If you want to know how healthy the economy is, just watch the consumer. The US economy is one-third manufacturing driven and two-thirds consumer driven, and consumer spending depends on personal income. When the consumer spends, businesses grow, causing them to lease additional space and open new locations, causing demand for new warehouses for distribution and manufacturing and benefiting many sectors of commercial real estate.
Just out today is personal income for March 2012, which rose 0.4 percent, showing a tepid but healthy consumer.
Personal income increased $50.3 billion, or 0.4 percent in March. In February, personal income increased $39.6 billion, or 0.3 percent, based on revised estimates which are often changed by billions of dollars. The January personal income estimate was 26.5 billion and revised to 36.8 billion, a change of 10.3 billion but only increasing the percent change from 0.2 percent to 0.3 percent.
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Revisions In Personal Income |
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| January 2012 Previous | January Revised | February 2012 Previous | February Revised | |
| Percent | 0.2 | 0.3 | 0.2 | 0.3 |
| Dollars | 26.5 | 36.8 | 28.2 | 39.6 |
Source: Bureau of Economic Analysis
This economy is like your car on the highway when you approach a school zone: you are still moving forward but with less momentum. Just out is #GDP for the 1st quarter 2012 which grew at 2.2%, meaning we are still out of the severe recession of 2008, but growth is slowing compared to the 4th quarter GDP growth of 3%.
For commercial real estate, this leads to these six consequences:
The real culprit in the news is called real nonresidential fixed investment which decreased 2.1 percent in the first quarter, in contrast to an increase of 5.2 percent in the fourth quarter 2011-specifically the following:
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Sources: US Bureau of Economic Analysis
Dr. Tichenor died at age 85 but his company is alive and well, delivering toothpaste, mouthwash and catchy slogans such as:
In January 2012, the company got $1.1 million from the Solomon Group for their building at 819 Girod, where they first got started selling half a billion bottles of mouthwash.
Dr. Tichenor was wounded in battle in 1863 and against doctor's advice to amputate his leg, he left the hospital and developed his antiseptic formula.
You can still buy T-shirts and caps at their website http://www.drtichenor.com/
The last remaining vestige of Heisman Trophy winner Reggie Bush, his penthouse condo at One River Place, was sold for $1.975 million on February 8, 2012, down 16% from his $2.3 million dollar asking price. Reggie came to the Saints in 2006 and rushed for 565 yards, his best year because he also had 742 receiving yards, but he was traded in 2011 to the Miami Dolphins where he rushed for 1,086 yards.
You might remember that the River Place condos were the victims in 1996 of the 700 foot tanker, Bright Field, crashing into the Riverwalk Shopping Center and the lower parking area of the River Place condos, spewing Mercedes Benz's and BMW's onto the edge of the Mississippi River.
Reggie's sale price of 16% of list actually is not too bad in this environment. A survey of commercial properties sold the last 5 years showed a sale price at 15% less than the list price, except for land which averaged a sale price at 47% off the list price. Valuation of land vary with the future use of the property, and the time required to sell land averages 2 years. A 15% discount on sale of commercial property shows the list price is fairly accurate, which is tribute to the research commercial agents perform when they market properties.
17 years is a long time to reap a 259% return, but that's how New Orleans commercial real estate works. Back in 1995 when the Resolution Trust was liquidating Landmark Land assets, the 1.248 acres at 1709 Poydras Street, opposite the Mercedes Benz Superdome, was purchased for $1.35 million by the team of Bob Merrick, owner of Latter & Blum, and Rathborne Properties, developer of Elmwood Business Park. Last month, the property was sold to Zelia CNP, operated by Tom Benson, owner of the New Orleans Saints Football team and the New Orleans Hornets Basketball team, for $3.5 million, or $64/sf. That works out to a 5.6% annual return. Just to compare, in 1995 the stock market was 5,000, Bill Clinton was president, gas was $1/gallon, gold was $380/oz, interest rates were 8.5% and OJ was innocent.
Look for a new development in the space rather than the existing parking lot, which could bring more commerce to a challenging part of Poydras Street but increase property values. The property next door is about twice as big and owned by Entergy and assessed for tax purposes at exactly the same value per square foot for the land as the price Benson paid.
It's not timely, but today's release by the Bureau of Economic Analysis on personal income growth does show the fastest growing counties in Louisiana: Bossier, Iberville, Catahoula, LaSalle, Natchitoches and St. Bernard, with greater than 5.1% annual growth for 2010.
The map below shows the fastest growing counties in dark blue, and the big surprise is the Mississippi Delta area with 13 counties ranked in the top category. The fastest growing county in the Southeast was Issaquena County, Mississippi at 17.4%.
The Southeast accounted for 23% of the nation's personal income growth, but the per capita income was $36,108, or 90% of the national average of $39,937. Texas still has the fastest growing personal income in the US, with declines in the Rust Belt and lower Nevada.
Source: Bureau of Economic Analysis, US Department of Commerce
Personal income is the income received by all persons from all sources. Personal income is the sum of net earnings by place of residence, rental income of persons, personal dividend income, personal interest income, and personal current transfer receipts.
There are only 3 New Orleans commercial properties priced over $2 million sold so far in 2012, with the highest sale exceeding $18 million for the old Amoco office building.
The largest commercial real estate market in New Orleans is the office category, but it is only one of 5 major types of commercial property. New Orleans MSA commercial real estate properties currently listed for sale total over one billion dollars and include at least 2,300 commercial properties, divided into these 5 basic property types:
1. Industrial-328 listings for 6.4 million sf totaling $263,000,000 in value.
2. Office-966 listings for 5 million sf totaling $434,000,000 in value.
3. Retail-Commercial-513 listings for 3.6 million sf totaling $307,000,000 in value.
4. Retail-Shopping Centers-150 listings for 1.2 million sf totaling $87,000,000 in value.
5. Vacant Land-428 listings for 182 million sf totaling $72,000,000 in value.
1. The highest price commercial property sale is the old Amoco office building at 1340 Poydras Street, sold on February 16, 2012, for $18.75 million, or $49.60/sf. The 20 story, 378,000sf, building was built in 1977.
2. Mid-City Carrollton, known as Victory Real Estate Investments, in Columbus, Georgia, sold 4.97 acres including the old Bohn Ford auto dealership on February 16, 2012, for $7.35 million to SST Carrollton WD, which is owned by Lewis Sterling and Gerald Songy. The site was under contract to Green Coast Enterprises, who planned to lease 30,000sf of space at $20/sf for grocery store Jack-n-Jake's, specializing in produce from local farmers, but Green Coast decided not to execute their option on the site so Victory sold the property for a record $35/sf for retail development. The new owners will develop the site into a 107,000sf building for anchor tenant Winn-Dixie and Office Depot, Pinkberry, Five Guys Burgers, and Jefferson Feed Pet Store.
3. At the corner of Chartres Street and St. Philip in the heart of the French Quarter, a two story building on 11,410sf land sold January 26, 2012, for $3.8 million by Riso Investments, owned by Jeff and Chris Riso, to Chartres Empire, owned by David Clement.
926 chartres Notorial Archives, LACDB Sources: Louisiana Secretary of State, New Orleans Assessor,
On Friday, US Senator David Vitter sided with developers who face astronomical costs in developing in areas regulated by the US Army Corps of Engineers who now require 2.4 acres of land to be mitigated for every acre developed, compared to previous method requiring 1.6 acres. This affects New Orleans commercial real estate development since this amounts to a 50% price increase.
Vitter spoke at a public meeting of the Mississippi River Commission (MRC) which was established by an Act of Congress on June 28, 1879. Congress charged the MRC with the mission to develop plans to improve the condition of the Mississippi River, foster navigation, promote commerce, and prevent destructive floods, and they have a public meeting twice a year to discuss strategies.
Every year, on average, the Corps of Engineers allows 20,000 acres of wetlands to be impacted by developments because they require 56,000 acres of wetlands to be restored by developers. This article explores how developers with a permit from the Corps are allowed to buy mitigation bank credits to offset the impact a development might have on wetlands.
Since New Orleans is technically under sea level, you would expect many real estate developers to be eventually confronted with wetlands on their property, which the Environmental Protection Agency defines as “an area that is regularly saturated by surface water or groundwater and is characterized by a prevalence of vegetation that is adapted for life in saturated soil conditions”. Although these areas make up a very small percentage of the total land found in the United States, Southern Louisiana contains 40 - 45% of the wetlands found in the lower 48 states. This is because Louisiana is the drainage gateway to the Gulf of Mexico for the Lower Mississippi Regional Watershed which drains more than 24 million acres in seven states from southern Illinois to the Gulf of Mexico.
Compensatory mitigation for unavoidable wetland impacts may be accomplished through three distinct mechanisms:
• Permittee-Responsible Mitigation: Restoration, establishment, enhancement or preservation of wetlands undertaken by a permittee in order to compensate for wetland impacts resulting from a specific project. The permittee performs the mitigation after the permit is issued and is ultimately responsible for implementation and success of the mitigation. Permittee-responsible mitigation may occur at the site of the permitted impacts or at an off-site location within the same watershed.
• Mitigation Banking: A wetlands mitigation bank is a wetland area that has been restored, established, enhanced or preserved, which is then set aside to compensate for future conversions of wetlands for development activities. Permittees, upon approval of regulatory agencies, can purchase credits from a mitigation bank to meet their requirements for compensatory mitigation. The value of these “credits” is determined by quantifying the wetland functions or acres restored or created. The bank sponsor is ultimately responsible for the success of the project. Mitigation banking is performed "off-site," meaning it is at a location not on or immediately adjacent to the site of impacts, but within the same watershed. Federal regulations establish a flexible preference for using credits from a mitigation bank over the other compensation mechanisms.
• In-Lieu Fee Mitigation: Mitigation that occurs when a permittee provides funds to an in-lieu-fee sponsor (a public agency or non-profit organization). Usually, the sponsor collects funds from multiple permittees in order to pool the financial resources necessary to build and maintain the mitigation site. The in-lieu fee sponsor is responsible for the success of the mitigation. Like banking, in-lieu fee mitigation is also "off-site," but unlike mitigation banking, it typically occurs after the permitted impacts.
Here’s how mitigation works in New Orleans commercial real estate development. Let’s say a private developer is building a subdivision on 900 acres of land, of which 300 acres has been declared wetlands by the U.S. Department of Army under the Corps of Engineers. Once federal and state regulatory agencies have agreed that the developer cannot avoid or even minimize the effect on those acres, the developer must compensate – hence, the word mitigation – for the wetlands’ loss by purchasing credits in a mitigation bank.
The mitigation bank is the area that has been restored-not a bank as we know it- and has four distinct components:
1. The bank site: the physical acreage restored, established, enhanced, or preserved;
2. The bank instrument: the formal agreement between the bank owners and regulators establishing liability, performance standards, management and monitoring requirements, and the terms of bank credit approval;
3. The Interagency Review Team (IRT): the interagency team that provides regulatory review, approval, and oversight of the bank; and
4. The service area: the geographic area in which permitted impacts can be compensated for at a given bank.
Before a bank can be permitted, and approved for wetland credit sales, federal and state government regulatory agencies form a Mitigation Banking Review Team (MBRT) that must approve plans for building the bank, from the hydrological and planting design to maintenance and monitoring arrangements. The MBRT also approves the number of mitigation credits that may be earned by the banker.
A developer can buy credits only if they have applied to the federal and/or state agency responsible for wetland permitting, and have provided adequate justification of a need to impact wetlands on their development. Mitigation regulations recommend that the impact and compensation be located in the same watershed and that the impact and mitigation be the same habitat, of similar ecological value or ecologically preferable.
A permit applicant may make a payment to an in-lieu fee program that will conduct wetland, stream or other aquatic resource restoration activities. In-lieu fee programs, as shown in Chart One, are generally administered by government agencies or non-profit organizations that have established an agreement with the regulatory agencies to use in-lieu fee payments collected from permit applicants.
Usually a non-profit organization acts as an intermediary to restore, enhance, create and preserve wetlands and assumes responsibility for their long-term maintenance, earning mitigation credits for their efforts. Non-profits can then sell these mitigation credits to developers who have a permit who must compensate for having impacted wetlands. The sale of wetland credits legally transfers the liability for wetland mitigation from the permittee to the wetland banker.
In 2008, the U.S. Army Corps of Engineers adopted new rules that dramatically changed its approach to mitigation under Section 404 of the Clean Water Act, which regulates fill in wetlands and other waters of the United States. The new rules adopt a mitigation hierarchy that moves away from the prior preference for onsite mitigation in favor of mitigation banks and watershed-based mitigation programs. If you wish to obtain a permit to impact wetlands, you must first minimize impacts, and then compensate for unavoidable impacts. The basis for the new rule is that despite progress over the last two decades, there are still gaps in the science of restoration ecology.
The new rule state a permittee must have mitigation plans which include the following:
| *objectives | *a mitigation work plan |
| *site selection criteria | *a maintenance plan |
| *baseline information (for impact sites) | *credit determination methodology |
| * performance standards | *a long-term management plan |
| *site conservation easements | *monitoring requirements |
| *financial assurances |
1 Federal Register, Guidance for Establishment, Use and Operation of Mitigation Banks, November 28, 1995
