knick-knacks have you purchased only to lose in some closet or drawer?

Shouldn’t the goal of your strategy be to get others to share ownership?  Owners, after all, tend to care far more deeply about the future of what they own.  Owners have a tendency to prioritize resources, make sacrifices, adapt to change, and make every effort to create success.  And with all the changes and uncertainty afoot, we need more owners than ever before – to solve problems, create resiliency and anticipate the future.

Instead of asking the question, “How do I get buy-in?” of your team, of your investors, and of all the other parties that can determine the success of your ventures, perhaps we should all ask, “how can I better share ownership?”

all ownership is shared – but how will we share it in the future?

Posted on | August 4, 2014 | No Comments

“We enter a new era.  Are we ready for the changes that are coming?  … In the perspective of fifty years hence, the historian will detect in (this decade) a period of criticism, unrest, and dissatisfaction to the point of disillusion – when new aims were being sought and new beginnings were astir.  Doubtless he will ponder that, in the midst of a world-wide melancholy owing to an economic depression, a new age dawned with invigorating conceptions and the horizons lifted.”

-        Norman Bell Geddes, 1932

“We are called to be architects of the future, not its victims.”

-        Richard Buckminster Fuller, 1978

As our society changes, so do our cities – the places where civilization happens.  Just as our cities changed after the Great Depression and in the post-war period, they are changing now to accommodate the needs, desires and resources of society.  In the second decade of the 21st century, we are still recovering from a frightening global financial crisis, facing changing demographics, and profound innovations in technology and global communication. How will our cities change, and how can we steer them to make not just habitable but better than they were before?

That isn’t a simple question to answer – in great part because no one person or entity owns or controls a successful city.  There may be a strong political leadership, powerful corporate interests, organizations, tribes and thought leaders that can exert some influence, but at the heart of any successful city is fundamentally the sharing of ownership.  The streets, the infrastructure, the buildings, and even the identity are owned by everyone who lives in the city.  In the emotional or spiritual sense, it is intuitive that the city is shared.  In a successful city, it is not uncommon to see someone pick up a piece of garbage or give a tourist directions to a museum, or shovel the snow off the sidewalk in front of their home or business – it is, after all, their city.  Every citizen owns and is responsible it.  When people don’t share ownership, however, only the most oppressive regimes can keep up even the appearance of a functioning metropolis.  City workers perform only the minimum tasks asked of them.  Security is corrupt and often non-functioning.  Garbage is left in the streets.  New investments in private and public space from anyone other than the leaders become scarce and those free to leave, do.

Equally important as the emotional ownership is the shared economic and legal ownership.  Over the centuries, we have created a series of structures, customs and laws that support sharing the city and its resources.  Financial and governmental arrangements such as leases, mortgages, regulations, taxes, and shared services all support a rich shared ecosystem that allows a city and a society to flourish. As those structures change, so does the nature of the cities themselves.

Cities are shared, and how we share ownership will determine the shape of their future.

As an example, North American cities underwent a tremendous transformation in the second half of the twentieth century. As predicted and to some extent encouraged by Mr. Bell Geddes’ prescient Futurama exhibit for General Motors at the 1939 World Fair, cities transformed through an expansion of the suburbs and the steady “emptying out” of the central downtowns.  Superficially, this was enabled by factors such as new industries, massive engineering of roads and bridges, wide-spread automobile ownership, the expansion of the economy after a brutal depression, and an explosive post-war population surge.  But the most powerful driver of transformation was the often overlooked innovation in shared ownership created by the Federal Housing Administration in 1934:  the 30-year self-amortizing home mortgage.

No one thinks of a mortgage as particularly innovative, and yet it changed the decisions, behaviors, and opportunities for millions of people, perhaps even more than all the brilliant design, engineering and technology of the 20th century.  Before the 1930’s less than half of the U.S. population could own their home.  A few short-term, balloon payment mortgages, where the entire principal had to be repaid in 5-7 years, were available, but only a small number of people had the means to take advantage of such loans to buy their own home.  In 1910, the census showed that only 46 percent of families owned a home.  Everyone else rented.

What happened over the next 80 years is well known and impressive to consider. Home ownership soared to over 65.9 percent of families in 2013.  An astonishing majority of people in the US live in their own homes.

By any measure, the thirty-year mortgage has been very popular…and with good reason.  As long as home values rise, the considerable cost of interest is mitigated or even superseded by the increased value of the home when it is sold.  But there was an important catch to this innovation in shared ownership that transformed the landscape far more than a simple change in ownership structure: up until the 1970’s a mortgage only worked for a single-family home.  Anyone who wanted to own their home would have to leave the city center for neighborhoods and suburbs with room enough for individual houses.  Mortgages weren’t available for apartments until federally insured condominium mortgages were developed in the 1970’s.  Until that time, if you lived near the center of the city, you were a renter.  If you wanted a mortgage, you moved out.

In the 1970’s some people used condominium mortgages to stay in the city.  In the next few decades, more people chose urban living and some city neighborhoods came back to life.  In a few cities, suburban growth slowed while urban growth increased.  For example, the U.S. census reported in 2011 that Chicago’s overall population decreased by 7 percent over the previous decade – and yet the population in a five-mile radius from the center of downtown grew by 36 percent.

City center populations continue to grow – driven by changes in technology and the growing preferences of well-off baby boomers and millenials to live, work, and play within walking distance.  But there is a downside to this recent success. Thanks to the law of supply and demand, living in today’s revitalized downtowns is becoming too expensive for many people who want to live there – and that could limit future growth.

Is it possible for shared ownership to change again?  Just as the 30-year mortgage developed the shape of the 20th century city, is there another structure that could facilitate the needs of the 21st century city?

Before considering what a new shared ownership structure might become, it’s important to clearly understand what a lease and a mortgage share in common.  If one rents a home from a landlord, one agrees to a lease of a defined term, usually one year.  Every month during the term of that lease, rent must be paid to the landlord.  If one buys a home with a mortgage, one agrees to a defined mortgage with a lender, usually ranging from 15 to 30 years, where interest (rental fee for the money) must be paid monthly.  If a renter stops paying rent or if a borrower stops paying their mortgage, both are eventually evicted, and the possession of the home reverts to the landlord or the lender.

Of course, there are very important differences between a mortgage and a lease, including the capability for a borrower to retain appreciated equity on any increase in value in their home – but in fundamental ways when one leases a home, one pays rent for the property, when one mortgages a home, one pays rent for the money.

Having a mortgage is simply another form of renting.  This is certainly supported by historical data on home ownership.  Despite the current 65.9 percent home ownership rate, the percent of families that own their own home without a mortgage today is about 20 percent.  Compare that to the rates of free-and-clear ownership in 1910 of about 30 percent.  Viewed this way, a smaller percentage of Americans today own their homes than in 1910.  Most Americans are still fundamentally renting their home, but use a different kind of rental agreement called a mortgage.

A similar financial construct allowed for most people to “own” cars as well.  Car loans allow for “owners” to make a regular payment on their cars until they are paid off.  Built into that payment is interest, or “rent” for the money needed to “own” the car.  If a car owner stops paying the loan, the car is repossessed by the lender.

Renting money for a house and a car were crucial enablers for suburban expansion.  Only by “renting” money could people afford to live in a home far away from the city and drive to work, shopping and to recreation. Without the mortgage and the car “loan”, the suburbs might never have happened. But how good a “deal” is renting of money to own a home and a car?

Consider the cost of “owning” a car:  even with a car loan or lease it is expensive.  According to AAA’s 2013 ‘Your Driving Costs’ study, the average sedan costs $760 per month to own and operate. A larger car, such as a truck or SUV, is even more expensive.

At the same time, it appears that most car owners do not use their car all the time.  For example, the 1995 Nationwide Personal Transportation Survey conducted by the US Department of Transportation calculates that the average time spent by drivers in their cars every day is 1.2 hours – or five percent of the total time.  That means that for 95 percent of the time, the car is not in use and is not providing value to the owner.

For most people it costs $9,000 every year to “own” a car that they only use five percent of the time.  But what if you could monetize some of the 95 percent?  What would happen if one had only to pay for 50 percent or 30 percent of that car?    What if you had a membership in a club that gave you access to a car when you needed it, but shared it with other members when you didn’t?

That’s precisely what car sharing services like ZipCar, Car2Go and DriveNow do.  Members only use cars when they need them, and the services are free to monetize the untapped 95 percent idle time by sharing the cars with other members.  Drivers are able to pay less on a monthly basis to have access to cars at their convenience – and a single car is used by many people in any given day. The value proposition to users is very compelling, and these kinds of services are growing fast. At the end of 2013, Zipcar claimed that their revenues had almost tripled in four years from $106 million in 2008 to $279 million in 2012 and has grown to 850,000 members.

Instead of renting property, or renting money to own property, these services offer membership based access to assets.

The appeal of these car-sharing services is often somewhat misunderstood.  The thousands of users who become members every year aren’t joining just to save money – they are gaining access to more than they could possible get if they were owners.  Just as belonging to a health club allows you to use facilities such as swimming pools or tennis courts that far exceed in quality that which could be built – sharing a car allows someone to live a far more elevated lifestyle than they could buy themselves through a money rental agreement like a car payment.  For $700 a month, someone can “own” a modest sedan but through a car sharing membership, one can drive much nicer cars – even perhaps afford to hire shared limo drivers through services such as Uber at the same cost.

By changing from renting to membership, individuals are able to gain access to more and better quality services than they could before.  Membership is not about saving money, it’s about upgrading lifestyle.  The question then becomes:  can membership be as viable a model for real estate shared ownership as it is proving to be for cars?  Can membership help more citizens gain access to the denser city centers of the future?

A membership is not as different from a loan or rental agreement as it might initially appear.  In both a rental and a mortgage arrangement, ownership of an asset – whether it’s a car, a house, an apartment or an office, ownership is shared – between a landlord and a tenant or between a lender and a borrower.  Membership is also shared ownership, but it is shared with a larger group of people.

This form of membership has already begun to be applied to office space.  Usually, the only way for a business to access office space is to buy an office building or to rent blocks of offices space in an extended lease of five to 20 years.  This buy or lease model has served large stable companies quite well, but smaller and faster growing companies are effectively shut out of the higher quality office space in downtown locations.

At the same time, there is a surprising amount of office space available.  Even in healthy downtowns where there are limited vacancies, most offices stand empty at least two-thirds of the time.  Someone walking down the streets of downtown New York, Washington, DC, San Francisco, Boston or Chicago, all currently healthy office markets with high official occupancies, might be surprised to see how many empty windows there are.  What if all that capacity was put to work?

Co-Working spaces such as Galvanize in Denver, Next Space in California, General Assembly and Neuehouse in New York all offer different versions of memberships for individuals and companies to locate their office – without renting.  By doing so, just like car sharing, it is possible for more people to use the same amount of space.  It also allows for a higher level of office space than those companies could afford to create themselves, located in coveted downtown locations, with a high level of services, infrastructure and flexibility for companies that are growing and changing every month instead of every 10 years.  If a company needs to add workers, they simply have to add memberships, not go looking for new office space to lease.  With membership in co-working offices available, a whole new demographic of companies, entrepreneurs and free-lancers can leave their attics and garages to work downtown.

These co-working spaces are surprisingly efficient.  Some operations report as much as three times the number of members than desk chairs in their office.  Instead of measuring the optimum amount of office space as 100 or 200 square feet per person, a membership model allows far greater density.  This is important if everyone wants to be downtown, and may be a key to understanding what our cities might look like in the decades to come:  a lot denser than they are now – but there is a good chance that it won’t feel very crowded.  Instead of offices and homes standing empty most of the time as they do today – if the buildings are used more efficiently, with different companies and individuals using space at different times of day and the week, it’s possible for more people to use the same amount of space without being on top of each other.

Interestingly, the density of people downtown is far less today than it has been historically.   According to a study done by Jerome Pickard in 1967, Dimensions of Metropolitanism, for the Urban Land Institute, the population density in 1920 for five of the largest cities, New York, Chicago, Philadelphia, Boston and Pittsburgh was about 8,400 people per square mile.  In 2010, those same five cities have a population density of 3,100 people per square mile.  Certainly, these cities’ populations grew in size over 90 years – by a considerable amount – but they mostly grew out thanks to the dramatic expansion of suburban communities.  Meanwhile, city centers built millions of square feet of new office product and lost over 60percent of their residential population density.

Today the greatest demand in our cities is for living space. More people want to live close to where they work.  There are many reasons that may explain why this is happening, ranging from higher costs and congestion for commuting to a shift in aspirations towards a more urban lifestyle.  Perhaps the simplest and strongest reason for the increase in demand for city centers is that people want to be closer to their friends.

When looking for a place to live, the assumption for many years is that most people value the quantity of space they can acquire above all other considerations; as in, “how much space can I get for the money?”  And although many people still ask that question, it is not the primary driver of living decisions; instead it is a bit more complex.

An apartment developer recently asked prospective tenants what amenities or features they valued most in a potential apartment, and what would most influence their decision to move into or stay in any given building.  The list of features that prospects were asked to rank included things like swimming pools, concierge services, workout rooms, parking, party rooms, cleaning services and many others.  With all these high-value, and often expensive amenities on offer, it was striking that the most influential feature, well above anything else, was “a friend that lives in the building.” The social aspect of home purchase or rental decisions is quite often the primary driver.  Even single family home buyers select the neighborhood they want to live in, often one close to friends and family members, well before they try to find the largest or most attractive house they can afford.

Membership structures can help make a more social lifestyle affordable for more people.  If one lives close to where they work, and has easy access to car share service, mass transit, and taxis, one can forgo owning a car entirely – and save the $700 + per month cost of ownership. That frees up more money to pay for a more expensive apartment.  But it is important to remember that even though urban living is more expensive on a per square foot basis, the difference in price for a living space isn’t always that much.  Urban living is very different from suburban living, in that much more time is spent in shared spaces, such as coffee shops, parks, lobbies of apartments, etc.  In the suburbs, there is far less common space, and much more time is spent in a private home.  Therefore, a suburban home needs to be larger than an urban one – as more time and more activities take place there.  Urban homes can be much smaller because people spend less time there – and therefore more affordable as a whole despite a higher per square foot price.

An apartment membership scheme could make urban living even more accessible.  Membership based office space has fewer empty windows than traditionally leased office, but thanks to more efficient space design and scheduling, there is plenty of room for everyone to work.   Managed correctly, apartments could also use shared space more efficiently through membership. One of the drivers of vacancies or non-use of apartments in existing buildings is that peoples’ lives often change faster than the term of a lease.  One might take a new job too distant from the apartment, fall in love and decide to live together – or even welcome a child or pet into the home.

In a pre-membership environment, space stands empty until the lease expires and finds a new tenant.  Imagine what would happen if instead of signing a one-year lease for an apartment, one could join an apartment building for a one-year membership.  If during the membership term one changed jobs or decided to move in with someone else, one could up-grade their membership to allow them to shift to a larger apartment or to another building owned by the apartment company.  Instead of losing a tenant at the end of a lease term because their life changed, a building owner would be able to deepen their relationship and hold on to members by accommodating to their life changes.

High-end apartment buildings built today already feature quite a bit of shared membership attributes.  Shared amenities such as outdoor patios, dog walks, yoga studios, swimming pools, gyms, lounges and party rooms replace the need for large private spaces that used only a fraction of the time by their owners.  If one joins an apartment building, much the same way one joins a health club, it may be possible for members to enjoy a better lifestyle than they could create on their own.

Imagine what would happen to our cities if membership became the dominant form of ownership rather than the lease or mortgage. More people of a broader economic spectrum could enjoy the amenities and pleasures of a city at a lower cost – and encourage more uses in close proximity.  Consider, for example, what might happen if more people shared a single amenity such as a swimming pool.  According to a 2013 study by Benedikt Gross and Joseph Lee called “The Big Atlas of L.A. Pools” there are over 43,000 swimming pools across the greater Los Angeles area – most of them privately owned – costing over $946,000,000 in construction costs, 22 million square feet of land and 760 million gallons of water.  More sharing of those pools – could provide swimming to more people for a fraction of the money, land, and water used today.  Not everyone can or should pay $22,000 to swim in their own pool.  Many more people can pay a membership fee to share that pool with 10 to 100 other people.  Sharing of amenities means that fewer assets have to be made, less land is needed, less transportation required, less energy consumed and less carbon created – but more people can have access.

Since the beginning of cities, there has been some form of shared ownership.  The evolution of the forms of shared ownership, whether they are leases, mortgages or memberships have and will continue to define the shape of our cities.  If membership becomes a more dominant form of shared ownership, it is quite possible that in the next twenty years, the density of cities could double, and their citizens will share more of what a city can offer.

2014 CRE forecast moderated by Branson (video)

Posted on | January 31, 2014 | Comments Off

an empty space for NAREIM – new HQ in Chicago profiled

Posted on | January 25, 2014 | Comments Off

For a print version with photos, click here.

Can space change the way people behave, interact, and ultimately think? Is it possible for an environment to help create thought?

“This is not a typical association office,” exclaimed a recent guest after walking into the new offices of the National Association of Real Estate Managers (NAREIM). It is an open format environment, simply and elegantly furnished, on the third floor of the iconic Wrigley building. Out the windows are views of Michigan Avenue below, the Chicago river and some of the most exciting 20th century architecture in the world. This is less an office for association staff and more a gathering place for those making new connections, challenging their thinking, and learning how to run their businesses better.

In only a few months, the space has proven to be a flexible stage for strategy sessions, association meetings, and roundtable discussions—and has even served as a location for a student job fair. NAREIM members routinely use the space as a temporary Chicago office, holding meetings with colleagues and clients. And a good number of meetings in the 2014 NAREIM schedule are already planned to take full advantage of the new facility

The Wrigley Building was the first office building to be built north of the Chicago River in the early 1920’s, concurrent with the bridge connecting North Michigan Avenue with the Loop business district south of the river. Designed by the architecture firm Graham, Anderson, Probst & White, the grand new headquarters for the Wrigley chewing gum company was modeled after the Grialda tower of Seville’s Cathedral with white glazed terra-cotta ceramic tile cladding and ornate towers on top of the two office blocks. It was old but new from the beginning. Despite its elaborate detail and old-world inspiration, it had the most modern conveniences of the time and was the first air-conditioned office in Chicago. It stands almost like a gateway to the avenue, turned slightly off the grid of the streets and open to views and light on all sides. At night, bright spotlights light up the façade to glow like a beacon on the river. It may very well be the most recognized building in Chicago – and certainly seems to be the most photographed, as on any day looking down from the office windows, one can see a constant queue of photographers—profession and amateur alike—in the plaza below.

Owned by Wrigley throughout the 20th century, it was sold in late 2011 to a group of investors that include the Zeller Realty Group—managers of the building to this day. One month after the sale, NAREIM signed an agreement to lease space on the third floor of the north tower and move in once renovations were completed.

Here was a rare opportunity to create a stage for discussions—a place where members could connect, think in public, and work through the issues affecting their industry and their businesses.

The celebrated theatre director and author Peter Brook wrote in his 1968 book, The Empty Space, “A stage space has two rules: 1) anything can happen; 2) something will happen.”

Is it possible to create a place where anything can happen and something would happen when NAREIM members came together? With the build out of the new office, we intended to find out.

As a favor to the association, Donna Powers Branson took on the task of overseeing the build out and design of the interior. Drawing from her experience in the theatre, in retailing, and as an independent film art director, Donna had a considerable challenge with an oddly T-Shaped corner space that had not been occupied since the mid 1970’s. Fifteen hundred square feet that encompassed four separate office spaces, finished with thin veneered cabinets and radiator covers, gold-colored carpeting, and a dropped ceiling of acoustical tiles. Long abandoned paint peeling and flaking off the walls, ceiling tiles missing or dropped on the floor, and electrical wiring hanging ominously from the ceiling, it initially felt less like a headquarters for an association and more like the setting for a horror movie.

It was time to start from scratch. Everything was stripped bare—walls and cabinetry removed, the remaining ceiling tiles taken away. The morning’s light lit the entire office, burning clean the gloomy darkness that once hung in the air. It was immediately apparent; this bright, open light was what we would build around.

According to Donna, “To retain the best aspects of the space, we decided to keep it as open and spare as possible. NAREIM is all about new perspectives, flexible thinking, and looking forward. The space needed to reflect that.” No solid walls were built inside the space; no drop ceilings installed; no cubicles or dividers. Instead of covering up the radiators—they would be kept open, cleaned up, and given a fresh coat of paint. The nicks and scrapes that a building acquires over 80 years of use would still be visible, but made fresh and clean.

Since the ceiling was perhaps the roughest surface—and crowded with everything from conduit and fire sprinklers to HVAC ducts—most tenants would have simply installed another drop ceiling. Instead, to create the visual effect of a more finished ceiling below the mechanicals without blocking air-flow or lowering the height, lighting pendants were used. Reproduced from a design quite common in 1925 when the Wrigley Building was first constructed, the hanging fixtures mix modern with old with sculpted fluorescent bulbs that echo the shapes of early Edison filaments.

Furnished with simple and moveable furniture, the intent was to allow each meeting to adapt the environment as needed. At the same time, the environment needed to stimulate new thinking. According to Donna, “The last thing we wanted was ‘conventional’ furnishing. Instead of traditional office furniture, we used a mix of clean mid-century and industrial pieces with some historical references to Wrigley’s history. The addition of art added an occasional pop of color as well as wit.” The mix of mid-century and industrial is well represented by the meeting tables made from reclaimed barn wood set on wheeled legs of galvanized steel and simple chairs, copies of the classic 1957 Arne Jacobsen Model 3107 chair that were stained a deep indigo blue.

Instead of carpeting, the floor was laid with vinyl tiles made to look like wood planks—easily cleaned and maintained at a fraction of the cost of true wood floors. Using a hard surface created an uncommonly high level of energy as the acoustics became much more lively. The dead acoustical effect common in modern offices created through carpeting and drop ceilings can be very useful for audio recordings or conference calls as there is no echo when people speak. However, those kinds of acoustics can also have a deadening effect on individuals’ energy levels—and make it difficult for someone to be heard across a larger room without amplification. When people hear their voices bounce back from hard surfaces, it not only provides a boost to energy levels, it also helps the speaker intuitively moderate their voice to be comfortably heard by others.

That is why most public spaces built before microphones were commonplace have a similar acoustical signature. The environment functions as a literal amplifier of sound and energy—and in the process allow speakers to be more intimate and spontaneous than they would if handing around a microphone to speak.

Simple, easy to adapt, and loaded with visual wit, the new NAREIM Headquarters has arrived. Members now have a meeting space in Chicago to drop in on, engage in discussion, and connect to their colleagues. This is a place where anything can happen and something always does.

This is not a typical association office, but perhaps it should be.

PrivCapRE Discussion – changes in real estate and capital (video)

Posted on | November 20, 2013 | Comments Off



Why Real Estate Matters

Posted on | September 13, 2013 | Comments Off

Real estate matters…quite a bit more than many people assume.  Not only does real estate account for a full fifth of the gross domestic product, it is the infrastructure, ecosystem, and structure for a fully functioning economy.  The boxes we define as offices, stores, warehouses, and homes are only the physical manifestation of a broad range of activities that tie every aspect of our society and economy together into a broad and deep network of trust.  The pursuit of real estate investing is a valuable and essential part of building and maintaining civilization.

…and it requires quite a bit of thoughtfulness.

There is an assumption that real estate is simply about the deals; that is, whoever gets the best deal, either the purchaser or the seller, wins.  And though the ability to negotiate better than the counterparty of a deal is a key part of success in this business, it is not everything.  Real estate professionals also have to understand, anticipate, and help to shape economic activity throughout the term of an investment.  Purchasing that investment at a low price and selling it at a higher price is absolutely necessary, but there’s a lot more to it than negotiating terms.

According to the tired old cliché of real estate, the three most important elements of successful real estate are “location, location, location”. In some ways, the cliché – like most clichés – is too facile to explain the intricacies and importance of this business and it implies a somewhat defeatist or passive view of investing.  In other words, it is difficult to swallow the notion that “location is destiny” – especially when real estate investors have had quite a bit of influence in the discovery, building, improvement, and creation of new locations around the world.

In 2009, the New York Times published William Safire’s analysis of where ‘location, location, location” came from.  According to his research, the earliest recorded mention of the phrase he could find was in a 1926 Chicago Tribune real estate classified ad that said: “Attention salesmen, sales managers: location, location, location, close to Rogers Park.”  This is especially ironic to anyone who invests in Chicago real estate since property values in Roger’s Park are typically half of the average Chicago property.

But if the rules of real estate aren’t “location, location, location” what are they?

Here are three new rules to consider: Density, Diversity, and Shared Ownership.

Density

What makes for a successful location?  It has quite a bit to do with how many people want to spend time there.  If your building is where the most people want to be, it has the highest potential for revenue.  The denser people are, the more opportunity there is, the more value there is.  In some ways the real estate profession creates the infrastructure for density.  Real estate makes density possible.

Diversity

Diversity of people, of cultures, of uses, and of economic activity is essential for thriving places, cities, and communities.  In farming, it may be possible to improve crop yields if one devotes a large area to a single crop, but the moment conditions change, perhaps due to difficult weather, an invasion of parasites, or a shortage of water and nutrition in the soil, that monoculture is less likely to survive than farmland planted with a variety of crops.  Cities and communities behave much the same way. Less diverse economies like Detroit enjoyed tremendous growth at first – built around one very successful industry – but are particularly vulnerable to economic shocks.  More diverse economies are able to handle changes in the economy better and return to full productivity sooner. As Ecclesiastes said, “divide your investments among many places for you might not know what risks might be ahead.”

At the same time, a diversity of businesses, cultures, and people promotes faster formation of new businesses, new technologies, and new ideas.  A successful real estate investment depends on the economic success of the people and businesses that occupy the asset as well as the surrounding area.  Diversity creates new growth and mitigates the natural volatility of a business cycle.

Shared Ownership

Every tool at the real estate professional’s disposal is essentially a device to promote shared ownership – whether it’s the JV agreement, the limited partnership, the GP-LP relationship, the mortgage or the lease. Every agreement and contract is designed to bind all the parties as much as possible in a shared responsibility for the success of every asset.  The tenant needs to feel that they share in the ownership of a building as much as the lender or equity partner; the property management team needs to own its success as much as the developer or owner.  Everyone should be able to come together and work out the problems when the asset falls and share in the rewards of its success when it prospers.

At its best, the commercial real estate industry is all about sharing a sense of ownership.  And the most successful markets are passionately “owned” by all the participants.

For the best real estate investors, destiny is not just something in the stars, or in some pre-ordained quality of location, but rather in ourselves and in our ability to solve the challenges presented by a swiftly changing world.

CBC Lang & O’Leary Interview with Gunnar Branson (Video)

Posted on | July 24, 2013 | Comments Off

Gunnar Branson appeared recently on the CBC’s Lang & O’Leary Exchange to discuss the ongoing densification of cities and its impact on commercial real estate in Toronto.

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