john sikaitis & scott homa - property investment · filling equity gap: firpta reform • one...

John Sikaitis & Scott Homa

Federal Perspective

November 16, 2012

We have some certainty!!!

4

Source: Jones Lang LaSalle

EuroCrisis

FiscalCliff

Long-term sustainable debt

Election

Is the uncertainty over? Not yet, one down, at least three more to go…

As the recovery has taken various shapes, the composition has morphed and DC has disappeared


2010

Net absorption as a percent of inventory

2011 2012

5

Industry Employment base Most affected office markets to dateState Government Contracting California, Illinois, New JerseyFederal Government Contracting Washington, DCMedia-print Contracting LA, NYCFinance / banking Contracting NYC, Charlotte, Chicago, Palm Beach, PittsburghLaw firms Contracting (Rightsizing) Washington, DC, NYC, SF, Atlanta, LAConsulting Contracting (Rightsizing) NYC, Chicago, Washington, DCAccounting Contracting (Rightsizing) Chicago, NYC, LATelecom Stable NJ, Dallas, AtlantaRetail / consumer goods Stable NYC, Atlanta, Los AngelesEducation NFP: Growing; For Profit: Shrinking EverywhereGreen energy / clean technology Stable Pittsburgh, Silicon Valley, DenverMedia digital and TV Growing Atlanta, NYC, LA, Philadelphia, Washington, DC

Technology Growing Silicon Valley, San Francisco, Austin, Seattle, Portland, Midtown South NYC, Cambridge, MA

Natural Gas / Oil Energy Growing Denver, Houston, Dallas, PittsburghBiotech / pharmaceutical Growing San Francisco, San Diego, NJ/Phil, Boston, RDU

Most corporates are in a stable mode with respect to real estate due to slow revenue growth or rightsizing


6

Trophy and Class A product driving demand, presenting less leverage for tenants across the U.S. ahead


Trophy & Class A net absorption

49.1 MSF

2011 & 2012

Class B & C net absorption

3.6 MSF

2011 & 2012

7

The construction pipeline is also non-existent across most markets, presenting challenges in the years ahead Under construction (s.f.)


0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD2012

Spec construction underwayAtlanta

CharlotteDallas

HoustonNew York

Northern VirginiaSan FranciscoSilicon Valley

Washington, DC

8

9

Key issues still impacting the regional market


• Federal budget deficit and looming sequestration

• Drive for space efficiency

• Divided Congress

• Election cycle

We need legislation: Metro DC net absorption highly correlates trends with bills signed into law

Bills signed into lawNet absorption SF

10

Source: Jones Lang LaSalle and U.S. Senate

Political clarity drives Metro DC office demand, while government gridlock stalls growth. Will that change this time?Aggregate net absorption (SF)

11


12

“The Defense Department would be forced to cut 108,000 civilian employees from its workforce next year if automatic budget cuts take effect.”

- Center for Strategic and Budgetary Assessments

“Our analysis reveals bleak outcomes for both the defense industry and the economy as a whole if the budget sequestration trigger is pulled and $1 trillion is

cut from defense – with total potential job losses of 1,006,315.”- Stephen Fuller, George Mason University

“Military spending is an exceptionally poor job creator. Investing the same amount of money on tax cuts which produce increased levels of personal consumption will create substantially more jobs within the U.S. economy than would the same amount spent on the military. ”

- Robert Pollin, University of Massachusetts

How serious of a problem is sequestration? It depends whom you ask…

12

Heavily-impacted submarkets

SoutheastSouthwest

NoMa

Crystal CityAlexandria

Rosslyn-BallstonReston-HerndonTysons Corner

Route 28 CorridorSpringfield

I-270 Corridor

Source: Jones Lang LaSalle, Center for Strategic and Budgetary Assessments, GMU, Political Economy Research Institute

13

Mandatoryspending levels (Entitlements)

67% Taxpayers$ $ $ $ $

“Feeding Pac-Man”


67%

14

#3Energy Policy

#4Entitlements

Election impact: six predictions


#1Taxes

#6Defense

Spending

#5 Sequestration

#2Financial

Regulation

15


Greenshoots domestically, are planted and poised to foster stronger growth

• Record corporate profits

• Domestic political certainty ahead

• Tech and energy boom

• Improving housing market

• White collar job creation outperforming

• Election certainty• Dodd-Frank• Healthcare• Role of government

Source: Jones Lang LaSalle , GSA leased database, OMB

16

Share of overall federal budget spent on leased office space

We are talking about pennies on the dollar!!!

Average duration in years of GSA tenancy

Source: Jones Lang LaSalle, GSA

17

GSA renewal probability

Source: Jones Lang LaSalle, GSA

18

©2012 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

For more information, please contact:

John SikaitisSenior Vice President Director of Office Research, [email protected]

Scott HomaVice President Director of Mid-Atlantic [email protected]

www.jll.com

Chip Rodgers

National Policy Challenges for Real Estate

An Update from WashingtonClifton E. (Chip) Rodgers, Jr.

Senior Vice President

The Real Estate RoundtableWashington, DC

www.rer.org

The Real Estate Roundtable

Roundtable AgendaNational Policy Challenges

Critical Issues– Elusive Expansion– Euro-zone Entropy– Mounting Maturities– Regulatory Racket– Fiscal Cliff– Budget Bickering– Lame Duck

Economic Cloud Remains• Real estate continues to be affected by

economic distress – U.S. economy faces tough challenges– 12.3 million people remain unemployed – Slowest jobs recovery since job data was first

collected in 1939 by Labor Department– Tight credit in many parts of country; private

credit just starting to grow after 3 year stall• Improving economy solves many problems

for real estate The Real Estate Roundtable

Approaching the Fiscal Cliff• Combination of spending cuts and tax

increases will take effect early next year unless Congress acts to change law

• Could take $600B out of the U.S. economy, push it into recession

• Balancing efforts to grow economy and shrink size of government

• Testing the tipping point is unacceptable• Markets want to see resolution to impasse


Euro-Zone Entropy• Europe continues to threaten global growth• Can debtor nations slash spending and

keep economies from completely tanking? • Euro-zone’s per capita debt burden is

$27,000 versus $41,500 for the U.S.• Fear has driven up yields on riskier Euro

debt -- sent 10Y Treasuries below 2%• For now, the U.S. appears to be the least

scary house in a very scary neighborhood The Real Estate Roundtable

Mounting Maturities• $1.4 trillion of CRE loans expected to

mature through 2014 – over $300B a year– Credit capacity remains inadequate – 2012 projections: $112B credit, $45B equity– Many CRE loans won’t qualify for refinancing

at maturity without significant equity infusions – “Re-equitizing” mountain of CRE loans made

during the boom remains a serious challenge


Filling Equity Gap: FIRPTA Reform• One approach to filling equity gap is to

encourage capital from foreign investors – Foreign Investment in Real Property Tax Act

(FIRPTA) discourages non-U.S. investors from investing in U.S. real estate

– Remove tax barriers to foreign investment in US real estate

– H.R. 2989 and S.1616 introduced – Also seeking Treasury action on 2007-55


Dodd Frank Wall Street Reform• Targeted at every aspect of financial services

sector – from small banks to giant Wall Street firms, insurance industry

• 2,300 page law that tasks 11 federal agencies to implement some 398 new formal rule-makings, adding a myriad of new regulations –feeding climate of uncertainty

• Impact of new law reverberating across financial services industry and economy

• Intended to fix “too big to fail”The Real Estate Roundtable

Too Big to Read• The law that set up America’s banking

system in 1864 – 29 pages • Federal Reserve Act (1913) - 32 pages • Glass-Steagall Act (1933) – 37 pages • Interstate Banking Efficiency Act (1994) –

61 pages• Gramm-Leach-Bliley Act (1999) – 145

pages• Dodd-Frank is 2,319 pages


Credit and Capital Concerns• Dodd Frank

– Risk Retention– Volcker Rule – Investor Registration– OTC Derivatives Reforms

• Basel III– Raises concerns about real estate credit

capacity, ADC lending


Insuring Against Terrorism (TRIA)• TRIA is slated to sunset at the end of 2014

– Without TRIA, policyholders will be exposed and unprotected – as after 9/11

– Private markets unable to provide coverage – Important to maintain an effective, long-term

program that provides adequate capacity for U.S. economy and safety markets require

• Coalition to Insure Against Terrorism (CIAT) -- broad coalition of commercial policyholders formed after 9/11


Lame Duck


Lame Duck Perfect Storm• Congress will return for a "lame duck"

session the week of Nov. 12th• Stepping on to a massive fiscal cliff

– Expiration of Bush tax cuts, payroll tax cut, extended jobless benefits, AMT, estate tax

– 1.8M jobs associated with AMT patch alone– Again avoiding a breach of the debt ceiling– $1.2T sequestration cuts could cut 325,000

defense jobs and 420,000 non-defense jobsThe Real Estate Roundtable

Budget Bickering• Government has been operating without a

formal budget for over 2 years– Without requisite appropriations bills to fund

government, debt ceiling will be breached • Corporate tax reform discussions

continue, but action not imminent • Carried interest tax hike proposal lingers,

but appears dormant for now• Ties into broader “fairness” debate


Budget Impasse• Many continue to underestimate polarized

political dynamics under which negotiations to avoid sequestration will occur

• Both sides remain adamant about "red line" issues – expect rhetoric to increase before a deal is eventually made between the parties

• Atmosphere of economic uncertainty is paralyzing American business

• Fiscal squeeze worth roughly 5% of GDP and would send weak economy back into recession


Tax Reform• Tax committees have held a series of hearings

examining every aspect of the tax code• House passed legislation establishes fast-track

process for House and Senate consideration of comprehensive tax reform next year

• No specific policies have been translated into legislative language or action

• The Roundtable supports tax reform that promotes growth, is comprehensive rather than piecemeal and includes transition rules to give businesses sufficient time to plan and adjust


Tax Extenders• Business tax extenders have expired• Roundtable and others working to reinstate:

– 15-year leasehold improvement depreciation – deduct state and local sales taxes – numerous energy efficiency tax credit – immediate expensing of environmental remediation

costs (Brownfields)• Legislative efforts came close before recess but

no final agreement was reached• Leaving budget and tax code in chaos will likely

be a negative for markets and economyThe Real Estate Roundtable

Lame Duck Expectations• No agreement is expected until well into

December – markets will likely be roiled by uncertainty in final weeks of 2012

• Big budget deal unlikely – instead expect– Minimalist compromise possible that would

"punt" or reduce sequester WITHOUT any concomitant increase in revenues

– Temporary fixes, lasting several months (possibly a year) for most major spending and revenue decisions


“You can always count on Americans to do the right thing - after they've tried everything else.”

- Winston Churchill



www.rer.org

Kim Burke

Kim BurkePublic Institutions

Federal Tenant Perspectives

43

Space Reduction

Continuing Resolution

Gridlock

Fiscal Cliff

No-Net-New

ConsolidationCivilian BRAC

Where do Federal Agencies get information? Legislation? Executive Orders? Federal Register? US Code? GSA? OMB? Fox News? NPR? Wikipedia?

Sometimes maybe…. but more often

The “Grapevine”44

Grapevine says….

• Bet you´re wondering how I knew ´bout your plans to make me blue

• With some other guy that you knew before?

• Between the two of us guys you know I love you more.

• It took me by surprise I must say when I found out yesterday.

Agency hears….• What is Congress going to do?

• Will we get enough money for our programs?

• Will somebody else get the money?

• Will we get enough money to pay rent?

• Will our agency be eliminated?

Verse 1: Grapevine Questions

45

Grapevine says…

• I heard it through the grapevine not much longer would you be mine.

• I heard it through the grapevine and I´m just about to lose my mind.

• Honey, honey yeah.

Agency hears….

• Loss of funding

• Loss of property (disposals)

• Consolidations/loss of space

• Change management - telework, flexiplace, open space

• No translation needed….

Verse 2: Grapevine Answers

46

Grapevine says…• You know that a man ain´t supposed

to cry, but these tears I can´t hold inside.

• Losin´ you would end my life you see, ´cause you mean that much to me.

• You could have told me yourself that you found someone else.

• Instead,I heard it through the grapevine.

Agency hears… • Agency organizational changes

• Contingency planning for funding cuts

• Uncertainty regarding Congressional reaction

• Media reports on “The Fiscal Cliff” ranging from Government shutdown to “business as usual”

Verse 3: Grapevine Reactions

47

Grapevine says…

• People say you learn from what you see, and not from what you hear.

• I can´t help bein´ confused; if it´s true, please tell me dear?

• Do you dare let me go for the other guy that you knew before?

Agency hears…

• Previous sequesters resulted in temporary reductions, most were not long-lasting

• Situation now is compounded by other economic factors – different budget picture than past “cliffs”

• How (and when) do we balance our budget?

Verse 4: Grapevine Lessons

48

PROJECTEDFUNDING

SHORTFALL

REMAINING FUNDING

SHORTFALL

COST CUTTING

DECREASEFUNDING SHORTFALL

REMAINING FUNDING

SHORTFALL

ALTERNATIVE FINANCING

DECREASEFUNDING GAP

Approaching the new reality

Increase Available Funding (or Services In-Kind)

49

Agency Strategies

Cost Cutting• Consolidations, co-locations, dispositions (CCD)

• Portfolio right-sizing / optimization of existing space (reconfigurations)

• Workplace strategies (telework, hoteling, etc.) to reduce demand for space

Alternative Financing• Acquisition through lease or contract• Public-private partnerships (PPPs)• Exchange for property or services• Historic property outleasing (Section 111)• Energy savings (including ESPCs)

50

Victoria Hartke

john sikaitis & scott homa - property investment · filling equity gap: firpta reform • one...

Documents