Public-private partnerships gain ground as innovative solution for funding real estate development projects

Charles Renner

Charles Renner

By Charles Renner, Husch Blackwell

Federal, state and local government agencies have significant real estate needs, including the necessity of repairing and replacing aging infrastructure and utilities. But these agencies are finding it increasingly challenging to find the funding to pay for the development of their properties.

As a solution, public-private partnerships (P3s) are gaining ground as a viable funding source for real estate development projects. This is an approach that is catching the attention of not only developers, but also government leaders looking for innovative ways to fund their community infrastructure needs.

What is a P3?

A P3 is a contract between a government agency and a private-sector entity for a public project. This alternative approach to traditional funding and financing transfers substantial risk to the private party and allows the private party to fund the project with capital investments as a replacement for shrinking public funds. P3s can be a boon for local communities by driving economic growth and creating jobs.

P3 real estate development projects can benefit the public sector by transferring risk to the private sector, allowing government agencies to shift monies to other needed projects. Agencies also gain the expertise and creativity of public agencies to help them solve problems. In return, government agencies may be required to relinquish some direct control over projects to the private sector, must agree to commit future public funds and may experience increased financing costs on capital projects.

P3 projects in action

Over the decades, P3s have evolved from physical infrastructure projects such as roads and bridges, to encompass more complex social infrastructure projects, including affordable housing, hospitals, off-campus student housing and more. Here are a few examples of how P3s involving real estate are taking shape:

  • Drexel University partnered with the nation’s leading student housing provider for a three-phase project, worth $345 million, to develop more than 1.4 million square feet of space, increase on-campus student housing by nearly 80 percent and add more than 60,000 square feet of retail space in Bethesda, Maryland. The improved housing is returning students to campus and returning neighborhoods to residential areas for families with schools, parks and community spaces.
  • Denver International Airport is in the process of completing yet another P3 project, recently narrowing its private developer search to relocate its security screening point to a new level of the airport. The space previously devoted to security screening will be used for revenue-generating restaurants and stores. A portion of these sales would be used to repay the private developer, creating a potentially significant return on the investment.
  • The Tampa Housing Authority has agreed to an equal partnership with a developer to replace several rundown properties with condominiums, rental units and retail and office space on 150 acres of city-owned land. The developer agreed to designate 30 percent of the homes for low-to-moderate-income families.
  • County commissioners approved a $550 million project for a private developer to rehabilitate the Cook County Hospital and redevelop 13 acres of county-owned property in the Illinois Medical District on Chicago’s Near West Side. The first phase includes building a hotel, restaurant and retail stores. Three subsequent phases will add a technology and research center, medical office building, apartments, another hotel and parking decks. The development team agreed to hire Cook County residents for one-half of all working hours, and workers living within a three-mile radius of the site will perform 7.5 percent of the construction work.
  • The city of San Antonio is partnering with private developers to construct the Vista Ridge Pipeline as part of a water supply system that would protect the Edwards Aquifer (the city’s primary water supply) in case of drought. The new pipeline is estimated to increase the city’s water supply by 20 percent.

P3 survey results

In June of 2016, the Public-Private Partnership Conference & Expo was held in Dallas.  Husch Blackwell LLP partnered with the P3C Conference and Expo, and created a “flash” survey that all attendees from the public and private sectors participated in.  As anticipated, the survey provided encouraging results.1

Most survey respondents viewed P3s as necessary to supplement traditional financing methods for funding growth and improvements. Both public- and private-sector respondents indicated that funding shortfalls are the primary reason to enter into a P3. All other reasons rated as very secondary for the private sector, although the public sector rated the transfer of risk as another significant factor for using P3s.

In addition, 50 percent of public-sector respondents said they would accept unsolicited proposals and 80 percent of private-sector respondents said they were willing to voluntarily submit proposals.

Overall, respondents indicated that they felt hopeful about the future of P3s. Nearly 90 percent of private-sector respondents and 80 percent of public-sector respondents agreed that P3s will become a traditional finance model for public works projects. These survey results are consistent with findings in other surveys, representing a fundamental change in how the public and private sectors view P3s.

Keys to success

When considering a P3 project, best practices should be followed for a greater likelihood of success. According to the National Council for Public-Private Partnerships, the keys to success include:2

  • A statutory foundation to implement the partnership
  • A recognized public figure to play a critical role as the spokesperson or champion for the project
  • A team assembled by the public partner that is dedicated to the P3 project from concept through execution
  • A P3 contract that details the responsibilities, risks and benefits of each party
  • An identifiable revenue stream that is reasonably assured for the length of the investment period
  • Open and honest communications between the partners and the stakeholders affected by the partnership
  • Partners chosen with great care, considering experience and financial capacity, to find the best value rather than the lowest price

Conclusion

Increasingly, public agencies are turning to P3s with private-sector partners to meet their needs to fund real estate development projects. Whether the public needs affordable housing, parking, office space, health facilities or mixed-use development, a P3 is an option that has shown proven results in cities across the country.

Charles Renner is a partner and member of Husch Blackwell’s Real Estate, Development & Construction team. He is based in the law firm’s Kansas City, Missouri, office.

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Five Midwest regions ranked among top distribution markets by JLL

top distribution markets

The top distribution markets, as ranked by JLL.

 

 

by Dan Rafter

Five Midwest regions rank among the top distribution markets in the United States, according to a new industrial report from JLL.

JLL ranked the Chicago metropolitan area, which includes Milwaukee, as the fourth-best distribution market in the country. It picked what it calls the Mideast region — which includes the Indianapolis, Cincinnati and Columbus markets — as the seventh-best.

JLL chose the New Jersey/New York metropolitan area, Southern California and Central and Eastern Pennsylvania as the top-three distribution markets.

What helped the Midwest markets on this list rank so high? JLL says that Chicago draws large users looking to serve a wide geographic footprint. The Chicago market also boasts strong intermodal capabilities, a thriving network of rail service and the busy O’Hare International Airport.

JLL says that Milwaukee is an interesting satellite market for Chicago. Labor costs might be a bit higher here, but JLL says that demand in Milwaukee is high enough that the metropolitan area remains a tight distribution market with few Class-A space options available.

What makes the Indianapolis, Cincinnati and Columbus markets such strong distribution centers? Location is key, according to JLL. These three markets are within a day’s drive of a huge swath of the country, a prime benefit to industrial users. Labor is also skilled here and affordable. The cities’ strong interstate and air cargo options also give them a boost.

JLL says that Indianapolis benefits from a significant stock of Class-A space, has not been overbuilt and has a relatively low land-cost basis. Columbus has favorable labor rates and relatively inexpensive real estate or development options, while Cincinnati’s metropolitan area has a low vacancy rate and a sizeable foundation of warehouse and distribution real estate. it also has the ability to reach an extended portion of the Midwest population base. JLL said that Cincinnati can also tap into Louisville’s UPS air cargo hub.

Posted in Chicago Commercial Real Estate, Cincinnati commercial real estate, Columbus real estate, Illinois, Illinois real estate, Indiana commercial real estate, Indianapolis commercial real estate, industrial real estate, Milwaukee commercial real estate, Ohio commercial real estate, Wisconsin commercial real estate | Tagged , , , , , , , , , , | Leave a comment

Looking for financing? The basics still matter

James Cope

James Cope

by Dan Rafter

Midwest Real Estate News recently spoke with James Cope, executive vice president and managing director with commercial financing company Walker & Dunlop, about the steps investors, owners and developers must take when seeking commercial financing. Cope said that the basics still matter when borrowers are seeking dollars for refinances, acquisitions and construction.

Midwest Real Estate News: What are some of the factors Walker & Dunlop considers when determining whether it makes sense to provide financing to specific borrowers?
James Cope: Things haven’t changed dramatically over the last several years. The basics are still what we focus on. We review the financial wherewithal of the sponsors supporting the transaction. The first thing that we look at is whether the sponsors behind a transaction have reasonable financial strength to support what they are asking for.

We also run credit reports on the borrowers. We don’t get a credit score, per se.  Instead we run a report on the background and history of the sponsors. This gives us an idea of what issues might have come up in the past with the sponsors. Having an issue in the past doesn’t necessarily mean that we won’t approve financing. We’re interested in how the sponsors dealt with and resolved these issues.

We also ask borrowers to complete a questionnaire. That form gives borrowers a chance to tell their story. It gives them the chance to explain how they handled themselves in tough situations. Every lender has a different view of things, and the questionnaire gives them the chance to tell their story.

MREN: What do you look at when it comes to the project itself?
Cope: There are so many different variables here. Is it an acquisition? Is it a refinance? What type of property is it? There is so much to consider. Today, buyers are often putting more cash into deals. For our business today, we are spending most of our time with acquisitions and refinances. Both of these areas are very robust today. Construction lending today is a much smaller part of our business.

MREN: Which asset classes are you financing most often today?
Cope: It’s not much of a surprise, but multifamily is the most common asset class for financing requests today. We also provide financing for office, retail and industrial, but if you look at our overall business, multifamily is the majority. When it comes to asset class, we are primarily seeing financing requests for Class-A and Class-B properties, though we do provide financing for some Class-C properties.

MREN: How do you explain multifamily’s continued growth?
Cope: There was a pent-up demand for apartments following the economic downturn. There was very little multifamily construction during the recession. At the same time, the country has been moving away from what was such a high demand for homeownership. Prior to the downturn, the homeownership rate was rising steadily. There has since been a significant shift in terms of more people choosing to rent. Those two factors have been strong catalysts in the growth of the multifamily market.

MREN: Are there any concerns that we might be seeing too much apartment construction in some cities?
Cope: No question. There are concerns. Everyone is trying to asses where we are in the cycle. Where is the demand at today? Most of the product being built today is Class-A. How much depth is there for that market? How many people can really afford that level of product? People are paying attention to that. Banks are tightening on construction lending as they consider these questions.

MREN: How busy are the other three main classes with which you work: retail, industrial and office?
Cope: Industrial is considered one of the strongest asset classes right now. Industrial is very solid. In many of the markets in which we work, occupancy rates in industrial are extremely high. That asset class is doing quite well. Office is still trying to find its way a bit. Certainly there is demand for it. But given the changes in working patterns and other factors, we are not seeing the same level of demand as we see in other asset classes. Retail is kind of selective. Most lenders are very focused on grocery-anchored, need-based retail. There are some opportunities in other sectors of the retail market, but the grocery- and need-based projects are the ones that lenders consider the strongest today.

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Midwest industrial real estate just got even hotter, thanks to a bigger, better Panama Canal

market position -- panama photo

 

Guest post by Margy Sweeney 

The mother of all short-cuts for the supply chain world—the Panama Canal—just got a lot bigger this June, and so did the ships that move through it. As a result, the Midwest industrial real estate market may also be getting a big boost, Panamax-style. However, when and how that boost will occur depends on who you ask.

Margy Sweeney, Principal, Akrete: What’s the magnitude of the Panama Canal expansion and its impact in the Midwest? 

Rich Thompson, Global Leader of Supply Chain & Logistics Solutions, JLL:  Higher capacity along with improved economies of scale is expected to make the Panama Canal route more competitive alongside the other major options: the Suez Canal and U.S. intermodal shipping. The expanded Canal and new locks will be able to accommodate ships as large as 13,000 20-foot equivalent units (TEUs)—more than double its current 5,000 TEU capability. The Panama Canal will also be able to accommodate 12 to 14 additional vessels each day, totaling an additional 20,000 trips each year. The market “battlefield” that is the focus of attention is the Midwest. East Coast ports are working to better connect via rail to service the Midwest population centers in hopes of picking up market share from West Coast ports.

Adam Roth, SIOR, NAI Hiffman and President, Chicago Chapter of SIORBigger shipments, faster arrival of goods from Asia—coastal ports have been anticipating the benefits for years, and their industrial real estate surrounding ports has been preparing for the impact. But in my opinion, the impact further inland will not be as profound. Midwest industrial real estate market activity is not expected to be deeply influenced over time, however buildings and supply routes will shift, influenced by the changes in shipments of goods.

Todd Hendricks, Global Supply Chain Strategist, Darwin Realty: The major ports, container volumes and longshoremen throughout the United States will be affected greatly over time.  With new trade routes, the infrastructure supporting these new import /export lanes will also be greatly affected.  Houston east to Miami, north up to New York / New Jersey and all the way inland to the Midwest: all can expect to feel new surges and increased volumes, along with a need to handle more volume and increased infrastructure. But take warning: I don’t believe it will happen as soon as some believe.

Sweeney:  Sounds like that will mean long-term changes in what gets built. What’s the future going to look like when it comes to Midwest industrial facilities? 

Thompson:  There is no substitute for seeing things firsthand. A JLL team recently toured the Panama Canal region and met with the Panama Canal Authority’s Executive Vice President, Oscar Bazan. In addition, we met face-to-face with all of the East Coast port directors. The consensus is that a more competitive route through the Panama Canal and more efficient rail options from East Coast ports will benefit the Midwest. It creates options for shippers that did not exist before the way they do now. One thing to remember is that the expanded Canal is not the silver bullet answer. For higher-value goods or products that need speed, such as fashion or electronics, shippers will likely continue to choose the West Coast ports and cross country rail and truck transport to inland distribution centers in the Midwest including Chicago.

Hendricks: The future will follow the ships. That will mean creating mega-ports, high velocity warehouses, cross-dock and consolidation centers. It will also mean taking increased volumes of imports and exports and delivering the product direct to store with multi-stop truckload carriers or direct to customer. By creating less touches and streamlining productivity, customers can expect to get product faster and adhere to just-in-time expectations.

Roth: Panamax is all about options—logistics strategists can now choose from more routes to more ports.  Ultimately, more goods coming into the region means more opportunities for both well-established distribution corridors such as Chicago’s I-55 sub-market or Indianapolis’ industrial parks—as well as for emerging and secondary Midwest markets.

Sweeney:  What do you expect to see over time, as the Panamax Effect matures?

 Roth: I recently heard the term “snacking” – purchasing items on your mobile device when an opportunity presents itself like waiting in line or being on hold.  We are all getting addicted to e-commerce—we want 24-hour connectivity and visibility along with immediate delivery.  The omni-channel solution for companies is very challenging.  The Panama Canal expansion will be a part of that solution. With more options to the East Coast, we can expect to see shifts in how shippers design their logistics strategies amidst growing consumer expectations.

Thompson: Of course, it will take time for full market impact to become evident. Clearly, there are many variables that come into play that will impact a company’s decision as it relates to imports and optimizing supply chain flows. But one thing is clear; companies and their supply chain professionals will work the math to determine the most cost efficient and service effective ways to serve their customers.

Hendricks: Over time, I believe we will see increased southern and east coast traffic resulting in more Midwest inbound and outbound shipments as a result of the Panama Canal.  Many customers will choose to build manufacturing or distribution centers in southern locations because the cost of shipping to the Midwest and other points is beneficial to bottom line profits.  And as more product starts to enter these markets, capacity will dwindle, rates will climb and we will all be looking for the next great idea within supply and demand on how to save money and increase product flow patterns.

Margy Sweeney is an entrepreneur with more than 20 years’ experience marketing and publicizing commercial real estate. She is the founder of @TeamAkrete, a consulting firm.

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AppFolio: Apartment rents to keep rising, just not as quickly

one-southdale-place-1024x683

 

by Dan Rafter

What word best describes the U.S. apartment market today? AppFolio, in its latest research report, points to “growth.”

That’s the key word that the company, which provides property-management software, refers to in its 2016 Apartment Forecast report. The difference this year? Apartment rents will still rise across the country, but not by as much as it has during the last two-plus years.

AppFolio predicts that apartments rents will have risen by 3.2 percent in 2016 by the time the year ends. That’s still impressive, but it’s a bit of a slowdown from the last two years. AppFolio points to the high number of new apartment units hitting the market. The company reports that at least 247,647 new apartment units have or will enter the market in 2016. As AppFolio says, supply is slowing beginning to outpace demand in some markets.

Nat Kunes, AppFolio’s vice president of product, said that this news shouldn’t be a surprise. Developers have simply added so many new apartment units to the mix, it was inevitable that rent increases would eventually start to slow.

“If you have more demand than supply, rents tend to grow quite dramatically,” Kunes said in an interview with Midwest Real Estate News. “When supply catches up, though, the prices tend to stabilize more. That’s what we are starting to see now.”

Three Midwest markets are among those that AppFolio says will see a significant slowdown in rent growth. Kunes said that the company predicts that Chicago apartment rents will have grown 2.2 percent in 2016, Milwaukee’s 2.6 percent and Minneapolis’ about 2 percent. All three metro areas, then, will see apartment rents rise at a more sluggish pace than in most of the rest of the country.

“There are definitely some markets where supply is catching up,” Kunes said. “It has taken a while. During the recession, most construction stopped. The demand for apartment units was growing, but new construction wasn’t. We were playing catch-up. Many markets are just starting to get caught up, but some haven’t yet.”

Kunes points to Minneapolis as one of those markets in which the supply has caught up with demand, which is why apartment rents, while still growing, are growing at a slower pace in the Twin Cities area.

“Owners might not like that, but it is a benefit to residents moving into the city,” Kunes said.

In many cities in which the growth in apartment rents is taking place at a more modest pace, developers today are focusing on pricier luxury apartment units and little else, Kunes said. That is a challenge for many renters, as these luxury apartments come with sky-high rents that are out of the reach of too many potential renters.

Kunes said that Chicago is a good example of this. The city is seeing plenty of luxury apartment buildings added to the skyline. These buildings come with amenities such as valet parking and concierge services. But they aren’t coming with monthly rents that are affordable to most potential renters.

“Developers are doing that because when they build a typical apartment complex, they won’t see as much potential rent growth,” Kunes said. “If they build a luxury development, they get more rent growth.”

The strategy is often different in cities in which apartment rents are growing at a faster pace, Kunes said. Developers here can add a wider variety of apartment types – including those that rent at lower prices – and still see a solid increase in rental rates over time.

Overall, AppFolio says that the markets with the strongest rent increases are clustered in the Western and Southern portions of the United States. Sacramento, California, as of the first half of the year, had the highest effective rent growth so far, with apartment rents rising by 11 percent.

Other markets seeing strong rent increases include Portland, Oregon; Colorado Springs, Colorado; Salt Lake City; Las Vegas; Tucson; Atlanta; San Diego; and Austin, Texas.

Markets seeing below-average rent growth include Milwaukee, New York City, Chicago, Minneapolis-St. Paul, Baltimore, Philadelphia and Oklahoma City, according to AppFolio.

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It’s a continuing trend: Two-building office campus in St. Louis headed for online auction

Park 270

by Dan Rafter

Online real estate company Ten-X is auctioning off a two-building office tower campus in the St. Louis area. Bidders will see on Oct. 5 which buyer will become the new owner of the property.

The sale of Park 270 — a 274,650-square-foot property located along Interstate-270 and owned by VFC Properties 41 — continues a growing trend: Owners have discovered that some commercial assets are ideal for selling in the auction format.

What makes a property a good fit for auction? Commercial buildings in highly visible areas, near strong transportation arteries and with plenty of amenities tend to fetch solid bids. And that’s what Park 270 offers. The hope on the part of owners, of course, is that auctioned properties will sell quickly for a solid price, with owners finding buyers in one quick shot.

“Park 270 presents investors with an opportunity to acquire a stabilized office campus in a strong market with value-add potential through leasing and increasing rents,” said Gordon Smith, general manager of Ten-X’s commercial real estate division.

Park 270 could use a bit of a refresher, but only a bit. Whichever owner buys the property at auction will have a clear path to making the office park more attractive for future tenants: Improvements should boost the buildings’ already strong appeal, Smith said.

“A new owner will have the opportunity to increase rental rates through modest upgrades at the property, which already benefits from its dynamic visibility and a West County location,” Smith said.

Ten-X is partnering with CBRE to market and sell the office buildings.

Ten-X is relying on a two-step process to sell Park 270. Interested buyers have to submit sealed bids by Sept. 12 to qualify for the online auction. The managed-bid part of the auction will take place Oct. 5. Interested buyers can take tours of Park 270 Sept. 1 and Sept. 8.

Located at 1801-1807 Park 270 Drive, the campus’ two five-story buildings were built in 1984 and 1987. The buildings have 26 tenatns for a combined occupancy rate of 90.5 percent. Hub City Terminals, which recently renewed its lease for six years and expanded its footprint to about 80,000 square feet, is the largest tenant in the facility.

Park 270 sits in St. Louis’ Westport Plaza Corridor within the West County office submarket. This is St. Louis’ most popular suburban submarket, consisting of about 16.1 million square feet of office space.

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Avison Young: Indianapolis, Cleveland, Columbus and Chicago office markets still on the rise

columbus office2

 

by Dan Rafter

The vacancy rate in the downtown Columbus office market dropped to 7 percent in the second quarter, according to the latest research from Avison Young. That’s a strong performance, good for a drop of 60 basis points from the same quarter one year earlier.

And the good news in Columbus was just the start of the positives in the Midwest when it came to office markets, according to Avison Young. The company reported that the office vacancy rate in Indianapolis fell to a 10-year low of 14.7 percent in the second quarter, a drop of 240 basis points from the same quarter one year earlier.

In Cleveland, the suburban office market’s vacancy rate stood at a low 11.1 percent in the second quarter. The entire Cleveland office market saw 810,000 square feet of net absorption during the 12-month period from mid-year of 2015 to mid-year of 2016.

And in Chicago, the overall office vacancy rate stood at 13.3 percent. The Chicago area saw such notable transactions as Leo Burnett renewing its 642,000-square-foot lease, CNA leasing 272,000 square feet in a new development and U.S. Cellular’s expansion of its suburban headquarters by 119,000 square feet, bringing its footprint here to 331,000 square feet.

Avison Young reported that average asking rental rates continued to trend higher in the Chicago office market. Average asking rental rates were up 1.1 percent at mid-year 2016 when compared to one year earlier. Class-A rates in both the CBD and suburban markets rose 7.6 percent and 5 percent, respectively.

In Cleveland, rents averaged $19.13 a square foot in the downtown market and $16.39 a square foot in the suburban market.

In Columbus, developers are expected to break ground on 478,600 square feet of new office projects in the third quarter. This includes a nine-story office building in the city’s Short North neighborhood. This will be the first Class-A office building higher than six stories and the tallest building in the arts district.

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