Category: National Economy

The Effect of Rent Control Laws on New Housing Development

Posted on January 1, 2020 | Leave a comment

It is widely believed that an affordable housing crisis is currently affecting the United States. Even when homebuyers and renters can find available housing and rental properties, often they find that the prices are too high for them to afford. The high cost of living has led to increased homelessness, especially in big cities. The problem is not epidemic in Pennsylvania, or Pittsburgh specifically, but the political and civic leaders in Western PA have identified affordable housing as a problem to be solved in order to provide economic prosperity for all. Thus far, no one on Grant Street or Harrisburg has proposed putting controls on the housing market but the city has made affordable housing a requirement for developers receiving subsidies for their projects. What is the future of such intervention? Look at California’s new initiatives to get a signal.

In order to address these social issues, Gavin Newsom, the governor of California, signed into law a new statewide rent control law that will take effect January 1st, 2020.

Understanding the New Rent Control Law

With its new rent control law, California is now the third state to pass statewide rent control this year, the other two being New York and Oregon. California’s bill is set to last for 10 years (through 2030), and it caps annual rent increases at 5%, with the cost of inflation included. It also makes it more difficult for landlords to evict tenants. Some experts say that California’s law is one of the strongest in the country at controlling rent increases and protecting tenants.

The California Apartment Association (CAA) believed that the state should instead focus on building new housing for those who need it, however Newsom has decided to do both, and then some. According to Newsom, rent control, tenant protections, and new construction make up his three pronged approach for addressing affordable housing.

Tom Bannon, the CEO of the CAA sent the following comment to CoStar News regarding the next steps to take in this initiative:

“Now that California has adopted the nation’s most sweeping statewide tenant protections, it’s time to fix the root cause of our housing crisis, a chronic lack of supply.”

Newsom said at the bill’s signing:

“We’re living in the wealthiest state in the country and while we’ve made progress in reducing our poverty rate, it’s still the highest in the nation. This is the issue that defines all other issues in this state.”

Impact of Rent Control on Californians

California currently has 17 million residents who rent, and of those, more than half pay more than 30% of their monthly income on rent. There are also millions of Californians who pay more than half of their monthly income on rent. A renter is considered cost-burdened when they spend more than 30% of their monthly income on rent, so this demonstrates how significantly the affordable housing crisis has hit California. It also helps to explain why California has the highest homeless population of any state.

The new law does have some limitations. As mentioned previously, it will be in effect for 10 years. It also does not affect any housing or rental properties that were built in the last 15 years, single family homes, and duplexes where the owner is one of the tenants. Single family homes owned by corporations or REITs would still be impacted by the bill however.

These limitations were put in place to incentivize builders and developers to construct new housing. Even with these limitations, however, Assembly member David Chiu predicts the law will help at least 8 million Californians. Chiu adds that “it’s historic legislation, but folks, our work is not done…In the long run, we have to build millions of new units at all levels of affordability to solve this crisis.” Chiu doubles down on the governor’s statements that construction of new homes is an important part of the future state of California’s housing.

Impact of Rent Control on Real Estate Investments

According to real estate investment analyst, Alexander Goldfarb, the rent control law could loom over real estate investments. While he does begin by saying the three states’ rent control laws “likely won’t have a revenue impact until next cycle, which might as well be next century given that most investors are judged on an almost weekly basis in the current market.” He goes on to say the following:

“But this is something we believe investors should pay more attention [to] as regulatory threats are likely to increase…We believe the rent control debate will continue across the country as renters face rising housing costs. While we think national rent control is unlikely, it will be an increasing campaign talking point, casting a shadow on market rate landlords and making life tougher for currently regulated units.”

Going Forward

The rent control laws passed by California, New York, and Oregon are set to make housing more affordable for millions of Americans. These laws are only the first step, however. In order to further assist the homeless and cost-burdened residents of the country, construction of new housing must be, and is, next on the agenda. The message this sends to investors is one of caution. New housing should be on its way, however, rent control will impact market rates for the next ten years.

How a Recession Would Impact Commercial Real Estate

Posted on December 23, 2019March 9, 2020 | Leave a comment

When it comes to recessions, it is not a matter of if, but a matter of when. The average American tends to view recessions as massive periods of history such as The Great Depression. In reality, recessions are quite frequent with varying degrees of impact on the individual and on different industries. Based on historical precedence, the US is due for another recession in the coming years. What is more difficult to calculate is the severity and duration of the next recession.

As real estate investors, recession can be viewed as both a scary proposition and also as an opportunity. Today, we will examine past recessions to better understand how investors can prepare for the impact of a future recession on commercial real estate.

The Inevitability of the Next US Recession

While nothing is inevitable beyond death and taxes, a recession is pretty damn close. Beyond the conceptual inevitability of economic ebbs and flows, recent recession indicators have shown that the US is due in coming years. Examples include:

Inverted yield curve: In a healthy economy, a long term, 10-year yield is expected to outperform a short term, 3-month treasury rate. In 2019, the 10-year yield dipped below the 3-month yield for the first time in 12 years. The last time this occurred, the 2008 financial crisis was looming around the corner.

Unemployment rates belie the reality: One of the strongest pillars of the current US economy is historically low unemployment rates. This is a great sign of stability of the nation’s economy. However, a worrying trend is that 2019 saw huge cuts to employee hours. This is often the first step towards higher unemployment rates, as employers tend to cut hours first, before ultimately having to downsize.

New York Federal Reserve recession probability model: The New York Federal Reserve puts out one of the most comprehensive and respected predictive models when it comes to future recessions. According to this model, the likelihood of a recession has approached 40 percent for the first time since 2009. Previous predictions have been accurate with a nearly perfect track record.

2008 Great Recession’s Impact on Commercial Real Estate

The residential real estate market gets most of the attention when it comes to the Great Recession of 2008-2009, and for good reason. Foreclosures and purchasing habits took a massive hit during the following years. However, the commercial real estate industry was hit nearly as hard. In fact, the average price of office space has been slower to recover than average rental rates. While office prices in 2017 had recovered to 30 percent above their 2007 highs, rental rates were performing at 60 percent above their 2007 highs.

Another grim aspect of the 2008 financial crisis was the impact it had on vacancy rates within commercial real estate. 2010 saw peak vacancy rates at 17.4 percent for office space, 10.1 percent for industrial space, and 10.8 percent for retail space. It is important to note that the impact on CRE markets seems to have been a bit more delayed than within the residential market, potentially accounting for some of the slower recovery noted above.

From the years 2007 to 2009, total investments in real estate went from $460 billion to $70 billion. This is one straightforward trend which will likely translate for commercial investment in any coming recessions. The impact may not be so severe, but total investments will almost certainly slow when a future recession hits.

How CRE Investors Can Prepare for a Recession

With all of this in mind, how exactly can commercial real estate investors prepare for this inevitability? While predicting the future is obviously a fool’s errand, there are two primary strategies that CRE investors can use to stay ahead of the curve.

Liquidate assets now to turn investments into cash

The signs of recession are certainly there. Some investors who have seen solid returns on their current CRE investments might want to take a turn-to-cash approach. This essentially takes your skin out of the game until the economy is back on the rise. The fringe benefit of turning current investments into cash is that savvy CRE investors can once again get back into the real estate market when property values hit their lowest points.

Retain real estate assets and weather the storm

Recessions are scary, but as all things, they too will pass in time. Most long-term investors understand that half the battle is staying in the game. All of the figures we have quoted earlier show horrible downturns and also eventual recoveries. In fact, one of the “bad” statistics for CRE was a mere 30% increase in value over a 10 year period.

Going Forward

Recessions are as American as apple pie. They are not to be feared, but they certainly call for some preparation and smart decision making. Commercial real estate is every bit as susceptible to an economy in recession as residential real estate or any other forms of investment. Smart investors will view coming economic downturns as just a part of the greater picture. Just as the CRE market recovered from 2008, so too will it recover from the next recession.

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.

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.

Suburban Office Growth

Posted on November 29, 2019March 9, 2020 | Leave a comment

That morning commute from the suburbs into downtown might be getting a little easier in the coming years. Suburban office growth has taken off for investors and for businesses in recent years, and this trend appears to be strengthening over time. Yet some more conservative estimates warn that short term, overbuilding may lead to greater supply than current market demand. As is the case with many things, the truth likely resides somewhere in the middle.

Projected Value of Suburban Commercial Real Estate

Urban commercial real estate has become increasingly volatile in recent years. High cap rates and pricing in traditionally urban areas has driven many investors to the suburbs. Consider America’s biggest urban market: New York, which as recently experienced a 37 percent decrease in urban sales volume. This may be influenced by a lack of available real estate for sale, but a significant downturn also indicates a real lack of interest in high priced urban commercial real estate.

Instead, the projected value of the suburban commercial real estate market looks positive. This is particularly true for high value markets such as New York and San Francisco, where foreign buyers are effectively pricing out the competition in the urban space. The majority of Americans do live in suburban areas, which offers yet another unique advantage to employers looking to find their next commercial real estate rental or purchase.

A key factor in the value of suburban markets lies in their location and convenience. Commercial real estate within walking distance of retail amenities is projected to hold a higher value that suburban real estate that is more isolated. These mini-pockets of urban lifestyles allow for businesses to pay suburban prices with the convenience of an urban location.

The bottom line is that suburban commercial real estate is less expensive, has potentially high upside, and is becoming increasingly appealing to investors and businesses alike. The key is finding the suburban location and amenities which can sustain a commercial investment long term.

Suburban Offices vs. CBD

To a certain extent, urban sprawl has blurred the lines between urban and suburban real estate. Yet there remains a premium when it comes to traditional downtown work spaces that many companies and real estate investors are no longer willing to pay. The differences between suburban and central business district workspaces may be diminishing over time, but here are a few key factors which keep the distinction relevant:

Access to transportation: public transportation access is a huge driver of commercial property desirability and therefore it is a huge driver of commercial property value. While a massive amount of Americans enjoy access to public transportation including subway systems and city buses, nearly half have no access to public transportation. The value add of CBD is that properties are all but guaranteed the convenience of a nearby transportation option.

Walkability: along these lines, being within walking distance of retail amenities, restaurants, and other conveniences drives value. CBD again comes out ahead here, but modern suburban planning is catching up quickly.

Price points: no matter how much we talk about how trendy and desirable suburban office space has become, central business district real estate pricing remains nearly double the cost of their suburban counterparts per square foot. This difference simply cannot be overlooked. The biggest difference between these two real estate options is, and will likely remain, the price.

The Advantages and Benefits of Suburban Office Growth

As referenced above, the largest benefit of suburban office growth is undoubtedly the cost savings. Yet there are so many advantages that come with expanding beyond city limits. Here are just a few:

Commuting is easier for employees. Besides the issue of public transportation, suburban offices will reduce commute time for the vast majority of employees. Whether that comes via going against the flow of rush hour traffic or avoiding long commutes altogether, this is a huge plus.
Parking is cheaper, easier, and more accessible. Along those lines, suburbia comes with more space, and with more space comes more parking options. Employees will likely no longer have to shell out an hour’s pay just to find a spot to park.
Curb appeal is improved and often more prominent. Unless you are looking for a specific urban vibe to your workspace, properties in the suburbs generally afford greater curb appeal to visitors. Signage is more prominent and the options for landscaping and other exterior features are far greater.
Suburban offices tend to have a campus feel. The hustle and bustle of downtown life is appealing for many, but can certainly wear on already frayed nerves. Suburban office space offers a more serene, campus-like atmosphere which appeals to workers and employers alike.

Going Forward

The market is strong for suburban office growth. With lower barrier to entry and an increasing public interest in moving away from central business districts, the future of commercial real estate seems to be turning suburban. The key to smart investing is picking locations which are convenient with high quality amenities. If employers can offer the convenience of a downtown work environment without the hassle, all for a lower price? What is there to lose?

Completing the WeWork Takeover

Posted on November 26, 2019March 9, 2020 | Leave a comment

The collapse of WeWork has made headlines around the country, and outside of it. Everyone has heard of what happened, and now it is time to look to the future of the We Company subsidiary. With less than a month before the company was set to run out of money, a WeWork takeover seemed inevitable. There were two options on the board to avoid going out of business. The first offer was a bailout from JP Morgan Chase and several of WeWork’s other lenders, while the second offer was to be taken over by SoftBank.

WeWork Takeover Options

WeWork had connections to both JP Morgan and SoftBank. SoftBank was a big investor in The We Company, while JP Morgan Chase was former CEO Adam Neumann’s personal bank. JP Morgan had underwritten some of WeWork’s loans, but SoftBank’s offer included paying off some of Neumann’s debts.

Choosing one of these deals was necessary to avoid going out of business. If WeWork was to go bankrupt, it would have a significant impact on the commercial real estate industry. CNBC broke down why it would be bad for real estate if WeWork was to go bankrupt. Since WeWork deals in long-term leases, any landlord that has rented space out to them would suffer. The number of landlords is not small seeing as how the company leases tens of millions of square feet of office space across New York, San Francisco, and London.

WeWork Takeover Moving Forward

With bankruptcy off the table, WeWork decided to accept SoftBank’s offer. With this, the WeWork takeover was finally underway. While he did maintain some voting power, Neumann was removed as CEO. SoftBank now owns 80% of WeWork, and plans on advising the new CEOs moving forward.

SoftBank already controls two seats on The We Company’s board, and has tapped Bolivian-born executive and billionaire Marcelo Claure to lead 20 of its staffers in managing WeWork’s turnaround, the WSJ reports. Claure will advise co-CEOs Artie Minson and Sebastian Gunningham in deciding how to best cut costs to shorten the company’s path to profitability.

Now that the WeWork takeover is being implemented, does this save the company? WeWork had multiple deals that were still being negotiated that have now been halted. There are also business relationships that have presumably ended due to a new level of caution. A frustrated landlord, who wished to remain anonymous, had been in talks with WeWork, and commented on the current situation:

Now, the latest thing they told us after the SoftBank bailout was announced, [was] ‘we are still on hold, and we could be back to you in two days, two weeks — or never.

What’s Next

To some of WeWork’s business partners, they see its collapse as a new opportunity. WeWork served as a middleman to connect them with tenants, but with those relationships already formed, they can cut WeWork out of the process and deal directly with the businesses. This idea was mirrored by Steven Durels, the Director of Leasing for SL Green. He looked at one of his company’s properties, that WeWork rents out and leases to Amazon, and explained that a lease would be made directly with Amazon in a scenario where WeWork was no longer a factor.

So, if there were no WeWork, Amazon would simply be our tenant, they step into that lease next day, there would be interruption of services and no break in our income.

The coworking industry has also been thriving outside of WeWork. The Real Estate Board of New York reported on the flexible office space available in the region, and WeWork makes up 28% of it. This is a big enough percentage to cause problems by going out of business, but small enough where there are alternative options post-takeover.

Vornado Realty Trust, for example, plans to start offering flexible office space for tenants in the coming future. The president of Vornado, Michael Franco, commented on WeWork, and the Trust’s upcoming plans.

While we appreciate some of the creativity that WeWork brought to the office business, we chose to lease our space to end users with better credit over the past few years…We will brand this space under the Vornado name and, importantly, retain the bulk of the upside.

Going Forward

After its brush with bankruptcy, WeWork is going to have some difficulty getting back on its feet. It had a lot of relationships and partnerships with landlords around the world, but those landlords have either begun to doubt WeWork, or are enacting backup plans so that they do not have to be reliant on it. This puts WeWork in the position of having to prove itself all over again, and regain the trust of those it did business with.

SoftBank’s takeover and cash infusions may have saved WeWork for now, but there’s no telling whether its new leadership will be able to right the ship moving forward.

The Impact of the 2020 Election on Housing

Posted on November 25, 2019March 9, 2020 | Leave a comment

With 2020 approaching soon, so too does the 2020 presidential election. The administration in charge of the Executive Branch has a significant impact on housing development and construction. The Republican nominee for president is clear, and if Donald Trump wins reelection, then the current system would stay in place. There are many Democrats who are in the running to challenge Trump, and with them come numerous plans to change the housing market.

Housing Issues to Be Addressed in the 2020 Election

Before focusing on what goals individual candidates want to achieve, it is important to look at the current issues that they want to address. CNN analyzed a report by Harvard’s Joint Center for Housing Studies, and came to several conclusions about what currently ails the housing market:

Despite gains in 2016 and 2017, construction slowed in 2018.
In previous years, the number of renters declined due to increases in homebuyers, but going forward there will be approximately 400,000 new renters.
The percentage of people who spend more than 30% of their income on housing has decreased due to homeowners receiving lower mortgage interest rates. On the other hand, almost half of all renters are paying more than 30% of their income on housing.
Millennials are starting families, but the housing market isn’t providing homes that they can afford with their income/student debt. Construction of homes under 1800 square feet made up 22% of new housing (down by 10 percentage points from less than 2 decades ago).
Homelessness did decrease between 2008 and 2018 thanks to policies that ignored past substance abuse issues or job training. The rate started to go up again in 2018, especially on the West Coast.

While there did seem to be improvement post-recession, prices are beginning to go up, and this makes it difficult for people to afford to buy homes. Rent is also high, so finding affordable apartments is also difficult. Some local governments have attempted to provide rent controlled housing, but Chris Herbert, Managing Director of Harvard’s Joint Center for Housing Studies, disagrees with this approach.

“The fact that we’re turning to rent control is a sign that we’ve failed at other direct ways of addressing these issues,” Herbert said. “We’re not providing enough direct subsidy to people who need it.”

If rent control is not a viable solution, then how should homelessness and affordable housing be addressed? This is where the presidential candidates come in. Many solutions have been put forward, including: tax credits, federal programs, regulatory changes, and legal protections.

Housing Solutions by 2020 Candidates

A Renters Tax Credit has been endorsed by Cory Booker, Kamala Harris, and Julian Castro. It would give taxpayers a credit based on the difference between how much they pay in rent, and what 30% of their income is. Curbed explains that “if you paid $15,000 in rent in a year and 30 percent of your income was $10,000, you’d get $5,000 from the federal government in the form of a tax credit.”

Cory Booker has also reintroduced the idea of Baby Bonds. Under this plan, “each new baby born in the U.S. would be given a $1,000 bond, with up to $2,000 in annual additions depending on the income of the child’s family. The money would be invested in a low-risk fund managed by the Department of Treasury, and the child could have access to the money at age 18. This seed money could later be used for a downpayment on a house.”

Beto O’Rourke has proposed a policy that allows prospective homeowners to deposit money into a savings account, and have that money doubled by the U.S Postal Service. There are limitations to it, but if a person qualifies, they can (for example) deposit $2,000 into the account, and receive an additional $4,000 for a total of $6,000. This would be saved over the course of a few years, and used for downpayments on a home.

How the 2020 Election Could Impact Federal Programs

Bernie Sanders wants to guarantee housing for all Americans. “Sanders would invest $70 billion to rehabilitate the nation’s existing public housing stock. build 2 million mixed-income units, and expand the National Housing Trust Fund to help construct, rehabilitate, and preserve 7.4 million housing units for seniors and those with low-income or disabilities.”

Elizabeth Warren wants to build 3.2 million new housing units with 500 billion in federal housing funds. She believes that this will lead to rent decreasing for low and middle class families. Most of the money would fund the Housing Trust Fund, but other programs would be funded as well.

Julian Castro and Beto O’Rourke agree with approach. O’Rourke, Castro, and Amy Klobuchar also want to expand the Low Income Housing Tax Credit Program, with the latter two wanting to expand Housing Choice Vouchers as well. In addition, Klobuchar intends to expand the role of Fannie Mae and Freddie Mac in providing mortgages to potential homeowners.

Booker, O’Rourke and Castro want to fund HUD specifically to target the issue of homelessness. In addition, O’Rourke wants to triple the funding of Projects for Assistance in Transition from Homelessness to 194 million, as well as provide additional counseling options for children, veterans, and members of the LGBT community who have experienced homelessness.

Sanders, Warren, and Booker all have plans for combatting housing discrimination and promoting fair housing and strengthening legal protections. O’Rourke would reinstate the Affirmatively Further Fair Housing rule, and update credit score parameters as to benefit communities that are typically discriminated against in this way. Harris and Klobuchar plan to change credit requirements as well.

All three, together with Booker, plan to ban discrimination based on people who use housing vouchers to pay for their rent. Harris also wants to add 100 billion to a HUD grant program to assist with down payments and closing costs. Warren would provide grants for down payments, as well as reform the Community Reinvestment Act that requires banks to invest in communities they have branches in. Something Klobuchar agrees with.

Many candidates also have platforms to reform zoning laws. The federal government cannot dictate local zoning laws, however, so all the candidates can do is try to incentivize local governments through various grants and funding.

Going Forward

There are many details to these policies, and many candidates who have put thought into the housing issues currently plaguing the country. The visions they have for the country will certainly impact the housing market if one of them wins the White House in 2020.

Housingwire provides links to every candidate’s housing plan who has released one.

The Viability of CoWorking Post-WeWork’s Decline

Posted on November 15, 2019April 17, 2020 | Leave a comment

The modern work environment has evolved and will continue to evolve in the coming years. About four (4) million Americans work from home. The number of small businesses who eschew traditional workspaces is on the rise. As these trends accelerate, the world of commercial real estate is adapting. Enter organizations like WeWork. Started in 2010, WeWork gained significant traction in the CoWorking market within a short period of time. Their business model provides shared office spaces for individuals and small businesses which are highly flexible and on demand.

WeWork’s meteoric rise has now been followed by significant financial difficulties. After proving that the concept of coworking is economically viable, they have also proven that hyper-aggressive real estate investment and predatory pricing may be short term realities. WeWork has had a massive impact on commercial real estate and those who use coworking office space. The question now becomes, how will this impact translate once the dust settles?

How WeWork Operates

As real estate professionals might imagine, the overhead costs associated with a giant coworking organization are staggering. It is estimated that the company currently holds lease obligations of $17.9 billion. That up-front investment presents huge risks for the company with the potential benefits being far greater. An initial IPO offering slated for mid-2019 was canceled amidst a myriad of concerns included inflated company valuation.

WeWork makes money the same way many commercial real estate investors make money: through office space rentals. The primary difference being that most clients who utilize WeWork office spaces are independent contractors, remote workers, or small businesses. These smaller scale, more individualized contracts come with a premium price, but with less guarantee to WeWork’s bottom line.

With all of this in mind, recent reports suggest that WeWork will put a freeze on additional real estate investments and focus on fundraising and fully utilizing their current assets. This move comes on the heels of major financial losses being reported in the early part of 2019. WeWork was valuated at $50 billion in early 2019. These new reports have lowered that valuation to approximately $8 billion.

Typical CoWorking Arrangements

Let’s examine a typical coworking arrangement to understand how WeWork rents spaces to clients. While no two agreements are exactly the same, here are some highlights of a common coworking arrangement:

Basic coworking terms allow access to office space. At a minimum, coworking promises a desk, wifi, and access to the community spaces. One of the key benefits of WeWork is that their large network of commercial real estate means that members will likely be able to find a WeWork office space in a major city while traveling.

Meeting rooms are available for rent or in some cases, just by appointment. Beyond just desks and workspaces, WeWork and other shared work environments will typically have board rooms available for an additional rental fee per use or on a long term basis.

Renting by the suite or by the floor. It is important to note that WeWork is not only for independent contractors and very small companies. In fact, around 40 percent of WeWork members are affiliated with companies with 500 plus employees. Included amongst these clients are Facebook, Microsoft, UBC, and IBM. These organizations have the option to rent full suites, full floors, or even to build out their own custom workspaces.

Flexibility of access. WeWork offers three primary methods of payments: unlimited access (long term agreement), membership access (pay-as-you-go), and event space (single event only). This focus on flexibility puts the power in the clients’ court.

How WeWork Changed the CoWorking Market

Recent estimates put WeWork as holding a ~69 percent share of all coworking leases in Q3 2019. This number is bolstered by the wide reach of WeWork, who currently holds the number one position in 9 of the 10 largest markets for flexible space growth. The three largest markets for WeWork are also the three largest markets for coworking overall: New York, Los Angeles, and Boston.

So what does the rise of WeWork mean to the coworking real estate market? There are three takeaways which may impact the coworking market:

Coworking, as a concept, has grown exponentially and can be reasonably expected to continue to move in that direction.
WeWork’s business model is adaptable and adoptable for other organizations to emulate.
The collapse of WeWork is a cautionary tale within the coworking industry.

As WeWork continues to lose control of the market, real estate investors are eager to see just how much control they will retain and what competitors will rise to the occasion.

Going Forward

Coworking and shared workspaces are likely here to stay. WeWork has shown both the opportunities and the risks of investing in shared workspaces. It is also likely that the worlds of traditional commercial real estate rental and modern coworking arrangements will blend further and further until the line becomes hopelessly blurred. Coworking is still a burgeoning industry. We are waiting on a company or companies to find the correct formula to take advantage of a demand for flexible workspaces that will remain viable long term.

In the broadest possible terms, the outlook for commercial real estate remains bright. Even individuals with the power to work from home see the value in dedicated workspaces. And as independent contractors and small companies shift towards telecommuting, the real estate game does not need to be left in the dust.

High Mortgage Rates are Decreasing Mortgage Applications

Posted on November 7, 2019March 9, 2020 | Leave a comment

For the majority of Americans, buying a home requires a mortgage loan. There are many factors that impact a person’s ability to purchase a home, but a mortgage will always be one of the most significant factors in determining whether a house is affordable or not. Given the impact they have on your monthly payments, mortgage rates are also relevant.

Mortgage Rates

When mortgage rates are higher, less mortgage applications tend to be filed. What has been happening as of late, is a fluctuation of mortgage rates that has made home purchases difficult to predict. The Mortgage Bankers Association keeps track of changing mortgage rates, and publishes the numbers. In the last month, the country has seen mortgage rates plunge, and then recover, and then go back down again. The market is volatile right now because of the US’s relationship with China, and home buyers are making sure to only act when rates are low.

Refinancing of homes is also impacted by mortgage rates. Generally homeowners will refinance their mortgages for the purposes of lowering their monthly payments. Due to this, applications for refinancing loans are extremely sensitive to changing mortgage rates. Mike Fratantoni, the Senior Vice President and Chief Economist of the Mortgage Bankers Association, commented on interest rates:

Interest rates continue to be volatile, with Brexit votes and ongoing trade negotiations swinging rates higher or lower on any given day…Borrowers with larger loans are the most sensitive to rate changes, and with rates climbing higher last week, the average size of a refinance loan application fell to its lowest level this year.

Home Sales Projections

Mortgage applications to purchase a home have certainly been falling compared to weeks prior, but the good news is that the numbers are still better than a year prior. This is good news for the market. Additionally, there is hope that the market could be improving in the near future. Joel Kan, the Mortgage Bankers Associations’ Associate Vice President of Economic and Industry Forecasting, had his own comments on the state of mortgage rates.

U.S. Treasury yields trended downward over the course of last week, as the Federal Reserve meeting highlighted the elevated uncertainty in the economic outlook. However, despite falling yields, mortgage rates ticked up again and have risen 20 basis points over the past two weeks…The increase in rates led to fewer refinances, and activity has now dropped 17% over the last two weeks…The recent data on increased existing-home sales and new residential construction points to the underlying strength in the purchase market this fall.

Kan believes that buyer demand was stronger than expected. If this trend continues, prices on homes will be higher, and the supply of homes for sale will lead to a stronger housing market. That would, of course, be the preferred outcome, however sales are not increasing as much as they should be given the lower mortgage rates as compared to those from one year ago. Home sales should be increasing, but due to home prices being too high, any savings made through lower mortgage rates is being negated.

The National Association of Realtors reported the increase in September’s home prices, and experts point to a lack of supply for the unexpected falls in sales. Diana Olick, a real estate correspondent with CNBC explained:

The problem is low supply combined with high prices; prices jumped nearly 6% annually, according to the National Association of Realtors, the biggest gain since January 2018. Prices are being juiced in part by lower mortgage rates. Lower rates help with affordability, but they also give buyers more purchasing power, which in turn causes prices to rise.

Matthew Speakman, a Chief Economist at Zillow, agreed with Diana, and doubled down:

Much of the sales boost this summer can be chalked up to interest rates dragging along the bottom this year, which enticed more would-be buyers into the market…Now, sales are coming back to earth, largely because of an ongoing shortage of inventory. There simply are not enough lower-priced homes to keep the market humming. While builders are putting up more homes, their pace is not keeping up with what buyers demand.

Going Forward

Mortgage rates have fluctuated quite a bit, and these rates have negatively impacted mortgage applications, refinancing, and home sales. The fluctuation can be attributed to many things, but the fact remains that at the moment, the housing market has seen dips in sales. When the mortgage rates are high, potential homebuyers don’t buy, and homeowners don’t refinance. When mortgage rates are low, demand ends up driving prices up, which keeps people from purchasing. The foreign influences on mortgage rates are also a factor in the fluctuation.

Going forward, the market needs to see an increase in construction, and the best way for this to take place is through competition. With new players breaking in to the industry, the burden of additional home development won’t be placed on the builders that are currently holding back on the number of production projects they take on.

Obama Era Executive Order to Raise Minimum Wage for Federal Contractors

Posted on November 6, 2019March 9, 2020 | Leave a comment

The US Department of Labor’s Wage and Hour Division published a notice to announce that minimum wage for federal contractors will increase to $10.80 per hour from $10.60. A change that has become a regular occurrence thanks to the Obama Administration.

This regular minimum wage increase is the result of the Obama Administration’s Department of Labor’s final rule which implements Executive Order 13658. The order determined that a minimum wage would be set for contractors to pay their workers for work completed for federal contracts. This minimum wage started at $10.10, but has had consistent annual increases.

Explaining the Minimum Wage Increase

The executive order states:

This order seeks to increase efficiency and cost savings in the work performed by parties who contract with the Federal Government by increasing to $10.10 the hourly minimum wage paid by those contractors. Raising the pay of low-wage workers increases their morale and the productivity and quality of their work, lowers turnover and its accompanying costs, and reduces supervisory costs. These savings and quality improvements will lead to improved economy and efficiency in Government procurement.

As stated in the executive order, the original minimum wage standard was $10.10, and now (over the course of 5 years), it has grown to $10.80. Assuming that the executive order is not undone, there will be more minimum wage increases in the future. Is this what’s best for the construction industry though? Some people don’t think so.

Opposition to the Executive Order

Associated Builders and Contractors, Inc. submitted a letter to the administration with concerns over the executive order. They claimed that it would cause confusion amongst government contractors, and lead to additional burdens thanks to unnecessary regulation.

The regulation itself was seen as unnecessary due to the majority of government contractors already surpassing the $10.10 threshold in paying their workers. There were also concerns about setting a precedent where a government can come into an industry and tell them what to pay workers. Years later, the opposition to the executive order still exists, however, the order has not been rescinded.

Explaining the Execution of the Minimum Wage Increase

The final rule/fact sheet attempts to address the concerns of contractors by breaking down the obligations that contracting agencies, contractors, and even the Department of Justice have. Not only does this attempt to address those concerns, but it also explains how the order is to be enforced. The final rule explains that the process itself “should be familiar to most government contractors and will protect the right of workers to receive the new $10.10 minimum wage. The Department of Labor generally has adopted existing mechanisms for enforcing long-established prevailing wage laws to enforce the provisions of the Executive Order”. It even confirms that around 200,000 workers will benefit from the order.

The obligations for contracting agencies, contractors, and the Department of Labor are broken down as follows:

Contracting agencies are responsible for ensuring that the contract clause implementing the Executive Order minimum wage requirement is included in any new contracts or solicitations for contracts covered by the Executive Order. Contracting agencies are also responsible for withholding funds when a contractor or subcontractor fails to abide by the terms of the applicable contract clause, such as by failing to pay the required Executive Order minimum wage, and for forwarding any complaints alleging a contractor’s non-compliance with Executive Order 13658 to the Wage and Hour Division.

Contractors and subcontractors must include the Executive Order contract clause in any covered lower-tiered subcontracts. They also must notify all workers performing on or in connection with a covered contract of the applicable minimum wage rate under the Executive Order. Contractors and subcontractors must pay covered workers the Executive Order minimum wage for all hours worked on or in connection with covered contracts, and must comply with pay frequency and recordkeeping obligations. Finally, the final rule prohibits the taking of kickbacks from wages paid to workers on covered contracts as well as retaliation against any worker for exercising his or her rights under the Executive Order or the implementing regulations.

The Secretary of Labor is required to determine the Executive Order minimum wage rate yearly beginning January 1, 2016, and publish this wage rate at least 90 days before the wage is to take effect. The final rule outlines the methods that the Department will utilize to notify the public of the Executive Order minimum wage,

Finally, the order explains how complaints against it can be taken up. It outlines a process for filing these complaints with the Wage and Hour Division. It also allows for investigations into instances of believed violations or abuses of the executive order, as well as resolutions/consequences for these violations. Lastly, the order provides an administrative process for resolving legal disputes over the order’s enforcement.

Going Forward

Despite opposition by contractors and contracting organizations, the executive order was submitted and enforced. This bill focuses on workers, and paying them a wage that the government believes to be fair. The final rule also states that it accomplishes this in a way that has long-been accepted, and in a way that multiple industries are familiar with. This should not only limit confusion, but prevent legal challenge due to the precedent of such laws being deemed as constitutional and acceptable.

There may still be opposition from contractors, however, the order is still in effect, and for now it looks like it will stay in effect moving forward.