Though commercial real estate is primarily male-dominated, women are building a solid presence in the industry. In an effort to determine to what extent this is happening, CREW Network is spearheading its 2020 benchmark study. Leadership of the international professional organization, which serves women in real estate, is encouraging men and women — CREW members and non-members — to participate in this research. The study questionnaire is available on CREW Network’s website; deadline for completion is March 31, 2020.
Results will provide information and insights on areas including compensation, career advancement and company structure. “A critical step in building a more diverse, equitable and inclusive industry is measuring it,” said Laura Lewis, CREW Network Chief Marketing Officer.
The seeds of the study were planted in 2004, when then-CREW president Deb Quok launched a research project to analyze how well women were doing in commercial real estate. “The first benchmark study was released in 2005, and laid the foundation for CREW Network to become the leading researcher on gender and diversity in our industry,” Lewis explained. The benchmark analysis is conducted every five years; the MIT Center for Real Estate is gathering the data for the current study, as it did in 2015.
Additionally, the 2020 questionnaire is being expanded to gather and analyze CRE diversity data. “The industry needs to start with a clear benchmark,” Lewis said, adding that the full study report will be released in September 2020.
The coronavirus — officially dubbed COVID-19 by the World Health Organization — is starting to impact the United States, with at least 15 cases reported. Amid much of the news and advice (which is not to panic), The National Multifamily Housing Council released its own set of suggestions and information to apartment owners and managers.
The advice, under the NMHC’s “Emergency Preparedness” subhead, focuses on the following.
Ensure management support. Any plan to mitigate and educate residents on potential exposure to the virus should have the support and involvement of leadership, along with people from human resources, legal, technology and operations.
Focus on communication. Ongoing communications with employees, residents, vendors and even the media is critical. Contact information should be disseminated to staff and residents.
Implement, and oversee, infection control. The usual steps to preventing spread of any kind of infection should include frequent washing of hands, proper cough etiquette and staying home when sick. Other steps, such as placing hand sanitizers in common areas and fitness centers and sanitizing commonly-touched elements, are also suggested.
Establish employee leave protocol. Under the category of “staying home when sick,” the NHMC noted that any kind of severe outbreak could see a spike in absenteeism. As such, leave policies should include telecommuting and staggered schedules, as well as cross-training staff.
Understand legal liability. Resident illnesses, employee exposure to ill residents and evictions should be understood. Apartment owners and managers should also determine whether to direct residents to third-party sources for information, rather than being the source of information.
Consider the aftermath. Apartment owners and managers should understand the human and financial impact of such an outbreak on the company. In the days following a disaster, experts suggest companies evaluate insurance coverage, revisit human resources policies concerning back-to-work issues and pay attention to government aid availability.
The NMHC indicated that a mass outbreak of COVID-19 isn’t certain. However, “to proceed without a plan is a risk your company should not take,” the organization said, adding that any firm should have a plan in place, and fine-tune it, as necessary.
The White House Opportunity and Revitalization Council publicly released its one-year report to President Donald Trump. The paper both highlighted achievements of the Opportunity Zones program, while calling for legislation that would better measure the impact of the legislation.
The council’s agencies proposed a total of 233 recommendations, geared toward encouraging public and private investments in urban and economically distressed areas. The recommendations also included assistance to help state, local and tribal governments to “better identify, use and administer federal resources in urban and economically distressed communities, including Opportunity Zones.” Of the recommendations made, the council has undertaken 180 actions.
The report, itself, described the formation of “work streams,” and specific action items related to those streams. Specifically:
The council indicated it would issue an Opportunity Zones “best practices” report in spring, 2020.
The group was formed in December 2018 to streamline and coordinate federal resources dedicated to the program. The group is comprised of 17 federal agencies and federal-state partnerships.
A recent report showed that federal tax incentives, such as the Opportunity Zones program, can be used to develop mixed-use projects that would, in turn, help support life-sciences and business growth. Entitled “Cultivating Chicago’s Innovation Environment,” the report was issued by the Illinois Medical District (IMD), and focused on attracting private capital through the O-zone program and “catalyze mixed-use development.” Much of the 31-acre IMD has been designated as a Qualified Opportunity Zone, and eligible for Qualified Opportunity Funds (QOF) proceeds.
The Kaufman, Hall & Associates market study indicated that the IMD, situated two miles west of Chicago’s loop area, is an ideal location to “support a large and thriving health innovation” district, one that could support both lab space and residential and commercial developments. The report, taking a page from the Brookings Institution, defined an innovation district as a “geographic area where leading-edge anchor institutions and companies cluster and connect with startups, business incubators and accelerators . . .” Such districts also offer plenty of transit, as well as mixed-use amenities. The study noted that the IMD is a good location for a potential life sciences innovation district, due to existing infrastructure and potential opportunity for development of other facilities.
The study also pointed out reasons why Chicago lags behind smaller cities when it comes to life sciences activities. These include a “lack of coherent mission and holistic plan of action across institutions,” along with the lack of an anchor institution that could provide support to development and community engagement.
The report concluded that, while the IMD has the tools necessary to support a “large and thriving health innovation district,” the fragmented market could end up being a problem. However, use of the Opportunity Zone situated within the IMD, could attract private capital, which could lead to a “live-work-learn-play” environment.
Pictured: Illinois Medical District
By Tiffany-Linn Vincent
PFAS is currently a hot topic in the environmental community, and with the help of a few high-profile corporate lawsuits and the film “Dark Waters,” has gained more widespread publicity. On December 2, 2019, the US House Committee on Energy and Commerce passed the PFAS Action Act of 2019 (H.R. 535), which, if approved by the Senate, would officially designate all PFAS compounds as pollutants under the Environmental Protection Agency’s Clean Air Act and as hazardous substances under the Clean Water Act, and therefore subject to all appropriate inquires during due diligence. What does all of this mean for you, your existing property or investment, and your environmental responsibility? Is it the end of the world if PFAS is found on your property?
If you own or are buying industrial sites, warehouses, or are investing or developing around military bases, you should be aware of this growing issue. The article below provides essential background information on PFAS, and the latest regulatory and technology updates.
What is PFAS?
Per- and polyfluoroalkyl substances (PFAS) are comprised of synthetic organic molecule “chains,” most notably Perfluorooctanoic acid (PFOA) and Perfluorooctanesulfonic acid (PFOS), among others. PFAS are ubiquitous in industrial and post-industrial societies around the world and have been found in air, soil, and water. PFAS is extremely useful for a wide range of manufacturing and industrial applications due to its resistance to heat, water and oil, and inability to biodegrade easily. It has been used in food packaging, household products (Teflon, Scotchgard and other stain repellants, cleaning products, etc.), industrial or production facilities, fire-fighting foams, and other general workplaces. Like other substances that have made life easier, we are now realizing that the disadvantages of PFAS outweigh the benefits. Disadvantages include evidence that certain PFAS can accumulate and persist in the human body and exposure to PFAS can lead to adverse health conditions.
Although PFAS is referred to as an ‘emerging contaminant,’ oversight of its use does have a history. An earlier form of PFAS known as “long-chain PFAS” was removed from use in the U.S. market in the early 2000s. In 2006, the EPA invited eight of the leading companies in the PFAS industry to join a global stewardship program. The intention was to reduce facility emissions by 2010. and work toward the elimination of the chemicals from emissions and products by 2015. These goals were met, and we seem to be on our way toward eliminating PFAS in the United States.
Regulatory Updates and Due Diligence
Ground and surface water contamination, as well as human exposure to PFAS, is currently a large concern throughout the U.S. In May of 2016, the EPA issued a lifetime health advisory of 70 parts per trillion for long-term exposure to PFOA and PFOS in drinking water, and in February of 2019, they published their PFAS Action Plan. The Action Plan outlines essential tools that the EPA is developing to assist states, tribes, and communities in addressing PFAS.
On a state-level, PFAS regulation is still a bit of a moving target—standards have not yet been legally enforced—however regulatory Case Managers are communicating that they are evaluating PFAS and they are requesting PFAS consideration with specific sites. Drinking water sampling is of high focus, but general groundwater investigation sampling is becoming increasingly more common. In states that have adopted Licensed Site Remediation Professional (or similar) programs, such as New Jersey, there is the expectation that PFAS is being considered and addressed, as appropriate. As of April 1, 2019, the NJDEP has proposed maximum contaminant levels of 14 parts per trillion for PFOA and 13 parts per trillion for PFOS.
Other states, like Massachusetts and Michigan, have instituted sampling guidance and advisor committees towards eventual enforceable standards by State regulatory agencies. California’s State Water Resources Control Board has announced plans to order owners and operators of more than a thousand facilities to conduct environmental investigations for PFAS.
As part of a standard transactional due diligence assessment, it might be in your best interest to ask your consultant to conduct research to assess if these ‘emerging contaminants’ may be present and affecting your property. Because of its long-time use in fire-retardant foams and military training exercises, properties near airports, military bases, and other known PFAS manufacturing facilities are particularly vulnerable to historical contamination. Additionally, industrial properties and warehouses may have processed PFAS-containing materials in high volume.
Should you already own a property impacted by PFAS, expect to include this consideration during any future environmental investigations or remediation liability. It’s worth noting that PFAS sampling is a newer technology and, due to its prevalence in many everyday items, it requires special consideration and particular field sampling protocols are necessary. Furthermore, reporting limits are 1,000 times more stringent than average groundwater contaminant reporting limits (parts per trillion versus parts per billion).
If you are looking at investing in or if you already have a property where PFAS contamination is present, there are options available for its remediation. Products like CETCO’s proprietary, NSF-certified FLUORO-SORB® adsorbent material effectively binds the entire spectrum of PFAS. It can be used in place of granular activated carbon (GAC) as a flow-through treatment for groundwater (much like a standard water filtration system), as an in-situ treatment, or even included in a geotextile mat for capping. Because of FLUORO-SORB®’s higher adsorption properties and density it requires fewer change-outs than GAC, resulting in a substantially reduced total cost of ownership with better adsorbent results than standard GAC.
Chemists are currently working on designing additional new non-clogging adsorbents that target and “swallow” PFAS, ion-exchange resins that filter out clean water while binding PFAS molecules to an organic backbone, and on treatment methods that can completely degrade the molecules into manageable pieces that can then be easily eradicated. Many of these methodologies are already being tested in the laboratory and could be implemented within the next decade.
PFAS has been widely used for decades, and we are now reckoning with the resulting consequences, along with increased scientific consensus. Five years ago, what may have seemed like an environmentally clean property may now require PFAS assessment. In the future, previously “cleared” sites may require retroactive cleanup or containment measures. There is never a better time than during your due diligence period to determine if this is something that will require future remediation. Even if you are not currently in a state on the crest of the PFAS wave, it is worth knowing that a national regulatory wave will eventually come.
PFAS is not something to be afraid of, but should be considered and planned for appropriately, like every other potential environmental liability. If you are looking at investing in, or if you already have a property where PFAS contamination is present, know that there are options.
Tiffany-Linn Vincent is a Senior Project Manager with Partner Engineering and Science, Inc.
Qualified Opportunity Funds have been set up to fund Qualified Opportunity Zones and Qualified Opportunity Zone Businesses. One such QOF, the LGS Opportunity Zone fund, focuses on development and maintenance of indoor vertical urban neighborhood farms, grown and distributed by Local Grown Salads. The “farms” are being developed older buildings, situated in Baltimore, MD Opportunity Zones. According to the company’s website, four properties have been identified, to date, with the farms set up in 15,000-square-foot increments.
The product coming out of these businesses are packaged salads consisting of lettuce, cucumbers, chard, kale and others, which are sold to local restaurants and the community.
In a recent interview with OpportunityDB’s Jimmy Atkinson, Local Grown Salads Founder Zale Tabakman explained that Opportunity Zones and indoor vertical farming are a good combination because these operations can be set up in “food deserts,” lower-income areas where people have to drive, or take a bus long distances to get food to eat. Additionally, they are environmentally sound because the food grown isn’t using pesticides or fungicide, and little runoff. Tabakman also cited a carbon footprint reduction, pointing out that the locally grown food has less distance to travel than, say, produce from California to the East Coast.
Finally, these farms are set up to create local jobs. Tabakman indicated that each farm can create 25 jobs, with pay averaging around $15 per hour. Additionally, the company is working with the bank to ensure financial literacy for employees.
From Tabakman’s point of view, LSG’s vertical farms tick off the many boxes of Opportunity Zone investments, being located in the federally-designated areas, and providing a positive impact to the community. “Indoor vertical farming, because it’s food, is great . . . but any other product being produced locally really makes sense in an Opportunity Zone . . . especially when you need to be close to your customers,” he told Atkinson.
A year ago, as we entered 2019, trade talks with China were tense, the Federal Reserve announced that it would increase interest rates three times before the end of the year, and the federal government was in the middle of a shutdown. That these factors had little impact on multifamily speaks to the strength and resilience of the sector.
As we enter 2020, the Federal government is operational, talks with China have improved, and the Fed is so far taking a hands-off stance on interest rates. As such, it’s time to look ahead, and determine how current trends will impact multifamily construction, rents and investments in the coming year.
According to Marcus & Millichap’s just-released “2020 Multifamily North American Investment Forecast,” it’s anticipated that fundamentals will continue to support this robust sector. Additional factors impacting the industry will include:
Certainly, other issues will affect the apartment sector over the next 12 to 18 months. However, the above will determine supply and affordability, two trends that are shaping the industry.
Household Formation, Unit Deliveries and Workforce Housing
Apartment demand comes from household formation, and there was a great deal of that in 2019. U.S. households increased by 1.35 million, thanks to continued job and wage expansion. Yet, only 1.17 million single-family and multifamily dwelling units were delivered.
Things aren’t likely to change in 2020, not with household formation growth forecast at 1.45 million, and approximately 1.25 million new dwelling units to be delivered. As tight as the market is now, demand will outstrip supply by another 200,000. Furthermore, most of that supply will consist of Class A product, while much of the demand is coming from middle-class to upper-lower-class households that can’t afford Class A rents. This will mean continued workforce housing scarcity.
We can talk about the social justice of workforce housing. But at the end of the day, it’s a math equation. The figures need to make sense. And right now, they don’t.
A primary reason is high development costs charged by municipalities. According to a National Multifamily Housing Council (NMHC) study, approximately 35% of development costs consist of so-called “soft costs,” the price tag attached to permitting, entitlements and zoning. This is in addition to rising material and labor costs. Developers need to recoup their investments, and absent tax breaks or subsidies, this means market-rate projects.
Additionally, not as many apartment-dwellers are moving into homeownership. First-time homebuyers are finding it difficult to qualify for home mortgages. Fewer starter homes are being built, due to limited capital availability. As a result, middle-income households remain renters, meaning lower vacancies and less available supply.
Rent Control Legislation
In 2018 and 2019, Oregon, California and New York passed laws to cap rents, with more states likely to do the same in 2020. Certainly, apartments can, and have performed well in such situations, but statewide rent legislation could mean more documentation and paperwork for operators and investors.
And, while rent-control legislation is thought to help reduce housing costs, the action actually exacerbates both affordability and deliveries. Because of the uncertainty inherent with rent control, developers will go elsewhere, to metros and states without rent caps. It is likely that fewer units will be built in states with rent-control legislation than if legislation did not exist, and the decrease in new supply will lead to rent increases.
Finally, increased housing costs can lead to higher costs of living, something corporations take into account when attracting and retaining talent. If employees can’t afford to live in certain locations, they’ll migrate elsewhere, with companies following them. The end result is that states with higher housing costs could end up with slower economic growth, as both housing developers and corporations choose other, more business-friendly areas in which to operate.
Capital Markets and Investments
The 2020 capital markets outlook is one of enhanced liquidity thanks, in part, to increased GSE lending caps. While capital will continue to be plentiful, underwriters are expected to apply conservative standards to the loans they make, depending on economic momentum and global issues. As such, developers and investors should expect to add more equity to any multifamily deal.
Basically, lenders are interested in financing smart investments. Equity or debt isn’t interested in the quality of granite countertops or the size of a swimming pool. The point here is that if a developer is building a product the market needs, and can achieve rents that will make the math work, the capital will be there.
We believe job creation and household formation will continue driving demand for housing, especially rental housing. We’re also anticipating an uptick in secondary market multifamily investments and developments, due to population migration. And overall, apartment demand should continue to be fueled by a slower move to homeownership.
Wild cards are in play with this forecast, however, and include:
To conclude, multifamily investors and developers will face many unknowns in the coming year. However, we believe that the continued strength of employment, combined with positive demographic drivers, will reinforce apartment demand and will favor multifamily real estate.
To learn more about our 2020 multifamily sector forecast, please click on this link.
The U.S. multifamily sector closed out 2019 with steady rent growth, boosted by a “healthy job market and low unemployment,” according to the December 2019 Yardi Matrix’s Multifamily National Report.
“With year-over-year rent growth moving between 3.0% and 3.3% for much of the year, 2019 will go down as a year without much drama in the multifamily sector,” Yardi Matrix’s analysts said, “but market players would take a few more years like it.”
Even with 300,000 units delivered over the year, the November 2019 occupancy rate stood at 94.9%, representing a drop of 10 basis points, from the year before. Yardi Matrix’s analysts pointed out that a healthy job market with low unemployment “helped produce steady absorption.” Meanwhile, as year-over-year rent growth softened — it was “at its lowest level since May 2018, when it reached 2.9%,” the analysts said — steady demand continued.
Still, some metros showed signs of weakness, such as the following:
The Yardi Matrix report indicated that the Bay Area’s weakness was due to “concern over growth in startup technology firms, the feeble IPO market and the lack of affordable housing . . .” Other metros, in the meantime, have been absorbing a great deal of supply. Deliveries in Denver, for example, added 4.4% to its already-existing supply, which was “among the highest rates of new supply nationwide,” the report said.
The Yardi Matrix analysts said that, as these metros have a strong economic base, it’s likely growth will rebound in the coming year. Additionally, given there are “no red flags on the immediate horizon”, and despite some pockets of concern, “2020 should be a healthy year,” the report concluded.
Though there have been positive and negative viewpoints concerning the Opportunity Zones program, not much feedback has been garnered from leadership in cities and towns with federally-designated areas. The 2019 Menino Survey of Mayors added nationwide city and town mayors to the O-zone discussion. The result was that, while most U.S. mayors acknowledged having “favorable impressions” of the Opportunity Zones program, there tended to be a “broad divergence” on some of the aspects of the program.
Three-quarters of the cities in the survey sample contained eligible census tracts, with two-thirds having at least one designated Opportunity Zone. As a group, the mayors felt that the two largest influences on their governors’ Opportunity Zone decisions were 1) a desire for even geographic distribution, and 2) the mayors’ own input.
The survey indicated that:
The 2019 Menino Survey of Mayors was conducted by the Initiative on Cities at Boston University. The sample size consisted of 119 mayors of cities with populations above 75,000.
The U.S. economy, in recent months, has been marked by low unemployment and slowing job growth, partly due to more jobs than people available to fill them. The rental housing sector has not been immune from this issue, with apartment owners and managers focused on finding the right employees, and retaining them.
According to a recent article in the National Apartment Association’s Units magazine, apartment operators report that “a tight job market is forcing them to constantly renew their compensation package against competitors . . .,” as well as turning to technology and outsourcing to ensure smooth-running operations. Additionally, the current employment market is providing ownership the ability to “differentiate with first-class, in-house customer service, and what’s better left to automation . . .” the article said.
For example, Bozzuto Management Group eschews call centers. When prospective and current residents call in, they talk to an in-house employee each time. The reason is because the company views each call as an opportunity to differentiate its brand, and to stand out in the field. In this scenario, third-party outsourcing is better with back-end and administrative tasks.
Bell Partners also turns to third-party outsourcing, but only for its revenue-management processes, as well as when it comes to turning apartments. In that scenario, “we outsource painting because our turnovers are done in bulk, and we can’t hire enough people to get that done internally,” said the company’s Cindy Clare.
The article’s focus was that apartment owners and operators will need to continue strategizing in an economy in which, at this point, there are more positions available than bodies to fill them. “This is the new normal, at least for now,” said Bozzuto Management’s Kristen Magni. “As an industry, we’re in a tight spot, and there are going to continue to be positions that are very challenging to recruit for.”
The U.S. Congress and President Trump approved legislation to fund the government through September 20, 2020 for all federal agencies. President Donald Trump’s approval of the measure avoided the threat of a government shutdown. It also meant an increase in the U.S. Department of Housing and Urban Development’s (HUD) Fiscal Year 2020 budget. Specifically, HUD will have $49.1 billion in resources over the next year, a $4.9 billion increase above the FY 2019 level. Additionally:
The National Multifamily Housing Council (NMHC), in partnership with the National Apartment Association (NAA), acknowledged support for the funding, noting that “funding levels are expected to support the same number of households currently assisted.” The two organizations acknowledged continued concern, however, about the “growing affordable housing crisis.”
By Dennis Kaiser
Connect Retail West is just around the corner on February 13 at The Resort at Pelican Hill in Newport Coast, CA. Leading up to the event, Connect Media asked Retail industry leader, Patrick S. Donahue, Chairman and Chief Executive Officer of Donahue Schriber, to share insights leading up to his planned keynote conversation at the event.
Donahue joined Donahue Schriber in 1979 and has been engaged in nearly all of the 32 million square feet of retail space in which the company has been involved. We will go behind the real estate and talk about his career, growth, and how he innovates and leads today. Check out a preview of that discussion in our latest CRE Q&A.
Q: What keeps retail alive today, given all of the sector’s challenges and detractors?
A: What keeps retail alive today are the things that always have: giving the customer what they want and need at a fair price. Clearly, we are over-retailed, having delivered nearly 125 million square feet per year to the sector for 30 plus years. However, for the last nine years that number has been less than 20 million, so while demand is muted, there is still demand and very little new supply. So, that is the main reason, in our opinion, our fundamentals and those of the public companies we track are outstanding.
The main issue now is the narrative has gotten in the capital markets, and now we are not only over-retailed but “over allocated to retail” in the capital alternatives. This is creating all sorts of issues with the institutions that play in the sector. I don’t think anyone would ever have fathomed that industrial would be the darling of the primary CRE sectors.
What’s driving industrial is E-commerce, of which half of that is done by brick and mortar retailers. It is a very strange time indeed. We are seeing strong sales in our retailers and subsequently good growth in our rents. Our fundamentals are at or near all-time highs. Again, that lack of new supply bodes well for those that own good quality retail.
Q: What are some of the ingredients to creating successful retail properties? How has that changed over time?
A: I don’t think it has changed much over time. I think we may have gotten away from the fundamentals in an effort to create widgets instead of centers that provided the highest and best use of that site. The location has to be strategic, including ingress, egress, and parking. A property must have a reason for being: whether that be convenience, atmosphere, community gathering, need, food and beverage, or local goods. To me, that all sounds like a marketplace from 2,000 years ago. I just got back from Switzerland and some of its Christmas markets. You can learn a lot about what makes retail tick by studying those markets. They have atmosphere, they are in a prime location, people love to gather there, there’s good food and beverage, with local goods to buy. It is a very simple formula that continues to work today provided it is done right.
Q: What impact and adjustments have you seen in the retail segment as a result of Omnichannel, e-commerce, digital shopping, etc.?
A: The major adjustments for our portfolio is a general shift to things you can’t do on the internet – food, fitness, health and beauty services, medical uses for both humans and pets. Retailers are doing roughly half of all e-commerce sales. That is positive for our business although you need to guess right on the trends for store size and numbers of locations. But any sale at any of our retailers is a good sale.
Q: What advice do you have for those in the retail sector today?
A: Be a student of the game. You learn a lot by studying the narratives and cutting the commentary from the facts. The best centers are getting better. We think retail is going to be very fundamentally strong for the next three to five years. Good operators will adjust course and with no new competition, and we don’t see any, you should be in a good spot with a quality portfolio.
Q: What do you see as the most interesting opportunities and what are some challenges you see on the horizon in 2020 to address?
A: This over-allocation in retail by the institutions is going to create some potential opportunities to buy centers and infuse capital.
The number one challenge we see to the industry is the replacements for vacant boxes; The midsize boxes that have gone out with OSH, Toys and Babies R Us, as well as some of the fast-fashion category. They are the only real issue we see, and it will take capital and relationships to replace those. But if you have well located, well merchandised centers, those boxes will re-lease with better performing retailers.
With the new year underway, Realtor.com examined trends that shaped the housing market over the previous year. In its report, “Annual Housing Market Report 2019,” the organization touched on topics that included housing affordability, supply and demand and generational trends.
In brief, the top trends were:
Constricted growth in home sales. According to Realtor.com, the reason behind this involved low inventory and buyer exhaustion, when it came to finding homes amid the dwindling inventory.
Continued low mortgage rates. Low mortgage rates prevented home prices from further deceleration. While the search for affordability drove buyers to lower-priced secondary markets (meaning upward pressure on sale prices), large, overheated markets “struggled to sustain levels of price growth,” said Realtor.com.
A very slight improvement in housing affordability. The improvement, however, was unequal across income levels, with higher-income households achieving more affordability, with help from growing paychecks.
Continued supply/demand mismatch. A gap remained in what buyers wanted, and what was for sale. Buyers regularly sought out homes priced at least 9% below the nation’s media price of $315,000.
Lower costs of borrowing drove homebuying vs. renting. Thanks to more buyer-friendly mortgage rates, purchasing a home was more attractive than renting in many markets.
Housing demand in suburbs and exburbs outpaced that in urban areas. Inventory accumulated in denser urban areas before less-dense neighborhoods. Historical decrease in time spent on market grew more quickly in urban markets.
Millennials stepped up. At the end of Q3 2019, the millennial share of primary home loan originations increased to 46% from the previous number of 43%.
Investor home-buying growth increased. Investor home-buying growth outpaced total home sales; the investment share of total sales increased from 7.1% in Q2 2018 to 7.7% in Q2 2019.
On Dec. 19, 2019, the Internal Revenue Service and U.S. Department of the Treasury issued their third and final round of guidance pertaining to Opportunity Zones. Novogradac, an audit, tax and consulting firm, has provided insight into the meaning of the recently released guidance.
“The final regulations represent a tremendous effort by Treasury to expeditiously provide regulatory guidance on the OZ incentive,” wrote blog authors John Sciarretti and Michael Novogradac. “With the release of the final regulations, we expect significantly more equity investment to be made in distressed communities across the nation.”
Sciarretti and Novogradac indicated that the updated regulations address 26 issues, broken down into the categories of investors, Qualified Opportunity Funds, Affordable housing investments in O-zones, Opportunity Zone Business Properties and Opportunity Zone Businesses. The chart, below, focuses on some of the issues that could be pertinent to real estate developers and investors.
Urban Catalyst acquired a currently vacant 70,330-square-foot property in a downtown San Jose, CA designated Opportunity Zone. The new owner plans to transform the asset at 201 S 2nd St. into a mixed-use development. The goal is to revamp the property into 65,000 square feet of tech-friendly office space, and 20,000 square feet of ground-floor retail.
The seller was undisclosed; though according to media reports, the previous ownership consisted of a joint venture, which included Imwalle Properties and Gary Dillabough, who is with Urban Community. Urban Community will work with Urban Catalyst to redevelop the asset, which once housed Camera 12 Cinemas. Revenue losses and maintenance costs shuttered the theater, according to the San Jose Mercury News.
Urban Catalyst is working on developments throughout San Jose’s Opportunity Zone. As such, the new project is in the local company’s wheelhouse. “This is an exciting time at Urban Catalyst as we move forward with another opportunity zone project in downtown San Jose,” said Urban Catalyst founder Erik Hayden. “We’re looking forward to activating the Paseo De San Antonio pedestrian mall with in-demand office and retail, breathing new life into this critical corner of downtown.”
The project is being developed in coordination with Urban Community, and is expected to launch construction in 2020, with projected completion at the beginning of 2021. The building is adjacent to VTA Light Rail, and is located near the Fairmont Hotel, the Hammer Theater, the popular SoFA district, San Jose State University, and the Fairmont Plaza.
“Working with Urban Catalyst, we plan to make over this underutilized space to better reflect the community and create a positive urban environment,” Dillabough said. “We want to help this area come to life.”
By Dennis Kaiser
Successfully competing in e-commerce comes with a hefty price tag, but retailers need to be on this platform to survive and stay relevant to the consumer. Strong omnichannel retailers have thinned out and heightened the competition. This competition has also negatively impacted the retailer’s profit because of the high cost of e-commerce technology and talent, distribution centers, digital marketing and more. Some noteworthy competition includes Walmart, Target, Home Depot, Staples, Best Buy, Target, Kroger and Macy’s.
Colliers International’s Anjee Solanki shares insights into the traditional brick and mortar brands that are crushing it online in our latest 3 CRE Q&A.
Q: Why are brands moving from a physical store strategy to one that also includes online? Should landlords be worried?
A: It’s important to note that the physical store strategy is not going away. As highlighted in Colliers’ Fall 2019 Retail Spotlight Report, the localized physical space of a brick-and-mortar store contributes to the overall experience a consumer has with a brand. Instead, a convergence between in-store, online and mobile shopping has emerged, providing flexibility and convenience to the consumer. The omnichannel shopper will be doing more as retailers prioritize investments. For example, omnichannel shoppers expect to do more product look up, more buying online and picking up in store, and higher demand for same-day delivery. Retailers are seeking to emulate the marketplace model by offering a much wider selection without bearing the cost of buying, storing and shipping a lot more merchandise. For example, Walmart, over the past several years, expanded its online catalog from two million to 75 million SKUs, allowing third-party merchants to sell on Walmart.com. More than 10% of shoppers say they have returned an Amazon order to a store not operated by Amazon.
Landlord’s should not worry though: Physical stores influence 39% of U.S. online retail sales. However, at what point are sales from online purchases and store pick-ups shared with landlords in an effort to bill percentage rent, or discussed to allow for additional transparency when negotiating terms? In other good news, the percentage of Black Friday online spend that ‘touched’ a store – meaning bought online and picked up in-store was 42%. Having a strong in-store customer satisfaction score that is on par with the online shopping experience is key for a retailer. For landlords, there is significant potential of increased cross shopping to occur, pushing sales for other retailers and the food and beverage sector.
Q: What are some of the ingredients to brands executing this transition smoothly?
A: Knowing the customer and their behavior must always be top of mind if retailers intend to capitalize on the continued growth of e-commerce. Focus should be placed on the following ‘ingredients’ to create a seamless shopping journey:
• Both desktop and mobile
• Web design
• Flexibility to check product availability online
• Free shipping and returns
• Assortment online
• Convenience of pick-up in store
• Same-day delivery
• Warranty and receipt management
• Rewards and loyalty program
Q: How should landlords prepare for this reverse retail strategy?
A: Online retail will continue to evolve to stay relevant in our insta-society by making it easier to shop online, and most landlords recognize this shift as the future of retail. But, let’s not dismiss the power of retail sales in physical stores that grew 3% (excluding online growth) this year. The retail chains that are closing are due to lack of store experience, an omnichannel platform and not understanding their consumers buying patterns; while the stronger chains are thriving and increasing their e-commerce share.
Digitally native brands are flourishing, and we are seeing consumer brand manufacturers investing more into direct sales to get their consumers attention back. We are also seeing Amazon’s biggest competitors provide more products on their website to keep customers on their site. On the other side of the spectrum, we are seeing some stores, namely Kohl’s, embrace Amazon by collaborating with the e-commerce giant. They are heavily investing in robotics within warehouses and distribution centers to stay ahead of the competition.
E-commerce will continue to grow and cut into retail profits, but this should never interfere with the customer in-store experience, something e-commerce can’t offer.
Connect Retail West is coming to Newport Coast, CA on Feb. 13. For more information, or to register, click here.
Sustainability. Affordable housing. These terms often overlap when it comes to development and/or renovation of multifamily product, and for good reason. There is a growing need and demand for affordable housing. There is also increased demand for green residences, those that are created through use of sustainable design practices, and result in operational efficiencies.
The question: How do green design features impact the feasibility of developing new affordable rental housing?
The answer: It depends.
Affordable housing development depends on a limited supply of low income housing tax credits — LIHTCs — to help finance development. Green development, meanwhile, is also important, but for different reasons. Eco-friendly housing creates efficiency and protects the environment. However, it is sometimes difficult to quantify green development benefits. As such, equity providers and lenders might not be willing to underwrite all operating efficiencies from a green development to generate greater loan proceeds.
While all stakeholders would prefer to see sustainable design features in new development, the cost can stress project budgets and could increase the number of LIHTCs necessary to produce affordable housing. At the risk of oversimplifying, this has resulted in a trade-off, of sorts, between the amount of affordable housing produced each year and the level — and cost — of green design features.
“Even with case studies noting that green, affordable housing can eventually save money, the upfront costs can place project budgets under stress and create bad optics for those concerned about the cost of affordable housing production,” said Todd Crow, executive vice president and head of the Tax Credit Solutions segment of PNC Real Estate.
Affordable housing is designed to serve a renter pool spending less than 30% of its after-tax income on housing.1 The townhome development in your neighborhood, in which residents earn up to 60% of the area median income, is affordable housing, as is the urban core residential high-rise offering half of its units below market rate.
In its 2018 “The State of the Nation’s Housing,” the Joint Center for Housing Studies of Harvard University said that demand for affordable housing continues to outstrip the available supply. The report noted, “The nation’s supply of low-cost rental housing shrank significantly after the Great Recession, and has remained essentially unchanged since 2015.”2
There is little doubt that demand for affordable housing has reached a crisis point in some parts of the country. Higher upfront expenses involved with green development can mean fewer units.
When it comes to green development, “developers struggle with sustainability issues, as they attempt to apply a ‘one-size-fits-all’ approach to green activities,” Crow said. “‘Sustainability’ can run the gamut, from natural-gas vehicles to transport construction materials, to use of environmentally-friendly paint on houses, to a focus on reducing consumption of water and energy.”
In an attempt to narrow the category, GSA lenders Fannie Mae and Freddie Mac provide loans reliant on green practices. The Freddie Mac Multifamily Green Advantage® program offers loans rewarding investors and developers that take steps to reduce energy and water consumption.3 Fannie Mae’s Green Financing Business is also geared toward energy and water improvements, as long as they are part of a renovation or development of affordable rental housing.4
And, there is proof of eventual cost savings involving green programs. The Environmental Protection Agency said that implementing energy-efficient programs across affordable housing types can result in energy savings of anywhere between 15%-30%.5 Furthermore, a 2012 study by CNT Energy and the American Council for an Energy-Efficient Economy said that building owners and residents could save $3.4 billion per year by making energy-efficient upgrades in existing multifamily housing.6
If this is the case, then why isn’t there more affordable housing, especially housing that is energy-efficient and sustainable?
One reason is that, as noted above, higher upfront costs and the need for higher LIHTCs can be problematic for construction budgets. Eco-friendly roofing and frame materials are frequently more expensive than other materials. Renewable technologies, such as solar panels, programmable HVAC systems and water reclamation systems, are costlier. A higher per-unit cost for sustainable development could result in fewer units delivered.
To summarize, the connection between eco-friendly development and affordability is complex, partly because sustainability is such a broad concept. Additionally, higher up-front development costs can sometimes mean fewer units, even if green design features eventually lead to lower expenses and future savings. The challenge of merging the proper balance, between meeting the urgent need for affordable housing and desirability of sustainable design, must be a priority for owners and operators alike.
Much has been written about apartment “amenity wars,” as owners and managers focus on adding fitness centers, pools, dog parks/pet spas and package lockers to their residential offerings. However, some owners and managers are focusing less on amenities, and more on experiences. Some, for example, are encouraging on-site farmers’ markets and food trucks.
But, psychographics are necessary to ensure the right experiences. Alexandra S. Jackiw, with Milhaus Management, recently gave a presentation at the National Apartment Association’s Apartmentalize, and indicated that psychographics can help determine what, exactly, residents are looking for in an apartment community. This is because psychographic goes beyond demographics, to provide insight into why people make the buying decisions they do which, in turn, provides information on values and behaviors.
Jackiw suggested that operators can use a variety of methods to collect psychographic data, including in-person and phone interviews, customer surveys and questionnaires. Once operators have quality psychographic data, they can use that information to create more refined social media audiences, write emotionally compelling ads and effectively rely on aspirational imagery and messaging.
“Experiences have become a huge component of what we do,” Jackiw said. “But how do we know what experiences to provide? . . . That’s where psychographics come in. Psychographics can put you ahead of the competition.”
By Dennis Kaiser
Marcus & Millichap recently hosted a six-part webcast titled ‘Mastering the Markets’, which explored emerging trends across the major commercial real estate asset classes. The Retail Investment Forecast included presenters Westwood Financial’s Mark Bratt Chief Executive Officer, Marcus & Millichap’s Scott Holmes, Senior Vice President, National Director, Retail, and Marcus & Millichap Research Services’ John Chang.
The deep-dive conversation examined the top issues, concerns and opportunities that face the retail sector today and in 2020. The discussion was framed by an overview of the economy, with Chang noting the retail industry in particular is impacted by what’s happening in the broader economy.
He pointed out that the current 10.25-year expansion cycle, which matches the longest in the nation’s history, experienced a “moderate pace of growth throughout.” Though it only qualifies in the “middle of the pack in terms of the strength of the growth cycle,” he noted. By comparison, this cycle hasn’t faced the challenge of overdevelopment or overleverage, which are typical in a rapid growth cycle, said Chang. This “Goldilocks” market is one of “not too hot or not too cold,” that has stretched over an extended time. “That favors all commercial real estate, especially retail,” said Chang.
Holmes says, “[The economy] seems to be humming along pretty strongly,” which benefits all property types, but in particular retail. They are “not seeing euphoria” but described the retail sector as one that leans toward “cautious optimism from lenders, developers, even tenants and owners. It feels pretty healthy,” he said.
Bratt noted across their portfolio with 1,600 tenants, they are not seeing receivables grow, which had been experienced in past downturns. “[The] consumer has money, employment is good, but you have to offer them value, something they want to buy,” he said. He noted they are bullish on 2020, though concerned about where we are in the cycle. He pointed out most investors are looking at this later stage in the cycle and they are pausing and asking: “What happens if we do go into a recession and we lose 200 to 400 bps of occupancy in our shop space?” That has led to them underwriting a bit more cautiously today, he said.
Holmes pointed out the single tenant sector is a dominant category today because it delivers “options for yields and risk tolerances.” He said the drive-through fast food sector is popular now. But they are also seeing investors “take chips off the table and wait,” he said. Other active retail categories include auto parts and related services such as body and collision repair shops, as well as car washes.
Chang noted he’s seeing defensive strategies emerge that involve investors shifting to different property types.
An interesting trend is the growth of fitness concepts as people become more conscious about health. Holmes pointed out that roughly 25% of people own gym memberships. That trend is leading to junior boxes being back-filled by fitness tenants like Planet Fitness, and is reflected in the rise in popularity of smaller concepts like Orangetheory and SoulCycle.
Bratt said the shift toward a more fitness-aware and focused consumer is also echoed in the common refrain, “health is the new wealth.” And landlords who adapt and add fitness tenants can benefit. A fitness tenant can drive visits and cross shopping opportunities, since people typically visit a fitness center multiple times a week. In many cases, fitness tenants are now viewed as a new type of anchor, along with restaurants. And landlords have changed their view too, many now want fitness and food tenants in their centers.
Another trend being watched is online shopping and e-commerce. As digital native retailers expand their physical footprints over the coming years, it is expected the synergies that exist across the retail sector will benefit retailers and landlords. Rather than bring on the demise of retail, it is expected to generate a lift for retail, said Chang, as online and off-line retail channels grow.
Bratt noted, “Successful retailers are pivoting, and being able to offer the consumer what they want in terms of the merchandise, when they want it and how they want it. And that’s not an easy thing to do.” They are “figuring it out” now, and it is being reflected in such retailers as Target, which hit an all-time-high stock price and its market cap is increasing. “The retailers who can adapt are doing well, Bratt said.
For retailers that haven’t fared as well, like Sears or Kmart, the silver lining is that those closings will benefit the market. There is a view that getting those locations back under the landlord or new ownership control will benefit the entire retail center, especially if they’ve dragged down the center’s performance. The hope is a new vibrant center will emerge as those sites are cleared, redeveloped and new mixed-use components are brought in.
Retail continues to experience a transformation to a more experiential environment, noted Holmes. One such example he cited was an extreme surf oasis concept that helps bring communities together in a safe, fun, enjoyable place. By appealing to Millennials’ desire to share a physical in-person experience – whether that be entertainment, a restaurant or bar or the combination of both in the case of TopGolf – a center stands to win fans. The trend is expected to continue. Bratt said there is a demand for a “sense of community and village” even in smaller centers, because it helps make them inviting places to gather.
The apartment sector continues to be a strong one, generating questions as to how long this can continue. Connect Media recently put this question — and others — to Rawley Nielsen, Colliers International’s President, Investment Sales.
Q. How close are we to the end of the multifamily lifecycle?
A. As an active investment sales broker in the Utah multifamily space, I have not seen any major signs of a slowdown heading into 2020. The debt, equity and sales markets are as strong as they have ever been for apartments, and we anticipate this momentum to continue well into 2020. Even though I haven’t seen significant signs of a slowdown, we are definitely seeing changes in the market. Our clients are being more strategic and cautious with their investment dollars. Investors are less optimistic that they can acquire a value-add deal and “flip” it in the near term for a large profit. So, investors are factoring in longer hold periods in their investment model than they have over the last five years. With the length of our current economic cycle, everyone is expecting some sort of slowdown or cooling, but we are still going forward at a strong pace. I do think that next year’s presidential election could play a major role in investor sentiment and the sales market in late 2020 and beyond.
Q. What are some of the continued drivers that are leading the U.S. to become a nation of renters, rather than owners?
A. For years, our country has been trending more towards rentals and multifamily, and less towards home ownership. A recent statistic I saw showed that since 2010, rentals made up nearly 57% of the new housing demand throughout the country. Younger generations are marrying and starting families later in life than previous generations. Only 46% of millennials between the ages of 25 to 37 were married in 2018, compared to 57% of Gen Xers and 65% of boomers. As younger generations marry and start families later in life, they typically choose renting over owning. I do think that most Americans still want to own their home eventually, but changing demographics and evolving generational housing needs are having a major effect on the country’s housing market. For younger generations, location, walkability and property amenities are more important than owning their own home. These trends will continue to have a positive effect on the multifamily market throughout the country.
In addition to changing demographic trends, owning a home is also getting significantly more expensive throughout the country. Incomes are not rising as fast as home prices, and many would-be buyers don’t have the financial capacity to make a down payment and support a monthly mortgage. In addition, portions of the tax act of 2017 make home ownership less affordable. With limits on mortgage interest and property tax deductibility, and no deductibility on home equity loans, home ownership doesn’t have all the benefits it once had.
Q. What will we see in 2020?
A. The demand for multifamily investments will continue to be strong moving forward. There will continue to be an abundance of capital, both debt and equity, chasing all sizes and classes of multifamily deals across Utah, and throughout the country. More and more private and institutional investors will be looking to acquire their first apartment deal in Utah. Many of these buyers are trying to complete a 1031 exchange from a property sale in out-of-state, usually coastal, markets. These exchange buyers are typically more aggressive on pricing and terms than local buyers, and they are willing to accept lower yields to acquire newer assets in stable and high-growth markets.
In 2020, cap rates and pricing should remain relatively consistent with 2019. However, interest rate increases and changing investor sentiment are expected to have more noticeable effects on pricing and sales activity later in the year and into 2021. Again, the presidential election in the fall of 2020 could have a major impact on the capital markets and thus cause a more noticeable slowdown. In 2020, Class B and C value-add properties will continue to generate the most interest and buyer activity. Pricing and cap rates will remain the most competitive in this part of the market. However, there should be substantial buyer appetite in the full spectrum of the multifamily market – from workforce housing, to value add, to Class A apartments in core locations.
The demographic and economic indicators all show strong for apartments in general, but they show extremely favorable for apartments in Utah. We do not foresee any slowdown in investment demand, and sales volume will only be tempered by the lack of opportunities available in the market. It is important to note that Utah has gone from primarily a private capital investment market to a more mature institutional capital market over the past few years. The market is becoming more sophisticated and more liquid, and local investors are trying to keep pace. We are perceived as a haven and, on a relative basis, a low-risk market with limited downside and significant upside through our continued population growth and strong local economy.