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Multi-family Rental Rates Look to Flatten in 2020

Posted on December 20, 2019March 9, 2020 | Leave a comment

Real estate is not a static entity. When it comes to residential real estate and commercial real estate, a complex series of factors goes into property values and lease rates. When it comes to rental rates, the outlook has remained relatively steady over the past five or so years. As the economy chugs along at a steady rate, rental rates have begun to underperform compared to economic benchmarks such as the Dow Jones Industrial Average.

So what does this all mean for commercial real estate investors and renters? While the future is never certain, here are some reasons to expect rental rates to flatten in 2020.

The National Rent Index was Flat in Late 2019

According to Apartmentlist.com, the national rent index has remained more or less constant from June 2019 – December 2019. The year over year rental rate growth sits at approximately 1.4 percent from 2018 to 2019. Again, this goes against the general trend of increased residential property values and other economic metrics, which have all steadily increased during this time period. Between the years of 2014 and 2017, the year over year growth rate varied from 1.9 to 3.3 percent.

It should also be noted that virtually all of the rental rate growth in 2019 occurred between the months of March and June (1.3 percent increase during that period). The usual seasonal ebb and flow of real estate supply and demand is certainly somewhat responsible for this market behavior, but was even more pronounced in 2019. This leads some investors leery of rental rate increases in the more desirable spring market of 2020.

These numbers are all pulled from a single source which used a “fully representative median rent statistics for recent movers taken from the Census Bureau American Community Survey”. Still, other estimates place 2018 rental rates at a net loss as compared to 2017. Whether rental rates are slightly increasing or slightly decreasing, it is certainly true that the rental market has remained somewhat stagnant over the past few years.

Overall Rental Rates Outlook into 2020

One of the reasons that rental rates seem to be lagging behind other economic metrics is apartment demand. It is estimated that in 2020, apartment demand will hover around 240,000 units compared to an apartment demand of 300,000 units in 2019. This 20 percent decrease is likely to have a massive impact on not only rental rates, but vacancies and other market factors as well. This is partly due to young adults with buying power trending towards home ownership at higher rates than in recent years.

Rent control legislation is also a major factor that rental rates are likely to remain flat in 2020. New York, Oregon, and California have all passed new rent control laws which were put into effect in 2019. Illinois, Washington state, and California all have additional rent control proposals in the wings for 2020 and beyond. As highly desirable markets such as San Francisco and New York continue to have significant affordability issues, this trend looks likely to continue moving forward.

Other estimates on 2020 rental rates are more bullish, citing the aforementioned economic strength in other sectors including residential real estate. Occupancy rates remain high for now. A huge question yet to be answered is whether the 20 percent decrease in apartment demand is an accurate prediction. If so, even strong economic growth might not be enough to drive rental rate increases.

What Drives Rental Rates to Increase or Decrease?

Location demand

There is no factor in real estate more important than location. This is perhaps never truer than determining rental rates. San Francisco is a prime example of rental rates being borderline out-of-control due to location demands. Despite rent control efforts, the average rental rate for a one-bedroom apartment is approximately $3,550 per month or $42,600. To put that in perspective, the median income for an individual in the US generally hovers between $30-35k.

The relationship between affordability and convenience is a key driver of rental rate increases and decreases. Millennials have tended to opt for location over affordability, but have slowly started to trickle towards the suburbs for more reasonable rental and/or purchase prices.

Occupancy rates

Occupancy rates, also sometimes thought of as the inverse of vacancy rates, is the percentage of rental units which are currently occupied. Strong occupancy rates signal that demand is on par or greater than supply for a rental market. Rental juggernauts such as New York, Los Angeles, and Washington D.C. commonly have occupancy rates of 95% or greater. This is how rental rates have soared over the past few decades, which also creates conflict between affordability and practicality.

Other more complex factors such as inflation, unemployment rates, GDP, and much more can all play a role in commercial real estate valuations and rental rates.

Going Forward

Renters can expect most markets to remain relatively stagnant moving into 2020. There are some obvious exceptions such as high demand coastal cities, but the overall rental rates look to remain flat for the immediate future. Rental rates could see a huge shift depending on how and when the next recession hits. It is important to note that the Great Recession of 2008 actually did little to stem increases in rental rates, and that other factors tend to be more important. Commercial and residential real estate investment in rental properties remains a strong choice in most markets.

Construction Heating Up on I-70

Posted on December 19, 2019 | Leave a comment

The January/February BreakingGround will feature a look at how long the construction boom is going to last. (That’s a boom that fizzled a bit due to indecision in 2019.) During the research on the activity in Westmoreland and Washington County, it became clear that the logistics market was driving new development along the I-70 corridor.

In Westmoreland County, Al. Neyer has agreed to two major projects. First is a 150,000 spec warehouse in the Westmoreland Technology Park II, in Hempfield Township outside New Stanton. The larger project is the Commerce Crossings at I-70 in Sewickley Township. There, Al. Neyer intends to build two Class A industrial buildings totaling 480,000 square feet.

Mon Valley Alliance CEO Ben Brown talked about the heightened activity at MVA’s Alta Vista Business Park along I-70 in Fallowfield Township in Washington County. Below is an excerpt from the article:

“We should have five buildings rising in Alta Vista in 2020, which will essentially double the size of the park,” Brown says. “We sold a lot last year to Apex North America. They are working through their financing, which was just approved. That will be about 100,000 square foot facility. Earlier in 2019, in February, we sold lot 10B to Frontier Railroad Services, which is based in New Stanton. They will be a smaller facility for Alta Vista, about 20,000 square feet with a 2 acre yard. That site will be adjacent to the 35,000 square foot spec building that Mon Valley Alliance will put out to bid in February. Recently we sold a lot to Fratelli Partners. They are building a 50,000 square foot spec building.”

TBI Contracting is building the Frontier Railroad Systems building. New-Belle Construction will build the Fratelli Partners project.

Brown could not comment on two other projects on which the authority is reported to be performing due diligence. One is a 100,000 square foot office and light manufacturing building. The other is a 240,000 square foot industrial building that Suncap Property Group is reported to be developing. Suncap was one of the developers pursuing a similar building that was on the streets earlier in 2019 for Komatsu Mining Corp.

In other construction news, FNB made a big announcement that it will anchor the $450 million Civic Arena site in a 24-story office tower. The PJ Dick/Mascaro/Massaro joint venture will build the new development. Highmark selected Turner Construction for its $25 million lobby and exterior renovation at Fifth Avenue Place. The Woodland Hills School District has its $30 million 2nd phase out to bid due Jan. 23. PSU has short-listed Jendoco, PJ Dick, and Rycon on the $6 million Forker Lab Building at its Shenango Campus in Sharon. TEDCO Construction is building a $10 million private residence at Deep Creek Lake. PJ Dick has started construction on the $15 million Western Pennsylvania Surgery Center near the Center Township exit of I-376 in Beaver County.

White House Proposes Changes to the National Environmental Policy Act for Faster Infrastructure Permitting

Posted on December 19, 2019March 9, 2020 | Leave a comment

In the United States, the federal government uses a strict set of guidelines to approve and/or permit infrastructure projects. In August of 2017, President Trump submitted an executive order titled, “Establishing Discipline and Accountability in the Environment Review and Permitting Process for Infrastructure”. The purpose of this document was to allow for greater infrastructure investments, create jobs, increase wages, and ultimately to strengthen the national economy. The order aimed to accomplish these goals by reducing necessary paperwork, eliminate redundancies in the infrastructure construction approval process, and to “focus on issues that truly matter rather than amassing unnecessary detail”.

In October of 2019, the Trump administration has proposed further changes to our nation’s regulation on infrastructure construction projects. In particular, the White House is now focusing on speeding up the process of approvals for environmental permits. These proposed changes may have far reaching impacts on the construction industry in the coming years. Here is what you need to know.

The Changes are Aimed at Alternating NEPA (National Environmental Policy Act)

The National Environmental Policy Act (NEPA) is one of the earliest pieces of legislation in the US which was intended to protect our natural environment. Passed in 1969, NEPA had a simple goal: ensure that all government projects go through an environmental evaluation before enacting a change. NEPA remains the primary legislation which protects our environment from dangers including improper construction, the dumping of hazardous waste, and everything in between.

NEPA has a strict set of requirements when it comes to construction projects. These requirements have been amended over the years to reflect our increased understanding of how construction (and human activity as a whole) impacts our environment. The bulk of these checks and balances are carried out by the Environmental Protection Agency (EPA).

The new changes proposed by the White House aim to roll back and/or lessen some of the regulations within the NEPA. The stated purpose of these changes is to increase productivity, reduce time wasting, and to strengthen our nation’s infrastructure and economy. Critics argue that these changes undo years of environmental work and could be dangerous in the long run.

Potential Benefits of NEPA Reform

As with most political issues, there are champions and critics coming from both sides. Here are some of the reasons why the construction industry might benefit from President Trump’s NEPA reform proposal:

The National Environmental Policy Act is out of date. One of the primary arguments for NEPA reform is simply its age. Turning 50 this year, NEPA certainly has some language and terms which could benefit from a facelift. Industry experts believe that it is too easy to either skirt NEPA regulations or, in some cases, that NEPA regulations offer no concrete advantage to infrastructure construction or the environment.

Simplification of NEPA approval would stimulate infrastructure construction. Regardless of whether you believe it is the right decision, it is almost certain that rolling back certain regulations would stimulate infrastructure construction projects. The US infrastructure isn’t just aging, it is quite literally falling apart in some areas. The new proposed reforms would speed up the application and permitting process for new infrastructure projects.

The NEPA process is ineffective. As we mentioned above, a huge amount of projects are able to simply gain a categorical exclusion from NEPA. This means that many, if not most, projects are not forced to submit to environmental assessments, create environmental impact statements, or go through the bulk of the process in the first place.

Environmentalists Warn that NEPA Reform is a Dangerous Move

On the other side of the equation, those with concern about the environmental impact of NEPA reform have decried the changes as dangerous. Here are a few reasons why:

NEPA is intended to protect our environment from careless government action. The stated purpose of the National Environmental Protection Act is to protect our environment from government projects which may do it harm. By extension, NEPA is in place to protect the people and future generations from harm caused by environmental damage. Rolling back regulations is a potential threat to environmental causes.

NEPA reform weakens the Clean Air Act and the Clean Water Act. Two pieces of legislation known as the Clean Air Act of 1963 and the Clean Water Act of 1972 protect American citizens from unhealthy living conditions caused by pollution. White House NEPA reform weakens these regulations by clipping the EPA’s wings when it comes to review other agencies’ environmental impact statements.

Environmentalists warn that NEPA reform sets a dangerous precedent. Last but not least, many environmentalists view NEPA reform as less of a reforma and more of a concerted effort to roll back environmental protections. This has been viewed as some as a slippery slope which could lead to lessened regulation on our drinking water, air, and pollution policies.

Going Forward

There is no question that political issues like government regulation and environmental protection policies can get messy. When it comes to the commercial real estate industry and infrastructure construction industry, the proposed NEPA reforms would likely reduce the time required to get permits and approvals for infrastructure projects. It remains to be seen whether these changes will be passed into law and in what state they will exist when they do become law.

Another huge factor which has not yet been addressed is the including of the renewable energy sector, which is the fastest growing energy sector in the US. With so many balls in the air, we can only wait and see how the story unfolds.

Office Space Investments in the Sun Belt Performing Better than Coastal Cities

Posted on December 18, 2019March 9, 2020 | Leave a comment

The Sun Belt, sometimes condensed into “SunBelt”, is a region in the southern United States which stretches from Virginia to California and all across the border with Mexico. Named for the traditionally sunny weather, the Sun Belt is essentially the name for the bottom third of the US. When it comes to commercial real estate, this area has traditionally been thought of as less desirable with the exception of major metropolitan areas such as Los Angeles, Atlanta, Dallas-Fort Worth, etc. In more recent years, relatively underdeveloped areas in the Sun Belt have attracted massive interest from real estate investors looking to build, purchase, and/or lease office space.

There are numerous reasons why Sun Belt commercial real estate has been outperforming traditional powerhouses such as New York City and Boston. We will explore some of these reasons as well as why we expect this trend to continue moving forward.

Sun Belt Population’s Impact on Commercial Real Estate

To understand why office space in the Sun Belt is such a hot commodity, one must first look at population trends in the US. Here are some statistics on population in and out of the Sun Belt and how this has impacted commercial real estate investments:

The Sun Belt now accounts for approximately 50 percent of the US population. This number is likely to rise to approximately 55 percent by the year 2030.
The Sun Belt has experienced huge population growth, accounting for 75 percent of the total population expansion in the US.
When it comes to the 10-year cumulative domestic migration by destination state (a measure of the states which are being moved to in the highest numbers), 8 of the top 9 are Sun Belt States. Texas, Florida, North Carolina, Arizona, South Carolina, Colorado, Georgia, and Tennessee account for these 8 states, with Washington state being the lone non-Sun Belt state.
States with traditionally strong commercial real estate markets in the American Northeast such as New York, Massachusetts, Washington, D.C. and Pennsylvania are all experiencing a net loss when it comes to domestic migration.

Commercial Real Estate in the Sun Belt is Booming

Of course, greater populations are not the only reasons why Sun Belt states are experiencing such high demand for office space. Additional reasons for the Sun Belt commercial real estate boom include:

Lower costs: real estate investors know all too well that housing prices, real estate prices, labor costs, and other regional cost factors can make or break an investment. Many areas of the Sun Belt offer extremely friendly costs for investors in markets with lower costs of living.

Less governmental restrictions: many sun belt states, particularly those in the Southeast, have made it a policy to have more lax policies when it comes to businesses and real estate investments. Lower taxes and less strict regulations allow for cost savings and greater flexibility for office space investors.

Friendly climates: as a whole, the Sun Belt enjoys a milder, more building-friendly climate. This leads commercial real estate to come with lower insurance costs, upkeep costs, and general maintenance which comes from dealing with cold weather and dramatic temperature shifts. There are obvious exceptions to this rule such as regions who experience flooding, hurricanes, etc.

Local Economy and Office Space in the Sun Belt

Another key factor in the Sun Belt’s success story within the CRE realm is the recovery from recent economic difficulties. While many regions are still struggling to bounce back from the 2008 financial crisis, a huge chunk of the Sun Belt has found its footing in the energy industry, tech industry, and more.

This is reflected in the fact that over 200,000 new jobs have been created in the state of Texas in the last 10 years alone. Many of these jobs are centralized in cities cush as Houston, Dallas-Fort Worth, and San Antonio. Where these regions were traditionally reliant on industries which paid relatively low wages, those jobs have been replaced in large numbers by energy and tech jobs. The strength of this rising Sun Belt economy comes from skilled jobs which pay between $60-$100k per year.

The Sun Belt is also leading the pack in the high tech industry has grown more rapidly than in any other areas in the US. In fact, Sun Belt cities Austin, TX, Raleigh, NC, Houston, TX, and Nashville, TN are numbers 1-4 respectively when it comes to STEM and tech industry growth between 2001-2013. New York clocks in at 36th and Boston ranks 26th.

Going Forward

The Sun Belt looks to be the healthiest market for office space investment in the foreseeable future. Trends of job growth, population migration, and lenient governments appear to be here to stay. Some of the main questions yet to be answered include whether states like Massachusetts, New York, and Pennsylvania will change governmental regulations to stop the bleeding of population and economic losses, or whether the Sun Belt with continue to grow unchallenged. It also remains to be seen whether higher costs of living in newly burgeoning Sun Belt area will bring the pendulum swinging in the opposite direction.

For now, the future of commercial real estate in the Sun Belt looks as bright as ever.

Predictive AI Being Used in Construction

Posted on December 17, 2019March 9, 2020 | Leave a comment

Artificial intelligence is well over 60 years old. What started as the brainchild developed by a young Alan Turing has since become a part of our everyday lives. While it remains tempting to think of AI as some potential future technology, the reality is that AI has overtaken many industries from your Facebook Feed to the cars we drive. The construction industry has some obvious applications for artificial intelligence which continue to develop over time. As real estate investors become more and more tech savvy, the need for predictive AI in the construction industry will only grow moving forward.

Today, we will define predictive artificial intelligence and discuss how this technology can be used within the construction industry to increase jobsite productivity, schedule projects efficiently, develop 3D models, control costs, and much more.

What is Predictive Artificial Intelligence (AI)?

To understand predictive artificial intelligence, we should first learn the definitions of a few key terms.

Artificial intelligence is any application of computer science which simulates intelligent behavior. Any machine which can imitate, emulate, or simulate an intelligent action based on any set of input may be considered a piece of artificial intelligence.
Machine learning is a subset of AI which involves the machine/program learning and adapting based on a series of inputs. In other words, machine learning must involve the artificial intelligence program being able to reprogram itself and/or change its behavior over time.
Predictive artificial intelligence is a type of artificial intelligence that uses inputs and algorithms to likelihoods and makes intelligent decisions regarding efficiencies. Predictive AI may or may not include the concepts of machine learning.

Most predictive AI does not include machine learning, but advanced systems can certainly use the technology. This is an important distinction, as many of us think of artificial intelligence and machine learning as being synonymous. In reality, any software program which is able to intelligently predict potential outcomes can be considered predictive AI.

Predictive AI Uses Algorithms to Help Produce 3D Models

While designers, architects, and engineers still hold the reigns, predictive artificial intelligence programs help these professionals to develop 3D models which avoid common design flaws such as plumbing oversights, electrical issues, and mechanical problems. Designers can work within 3D model programs to design construction projects and are notified by the predictive AI when something is off.

A unique advantage of this technology is that designers can continue to update the 3D models as the project progresses and is changed in real time. This allows for the predictive AI to remain useful well into construction. As this technology advances, functionalities will likely expand to make functional suggestions even before any design errors are detected.

Predictive AI Mitigates Risk on Construction Sites

Any investor or construction industry veteran knows that there is no such thing as a construction project without risks. Safety concerns, inventory, site conditions, labor shortages, and poor planning can all pose major threats to both the project and the individuals involved. Predictive AI can be used to both monitor and predict ongoing risks ranging from safety concerns to labor shortages. This allows project overseers to focus their time on more important issues as well as keeping them informed on the biggest threats to the current project.

The best part of artificial intelligence for risk mitigation comes from the predictive aspect. Where hoping for the best and preparing for the worst used to be a best case scenario, current predictive AI technology for construction has the ability to prevent injuries and costly accidents from happening in the first place.

Predictive AI for Construction Project Management

Not all predictive AI for construction projects are used to reduce risks. Predictive AI can also be used to more efficiently manage ongoing construction efforts to keep costs low and jobsite productivity high. Machines powered by artificial intelligence have even been developed for repetitive tasks including demolition.

The primary benefit of predictive AI from construction project management comes down to increasing efficiency and through scheduling, labor management, inventory management and other more mundane tasks. This is the “workhorse” side of artificial intelligence: taking in massive amounts of raw data and making well-informed recommendations about what to do next.

Going Forward

Predictive artificial intelligence applications for large construction projects are numerous. The real estate industry on a whole is adopting AI wholesale with no signs of slowing down any time soon. The same technology which predicts whether or not you will want to see a post on your social media timeline will be (or already is being) used to predict what properties might interest investors, renters, buyers, etc. Construction applications such as machine programming, jobsite safety, scheduling, and 3D modeling are already in use today.

It is likely that both “smart” and “dumb” AI will continue to expand within the construction industry, trickling down from mega-construction projects with massive budgets to small scale residential construction. This does not mean that all construction workers will need to go back to school for a computer science degree. Instead, predictive AI looks to be folded into traditional construction practices as just another part of the process.

The future of technology like artificial intelligence and machine learning is unknowable. When it comes to construction, it is nearly certain that predictive AI will drive the industry for many years to come.

Can Blockchain Benefit Commercial Real Estate?

Posted on December 16, 2019March 9, 2020 | Leave a comment

Blockchain has gained traction in recent years through its connection to cryptocurrencies including Bitcoin. In the simplest terms, Blockchain is a method of data storage, authentication, and verification. The details of what Blockchain is and exactly what it does are slightly more complicated. Commercial real estate is an industry which relies on up-to-date information being accurate for secure transactions. The applications of Blockchain for real estate investors are many. The question remains: will the industry adopt Blockchain technology?

What is Blockchain?

At its core, Blockchain is a system of data management. Like any other system of data management, it works by storing data into a database. Unlike other systems of data management, Blockchain works to actively authenticate incoming transactions internally. Transactions which have been verified as accurate are entered into the system. There are a few attributes of Blockchain technology which make it unique, including:

Shared ledger technology: one of the biggest problems with modern data storage and accessibility is that the same data may be stored in multiple places simultaneously. Consider the hellacious healthcare information sector for one such example. Blockchain stores data once, in a centralized ledger.

All data is immutable (unchangeable): it is impossible to alter so much as a single data point within a Blockchain once it has been authenticated and entered into the system. This offers a level of assurance that the data is accurate and reliable for any interested parties.

All transactions are entered as a part of a chain: the other key aspect of Blockchain is the actual method of data storage. All data points are given a unique identifying code and are assigned as part of a larger chain. This organizes transactions in such a way that the history of transactions can easily be linked going back and moving forward.

Blockchain Blocks for Data Organization

So what exactly are “blocks” and what exactly are “chains”?

Blocks simply refer to any new piece of information or sets of information which are authenticated and added to the blockchain network. Blocks can include transactional data, informational updates, or literally any other new or altered piece of information. What is important to understand about blocks is that old information is never simply updated as it might be in a traditional database system. Instead, any updates are added as new blocked which amend previously stored data.

Chains are methods of connecting blocks both to create a transactional history and for users to look at a series of data points on a single subject. As a potential example within the commercial real estate industry, a chain might be a particular property, where data points like purchase history, address, price changes, ownership changes, etc. all might be considered blocks.

Both blocks and chains are given unique IDs which allow them to be both tracked and secured in Blockchain system. Again, the main advantage of Blockchain is that all users can rest assured that the information is accurate and up-to-date. Even cloud databases can be altered and scattered. Blockchain fights to solve this common problem.

Blockchains and Commercial Real Estate

So why would this technology be a good fit for the commercial real estate industry? There are a few high level reasons, including:

Real estate information research would be centralized

This is actually a bit of a misnomer, as Blockchain technology is intentionally decentralized to prevent fraud. Yet the fact remains that Blockchain data storage means that any commercial real estate research can be performed knowing that the information is good. A current real estate research effort might involve wading through multiple platforms to make sure you aren’t missing anything.

Commercial real estate analytics would be easier to predict

Continuing with the idea that accurate and verified data is invaluable for commercial real estate investors, being able to search real-time owners, brokerages, and other transactional data gives investors a better idea of the current real estate environment. This lessens the pressure of finding accurate data and frees up investors to do their own analyses with confidence.

Blockchain would revolutionize commercial real estate financials

While Blockchain will not make commercial real estate into Bitcoin users, it will provide an accurate representation of who owns what properties, where the backing money resides, the accurate picture of financial transactional histories, and much more. In an industry where confidence in buyers and sellers is paramount, the value of these assurances cannot be overstated.

Verifying pre-leasing financial details and due diligence

Where the current method(s) of financial due diligence in the CRE sector is a slog, Blockchain would streamline this process significantly. The verification process of signatures, transactions, and financial statements all goes out the window when this information can be quickly and easily viewed all in one location. With full Blockchain integration, commercial real estate transactions could use smart contracts and input all of the information in real-time.

Going Forward

Blockchain is an ideal fit for the commercial real estate industry. The question of whether or not the industry will choose to adopt this type of technology seems to be more of a when than if. As data solutions become more sophisticated, the antiquated methods of due diligence, data verification, and transactional history hunting will all go the way of the dodo. This being said, it is impossible to know for sure. By the time our industry is ready to adopt this disruptive technology, a new champion might rear its head.

How Opportunity Zones Impact Property Investments

Posted on December 13, 2019March 9, 2020 | Leave a comment

In today’s political climate, the swinging pendulum of regulation vs. deregulation can be difficult to track. Yet sometimes government programs are put into place which can truly benefit both investors and the community. When Opportunity Zones were implemented as part of the Tax Cuts and Jobs Act of 2017, real estate investors were incentivized to invest and/or reinvest into low income areas through tax breaks including deferred capital gains, eliminated capital gains, and/or cost basis changes.

While the full tax benefits of Opportunity Zones will be lost starting in 2020, the program will remain in effect. Here’s how it works.

What are Opportunity Zones and Opportunity Funds?

All investors know the pain of capital gains tax. At its core, cap gains taxes are taxes paid on the net gain of an investment. A common example would be buying and selling stocks. If an individual purchases $1,000,000 in stock and later sells that stock for $1,500,000, he or she would be responsible for paying taxes on a capital gain of $500,000. Traditionally, the best way to avoid paying capital gains tax was to defer payment through reinvestment.

The Opportunity Zone program takes this idea and builds upon it. Let’s take the above example. Instead of collecting the full $1.5 million after selling this asset, the investor could instead reinvest the funds into an Opportunity Fund. It is important to note that to be eligible for tax breaks, this individual would only be required to invest the gains, not the full amount.

Opportunity Zones are Defined as an Economically Distressed

Community

In order for a real estate reinvestment to qualify for Opportunity Zones tax breaks, it must be determined that the real estate falls within a designated Opportunity Zone. The IRS defines an Opportunity Zone as “an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity ZELASTO_Media Report_052518.pdf ones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service.”

Qualified Opportunity Fund Reinvestment

The other key component of the Opportunity Zone Program is participation in a qualified Opportunity Fund. It is not enough to simply reinvest capital gains into an Opportunity Zone community. Reinvestments must be made through the program. If these steps are followed, the initial investment gains and any gains made through the subsequent reinvestment within the Opportunity Zones Program may be eligible for significant tax breaks.

One of the first Opportunity Zone projects in the Pittsburgh region, the construction of a 60,000 square foot indoor growing facility in Braddock for Robotany, will soon become one of the first projects to complete the investment cycle. Developer RDC Design + Build is nearing an agreement to sell the project to a permanent investor that will have the opportunity to reap the long-term tax benefits.

Opportunity Zones, Property Investments, and Capital Gains

There are four basic scenarios which can play out when an investor participates in an Opportunity Zone reinvestment:

If the investor sells the reinvested property in less than five (5) years: he or she will be responsible for paying capital gains tax at this time. Even without receiving the full tax benefits, this scenario does allow for tax deferment until the fund is sold or until December 31st, 2026 — whichever comes first.

If the Opportunity Fund investment is held between five (5) and seven (7) years: the full capital gain amount is deferred plus a 10 percent bump in cost basis. In our example, that would equal a saving of $100,000.

If the Opportunity Fund investment is held between seven (7) and ten (10) years: In addition to capital gains deferment, the cost basis is bumped a total of 15 percent, totalling a savings of $150,000 in our example.

If the Opportunity Fund investment is held for ten (10) or more years: the investor is responsible for paying nothing on the appreciation of the reinvested asset. This means that through the Opportunity Funds Program, it is possible to invest in real estate with zero liability for capital gains taxes on net gains.

2020 Changes to Qualified Opportunity Zone Funds

As one last point, time is running out for investors to reap the full benefits of the Qualified Opportunity Zone Program. As of January 1st, 2020, the maximum cost basis deferment will shift from 15 percent to 10 percent. While this does not take away from the other benefits of the program, that 5% cost basis differential can equate to huge dollar volumes for investors. Despite this, real estate investors are always cautioned to never rush into a real estate investment to get under a time limit or deadline. The right investment with a slightly higher cost is likely more profitable that the wrong investment at a slightly lower cost.

Going Forward

With current regulations, Opportunity Zones and Opportunity Funds continue to be a great choice for real estate investors through 2019. However, starting in 2020, that appeal is somewhat diminished by lessened tax incentives. This may cause some real estate investors to panic and make unwise investments. We would caution that a smart investment is a smart investment and a poor investment is a poor investment. When it comes to real estate, a tax incentive should be viewed as the cherry on top, not a reason to invest.

Rather than rushing to make an Opportunity Zone investment before year’s end, going through your usual due diligence is almost certainly the right decision. Whether that misses the 2019 end-of-year cutoff or not, your interests will be better secured.

How Energy and Transportation Projects Came to Dominate Construction

Posted on December 12, 2019March 9, 2020 | Leave a comment

Construction is the backbone of industry. Without construction there would be no homes, businesses, schools, or warehouses. In recent years, the construction industry has seen a marked increase in the share of projects that are large scale energy and transportation projects. This is true in the United States and across most advanced nations around the world. The question then becomes: how did this shift take place and why?

The Current State of Infrastructure Construction

The American infrastructure is aging. Most major infrastructure projects are upgrades to existing systems such as Tennessee’s $15.6 billion sewer project or Nebraska’s $12.5 billion highway maintenance effort. Let’s take a deeper dive to understand how modern infrastructure construction budgets are being allocated by examining the Nebraska transportation transportation update:

$7.1 billion is to be spent on highway maintenance, repaving, and other repairs. This asset preservation budget is primarily eaten up by $6.4 billion allocated to pavement repairs, with the remainder going towards the state’s bridge system.

$3.6 billion is to be spent on expanding roadways by way of building new roads, widening existing roads, and more.

$1.8 billion is slated for modernization of transportation services including rural roadways, bridges, highways, and railway crossing junctions.

This plan may be specific to Nebraska, but it is indicative of a typical mega-construction project in the US today. As you can see by the numbers, the number one concern for many areas is simply upkeeping the existing infrastructure. Modernization and expansion efforts take up less than half of the budget.

Construction Trends in 2019 and Beyond

Here are a few construction trends surrounding energy and transportation which we expect to continue beyond 2019:

Transportation construction projects at or near airports: even modern airports are in need of an upgrade in 2019. Most airports have a logistical problem moving people between terminals, parking lots, and other airport facilities. Chicago’s O’hare airport has undergone a massive construction project to replace their usual shuttles with a more sophisticated light rail system. More airports are likely to follow.

Construction of rapid mass transit: construction on heavy rail, light rail, and other municipal rapid transit is also on the rise. Even mid-sized cities like Pittsburgh have invested heavily into light rail transit to improve their public transportation offerings in recent years.

Massive energy projects including new power plants, refineries, and more: while the exact future of the energy industry is in a state of flux with new technology and legislations coming and going all the time, the demand for new energy solutions and the aging energy infrastructure all but demands massive overhauls.

Why Energy and Transportation?

As mentioned in the previous section, the energy sector has an uncertain future. One reality which is having an immediate impact on US energy construction is global demand for natural gas. The US is uniquely positioned to extract, produce, and provide natural gas to the global market. Additional energy-related products such as plastic refineries and chemical processing plants have all seen a demand increase in recent years.

As for transportation, we can primarily thank a crumbling infrastructure alongside population growth for construction demands. Whether it is maintaining existing roads, constructing light rail systems, or paving new roadways, the demand for transportation remains high in both urban and rural areas.

Mega-Construction Projects are Taking over Mid to Small Sized Contracts

To understand why mega-construction projects are outpacing small and medium sized projects, we must first understand where the infrastructure spending budgets come from. While the federal spending budget is more easily tracked, the vast majority of infrastructure assets are owned and controlled by state and local governments. So why are these smaller governments suddenly funding more multi-billion dollar construction projects rather than many small ones?

There is no singular answer, but a major reason is that approving one project is easier than approving multiple individual construction efforts. These mega-construction projects with budgets in excess of $1 billion are also sold as economy-boosters. Whether they be a new sports stadium, improved transportation at the airport, or improving the current energy solutions, generating buzz around these projects is easier for politicians.

There is every reason to expect this trend to continue and possibly even gain momentum moving forward. Consider California’s high speed rail authority project. The total project was quoted in the $50 billion range, but has since been re-estimated at nearly $100 billion. This publicly funded mega-construction project will someday connect most of the main cities in California including but not limited to San Francisco, San Jose, Los Angeles, and San Diego. California’s project is commensurate with the state’s enormous wealth. Yet it remains a sign of the future of transportation and energy construction in the US.

Going Forward

Unfortunately, the reality is that overall infrastructure spending is still down. Federal, state, and local governments had nearly $10 billion less in spending power for infrastructure projects in 2017 when compared to 2007. The good news is that Americans are growing more amenable to both increased spending on what is an increasingly outdated infrastructure including transportation and new energy solutions.

The true trend is shifting from new construction to maintenance efforts. Despite the talk of modernizing transportation and energy infrastructure, most of those projects will be to retrofit current construction with modern solutions.

New Laws Banning Airbnb “Investor Units” Seek to Lessen the Housing Shortage

Posted on December 11, 2019March 9, 2020 | Leave a comment

Airbnb can be thought of as a clearinghouse for short term lodging. While Airbnb does not own any of the properties it represents, it connects tens of millions of customers every year. The prevalence of Airbnb is disrupting the hotel industry in a similar way that Uber and Lyft disrupted the taxi and car service industry. By crowdsourcing inventory and employees, Airbnb takes a cut of the profits with minimal risk.

It didn’t take long for investors to take notice of the Airbnb business model. Some real estate investors purchased “investor units” to try and profit from Airbnb customers. This set off a long string of events which has led to a recent legal battle between Airbnb and the city of Boston. It is difficult to say whether this lawsuit will be indicative of things to come, but one thing is for certain: the future of Airbnb investor units is in question.

How Airbnb Investor Units Work

Many professional real estate investors lept at the opportunity afforded by Airbnb. While the service was intended to be a home-sharing platform, those who own rental properties saw this as a way to capitalize on the latest hotel and travel trends. It should be stated that Airbnb insists that the majority of their users remain regular people renting out extra rooms in their homes. A 2014 report from the New York State Office found that 94 percent of Airbnb hosts listed 1 or 2 units. The remaining 6 percent listed between 3 and 272.

That 94 percent number can be encouraging, but there are a few caveats. For one, these statistics are outdated and industry trends move definitively towards more investor involvement in the 5 years since the report. Additionally, even if 1 out of every 100 users was a large investment firm renting out units in the 100’s that tips the scales heavily toward real estate investors over regular Joes. In a service that was intended to give power to regular people, real estate investor units are threatening to take over.

Airbnb Investor Units and the Housing Shortage

One of the main problems with investors stepping into the Airbnb rental space is the trickle down effect that has on the affordable housing crisis. Major cities have been dealing with major housing shortages for years. Investor units owned by non-resident owners are essentially taking properties away from residents. Cities like Boston view this as a real estate emergency for several reasons:

Residential and commercial real estate is already scarce. In cities like New York, San Francisco, Boston, and many others, the demand already far outpaces the supply for real estate.

Investor units take away from housing inventory. Investors buying up rental properties only worsens the housing shortage problem. When residents are unable to find local properties in which they can live and work, the slippery slope gets even more slippery.

Property values skyrocket, becoming unaffordable. The American economy has long been dependent on home ownership. Investors taking away real estate to be used for tourist rentals is potentially damaging to the local economy.

The City of Boston vs. Airbnb

This all brings us to Airbnb vs. Boston. In a federal lawsuit, Airbnb filed a grievance against the city of Boston citing severe restrictions on how they do business within the city limits. The lawsuit was recently settled out of court, with both sides agreeing to terms that would create an environment where Airbnb could continue to operate in Boston without investor units. Here are the basic terms of the agreement:

All units rented out through the Airbnb platform and other similar sites must be restricted to owner-occupied spaces or by landlords who reside within the building. Any properties owned by absentee landlords or real estate investors are strictly prohibited from listing rentals on Airbnb. In other words, the city of Boston has banned investor units through platforms like Airbnb.

All Airbnb hosts must register their units with the city of Boston by December 2019 in order to be considered eligible moving forward. Once approved, Airbnb hosts must display registration numbers on all listings in order to provide transparency both to renters and to city officials.

Going Forward

Airbnb’s legal battles with Boston may be the most high profile case so far, but it likely will not be the last. This is one of the reasons why investor units have been popular amongst individual real estate investors but have remained unpopular for large real estate investment firms. The fact remains, investor units for platforms like Airbnb are incredibly risky as of the writing of this article. Nationwide housing shortages and public demand is trending towards similar anti-investor unit laws being passed in other major cities.

Airbnb was always intended to be used by individuals on both sides of the equations. Real estate investors saw an opportunity to make a quick buck, and many did. Looking forward, it is quite possible that the investor unit party will be coming to an end.

Hiring Bounces Back in November

Posted on December 9, 2019March 9, 2020 | Leave a comment

Employers were signaling caution as summer wound down. The ADP private payrolls report for November showed a big drop early last week; and then on Friday, the Census Bureau released its Employment Summary for November and reported that 266,000 jobs were created. That’s about 40% more than the consensus forecast of Wall Street economists.

There were some details to unpack that moderated the gains a little. The great manufacturing number was inflated by 60,000 GM workers returning from strike (which dampened the October report). Construction jobs grew by only 1,000 from October, a surprise given the amount of activity; however, not a surprise given the severe shortage of workers. On the other hand, strong performance in the financial and business services sectors, and especially healthcare, showed there is still some life in the expansion. Some of the highlights:

Unemployment fell back to 3.5%. That’s the lowest for 50 years.
Wage gains were modest at 3.1% year-over-year but were much higher at the lowest end of the wage-earning spectrum.
The broadest measure of unemployment fell to 6.9%.

There are two significant positive conclusions that can be drawn from the November report (bearing in mind that it’s one month’s data of course). First is that consumers are in good standing. Virtually anyone who wants to work is working. Wages are growing at twice the rate of inflation. The consumer drives the economy and the consumer should be happy. The second conclusion is that businesses aren’t as negative as was thought. Because business investment has been declining, concerns about the economy were becoming self-fulfilling. So far there is no data showing that other business investment is ticking upward but the jobs report shows that businesses are still investing in their most expensive asset: people. Moreover, a Vestige survey showed that 60% of business owners plan to add staff in 2020, while only 4% say they are cutting.

In regional construction news, Thomas Construction was awarded a $7.5 million contract to repair the Somerset Lake Dam. Turner Construction was awarded $5 million buildout of Pitt’s BST. PJ Dick was selected for the $55 million Pennley Place East office/retail development in East Liberty. Metis Construction started work on the new $2.2 million JP Morgan Chase branch in McCandless Crossing. Continental Building Co. was issued a permit for $3.2 million buildout for ServiceLink at Pittsburgh International Business Park in Moon Township. Walnut Capital was selected to develop the lot adjacent the Children’s Science Center. Walnut was also chosen to develop the graduate student and faculty market rate housing in Pitt’s lower campus.