2020 Ballot Initiatives by State

To help companies understand their potential exposure, the following are the published 2020 state ballot initiatives which could impact industrial firms and industrial real estate.

Arkansas

The Arkansas Transportation Sales Tax Continuation Amendment (2020) would continue to amend the state constitution to make permanent a 0.5% sales tax towards the funding of state and local tax infrastructure. For more information, click here.

California

The California Tax on Commercial and Industrial Properties for Education and Local Government Funding Initiative (2020) would amend the state constitution to require commercial and industrial properties to be taxed at their market value. Currently, California Proposition 13 limits all property assessments to 1% of the purchase price at the time of purchase and then the lesser of 2% or inflation per year thereafter.

Should the Initiative pass, it is estimated to cost companies and commercial real estate property owners $6.5 to $10.5 billion per year in additional property taxes. For more information, click here.

Florida

Amendment 2 would raise the minimum wage from $8.56 in 2020 to $15.00 by 2026. For more information, click here.

Idaho

The Idaho Minimum Wage Increase Initiative would raise the minimum wage incrementally to $12 per hour by 2023. For more information, click here.

Illinois

The Illinois Allow for Graduated Income Tax Amendment would repeal a state constitutional requirement that the state personal income tax be flat and instead allow the state to enact a graduated personal income tax. It also would change the limits for corporate income taxes to a ratio based on the highest personal income tax rate. For more information, click here.

Nevada

The Nevada Renewable Energy Standards Initiative would require electric utilities to obtain a minimum of 50% of their electricity from renewable sources by 2030. The increase would come in increments as follows: 26% by 2023; 34% by 2026; and 42% by 2029. This would amend the current standard which requires electric utilities to obtain a minimum of 25% of their electricity from renewable sources by 2025. For more information, click here.

CRE Services

Corporate real estate has developed distinct service categories to meet the real estate needs of business units and organize talent by skill sets. These services often work closely with each other. Portfolio administration continuously interacts with transaction management, facilities management and legal. Facilities management can frequently work with project management and space planning, or assume their functions within the facilities management department.

These services will often report directly to the corporate real estate management or account leaders in CRE service organizations, who can monitor their success with clearly defined key performance indicators or KPIs. While the names of the services may vary by organization, in practice they have similar functions in today’s CRE.

Portfolio Administration

Portfolio administration creates, manages, and communicates real estate information accurately and effectively to the entire corporate real estate organization. Referred to as lease administration in some companies, portfolio administrators can have many responsibilities other than managing contractual data. Today’s portfolio administrators can also share responsibility for strategic oversight, accounting, legal, and human resources functions in the modern corporation.

Transaction Management

Transaction management’s general function is to achieve company objectives through the oversight of real estate events. Rarely is transaction management only responsible for the successful completion of a real estate transaction. Most transaction managers today are tasked with assisting with strategic oversight of the company’s real estate portfolio and have a “cradle-to-grave” process for real estate events which involves responsibilities before and after transactions are complete.

Facilities Management

Facilities management has evolved from a property management function to becoming an increasingly important part of a company’s success. Today’s facilities management professionals are tasked with creating and maintaining environments in which company employees and equipment can thrive. They often track a variety of measurements of company space and how it is being utilized. Such data creates visibility in the organization about how space is being used. It allows the organization to communicate important messages to outside parties about its role as a caretaker of shareholders, employees, society, and the environment.

Project Management

Project management is the oversight of the design, build, furnish, redevelopment, re-furbish, and budgeting for company real estate projects. When corporate real estate needs real estate to be built or altered, a project management team usually is responsible. Project managers are also important resources for the other services. For example, project management can supply improvement costs, project timelines, and other construction related information to help transaction managers negotiate effectively, and facility managers plan for future upgrades.

Space Planning & Design

Space planning and design may be a function under project management or facilities management, but could also be a separate function in some organizations. Space planning can involve many different types of space. While many may think of space planners as designing office and site plans, space planners are also critical in manufacturing and warehouse environments as well.

Legal

Legal departments are typically responsible for the review of contractual agreements and hiring of outside counsels. Whether legal is a part of the real estate organization or a separate entity can have a significant influence on its function. Attorneys in legal departments which are separate from real estate often have responsibilities for documents outside of just real estate related contracts. With the possible exception of space planning, legal services usually interact with all of the other service lines and are a critical part of the overall success of the CRE organization.

Selecting and Hiring a Market Brokerage Partner

The selection and hiring of a market broker to represent a client as a fiduciary is one of the most significant responsibilities of a corporate real estate account manager. A market broker is typically an expert in a given geographic market or vertical, such as cold storage or truck terminals, while the corporate real estate account manager oversees the overall real estate services to the client.

Without the proper process in place, the odds of selecting the wrong market broker greatly increase along with the chances of frustration for the client, the market broker, and the account manager. There are a host of variables to consider in any market broker selection process. Without a defined process in place, many account managers simply do not have the time or resources to appropriately conduct a market broker search from scratch.

That’s why it is important for the account manager and the client to have an agreed upon plan and process for selecting a local brokerage team. Such a plan would ideally be simple, adjustable guidelines for selecting and working with market brokers. Some of the plan elements usually would include:

  • Criteria for market broker selection
  • Brokerage standards of conduct
  • Responsibilities of the client, account manager, and market broker
  • Confidentiality
  • How requirements are presented to the market broker
  • Expected compensation structure including fee sharing

Most clients want the best broker for their requirement in a given market. For the account manager, fulfilling this requirement means considering market brokers affiliated with their firm and those who are not affiliated with their firm.

Practically speaking, most account managers affiliated with large national brokerage firms will limit their search for market brokers to those within their company. Exceptions to this include areas where their company has limited coverage, such as tertiary markets, and when the client directs the account manager to use a certain local market broker.

Whether the account manager considers market brokers outside if their firm is ultimately not as important as making sure the selected market broker meets the client’s agreed upon criteria. If such standards are not met, the account manager should be responsible.

Brokerage standards of conduct and market broker responsibilities should be clear and concise. They should be communicated in writing shortly after initial contact and certainly before engaging the market broker. A brief summary of expectations, such as reporting, confidentiality or dual agency concerns, along with a matrix showing the responsibilities of all relevant parties is usually sufficient.

Client requirements should also be communicated clearly and in writing to the market brokers prior to engagement. It does not make any sense to hire a market broker for an assignment until the account manager can accurately describe what the client needs. This communication is sometimes assisted by visual aids such as prototype site plans, maps, and photos of current properties similar to the required facility. Once a market broker understands the requirements, the account manager should allow them the opportunity of declining to be considered for the assignment.

Lastly, the account manager should communicate the anticipated brokerage fee sharing along with the standards of conduct and client requirements in writing. This includes the nature of any exclusivity, fee sharing with a client, and other matters related to their compensation. It is vital that the market broker and account manager have agreement on compensation concerns prior to the hiring of the market broker for the assignment.

The above does not include every consideration for selecting a market broker in every situation. Therefore, it is critical that the account manager and client have a general plan in place to review and modify prior to starting the search for a market brokerage partner. By doing so, they will greatly increase the likelihood of hiring a qualified, motivated, and invested market brokerage partner to work on their behalf.

Avoiding the Bad

Last week I was listening to the Art of Manliness podcast with guest John Tierney, who recently co-wrote a book called The Power of Bad: How the Negativity Effect Rules Us and How We can Rule It.

As the title would indicate, John and host Brett McCay discussed how humans are much more sensitive to bad events than good ones, and how this sensitivity shows itself in our daily lives. For example, John cited research that showed that it takes at least three good events to outweigh one bad one in our minds.

As companies consider future real estate decisions, it may be helpful to think about how to avoid bad outcomes before achieving outstanding ones. Most of us are in positions where we are in service to something or someone else, whether it be a business unit, client, or shareholders. While it may not fit our current narrative to the customer, the truth might be that the customer really wants to avoid negative outcomes much more than receiving great service.

Avoiding negative outcomes and great services are not mutually exclusive. But if we can design our systems, processes, and tasks in a way that protects against negative outcomes first, at least the research shows that we are tailoring our services to what people care about most.

Maintenance Responsibilities for Industrial Occupiers

One of the main areas I recommend industrial occupiers pay close attention to in lease negotiations are the responsibilities of who maintains, repairs, and replaces building systems and components under a lease.

Leases follow the 80/20 rule. 80% of lease content most likely won’t impact operations or P&L. 20% of lease content will. Maintenance, repair, and replacement provisions are always in the 20%. Therefore, it is smart for companies to conduct due diligence and structure maintenance, repair, and replacement provisions in a way most suitable for operations.

As a starting point, I suggest companies assess what the impact will be if operations dedicates the time and resources to maintaining, repairing, and replacing building systems during the lease. Would the company be better off if the landlord was responsible and passed through the costs? Are there reasons the company would prefer responsibility, such as site security or, for larger firms, potential cost savings. Whatever the answer, it will help to inform any initial discussions with prospective landlords.

Next, companies should conduct due diligence on what the age, condition, and useful life are of the components of the space being potentially leased. It should be standard practice to find out the age, condition, and useful life of the major building systems (structural, roof, HVAC, electrical, parking areas, etc.) before agreeing to maintain anything in the letter of intent or proposal. A property condition assessment report can be helpful in this area.

Lastly, companies should protect themselves against unfair replacement practices. Exposure to capital replacement costs should typically be limited to the amount of time remaining on the lease term and amortized according to GAAP or other reasonable useful-life schedules. Normal wear and tear should be expected in exchange for the rent.

Nothing is free. The landlord and/or the tenant will bear the costs of maintaining, repairing, and replacing within a property. Therefore, I would suggest the focus for industrial tenants should be:

  • What general maintenance, repair, and replacement arrangement is best for the operation
  • What property systems or components should not be the tenant’s responsibility
  • Preventing operational disruption by addressing the near-term replacement of building systems or components prior to signing a lease
  • Outside of requirements caused by tenant improvements, are there requirements such as ADA which are not being met in the space currently
  • Making sure there is limited exposure to unamortized capital replacements
  • If a property management fee is charged, it is commensurate with the market rate and justified by the responsibilities of the property manager

Site Selection for Land-Intensive Occupiers in Infill Areas

Key Concepts

  • Industrial properties with 30% or less improvement square feet compared to land square feet (“low coverage”) are increasingly scarce in metropolitan areas of the United States
  • Land-intensive industrial uses, which typically use low coverage industrial properties, can be challenging to entitle and therefore understanding zoning is critical to a project’s success
  • Successful site selection for land-intensive industrial occupiers typically involves a proactive approach to finding and securing suitable properties
  • The ability to compare the relevant internal and external data with a robust property search and indentification process exponentially increases the effectiveness of the site search

Availability of Low Coverage Properties

Finding available infill properties for land-intensive industrial occupiers is typically much more challenging than office, warehouse or manufacturing uses. Throughout most primary, secondary, and even tiertiary US industrial markets, low coverage properties are increasingly an endangered product type. With no more than 30% of their land area covered by improvements, low coverage properties have been developed into “higher and better” uses, subject to strict zoning regulations, and even turned into other property types.

Due to these challenges, site selection for land-intensive industrial occupiers must be designed differently to increase the odds of success. A successful site selection strategy for such occupiers incorporates the relevant internal and external sources of information with a proactive approach to investigate, target, and secure properties which align with company objectives.

The Proactive Site Selection Process

The site selection process involves multiple steps which ultimately lead to a desired site at the best cost/benefit ratio possible. Generally these steps are assembling project stakeholders, defining requirements, researching the market, analyzing potential options, negotiating, and acquisition. All these steps are important but I won’t be discussing all of them here. If you are interested, there are plenty of site selection articles in industry publications which discuss the site selection process in detail.

In any site selection search that has limited property availability in a desired area, such as the infill low coverage sites considered here, companies cannot follow the same playbook as a search for suburban office building or a dry warehouse and expect great results. Instead, I think there are two key areas where land-intensive companies should focus their resources.

First, firms should use internal and external data with GIS mapping platforms, such as Esri, to identify the areas in which they would consider a new location. GIS mapping technology can easily show customer locations, competitor locations, available properties, average real estate costs, zoning, labor, drive times, and more. A much better conversation can take place when stakeholders can see all the relevant information required to make location decisions.

Furthermore, it is especially effective to use GIS mapping when searching for properties that are difficult to find. Rather than just focusing on the location of currently available properties, via GIS mapping the stakeholders can determine:

A) the areas they would consider a location (“Areas of Consideration”)

B) zoning overlays within the Areas of Consideration which will allow their use (“Entitled Areas of Consideration”)

C) all properties within the Entitled Areas of Consideration which meet their minimum physical requirements (“Set of All Amenable Properties within the Entitled Areas of Consideration”)

D) all available properties, if any, within the Set of All Amenable Properties within the Entitled Areas of Consideration

E) then layer in additional data as needed.

The second key area I would recommend firms focus is actively marketing their requirement to owners of property within the Set of All Amenable Properties within the Entitled Areas of Consideration (Item C above), investor/developers, and brokers. This practice increases the odds of finding one or more suitable sites and can also create negotiating leverage with the owners of any sites currently on the market. The marketing can be done without divulging the company name, if helpful only indicating the basic requirements and creditworthiness to further entice landlords or sellers.

Marketing the requirement to owners is the inverse of what is typically done by an owner marketing its property. Similar to an effective property marketing program, a marketing program for an occupier can be structured in the same manner with marketing materials and scheduled follow ups being made to prospective landlords or sellers.

Another benefit of actively pursuing the key areas above is the trust it can build within the organization. Many site selection leaders experience the doubt expressed by others when available properties are difficult to find. By virtually exploring all the possible properties via GIS mapping and proactively marketing to those property owners, these leaders are able to show other stakeholders that no opportunities are being left “uncovered” and the organization is doing all it can to find a suitable site. This can engender trust in the site selection process internally and help prevent the dreaded “I see available properties everywhere. Why can you find one?” response many of us have heard.

First Principles

Today I was thinking about first principles and what first principles exist in my business as an industrial real estate resource and representative. A first principle is basically a concept which cannot be divided further. In other words, it is a foundational concept and leads to other concepts which are based upon something that cannot be further deduced.

I think one first principle for my business is the notion of service to individuals not organizations. When I represent XYZ Company, I am really representing and furthering the interests of the individual stakeholders at XYZ Company. This way of thinking helps me focus on building a personal relationship with the client where I understand their particular ideas, needs, and wants-not just the company’s objectives.

While it is great to have a reference board of the companies I represent, I really should have one that has just names of the people I work with at those companies. To me, they are a first principle for my business.

Trailer Spots per Acre

I was asked recently how many 53′ truck trailers could be stored on one acre of land and though I would share my answer, based on conversations with my clients and within my company. The first point to make about determining the storage capacity of land or any other two or three dimensional object is that it wholly depends on the configuration. A 30′ x 1452′ acre will have a significantly different storage capacity than a 209′ x 209′ acre. Assuming the acre is functional in shape, meaning closer to a square than a bowling alley, estimates typically range from 34-40 trailers per acre with no truck cab.

The second point to make is that as the land increases in size, the number of trailers that can typically be stored per acre goes up. For example, my team is marketing  an 8 acre land parcel and a space engineering firm created a layout with 394 trailer parking spots for a total of 49 trailers per acre, with 23 trailers spots double stacked.

Real Estate

  • Wal-Mart recently purchased 169 acres of industrial land just south of Denver International Airport in Colorado. Wal-Mart did not disclose what it planned to develop on the site however speculation has centered on a large e-commerce facility similar to the the five existing e-commerce facilities they operate in the U.S.
  • Global refrigerated warehouse capacity grew 600 million cubic meters this year according to the Global Cold Chain Alliance. However, most agree this is not enough to support the ever-increasing worldwide demand for fresh food. Capacity is expected to increase in developing countries as disposable income levels rise.

 

DC Metrics

As part of my research for the Global Logistics Specialist designation from California State University Long Beach, I have learned about certain metrics used by supply chain professionals in order to measure how their operations helping them meet their company’s objectives.  These metrics are commonly in the form of what are called key performance indicators, or KPIs for short.  For most experts, all KPIs are metrics but not all metrics are KPIs.  In order for a metric to be a KPI it must measure how well a company is meeting its objectives.  For example, a metric measuring cost of inventory in transit would be a KPI to a company trying to reduce their inventory holding costs.

For logistics professionals, it is beneficial to have awareness of how real estate might impact your company’s objectives and, if possible, its KPIs.  With an understanding of how the real estate impacts the KPIs, the logistics professional  will be able to more accurately determine what type of property will help them achieve their company’s objectives.

Using the standard metrics and definitions provided by WERC, MESA, and SCE[1], I have added the real estate components which might impact the following:

Warehousing Metrics Table 5.11.16

Supply Chain+ Real Estate Week in Review

Here are the stories I thought were interesting, categorized by topic and subtopic and in alphabetic order by topic.  Just click on the hyperlink to open the story.

Amazon

Barrons on Amazon’s freight deal and where will they stop 

Transport Topics on Amazon leasing 20 more jets

Journal of Commerce speeding up fulfillment

Ports

Food Logistics on concerns that the east coast ports are not ready for the Panama Canal

An opinion piece in the Daily Bulletin by John Husing, an Inland Empire economist working with the POLB, on the economic case for an Inland Empire inland port 

Journal of Commerce on Congress pushing for west coast labor talks between ILWU and PMA

The Maritime Executive on the FMC convening a port congestion panel

Journal of Commerce on the Port of Savannah helping shippers weigh containers for free

Wall Street Journal on the loss of US import share on the west coast

Business Insider on the impact of the new Panama Canal

Wall Street Journal on CMA pulling the plug on big ships for west coast ports

Railroads

Journal of Commerce on intermodal growth looking to accelerate

Shippers

Food Logistics on Target’s investment in technology to boost its food transparency

Food Logistics on Target cracking down on its suppliers to improve its supply chain

Transport Topics on shippers feeling the rate increases by railroads

SOLAS

Journal of Commerce on exporters and container lines pushing to win the SOLAS game

Journal of Commerce on railroads accepting containers without VGM

Supply Chain Real Estate

NREI 17 Top Performing Industrial Markets in US

Costar on 1Q 2016 Industrial Property Sales

Area Development on Sale-Leasebacks

Technology

Material Handling News on hypermodal systems and the internet of things in logistics

Trade

Politico on Rep. McConnell’s pessimistic view on passing TPP this year

Trucking

Journal of Commerce on shippers concerns that ELDs regulations will constrict capacity

Transport Topics on Roadrunner’s net income down 77% in the 1Q

Food Logistics on weak long haul demand reducing class 8 truck orders

Journal of Commerce on California offering amnesty to drayage companies who “properly” categorize drivers

Journal of Commerce on drayage companies lack of interest in amnesty from California

Transport Topics on zero-emission electric drayage trucks coming to California

San Bernardino Sun on the rising call for dedicated truck lanes in Southern California

Transport Topics on freight rates remaining under pressure

Transport Topics on lawmakers urging the head of the FMCSA to delay safety fitness determination rulemaking

Journal of Commerce on TL carriers struggling to reduce capacity

1 WERC, MESA, and SCE

New Format + Latest News in SCRE

I am excited to announce that after experimenting with post formats, I have decided to proceed with a new blog format which I think delivers timely information in a succinct and easy to follow structure.  Moving forward, the blog will be separated into two sections.

The first section will consist of a single topic which directly relates to supply chain and real estate.  Here I will cover, in as depth a manner as necessary, some of the latest trends and technologies I am seeing and hearing about.

The second section will consist of an aggregation of links to information which I have found over the past week to be interesting and thought provoking.  The links will be categorized to make navigation simple.

The reason I have decided on this format is two-fold.  One, selfishly I am using this blog to learn more about topics pertaining to my everyday business.  Therefore, don’t expect too much discussion on the banalities of industrial real estate here.  I wouldn’t be honest if I wrote about those.

Secondly, I do care about making this blog accessible and encouraging readers, including myself, to use it as a resource.  There are a number of great resources which cover supply chain issues or real estate issues.  I want to combine the two effectively.

Since I have blabbered on about the structure of this blog, which adds no value to your day at this point, I thought I would include the section with the past week’s SCRE links below.  Enjoy and please let me know your thoughts!

SCRE Links

Distribution Centers

From the Journal of Commerce: One reason for falling freight traffic may be the high levels of inventory

From Industrial Distribution: Werner Electric Supply uses custom pick module and warehouse design to double sales

From the Wall Street Journal: Warehouses Getting More Complex

Trade

From the Harvard Business Review: What politicians won’t talk say about manufacturing and trade

Ports

From the Journal of Commerce: POLB head says competition getting fiercer

From Modern Materials Handling: Panjiva reports lower US bound water shipments in March

From the LA Times: Ports of Los Angeles and Long Beach are losing market share to the east coast

From the Journal of Commerce: Real estate driving shippers to Savannah

Shipping

From the Journal of Commerce: Survey says…more shippers shifting to rail

Industrial Real Estate Market

From RE Business Online: US approaches historically low levels

 Lease Accounting

From Cushman & Wakefield: In Lease Accounting Changes: CRE to take Center Stage

From PwC: Overhaul of Lease Accounting