Category: Real estate news

The Devaluation of Traditional Real Estate Capitals

Posted on January 9, 2020March 9, 2020 | Leave a comment

In decades past, the most valuable real estate in the United States was not hard to identify. Commercial real estate in traditional real estate capitals such as Washington, D.C., New York City, San Francisco and other powerhouse markets dominated the landscape. In many ways, this remains true. However, savvy investors are frequently turning to less oversaturated, less expensive markets to make their mark. This has led to a vicious cycle where many traditional real estate capitals have depreciated relative to the overall market.

To better understand why major markets have become less valuable in recent years, today we will discuss stronger markets in non-traditional areas including the Sun Belt and why the largest real estate markets in the U.S. have suffered.

Suburban Sprawl and the Rise of the Sun Belt

The Sun Belt can be considered any land in the southern third of the United States. It should be noted that the Sun Belt absolutely contains powerhouse real estate markets including Los Angeles, Atlanta, and San Francisco. Yet the largest commercial real estate growth is expected to continue in less traditional markets such as Nashville, Austin, Raleigh, Phoenix, and many others. There are a multitude of reasons for these trends, including:

Domestic migration favors Sun Belt states. Texas, Florida, North Carolina, and Arizona are the top states for domestic migration over the past ten years. New York, California (a SunBelt state which is an exception to the rule), Illinois, New Jersey, and Ohio are at the bottom of that list.
Construction costs and living expenses are lower in many Sun Belt and other non-traditional markets. There is a reason why the largest companies on earth like Apple are choosing to build headquarters in Austin, TX instead of Silicon Valley. Costs are lower and employees are able to live more comfortably.
Many Sun Belt states (again excluding California) have less business and real estate regulation. Fewer regulations make for easier, cheaper CRE construction projects in addition to greater flexibility for businesses.

The Largest Real Estate Markets in the U.S. Have Cooled Off

San Francisco is Experiencing High Office Vacancies

Perhaps the most notorious real estate market in the U.S., if not the world, San Francisco’s real estate booms and busts are well documented. The outrageous cost of living is driven by insanely high residential real estate values which make it virtually impossible for long time citizens to continue to rent or to purchase new homes. The commercial real estate industry is experiencing many of the same issues. Recent reports suggest that high labor costs, poor living conditions, and very high lease rates have led companies to steer clear of office space in the Bay Area.

This has extended to store front businesses as well, where less foot traffic and higher rents mean less economically viability. Unfortunately, there does not seem to be an easy fix on the horizon. All markets have their tipping point, and San Francisco appears to be on the precipice. What remains to be seen is how the city will bounce back once the real estate market normalizes.

Traditional Retail Locations in NYC are Struggling

New York is a tough market to pin down. The largest U.S. city could be considered both the healthiest or the most tumultuous real estate market in the country depending on your point of view. And NYC has always been prepared for the recent industry shift towards infrastructure and new construction mega-projects. In this way, the already densely packed city has continued to grow its already robust commercial real estate footprint.

However, the retail sector is struggling in a local economy where retail real estate is incredibly expensive and retail business models are needing to adapt to survive. Where some New York flagships survive on tourist money alone, many are closing their doors in the wake of new economic realities. This has led to many CRE properties losing their value in recent years.

Boston’s Struggling Multifamily Real Estate

Although younger renters are willing to sacrifice other amenities for ideal locations, luxury multifamily complexes in high end Boston markets are struggling. With price points too high for many young adults and many businesses opting for non-centralized locations, downtown apartment living is becoming difficult for real estate investors. The silver lining of these trends in many expensive cities is that multifamily real estate in suburban areas is increasing in popularity and value. Savvy investors may want to look to different locations to fight against the devaluation of downtown apartment living.

Going Forward

Traditional real estate capitals continue to hold a high value when it comes to commercial and noncommercial real estate. That being said, their stranglehold on the most desirable properties has lessened in recent years, giving way for less centralized office buildings and CRE multifamily units. These trends will likely continue with the caveat that major markets like New York and San Francisco will remain extremely desirable to a certain population of businesses and individuals who value urban living.

Commercial Real Estate Lending Standards

Posted on January 8, 2020March 9, 2020 | Leave a comment

According to the Office of the Comptroller of the Currency of the United States: “Commercial real estate (CRE) loans include loans secured by liens on condominiums, leaseholds, cooperatives, forest tracts, land sales contracts, construction project loans, and—in the states that consider them real property—oil and mineral rights. National banks may make, arrange, purchase, or sell loans or extensions of credit secured by liens on interests in real estate.” All of this essentially to say that commercial real estate loans are frequently borrowed against other commercial real estate assets.

When it comes to commercial real estate lending standards, there are federal and state-wide regulations of which any active CRE investor should be aware. Today we will review some of the high level lending standards for real estate investments in the U.S.

Establishing a CRE Loan Portfolio

One of the most important aspects of securing a real estate loan for a commercial property or any other real estate purchase is building a loan portfolio. The onus to create these reports is on the insured depository institution, AKA any bank which is insured with the regulations of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The federal government has strict guidelines which regulate what must be included in these reports, including but not limited to:

Identifying and declaring the terms and conditions of the loan.
Scouting locations in terms of properties and geographical areas for which the loan may be applied.
Establishing a policy of loan portfolio diversification including parameters for investments by real estate type (commercial vs. real estate, etc.) geographic location, and more.
Identify any lending staff including personal qualifications.
Complete a risk assessment to determine any undue concentrations of risk.
Identify zoning requirements.
Identify the underwriting standards which will be used for the loans.
Establish loan-to-value limits (more on this below).
Identify the loan administration protocols which will be followed throughout the life of the loan including disbursement, documentation, collection, collateral inspection, and loan review.

There are more loan portfolio requirements than we will list here, but this is a reasonable sample to give prospective investors an idea of what the federal government expects when clearing future commercial real estate loans.

FDIC Real Estate Lending Standards

The Federal Deposit Insurance Corporation, more often referred to as the FDIC, is an independent federal agency responsible for insuring against bank failures. The vast majority of major financial institutions in the United States are FDIC insured or FDIC supervised. This is important for commercial real estate lending standards, as FDIC regulations come into play for any such organization. With this in mind, here are some high level regulatory standards set forth by the FDIC:

“Each FDIC-supervised institution shall adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens on or interests in real estate, or that are made for the purpose of financing permanent improvements to real estate.”
Real estate loans must be considered within the bounds of standard banking practices.
All written loan policies must undergo an annual review and approval process by an FDIC-supervised board of directors.
Commercial real estate lending procedures must include detailed underwriting protocols, loan-to-value limits, and portfolio diversification demands.
All loans must be monitored by an FDIC supervised institution to ensure that the current real estate landscape continues to support the terms of the loan.
All lending policies for real estate should adhere to the “Interagency Guidelines for Real Estate Lending Policies established by the Federal bank and thrift supervisory agencies.”

Supervisory Loan-to-Value Limits

While there are certainly more details to cover when it comes to CRE lending standards, the last key concept we will hit upon today is loan-to-value limits. Loan-to-value limits or loan-to-value ratios are essentially the calculation reached by dividing the loan amount by the total market value of the investment including any additional collateral being used to secure the loan. It is vital to understand this metric not only to secure loans and adhere to lending standards, but also to gauge how viable a loan and/or real estate investment will be.

Different real estate categories carry different loan-to-value limit requirements.

Raw land investments: 65 percent
Land development investments: 75 percent
New construction: situationally dependent
Commercial, multifamily, and other non-residential property investments: 80 percent
One to four family residential investments: 85 percent
Improved property investments : 85

Transactions Excluded from Loan-to-Value Limit Evaluations

It is important to note that many commercial real estate loans are exempt from loan-to-value evaluations. Examples of these types of loans include those which have been insured or guaranteed by the federal government, those which are backed by the full faith and credit of a state government, or those which are to be “sold promptly after origination, without recourse, to a financially responsible third party.” It is vital to understand precisely how transaction exemptions work before assuming that your loan will not undergo the scrutiny of a loan-to-value limit evaluation.

Going Forward

In most cases, it is not absolutely necessary for commercial real estate investors to understand the in’s and out’s of CRE lending standards. Yet knowledge of how the federal regulations work and what questions will be asked can allow investors and other CRE professionals to better prepare for loan applications. It is also important to understand that even federal regulations are not set in stone. There is no concrete reason to believe that these regulations will be significantly altered in the near future, but the possibility of change is always present.

Medical Office Buildings Remain a Safe Bet

Posted on January 7, 2020March 9, 2020 | Leave a comment

Commercial real estate, like many investment-based industries, can experience major flux over time. Yet certain CRE investments are safer than others due to strong demand and profitable business models. Medical office buildings have been a strong choice for CRE owners and investors for many years. We believe that this trend will not only continue, but trend towards greater value for investors. Some investors are hesitant to enter into this space for fear of policy change and bureaucratic red tape making the future murky. While these are certainly relevant considerations, today we will be reviewing why the pros of medical office building investment outweigh the cons.

The Value of Medical Office Properties

In order for an investment to be a safe bet, it must first be determined that the asset has value. Medical office property values have skyrocketed in recent years. Here are just a few reasons why.

Supply and Demand Favors Property Owners

There is no question that medical office buildings are in high demand. As the nation ages and healthcare becomes an even larger industry, outpatient procedures continue to climb in both quantity and quality. That handles the demand part of the equation. As for supply, medical office buildings often require specific layouts and capabilities which must either be designed from the ground floor or retrofitted into older properties. Simply put, there aren’t enough office buildings to handle the current demand. This obviously puts a premium on those properties which do exist and even those which are good skeletons to be converted into medical offices down the road.

The Medical Industry is Booming

Say what you will about our nation’s healthcare system, but there is more than enough money to go around. No matter if we continue with Obamacare and other current policies, roll back current policies, or go in the other direction and establish Medicare for All, money will continue to pour into our medical care infrastructure. The reason is simple: the medical industry is extremely strong and will likely remain so for many, many years. When you combine favorable supply and demand with a cash-rich industry, that equates to high value investments.

Flexible Medical Office Layouts Add Value

On a more specific note, the future of medical technology is moving to a format which enables physicians to perform a wider range of tests within their offices rather than sending patients to specialists. For this and many other reasons, flexible medical office structures offer a unique value to investors and to lessees by allowing for greater capability and flexibility of care.

Why Medical Office Buildings are a Wise Long-Term Investment

There are many reasons to believe that medical office buildings have strong value in today’s marketplace, but how can we be so sure that they will be a wise long-term investment? Medical office properties offer a unique safety net for investors for the following reasons:

Customer convenience means location is becoming more and more important. Nobody likes going to the hospital. This is particularly true when medical offices are more convenient from a location and practical standpoint.

The aging population will require more regular check-ups and routine health care over time. The U.S. population is aging. This is particularly true in areas like our own Western PA region where one in five residents will be 65 or older by 2025.

Outpatient procedures are outpacing hospital stays. Outpatient procedures are viewed as more favorable by patients, healthcare systems, and doctors alike in the majority of cases. Obviously some medical procedures absolutely must be performed in hospitals. For more minor procedures and checkups, the future is trending towards medical offices and away from hospitals.

Pittsburgh’s Medical Industry and Aging Population = Strong Medical Office CRE Market

As we mentioned in the previous section, our region’s population is aging rapidly. An aging population leads to greater medical care demands. Pittsburgh is also well known for offering world class healthcare. What this means for investors is that the demand for office buildings in our area is expected to climb for decades to come. As this demand climbs, well-funded organizations such as UPMC will have more than enough desire and capability to either purchase or lease medical office buildings at a premium.

Given the Pittsburgh region’s population trends, there is perhaps no safer commercial real estate bet than medical office properties. There is every reason to believe that UPMC and other local medical research facilities will continue to attract the best medical professionals from around the globe to keep our local medical economy strong.

Going Forward

It is impossible to speculate on the future of real estate, no matter how many positive indicators exist. As far as safe bets go, medical office buildings are about as close as you can hope to get. Aging populations, a demand that outpaces supply, a medical industry flush with cash and resources, and the national trend of outpatient procedures overtaking hospital procedures all add value to medical office properties. Medical office buildings are a unique beast, and all investors are also encouraged to understand the intricacies of medical office layouts and realistic expectations before taking the plunge.

Amazon, Google, and Apple’s Impact on Commercial Real Estate Value

Posted on January 6, 2020March 9, 2020 | Leave a comment

Amazon, Google, and Apple are three of the most important companies on earth in terms of total impact. This certainly extends to the realm of commercial real estate. In Pittsburgh, Amazon and Google alone are leasing or building about two million square feet of commercial space. It can be tempting to think of these companies as somewhat ethereal as most of us never have an in-person, real life interaction. The reality remains that all three of these companies require huge commercial real estate investments for office space, warehouse space, research and development, and much more. With this in mind, today we will review the impact that Amazon, Google, and Apple have on the US commercial real estate market.

Amazon Commercial Real Estate Footprint

A funny aspect of finding information about Amazon’s impact on the US CRE market is that most of the results are actually books, DVDs, and other materials about commercial real estate sold on the Amazon platform. Digging deeper, you will find that Amazon has perhaps the largest global real estate footprint in the world. In Seattle alone, the original headquarters of the e-commerce giant, their total square footage surpasses ~13 million. All of this before they announced plans to open a second, perhaps even larger American headquarters in Arlington, VA.

The new headquarters is expected to create approximately 25,000 jobs in its first decade or so of operation. Construction alone has been estimated to employ some 50,000 workers with an estimated budget of $5 billion. These two mega-headquarters garner all the headlines when it comes to commercial real estate, but the footprint extends much farther.

In Amazon’s own words: “More than 175 operating fulfillment centers and more than 150 million square feet of space where associate pick, pack, and ship millions of Amazon.com customer orders to the tune of millions of items per year. Specifically, in North America we currently have more than 110 operation facilities with a variety of employment opportunities.”

Google’s Impact on Commercial Real Estate

Google carries perhaps the smallest impact on commercial real estate of our three mega-corporations, but also impacts the industry in other ways. Google boasts over 70 office locations in 50+ countries around the globe including notable offices in Pittsburgh, San Francisco, and San Bruno, CA. Google employs over 100,000 employees both domestically and overseas. Where Amazon’s impact on CRE is relatively straightforward with massive warehouses and nearly 8 times the number of employees, Google’s impact can also be felt through their many data centers.

Google has over 20 data centers around the globe in locations such as Douglas County, GA, Mayes County, OK, and Hamina, Finland. As one can imagine, the data storage needs for a company like Google are comical. These data centers and other non-traditional commercial real estate needs are likely to grow in the coming years. This, alongside more traditional office growth and warehouse needs, means that Google will continue to drive CRE value for many years to come.

Apple Locations Impact Local CRE Markets

To examine how Apple impact local commercial real estate, let’s take a look at Apple’s recent decision to plant their second headquarters in Austin, TX. The new tech campus will include a $1 billion construction budget to develop a property covering approximately 133 acres. Local citizens have expressed both excitement and concern for the future local economy boon and the likelihood that prices will likely skyrocket for local real estate resources.

There is no question that when a sudden influx of cash and employment opportunities hits a mid-major market, the ripple effect touches every aspect of not only real estate, but the local economy overall. Real estate investors and current owners of local real estate can look forward to their property values climbing dramatically. For individuals who are renting their homes or businesses who are renting commercial real estate, this can pose a very real threat.

Situations like Apple’s decision to move to Austin is similar to the recent Amazon bids put in by medium sized cities like Pittsburgh. Local citizens expressed consternation that already rising pricing for real estate and other commodities would become downright unaffordable. That is the balancing act that must be struck when considering massive CRE and construction bids from any of these three powerful corporations.

Going Forward

The complexities of how Amazon, Google, and Apple affect the American real estate market are too many to distill into a neat article. Rising costs of living in tech cities like San Fransisco create situations where the wealthy are moving in and the average citizens might be leaving for greener pastures. These injections of local economic growth can also revive cities with lagging economies. Commercial real estate has trended towards the energy sector, tech sector, and infrastructure in recent years. Major corporations will continue to drive significant changes in CRE market value in the foreseeable future.

Will Commercial Real Estate Adopt 5G?

Posted on January 3, 2020March 9, 2020 | Leave a comment

5G is the future of cellular service. Like 4G before it, 5G will revolutionize how we use our phones and other mobile devices online. The next generation of web-service will not just impact individual users, however. It will also lead to the rise of smart cities, autonomous cars, immersive education solutions, and much more. With these added capabilities also comes a greater demand for infrastructure support and technological planning.

The world of commercial real estate will see a massive impact upon the arrival of 5G. Whether or not the industry chooses to wholeheartedly embrace 5G is probably not a reasonable question. 5G is on the way, and CRE investors, builders, and planners must all take it upon themselves to prepare for the future of wireless technology.

What is 5G?

5G is a next generation cellular network that provides extremely fast web service for mobile users. The “G” in 5G stands for “generation”, denoting that 5G is the fifth major leap in cellular service technology. Each new generation marks a technological advancement which is incompatible with previous technology. 5G will be fundamentally different than 4G on a technical level.

While 5G is not yet available commercially, major players in the telecom industry including T-Mobile, AT&T and Verizon have rolled out pseudo-beta tests for 5G. The jump to 5G may be a tumultuous one, with new infrastructure and widespread technological upgrades being required before launch.

The practical differences between 5G and 4G capabilities stem from two key improvements:

Extremely low latency: 5G drops latency (the delay while a network processes information) by 10 times or more compared to 4G wireless service. Latency can be as low as 1 millisecond.

Vastly improved bandwidth: traffic capacity for 5G will improve by ~100 times compared to 4G. Network efficiency will improve by 100 times, and spectrum efficiency will improve by up to 3 times.

What does all of this mean? Lightning fast speed coupled with the horsepower to download, upload, stream, and everything in between to keep up with modern consumer and business demands.

How CRE is Preparing for 5G

Commercial real estate will have to adopt 5G in one form or another. Whether that means planning construction around 5G hotspots or understanding how smart car technology will impact travel times, this new technology will be a disruptive force in the CRE industry. Here are some of the ways that CRE professionals can prepare for 5G in the coming years.

The Importance of Understanding 5G Fundamentals for CRE

Before we take a look at any of the details of 5G preparation when it comes to commercial real estate, it is important for all industry professionals to have a baseline understanding of what 5G is and how it differs from your existing 4G tech. For example, many CRE investors, owners, and managers, punt all technology related issues to their IT staff. This makes perfect sense for the vast majority of situations. However, with new and disruptive technology, having an understanding of your current properties 5G preparedness and what improvements can and should be made is a great place to start. This begins with understanding how 5G works and how you can optimize your buildings to accommodate the technology.

Data Needs Will Continue to Increase Exponentially

Statistics on data usage on technological devices is staggering. Multiples quintillions of bytes of data are created each day from billions of users around the globe. Each year, the amount of data we collectively produce goes up exponentially as more users create more data with higher detail, density, and regularity. It is estimated that the world produced 18 zettabytes of data as of 2018. That number is expected to grow to 175 zettabytes per year by 2025. The ludicrous amount of data stored within a zettabyte is not the point here — the larger point is that data production and demand is expected to grow by ~1,000 percent in less than a decade. Building owners must take this into account when planning their IT infrastructure, staffing, and so forth.

5G Will Continue the Trend of Tenants Wanting an Improved IT Experience

Current renters, office space lessees, and hotel guests all expect a certain standard of connectivity from their spaces. As commercial real estate investors, owners, and managers, it is our responsibility to keep our eyes on the horizon for incoming technology. When 5G hits its stride a few years from now (estimates vary), individuals will expect their 5G compatible devices to work seamlessly at their workspaces, homes, or hotel rooms. By keeping up with 5G news and working with IT professionals, providing 5G connectivity can be seen as an opportunity for CRE investors rather than a potential weakness.

Going Forward

5G is not a matter of if, but when. Someday soon your phone will be able to stream high quality video with virtually zero load times, latency, or interruption. Smart cars and smart transportation systems will depend on this next generation technology to keep them connected. Commercial real estate investors will need to adjust to this new reality or be left behind by those who do. The real question will become how best to feasibly adopt 5G technology in a way that is cost efficient and maximally beneficial to tenants. As the technology continues to develop, the answer to this question will reveal itself more and more.

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.

Younger Renters Value Location over Square Footage

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

There is no question that location has long been a primary driver of property value. When it comes to millenial and Gen Z renters, this has never been more true. Compared to Gen X and Baby Boomer generations, younger individuals and families tend to have somewhat different demands when it comes to choosing a place to live. Whereas property value, square footage, and affordability were primary drivers of the past, younger renters are more willing to pay a premium for location, convenience, and amenities.

This trend has already altered the residential and commercial real estate landscape in many major markets. Today, we will explore why younger renters tend to shop for location, other rental trends, and how these trends look to continue or slow down moving into 2020 and beyond.

Location, Location, Location

You have probably heard that young adults have been flocking to urban apartments and homes in record numbers. This is certainly true, but not necessarily for the reasons you might have assumed. The reality is that suburban life was the typical American dream for decades because it was the most practical and affordable for most Americans. In the current economic environment where student debt and stagnant wages are stifling young adults, affordability and convenience are still huge factors when it comes to young renters settling on a home. One small example of this is how few young adults choose to own cars compared to prior generations.

Here are a few location factors that young renters look for when searching for an apartment:

Commute length and cost to work and/or school.
Access to public transportation such as bus lines, trains, and subways. These two obviously go hand in hand and are tied into the trend of young adults relying on mass transportation over their own car.
Local amenities such as nightlife, entertainment, shopping, grocery store convenience, etc.
Convenience to friends and family members. This is another obvious reason which has actually shifted in recent years. While previous generations were getting married and starting families at earlier ages, young adults today are more likely to stay in an urban setting to remain close to their peers.

Population Trends of Young Renters

Whether or not it has happened at the time of this article’s publication, millennials will supplant baby boomers as the largest generation in American history. While baby boomers continue to hold the majority of our nation’s wealth, the purchase power is slowly but surely shifting towards the younger generations. As we mentioned in the introduction, young adults are certainly migrating towards urban environments. However, they are not moving towards “traditional” large cities such as New York, Chicago, and Los Angeles in the same numbers as previous generations. Instead, millennials are finding that more affordable cities provide more convenience and amenities for the price.

Millennials are moving to the Sun Belt. Perhaps the biggest overall trend in millennial migration is that a large number of young adults have chosen Sun Belt states such as Arizona, Texas, Tennessee, and Georgia. This is partially due to commercial real estate and businesses trending towards these locations, but also due to the fact that young renters can afford urban apartments in these states.

Millennials are moving away from major markets. New York, California, and Pennsylvania rank near the bottom when it comes to net population migration. By proxy, we can deduce that major cities such as New York City, Los Angeles, San Francisco, and Philadelphia are pricing out many young renters. This again shows that young renters on the whole are more interested in urban living than specifically living in certain cities.

What Renters Value in 2020 and Beyond

There is no question that most renters value location over square footage in today’s market. Of course, this does not tell the whole story. The main thing that young renters value in their apartments, townhomes, and house rentals is convenience. This includes locational convenience, washer and dryer amenities, access to high speed internet services, air conditioning and central heating, etc.

Larger spaces and “high end finishes” such as granite countertops, fireplaces, hardwood floors, parking, and more are often viewed as luxuries which many young adults cannot afford or are unwilling to pay a premium to enjoy. The primary takeaway is that cash strapped young adults have been forced to become practical and pragmatic when looking for their rentals. As young adults came into the workforce in the wake of the Great Recession of 2008, they have adjusted to this reality of pinching pennies to make ends meet.

Going Forward

Barring a seismic shift in the American economy, there is every reason to believe that young renters will continue to look for location first and foremost when apartment hunting. Younger adults are willing to pay a premium for convenience and amenities, but are less interested in larger, more luxurious apartments. For commercial real estate investors, this may inform decisions on values of properties based on locations and price points. Sun Belt and other “non-traditional” urban markets remain bullish in the face of millennial migration away from ultra-expensive cities.

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.

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.