A recent report from the Federal Deposit Insurance Corporation (FDIC) states that Commercial Real Estate (CRE) lenders are about to come under greater scrutiny. In the report, titled “Supervisory Insights Summer 2022”, the agency adds that there will be an increased focus on new lending activity, along with CRE sectors and geographic areas that are “under stress.”
This comes on the back of a record year, with “the volume of CRE loans held by banks recently peaking at more than USD2.7 trillion.” And while FDIC doesn’t oversee all these institutes, banks supervised by the FDIC account for around USD1.1 trillion of that amount.
The agency adds that there will be increased emphasis on transaction testing (i.e. sampling individual lending transactions), saying:
“Given the uncertain long-term impacts of changes in work and commerce in the wake of the pandemic, the effects of rising interest rates, inflationary pressures, and supply chain issues, examiners will be increasing their focus on CRE transaction testing in the upcoming examination cycle.”
Areas of concern
During 2021, FDIC examiners noted some specific CRE loan concerns, including poor risk analyses and improper assessments of whether loans could be successfully repaid. For example, some assessments failed to check whether a borrower’s business would be able to repay the loan when stimulus or other relief funds were no longer in the balance sheet.
Another area where some banks seemed to fall flat was in conducting a thorough and up-to-date analysis of prevailing market conditions. The agency added that examiners also saw cases where banks have “applied segmentation techniques ineffectively” or “have not drawn conclusions from the analyses performed.”
CRE lending outlook
Specific sectors identified as challenging for valuation in 2021 included some hospitality properties, offices, and malls, along with “some geographies, such as the Manhattan borough of New York City, [which] lagged.” In a Bloomberg article on the report, Brandywine Global portfolio manager, Tracy Chen added that “there are some challenges in pockets of CRE debt, such as offices and retails.”
In an environment where some banks have already announced cutbacks on CRE lending, the additional scrutiny may mean those lenders adopt an even more cautious disposition, especially for sectors they consider “high risk.”
Have there been any effects from changing lending policies on deal-making in your area?
Few innovations have had more of an impact on investment analysis than spreadsheet software. Dominated by Microsoft Excel for the last 25 years, this sector is currently used by an estimated 78% of U.S. businesses. While most know how to quickly copy, sum, drag and format, fewer may know about the real power of this software – a whole host of integrated functions and formulas.
I ran into a long-time reader a few weeks ago, who remarked on covering some ‘soft content’ during recent columns. As a result, this month we are going back to school to discuss some useful but perhaps little-known functions to help get your Excel game in gear.
Present value is a foundational concept and represents a value today for a series of cash flows to be received in the future at a specific discount rate. This concept has tremendous value to a real estate investor, as it allows us to determine what this series of cash flows is worth today. The formula is =PV(discount rate, time periods, periodic payments, future value).
Future value is also useful and is the exact opposite of present value. It rep- resents that value at some point in the future of a present lump sum value and/or a series of periodic payments, collectively compounded at a given compounding rate to a specific point in the future. The formula is =FV(compounding rate, time periods, periodic payment, present value).
We have discussed the concept of net present value several times over the years in these very pages. A kissing cousin to IRR, this concept adds a slight twist by discounting all future cash flows back at a target discount rate and nets the sum against the initial investment. The initial investment can be entered as zero, which makes this formula a very common way to determine the current value of an investment at a given discount rate. The formula is =NPV(target discount rate, series of periodic cash flows).
The addition of the ‘x’ allows for more specific control over the timing of cash flows. While NPV considers annual periodic cash flows, XNPV can distinguish between monthly, quarterly, semi-annual or annual periods, all within the same range of cash flows. The formula is =XNPV(target discount rate, series of periodic cash flows, range of associated dates).
Enter NPV’s kissing cousin. Most of us think of IRR as the rate of return that each dollar earns in an investment while it’s invested. But there is an alternative definition – IRR determines the exact rate at which all future cash flows dis- counted back to the present and netted against the initial investment equals zero. As a result, the IRR of an investment will be the same as NPV’s target discount rate when NPV equals zero. IRR is a very important metric to many investors but thankfully, the formula is simple: =IRR(series of periodic cash flows).
Similar to NPV, the addition of the ‘x’ allows for more control over timing. While IRR is an annual measure, XIRR can accurately calculate a mixture of time periods, including monthly, quarterly, semi-annually or annually. The formula is =XIRR(series of periodic cash flows, range of associated dates)
Back in the day, any real estate professional worth their salt would have a little red covered book called the “Ellwood Tables for Real Estate Appraising and Financing” right by their side. Filled with page after page of tables, it allowed the reader to quickly figure out the annual loan payment at a variety of nominal interest rates and amortization periods. This function in Excel makes the process a snap: =PMT(nominal interest rate, amortization period, initial loan amount). One word of caution – most loans are amortized and paid on a monthly basis so be sure that the nominal interest rate and amortization period both reflect this.
FV to find loan balance
Once you determine the loan payment, you can easily find the loan balance at any point during the life of that loan. The only time the future value (FV) will be zero is once the final payment is made and the loan is fully amortized. The formula is =FV(nominal interest rate, specific period for loan balance, periodic loan payment, original loan amount). Two input items of note. First, be sure that the interest rate, specific period and periodic loan payment all reflect months if using monthly compounding. And second, be sure to enter the periodic payment as a negative if the original loan amount is entered in as a positive.
Sticking with the loan theme, we know that the concept of classic loan amortization results in a portion of each periodic payment representing interest and a portion representing principal, which in turn reduces the outstanding loan balance. While both portions are important, we can use the IPMT function to determine exactly how much interest is associated with a particular periodic payment. The formula is =IPMT(nominal interest rate, specific payment period for interest component, total amortization period, original loan amount). Once again, be sure that all of the components represent months if using monthly compounding.
While IRR is a very useful tool, it has limitations related to its treatment of both negative and positive cash flows that the primary investment produce. Diving into the nuances associated with the treatment of negative cash flows can be the subject of an entire column (spoiler alert) so for now, just set that one aside. As for positive cash flows, IRR makes no assumption for cash flows that come out of an investment. The only thing that IRR cares about money coming out of a deal is that it is no longer in that deal. That’s an issue because, as an investor, I can re-invest that money into another investment. A concept known as Modified Internal Rate of Return (or MIRR) addresses this limitation by introducing consideration of a secondary investment, and associated reinvestment rate, for any positive cash flows that are generated by the primary investment. The formula is =MIRR(series of cash flows, safe rate applied to negative cash flows, reinvestment rate applied to positive cash flows).
While Excel has certainly changed the landscape of accounting and financial analysis, it wasn’t the pioneer. If you have a long enough memory, you may be thinking about Lotus 1-2-3, which was introduced in 1983. But four years prior to that was the OG – VisiCalc was the first spreadsheet software developed for personal computers in 1979. It is rumored that when co-founder Dan Bricklin, then a student at Harvard, showed his creation to a group of accountants, they sat in stunned belief at the ease by which simply changing a number would automatically update the sum total. And then, one of them started to cry. We certainly have come a long way, baby.
Financial Strategies by Alec J. Pacella, for October 2022 Properties Magazine.
Over the last few years, the hospitality industry has taken some hard hits. And for Commercial Real Estate (CRE) professionals focusing on the sector, 2020 may well have felt like a trial by fire. When we looked at the industry last year, however, things were starting to look up, with at least some evidence of a mounting recovery.
The good news in 2022 is that, as business travel and tourism resume, the hospitality sector seems set to hit highs we haven’t seen since before the pandemic.
RevPAR revving up
According to a recent article by hospitality analysts STR, the RevPAR (Revenue Per Available Room) for U.S. hotels is set to surpass levels seen in 2019. RevPAR is an important metric for the industry and is used by owners to calculate hotel performance. The new predictions suggest a $6 increase in RevPAR compared to 2019.
It’s worth noting though that the gains fall short when adjusted for inflation, and it’s likely the industry will only achieve full recovery in 2024. That said, the sentiment in the hospitality sector still seems to be bullish, especially on the back of average daily occupancy rates of nearly 60% in May this year.
Back in Business
One factor that seems to be fueling the gains is an uptick in business travel. STR president Amanda Hite states: “…right now, we are forecasting demand to reach historic levels in 2023 as business travel recovery has ramped up and joined the incredible demand from the leisure sector.”
The New York Times adds that domestic business travel in particular is on the increase, with cities like Las Vegas leading the pack in terms of the number of trade shows and events scheduled in 2022.
While the recovery for international travel seems to be slower, they note that business trips to Europe are leading recuperation on that front.
The European connection
The hospitality situation in Europe is certainly heating up, with many top destinations reporting strong gains in the last few months.
Taken together, these latest reports suggest that there may be some welcome relief for the hospitality sector as travel, both for business and pleasure, resumes. Going into 2023 and 2024, we may see a level of robust recovery that means the industry can finally put the hard times of the last few years behind it.
SOCIAL: For those working in hospitality real estate, how are the numbers stacking up in your area?And how do you anticipate the trend developing through the rest of 2022?
CRED iQ regularly monitors distressed rates and market performance for nearly 400 Metropolitan Statistical Areas (MSAs) across the US, an enormous data set that includes some $900 billion in outstanding CRE debt.
Month-by-month improvements In the report, they’ve laid out distressed rates and month-over-month changes for the month of June 2022, for the 50 largest MSAs, as well as a breakdown by property type (see below). “Distressed rates (DQ + SS%),” they write, “include loans that are specially serviced, delinquent, or a combination of both.”
Standout areas Of the top 50 MSAs, some 43 showed month-over-month improvements “in the percentage of distressed CRE loans within the CMBS universe”. New Orleans (-9.57%) and Louisville (-3.41%) were two of the MSAs with the acutest declines [in distress rate] this month.
On the other end of the scale, Charlotte (+1.15%) and Virginia Beach (+1.12%) were among the seven MSAs showing increases in distress rates last month.
By property type “For a granular view of distress by market-sector”, the report also delves into distress by property type, which potentially holds strategic insight for regional commercial real estate professionals.
“Hotel and retail were the property types that contributed the most to the many improvements in distressed rates across the Top 50 MSAs,” they detail. “Loans secured by lodging and retail properties accounted for the 10 largest declines in distress by market-sector. This included the lodging sectors for New Orleans and Detroit as well as the retail sectors for Tampa and Cincinnati.”
SOCIAL: What data metrics do you find most useful for understanding the health of CRE in your region?
Credit for commercial real estate (CRE) looks to be entering a crunch state in the second half of 2022 as a number of the big lenders announced in July that they were pulling back in that sphere.
The latest to make such an announcement are Signature Bank and M&T Bank. The former said it “expected to cut back on lending for multifamily and other commercial real estate assets”, and the latter laid the blame squarely at the feet of higher interest rates in its decision to make “fewer CRE loans this year”.
M&T’s CRE loan balances decline by 2%, or $830m in Q2 2022, as reported by the Real Deal, who extracted key takeaways from an earnings call hosted by M&T chief financial officer Darren King. King reportedly specified that construction loans declined, alongside a decline in completed projects and new developments coming online.
Interest rates and inflation
King said the rates moves were “affecting cap rates and asset values” and that they were “not seeing the turnover in properties like you might have under normal circumstances. And that will affect the pace of decline and our growth in permanent CRE.”
According to BisNow reporting, “Interest rates, raised in an attempt to beat back record-high inflation, have contributed to a drop in investment volume from the highs of 2021 and early 2022, slowing CRE deal volume”.
In broad term, these economic conditions are seen at varying rates around the world right now. As S&P’s recent update explains: “Economic growth is slowing. Interest rates remain stubbornly high. Estimates of the risk of recession or even stagflation creep upward and questions persist on whether central banks are under- or over-reacting in pursuit of monetary normalization.”
Additionally, on the residential side, their PMI research indicates “a steep contraction in demand for real estate amid tightening financial cost of living”.
Social: How is the rising cost of living playing out in your market?
A new report out from JP Morgan Chase provides an interesting mid-year review for commercial real estate (CRE), showing positivity in the first half of 2022, despite the various headwinds the industry faces.
“Despite rising interest rates—with the potential for more hikes in the coming months—commercial real estate has seen success in 2022,” writes Al Brooks, Head of Commercial Real Estate, Commercial Banking at JPMorgan Chase.
Giving retail a boost Even the beleaguered retail space has some standouts, according to JPMorgan. The report highlights a handful of factors that have bolstered strip malls in highly populated residential areas, underpinned by the likes of “grocery stores, fast-casual restaurants, and other retailers offering in-person services”, reads MPAMag’s coverage of the findings.
“JPMorgan observed that walk-in MRIs, testing clinics, and other non-traditional tenants may fill more shopping centers as retail evolves and adapts,” they add.
Class B and C malls, however, “continue to struggle” and the report authors call them “prime candidates for adaptive reuse” – into affordable housing and even industrial use, like fulfillment centers.
Industrial still booming Given the huge demand for industrial space – a trend that continues unabated – the report posits that we may start to see this category of property maturing in interesting ways. This could include adding the kinds of facilities and amenities which we associate with offices, such as gyms, complimentary snacks, nursing rooms, and so on.
This would fit with the evolution towards “multiple business purposes” within industrial sites, “such as a shipment center with offices or a showroom”, according to the report authors.
Casting forward As for the next six months, the report has a tone of tentative positivity, writing: “Multifamily and industrial properties have thrived in 2022. With healthy balance sheets, consumer demand could bolster retail, multifamily and industrial asset classes.”
But, they say, they’re keeping an eye on how “the country navigates hybrid work” and “on interest rate hikes, supply chain issues and geopolitical events, as well as ongoing relationships between public and private entities in affordable housing”.
For more information, and a link to the webinar replay, click here.
Social: What was the state of CRE in the first six months of 2022 in your region?
According to a recent report by Moody’s Analytics, the rest of 2022 might be the start of an economic rough patch as increasing risk factors boost market volatility. Moody’s states that economic risks and tightening monetary policy could translate into higher cap rates all the way into 2023.
Cap rate forecasts
The report also points out, however, that all is not equal in commercial real estate (CRE) markets, with sectors like hospitality, office and retail already showing signs of an increase in cap rates in response to rising interest rates. Multifamily and industrial cap rates have meanwhile remained steady in the face of uncertainty.
Worth noting is that the existing low cap rates seen in multifamily mean that an overall rise in cap rates will likely cause an increase for the sector. Put another way: “…sectors that have been transacting at very low cap rates have little place to go but up.”
Is a bump up inevitable?
Earlier this year, the National Association of Realtors (NAR) predicted only a modest rise in cap rates in 2022, counterbalanced by upward pressure in CRE prices. NAR notes that sales price growth has been on the up, especially for the industrial and multifamily sectors.
Moody’s Head of CRE Economic Analysis, Kevin Fagan, adds:
“There are strong opinions in the market both ways, that cap rates will go up significantly with rising rates, and others saying that cap rates will go down, and demand and expectations of rent growth will compress risk premiums.”
In a May 2022 interview with Wealth Management, Fagan added that the biggest headwinds currently facing US CRE are a combination of inflation, lower consumer expenditure and the risk of a recession.
Moody’s adds that, given the current economic climate, the chances of 2022 being a recession year have risen to 33%, while 2023 faces an “uncomfortable 50% probability” of a recession setting in.
Taking the long view
Though these predictions certainly add some uncertainty in the coming year, worth bearing in mind is that the outcome of the current volatility is far from set in stone. The way these factors play out in the CRE market remains to be seen.
For now, Moody’s takeaway prediction is that we should “expect to see more volatility in transaction and capital markets before we record pronounced effects on rents and vacancies.”
SOCIAL: Have you seen any movement in cap rates in your area? And what sectors do you think will be most affected?
Growing up in a small town in western Pennsylvania meant that I wasn’t necessarily on the cutting edge of technology. Any new electronics took months if not years to trickle down and even then would usually mean a trip to bigger cities such as Youngstown or Pittsburgh to track down. A great example is the LED watch. It was initially developed in 1971 and became widely available by the mid-1970s. But it wasn’t until Darrell Knight showed up sporting one on his wrist right after Christmas break of 1978 that I actually saw one, live and in person.
The use of technology in real estate seems to follow a similar path, with innovations taking months, if not years, to be integrated into the industry. This month, we are going to discuss some ways, specifically in the area of smart buildings, that technology has finally begun to make a big impact.
While certain sectors, such as medical and clean manufacturing, have been driving advances in clean air filtration and monitoring, the advent of COVID- 19 has placed a spotlight on this topic. The result is a whole ecosystem of products and strategies known as IAQ, or indoor air quality. The most common IAQ technologies revolve around higher-efficiency filters. Humidification and dehumidification systems have also become much more advanced, helping to control dust and mold while maintaining comfort. More advanced systems assist with heat and energy recovery ventilators to offset the increasingly “air- tight” nature of modern construction, as well as UV purifiers to neutralize airborne bacteria and viruses.
Voice-and touch-activated tech
Again, this type of technology received a huge boost in the wake of COVID-19. If you have ever used systems such as Alexa, Siri or Google, you are already well aware of the power and convenience voice-activation can offer. And while touch-activated technologies have been around for decades, the overwhelming popularity of smartphones and apps are leading to more advanced applications. In the commercial real estate sector, it’s no surprise that the hotel sector has taken the lead implementing this type of technology, ranging from speaking to control lights, temperature and entertainment to accessing the room and ordering room service from your smartphone. And don’t look now but many larger commercial property owners are beginning to integrate these same technologies, offering them to their tenants as a standard building amenity.
This may seem like something reserved for only big cities such as New York, Chicago and Los Angeles.
In the commercial real estate sector, it’s no surprise that the hotel sector has taken the lead implementing [voice activation] technology, ranging from speaking to control lights, temperature and entertainment to accessing the room and ordering room service from your smartphone.
And these cities certainly began adopting technologies years ago, with the advent of apps such as SpotHero and ParkWhiz, which allow parking operators to maxi- mize their occupancy through digital notification, reservation and even sub- leasing processes. But if you’ve ever parked in the decks at Hopkins airport, you’ve probably seen another, even sim- pler example that uses a small green or red light above each space, allowing potential parkers to quickly differentiate vacant spots from occupied spots
Energy efficient systems
This can fall into two categories:
1) systems that optimize energy via continual monitoring and 2) clean or renewable energy features. The former is the real heavyweight when it comes to smart building design and is mainly based on the autonomic cycle of data analysis tasks (ACODAT) concept. Basically, the HVAC systems have a central processor that continually monitors usage, time of day, outside air temperature, building occupancy and a host of other factors to not only be reactive in running the HVAC system at peak efficiency but also be predictive by learning patterns over days, weeks and months. The latter includes a host of advances in technologies such as heat pumps and geothermal systems as well as solar- and wind-enabled sources.
The most common acknowledgement of building technology is a certification known as Leadership in Energy and Environmental Design (LEED), through the U.S. Green Building Council. A similar certification is known as the Building Research Establishment Environmental Assessment Methodology (BREEAM) rating. Both of these involve achieving points related to set standards that address carbon, energy, water, waste, transportation, materials, health and indoor environmental quality. There are many examples of LEED-certified buildings in Northeast Ohio, including the Maltz Performing Arts Center at Case Western Reserve University, UH Avon Health Center and the Children’s Museum of Cleveland, among hundreds of others.
And there have been many noteworthy projects worldwide, including the following high-achieving facilities.
Developed by Siemens, the build- ing contains a variety of dynamic and artificial intelligence to power its operation. A noteworthy feature is an advanced air volume system that can put the entire building into “green mode,” which is a setting that uses aggregated historical data to optimize humidity, air pressure and temperature. It also has a decontamination mode that raises the temperature to acceler- ate the decay of airborne virus particles.
This was the first building in Toronto to be rated as a LEED Core and Shell Platinum building. It links up Cisco’s business operations and helps to power Cisco’s Internet of Everything (IoE) while also streamlining all building data into a single network.
Arguably the most striking example of the IoE in smart buildings, the Mitie building uses automated alarms, remote systems management, machine learn- ing and data analytics to achieve a 95% accuracy rate for predictive main- tenance calls and a 3% improvement of energy usage by clients.
By the time we hit high school, Darrell Knight’s simple, push-button, red-hued LED watch had been eclipsed by a series of LCD watches that integrated features like alarms (with music, no less), stop watches and the ability to track multiple time zones. And while today’s smart buildings have shown great advances over the last two decades, the pace of technology promises to have an even greater impact on this sector.
Those keeping track of our ongoing Top Tech series will know that this regular blog is aimed at highlighting some of NAI’s key tech partners and the game-changing solutions they bring to the commercial real estate (CRE) space. These are not sponsored blogs, but rather a way for us to share tools, technology, and ideas that are changing CRE for the better and streamlining and improving the services we offer.
This month’s partner is Apollo Energies. Below we discuss their approach to creating carbon-free properties and helping clients hit ambitious Environmental, Social, and Governance (ESG) goals.
What does Apollo Energies do?
The starting point for Apollo’s commercial services is typically an energy audit that helps clients determine the best way to streamline their building’s operations and bump up energy efficiency. Apollo also advises clients on how to meet safety, health, and wellbeing requirements in line with today’s ESG standards.
In recent years, there’s been an increasing push for corporate entities to meet sustainability commitments and to be able to show their progress. ESG criteria, which detail the goals these companies must meet, are also being used by investors and the public to evaluate the impact that company has on society and the environment.
With a focus on the ‘E’ of ESG, Apollo aims to help its partners meet the right goals, and lower their own energy spend in a clearly documented and reportable way. Their approach includes evaluating carbon emissions from a company’s operations, reducing carbon tied to power use, and assessing the carbon impact of the enterprise’s supply chains.
They also work with clients to meet benchmarks for Energy Star® certification, identifying their buildings as top performers in energy efficiency and ESG accountability.
The results of this focus and dedication are certainly impressive, and one of the reasons Apollo are a top choice among NAI brokerages across the country. At time of writing, the company has improved some 52 million square feet of building space and saved nearly 7.5 million kilowatt-hours (kWh) of energy across their client base.
There’s no getting around it – the last couple of years have not been kind to the office sector. The way we work and use office space is also changing, leading to what many consider a fundamental shift in how business, and office real estate, operates. While some consider these developments a chance to reevaluate what adds value in office, for others 23the signal is far more bearish.
Recently, Bisnow reported on a study that falls into the second camp, stating that office values are set to drop by $500 billion by 2029. Reasons given for this dramatic downturn included work-from-home and the resulting change in office risk premiums.
Breaking down the office downturn
The study in question, titled: “Work From Home and the Office Real Estate Apocalypse” suggests that 2020’s losses are just the beginning and that the sector should buckle up for a rough few years ahead.
The authors, focusing on data from the New York market, say that office should prepare for a 28% decline in value in the long run. Drivers of the decline include changes in lease revenues, office occupancy, lease renewal rates, and rents. They add that the impacts are much heavier for ‘low quality’ office buildings, and we can expect the ongoing ‘flight to quality’ to buffer the effects for high-end properties.
Another angle on office
It’s a pretty dire set of predictions for the sector, but, as is often the case, there’s some strong disagreement from other analysts. In a recent report, Moody’s Analytics painted a somewhat different picture, stating: “A two-year onslaught of gloomy, sometimes hyperbolic headlines about the future of office and cities could give casual observers the impression that urban areas are on a course to become post-apocalyptic ghost towns… However, doomsday headlines are at odds with empirical office performance.”
Moody’s went on to highlight that many office markets rebounded strongly in 2021, and that office loan delinquencies are still low, despite economic uncertainty.
Interestingly, the Moody’s analysis also points out that the New York market was one of the hardest hit in terms of rent growth, but that rent and occupancy decline is still less than what’s been seen in past cycles. They add that, overall, the evidence for a sustained decline in office occupancy or value is lacking, and that tenants are still signing and honoring lease agreements.
Moody’s takeaway from all of this? In the words of the report: “The office apocalypse is clearly on hold.”
A balanced view
As the above viewpoints show, the future of the office sector is a topic that currently generates a lot of strong opinions. How things play out in the long-term, however, remains to be seen. For our part, we’ll keep a practiced eye on the sector as prospects, and opportunities, continue to unfold.
SOCIAL: What have your own observations been of market trends in the office space this year? And what’s your go-to source when dealing with conflicting market information?
We have experienced, either directly or indirectly, all sorts of changes over the last few years. We are paying more at the pump each time we fill up, we are waiting longer for certain products that may or may not show up and we probably know companies that are desperate to hire workers that simply cannot turn up.
As we continue through a summer of uncertainty, the questions are not just increasing but also getting tougher. Everyone wants answers but few know where to look. This month, I’m going to review some of the most common economic indicators. When viewed collectively, these can provide significant insight.
Gross domestic product (GDP)
This is a basic measure of overall production for the U.S. economy, including the value of all finished goods and services that were produced in a given time period. During times of expansion, the GDP will increase. Real GDP will include the impact of inflation while nominal GDP considers the current market prices. This measure is produced by the Bureau of Economic Analysis, which is a division of the Department of Commerce. It is reported each quarter, generally released within four weeks of the end of the quarter. Most will use the associated change, on a percentage basis, from one quarter to the next. For the most recent quarter as of press time, first quarter 2022, GDP decreased 1.6%.
Consumer price index (CPI)
This tracks the changes in prices for what is considered a market basket of consumer goods and services. These include items such as energy, food, apparel, education, new vehicles and medical services, among others. As such, it is also the most common measure of inflation. CPI is tracked and produced by the Bureau of Labor Statistics and can be sorted by various base indexes and geography, but the most common is the All Urban Consumers (CPI-U). This index increased 1.0% in May 2022 and 8.6% over the trailing 12 months. The report is produced monthly and is generally available within two weeks after the end of the month.
U.S. unemployment rate This measures the total number of workers currently unemployed as a percentage of the total workforce. It is also tracked and produced by the Bureau of Labor Statistics and, similar to CPI, it can be broken down by job sector, such as Transportation & Warehouse, Construction and Manufacturing, as well as by geography. The unemployment rate for May 2022 was 3.6%. This index is produced monthly and generally available the Friday following the last day of the month.
Consumer spending This tracks consumer spending on goods and services by U.S. residences. It is similar to GDP in a few ways. First, it will increase during times of expansion. Second, it illustrates the change, on a percentage basis, from a previous time period. And finally, it is produced by the Bureau of Economic Analysis, who also produce GDP. This index was up 0.9% in April and 6.3% over the trailing 12 months. It is produced monthly, generally released by the end of the last weekday of the following month.
As we head into a summer of uncertainty, the questions are not just increasing but also getting tougher. Everyone wants answers but few know where to look.
Home sales This measures sales volume and prices of existing single-family homes in the U.S., including condos. It also breaks down the country by geographic regions. As with many of the indicators, a common metric is the percentage change from the prior period. This measure is tracked and produced by the National Association of Realtors (NAR), who publish it monthly. It is typically released on or about the 20th of the following month. For April 2022, home sales decreased 3.4% but the median sale price exceeded $400,000 for the first time ever, coming in at $407,600.
Housing starts This report tracks housing starts, as well as building permits and housing completions, associated with privately owned, single-family homes. Like many of these indexes, the information can be separated on a regional basis and is produced each month. It is produced on a joint basis by the U.S. Census Bureau and the U.S. Department of Housing. For May 2022, there were 1,549,000 housing starts, which was a 14.4% decrease over the starts in April. It is typically released on or about the 15th of the following month. Federal Reserve beige book If anyone has their finger on the pulse of the U.S. economy, it’s the Federal Reserve – or, as discussed next, perhaps they are the pulse. Eight times a year, they publish a compilation of reports collected from each of the 12 regional banks that make up the system. The result is a sampling of information; some is anecdotal, and some is statistical but all of it is insightful. The most recent edition came out June 1, with future editions scheduled for July 13, September 7, October 19 and November 30. Federal Reserve meeting Few events have more impact on the U.S. economy than the regularly scheduled meeting of the Federal Reserve Board. At these meetings, all sorts of decisions are made directly related to monetary policy, including the (in)famous discount or federal funds rate. The most recent meeting in June 2022 sent shockwaves worldwide when the Fed raised interest rates by 0.75%. This is the largest increase since 1994. The Fed meets a total of eight times a year, with the remaining meetings scheduled for July 26 & 27, September 20 & 21, November 1 & 2 and December 13 & 14. The list above is by no means all inclusive, as there are all sorts of other meaningful and insightful indexes, reports and surveys available. The key is to focus in on a group and consistently track it every month. As the old saying goes – the past is history, and the future is a mystery. But indexes and reports can definitely help to make today a present.
Few events have more impact on the U.S. economy than the regularly scheduled meeting of the Federal Reserve Board. At these meetings, all sorts of decisions are made directly related to monetary policy, including the (in)famous discount or federal funds rate.
New Zealand’s city of Hamilton – or Kirikiriroa in Maori – sits on the banks of the famous Waikato River which features heavily in its sights and site. In this city known for its beautiful greenery and walks, the most popular tourist attraction is the 54-hectare Hamilton Gardens.
With a population of just under 200,000 people, Hamilton is the fourth most populous city in the country. In 2020, it was named ‘most beautiful large city in New Zealand’. The wider Hamilton Urban Area includes Ngāruawāhia, Te Awamutu, and Cambridge, which collectively cover some 110 square kilometers of land. It is also the third fastest-growing urban area.
Leading industries and outputs
Hamilton’s economic heritage is as an agricultural services hub, particularly dairy cattle, and vegetable farming, but it also has thriving business services, construction, and health and community services. Additionally, R&D is an emerging sphere, given the city’s high tertiary educated population.
Residential market factors
New Zealand has typically seen high demand and low supply for residential housing in recent years which has kept prices elevated. There are, however, some movements in the markets, and new regulations around lending coming into play that could mean fewer residential buyers would qualify and those that do could be in for “bargains” in 2022 – according to a January 2022 report from Stuff.co.nz citing Mortgage Lab chief executive Rupert Gough.
Additionally, Realestate.co.nz recently reported new house listings in November 2021 were hitting their highest level in seven years, and Stuff.co.nz added that data from Infometric showing consent and permissions for new build projects were also much increased, compared year on year.
Our Hamilton reports that the city’s “total property Capital Value (the total value of the land and any buildings on it) increased 53%, and Land Value 67% since 2018”. “On average,” the article continues, ‘Capital Values for commercial and industrial property have increased by 40% across the city”.
Insight from NAI Harcourts in the country suggests that industrial will remain “the darling of the three commercial property sectors”, but also that there is momentum in the Hamilton office market, which they characterized as coming from a “flight to quality” that was pushing local business in the central business districts to up their game.For more regional insight, contact NAI Global’s partners in Hamilton and surrounds.
I’m always pleased to see comments from loyal readers. Most of the time, these are complimentary. But as a wise Yoda once told me, “Compliments grow flowers, but criticisms grow roots.” And while one of the comments I received in response to last month’s column wasn’t a criticism, it was insightful.
The gist was a historically limited viewpoint from the lender’s perspective. The comment wasn’t wrong; prior to the concept of 365/360 loan amortization covered last month, it had been a few years since anything related to the lender’s perspective was considered. And make no mistake – lenders are a dominant part of the commercial real estate landscape. Last year, nearly $4 trillion of capital invested in commercial real estate came from lenders, as compared to $2.7 trillion of equity. Given the significant role that lenders play, this month will be a bit of a ‘two-fer’ and follow up on some basic metrics that a lender uses to determine the appropriate level of participation in an investment.
One of the most common (and easy to understand) metrics used by a lender is the loan-to-value (or LTV) ratio. This approach considers the underlying value of the real estate as compared to a ratio established by the lender. For example, the lender determines a property to have a value of $1 million and has established a 75% LTV ratio.
In this instance, the lender would be willing to provide a maximum loan of $750,000 ($1,000,000 x .75). Another metric related to LTV but less common is the leveraged ratio. It measures the amount of equity as compared to the total investment. In the example above, the leveraged ratio would be 4:1, which means that every dollar of equity equates to four dollars of total value ($1,000,000 divided by $250,000). LTV and leveraged ratio are both focused on the underlying value of the real estate, but a lender will also look at the income characteristics of the asset. A primary measure with this focus is known as the debt service coverage ratio (or DSCR), which helps to ensure the property has sufficient cash flow to make the loan payments. LTV and leveraged ratio are simple and only require one step. DSCR is a bit more involved and requires two steps. The first step is to determine the maximum annual debt service given the property’s income, as represented by net operating income (NOI) and the DCSR established by the lender.
This ensures there is not just enough but more than enough income to service the debt. Assume a property has a NOI of $80,000 and the lender establishes a DCSR of 1.25. In this instance, the maximum annual debt service would be $64,000 ($80,000 divided by 1.25). This ensures a measure of safety for the lender, as the NOI could fall by up to
Another metric that has risen in popularity over the last decade is known as debt yield, which represents the percent of NOI as compared to the original loan amount. This is a helpful measure of risk for a lender as it illustrates the yield that a lender would realize if they were to come into a direct ownership position due to a default by the borrower. It is also a valuable metric as it helps to ensure the loan amount is not inflated by low cap rates, low interest rates or a long amortization period. Calculating this is straight-for- ward: dividing NOI by the loan amount. Again, using our example and assuming a $750,000 loan, the debt yield would be $80,000 divided by $750,000 = 9.375%.
The last metric I would like to discuss is also one that has been around the longest the venerable loan constant. It measures the annual debt service, including principal and interest, as compared to the original loan amount. Using our example and again assuming a $750,000 loan, the loan constant would be $61,910 divided by $750,000 = 8.255%. At the risk of sounding like the kid that had to walk to school and back uphill and in two feet of snow, a loan constant was used to calculate loan payments in the days before financial calculators. The cutting-edge real estate tool back then was a little book with a red cover entitled “The Ellwood Tables.” It was filled with pages upon pages of tables with eight-digit numbers.
At the risk of sounding like the kid that had to walk to school and backup hill and in two feet of snow, a loan constant was used to calculate loan payments in the days before financial calculators. The cutting- edge real estate tool back then was a little book with a red cover entitled “The Ellwood Tables.”
To use it, you would match up the columns for the lender’s nominal interest rate and loan amortization period. Once the corresponding eight-digit number was found, you multiplied it by the initial loan amount and, shazam, the annual debt service would be known. In the example above, matching up the column for a 20-year loan amortization with the row for 5.5% interest would result in a factor of .08254667.
Upon reviewing a sampling of past articles, the topics associated with mortgages and the debt market are indeed far and few between. And if it wasn’t for some- one taking the time to point this out, this month’s article would likely have been centered around internal rate of return, net present value or cap rates.
In May, law firm DLA Piper released the 2022 edition of their Annual State of the Market Survey report, highlighting that “optimism about the future of commercial real estate (CRE)” remains strong despite the headwinds the industry faces.
The survey on which the report is built was conducted in February and March of 2022, by collating and analyzing input from CRE leaders and professionals in the US – specifically their take on matters including “pandemic recovery, economic outlook, attractiveness of investment markets and overall expectations over the next 12 months”. This input is further contextualized with additional research, presented the report.
Overall, the report [PDF] shows “increased bullishness”, with “more respondents in 2022 [having] a higher level of confidence for the real estate industry’s next 12 months”.
Findings from the report also include that 73 percent of respondents are “expecting a bullish market”. This is consistent with 2021 expectations. “However,” they added, “this year, respondents reported feeling a higher level of confidence in a bull market over the next 12 months; 33 percent described their bullishness as an 8 or higher in 2022, compared to just 16 percent in 2021.”
Top contributing reasons include the apparent availability of capital in the market, with over half of the respondents citing this as the main source of their confidence.
Viewed per sector, Commercial Property Executive says in their analysis of the report, “Industrial (66 percent) and multifamily (57 percent) remain the property types that investors believe offer the best risk-adjusted returns over the next 12 months.”
Inflation and interest rate changes were ranked most likely to have an impact specifically in the CRE market in the coming year, but ecommerce, migration of workers out of city centers, and the “redesign/reimagining use of office and other commercial spaces” were also common responses.
Top concerns included interest rate increases (cited by 26 percent of respondents), inflation (18 percent), as well as the Russian invasion of Ukraine.
US gains and advice
Finally, respondents to the survey said they felt the US would be seen as a safe and stable option, attracting non-US investment. “During times of uncertainty – like the pandemic or the conflict in Ukraine — investors often flock to safe havens,” the report reads, adding “a well-defined legal system, transparency and proven economic resiliency” are among the US’s assets.
In the face of global uncertainty though, the report authors caution that CRE professionals and firms must “remain agile and prioritize adaption, with an eye towards staying ahead of the curve”.
SOCIAL: Do you see the US CRE market as a safe haven in times of global uncertainty? How do you expect inflation to make itself known in your CRE specialty?
The Q2 2022 has been a scary ride for markets and investors around the world. Increased geopolitical tensions, widespread inflation, and rising interest rates in many territories have been a cause for concern, and the capital markets bore the brunt of that low sentiment.
A recent look at the numbers shows that real estate investment trusts (REITs) didn’t escape the sell-off.
Crunching the numbers
The FTSE Nareit All Equity REITs index shows a decline of 3.66 percent in April. This is, as Wealth Management succinctly argues, “a major reversal from 2021, when REITs posted a 40 percent rise in total returns”.
Benchmarking against peers
Despite this, REIT total returns are trending stronger than many other indices in 2022, including some “darlings of the market” like S&P 500 (contracted 12.92 percent) and the Dow Jones Industrial Average (declined by 8.73 percent).
A history of performance
Bezinga data says: “The FTSE Nareit All Equity REITs index has outperformed the S&P 500 in total returns during 13 out of the last 20 years with an average total annual return of 13.1% versus 11.1% for the S&P 500 over the same time period”.
REITs use case
As an investment vehicle type, REITs are considered one of the most accessible ways for individuals to buy into commercial real estate (CRE), which has long been the terrain of institutional investors.
Although regulation changes have opened up this category in recent years, REITs still enjoy popularity with retail investors for the above reasons, and the relatively high dividend yields.
Although we do not offer this as financial advice and individual investment products must be reviewed on their own fundamentals, REITs are still largely considered an inflation hedge when rents are rising – making them one fascinating asset type to watch in 2022.
A recent report – released in late May 2022 – shows the industrial commercial real estate (CRE) boom is far from over, even when the “headwinds” are accounted for.
The May 2022 Matrix Industrial Report, from Yardi Matrix, says that although the “economy hit a rough patch in the first quarter due to inflationary pressures and rising energy prices, […] demand for industrial space continues to be robust”.
The continued presence of market fundamentals like increased consumer spending and job growth are adding to the sense of resilience seen from the sector, which has made huge strides since the dawn of Covid-19 kicked online shopping and fulfilment into particularly high gear.
CRE in general and the industrial CRE sector in particular do face a range of economic pressures as we look to the second half of the year. Slower economic growth in the first quarter, supply chain issues, and “persistent inflationary pressures” are not insignificant depressive factors, but the drivers of demand are not going anywhere either.
The boost factors, on the other hand, include “healthy consumer spending”, and “the need to bring the nation’s stock up to snuff to support modern logistics”.
Additionally, occupancy across most US metros remains high and “rents are growing well above historical levels around the country,” according to the report. Rental averages across the US have increased by 440 basis points year-on-year.
Industrial building supply chain
The report calls the new supply chain for industrial building “extraordinarily robust”, but, as Commercial Property Executive reporting on the report highlights, “[a]lthough the under-construction pipeline is ballooning, experts see the industrial market as severely undersupplied”.
This assessment, from Prologis, draws from several different data sources including the Purchasing Managers Index, retail sales data, and job growth statistics, to posit that the US has “16 months of available industrial inventory”.
Reportedly, over 640 million square feet of industrial space was under construction nationwide at the end of April. Including planned projects takes the pipeline to 650 million square feet.
Far from being a US-only trend, demand for industrial is high among most developed economies – or almost anywhere with a strong consumer base demanding more and quicker online shopping and delivery.
As this Financial Times article shows, that’s the case even where Amazon space acquisition is slowing: “There has been record demand for UK warehouses in the past two years,” they write, “with take-up north of 50 [million] square feet compared with a pre-pandemic average of 32 [million square feet]”.
Social: Are you operating in a well-supplied industrial CRE market, or are people scrambling to find space? Tell us where in the world you are, and what the “pulse of industrial” is in your region?
Foreclosures in the US were up in the first quarter of 2022 – setting what the data provider calls a “post pandemic high”. The data provider in this case is Attom, who specialize in real estate and property data – including tax, mortgage, deed, risk and other information for “over 155 million properties” country-wide.
It must be noted however that this level of foreclosure activity is still considerably better than the highs seen in 2020, before government intervention (more below).
A tale of two months
Attom’s Q1 2022 U.S. Foreclosure Market Report – released in April 2022 – shows a total of 78 271 properties filed for foreclosure in the first quarter of 2022. This is, they write, “up 39% from the previous quarter and up 132% from a year ago”.
Additionally, in March 2022 alone, the data indicates over 33 000 US property foreclosure filings – an increase of 29% from the prior month, and 181% compared to March 2021.
A mere month later, however, in the month-to-month reporting from the same provider (April 2022, released in mid-May), showed “a total of 30,674 properties with foreclosure filings — default notices, scheduled auctions or bank repossessions”. This was down 8% from March, but up 160% from April 2021.
Questioning the headline
As covered before on this blog, it is important to assess data and market reports like this one as pieces of a larger picture – viewed in context of time and other indexes. It is also worth noting that there is typically a delay between economic “crunch”, consumers feeling the pressure, and market movements showing the effects of said pressure.
The above caveats notwithstanding, the trend line this report highlights is concerning for investors who watch the residential market, and commercial brokers whose specialty/sectors are affected by residential, such as multi-family.
Specifically, the data point that March 2022 was “the 11th consecutive month with a year-over-year increase in U.S. foreclosure activity”, is not a positive direction for this metric.
Post-moratorium balancingWriting about the Q1 2022 “record”, a spokesperson for Attom explained that this foreclosure activity is “gradually return[ing] to normal levels since the expiration of the government’s moratorium” and the CFPB’s enhanced mortgage servicing guidelines”.
What economic and commercial property data do you keep a close eye on?
According to a recent article by the Massachusetts Institute of Technology (MIT), things are moving fast in the Asian real estate market. More specifically, MIT outlines that: “Every 40 days, a city the equivalent size of Boston is built in Asia.”
And while this means exciting development prospects for anyone involved in Asian commercial real estate (CRE), it also means that sustainability, and an innovative approach to growth, are becoming ever more important.
With those issues in mind, MIT’s Center for Real Estate (MIT CRE) recently launched the Asia Real Estate Initiative (AREI), with the goal of “connecting sustainability and technology in real estate.”
Addressing climate issues through innovation
During 2021’s United Nations Climate Change Conference, the real estate sector was identified as a key target for reducing global emissions, and one of the sectors Asian governments are aiming to transform to meet environmental targets.
Zhengzhen Tan, director of AREI, puts it like this: “One of the most pressing calls is to get to net-zero emissions for real estate development and operation.”
As a part of that goal, AREI is focusing on research across three main themes:
The future of real estate and live-work-play dynamics;
Connecting sustainability and technology in real estate; and
Innovations in real estate finance and business
Tan points out that the choices investors and developers make in the region now will “lock in environmental footprints” for the next decade and adds: “We hope to inspire developers and investors to think differently and get out of their comfort zone.”
Sustainability in mind in 2022
The initiative comes in the midst of a strong recovery trend for Asian CRE markets, with PwC’s Emerging Trends in Real Estate® Asia Pacific 2022 report noting that: “Transactions are rebounding after nearly two years of lockdowns and travel embargoes.” The report also adds, however, that the investment landscape in Asia has changed, particularly in terms of how different real estate assets are used.
One of the key trends highlighted in the report is a move towards renovating buildings to change usage or upgrade their environmental performance to a higher standard.
Speaking to the impact AREI is expected to have on this developing landscape, faculty director of MIT CRE and AREI faculty chair, Professor Siqi Zheng, had this to say: “The research on real estate sustainability and technology could transform this industry and help invent global real estate of the future.”
He adds that merging tech and real estate can help developers build out strategies that are “green, smart, and healthy.”
Global climate concerns
In the coming years, it’s likely CRE will see a larger global shift towards these types of sustainability initiatives as developers and investors become more environmentally conscious, and aim to address climate change challenges. For the savvy CRE professional, it’s a space worth keeping a sharp eye on as we move to make green initiatives part of the broader real estate picture.
Seoul is the capital of South Korea – officially the Republic of Korea. It is a massive, bustling city known for its amazing street food, pop culture influence, and cutting-edge technology, but it’s also an ancient city with many sites of historic significance.
This clash of the new and old – temples and skyscrapers, street markets, and teched-out headquarters – is one of the many reasons that Seoul remains a popular destination for global and regional tourists, while its robust and advanced infrastructure keeps it a business hub too.
Geared for industry and export
South Korea’s economic success is one for the textbooks – countless case studies have been done on the rapid transformation that took this economy from a “developing nation” to a global leader in record time. These days, South Korea is one of the top five largest economies in Asia, and within the top ten in the world – or 14th by some estimates.
Today, the gross domestic product (GDP) hovers around the $2 trillion mark – driven by an emphasis on research and development, value chain dominance, exports, and a highly-skilled workforce. Seoul is the epicenter of the economic activity in the country, especially in terms of electronics and finance.
Leading industries in Korea include electronics (especially semiconductors and mobile phones), telecommunications, vehicle production, shipbuilding, steel, and chemicals. Additionally, the economy of South Korea is largely export-oriented.
According to NAI Global’s partner in Seoul, NAI Korea, the country’s economy showed “clear signs of rapid recovery in 2021 with the economy expanding 4% year-on-year and is expected to be about the same in 2022”.
Residential market factors
In terms of population, Seoul has been designated a mega-city for having more than ten million residents. Residents typically enjoy high levels of education and employment, but housing does come with a certain premium – as in any large city.
To address this, the city government recently agreed to lift the 35-story restriction on residential buildings. Property prices tracking in the city is a mixed bag, but largely steady — with some parties recording a 0,03 percent decline recently and others a 0,01 percent increase.
Commercial property outlook
Office space, logistics, and warehousing remain “top of the pops” for Seoul commercial real estate, with major companies like Samsung, chip maker TES, Hyundai, and LG, as well as offices of Amazon, Deloitte, and IBM, all maintaining a considerable presence in the city.
Significant portions of Seoul have been earmarked for rejuvenation, while other regions – such as Gangnam – have enjoyed lengthy periods of consistent interest and investment. Where public spending on rejuvenation has been undertaken, significant public and commercial benefits have been realized.
For example, greening and restoration of the Cheonggyecheon district had a dramatic impact on land prices therein. As the World Bank notes: “Before the restoration, land prices within a 100-meter radius of the Cheonggyecheon were only 15 percent higher compared to those within a 600-meter radius. However, after the transformation to a green space, the gap in value doubled by 30 percent.”
Recent data from the Mortgage Bankers Association’s (MBA) latest Commercial/Multifamily Mortgage Debt Outstanding report shows that the level of outstanding debt on commercial/multifamily mortgages – during the final three months of 2021 – was $287 billion (7.4 percent) higher than the level seen at the end of 2020.
The MBA releases this data on a quarterly basis and this provides a snapshot of debt and market health at the time. Released at the end of March 2022, this report focuses on the last quarter of 2021 – and compares figures to the preceding quarter and the corresponding quarter of the previous year.
For the purposes of this research, the four major investor groups considered include: “bank and thrift; commercial mortgage-backed securities (CMBS), collateralized debt obligation (CDO) and other asset-backed securities (ABS) issues; federal agency and government-sponsored enterprise (GSE) portfolios and mortgage-backed securities (MBS); and life insurance companies”.
Their data shows that “total mortgage debt outstanding rose by 2.9 percent ($116.0 billion) in fourth-quarter 2021” and specifically that “multifamily mortgage debt grew by $42.1 billion (2.4 percent) to $1.81 trillion during the fourth quarter, and by $121.9 billion (7.2 percent) for the entire year”.
Understanding the data
MBA’s Vice President of Commercial Real Estate Research Jamie Woodwell commented: “Strong borrowing and lending backed by commercial and multifamily properties drove the level of mortgage debt outstanding to a new high at the end of 2021.”
This was evident in every major capital source, he said, adding: “The 7.4 percent annual increase in outstanding debt compares to a 19.5 percent increase in underlying property values.”
As Yield Pro points out in their analysis, government-sponsored enterprises (GSE) “continued to have the largest share of multifamily mortgages outstanding”.
In related material, MBA confirmed that commercial and multifamily mortgage delinquencies in the US also declined in Q4 2021, characterizing the rates as “down or flat for every major investor group”.
The general feeling seemed to be that 2022 will build on the overall strong figures from 2021, carrying forward the market momentum despite concerns from some about headwinds from the current rates environment. As with last year, specific asset classes are again expected to steal the show in terms of growth metrics.
Multifamily and industrial: Still real estate darlings
One of the strongest performers is multifamily, with a large part of the one trillion USD forecast attributable to properties in this class. Lending for multifamily is expected to make up 493 billion USD of the overall total, a 5% increase on 2021’s 470 billion USD.
The ongoing demand for these asset classes is unsurprising, given their recent performance. In 2021, both classes recorded record-breaking metrics for rent growth according to Moody’s Multifamily and CRE in 2021 analysis.
For multifamily, Moody’s reported that: “asking and effective rents grew by 7.5% and 7.9%, respectively.” These figures present the highest growth rates on record since the start of quarterly data recording in 1999. Multifamily vacancy rates also dropped to pre-pandemic levels by Q3, making these properties an increasingly sure-footed investment.
The third quarter also posted some strong gains for industrial, with vacancies falling to 8% and effective rents reaching 1.9%, the strongest quarterly growth for the class in five years. In particular, warehouses turned out to be one of 2021’s savviest investments.
Moody’s reports that vacancies for warehouse properties dropped to 7.5% by Q3 and effective rents rose a staggering 3%, the highest upwards shift in over 10 years.
Looking ahead to 2023, MBA predicts similarly high numbers, with commercial borrowing and lending expected to exceed 1 trillion USD for the year. Multifamily remains their top contender and with around 474 billion USD in lending anticipated.
Worth bearing in mind, however, is that there’s always the potential for a market shift, so we’ll be keeping a close eye on incoming predictions as we move ahead in 2022.
SOCIAL: How are multifamily vacancy rates and rentals adjusting in your area? And do you anticipate that the trend will continue?
In a recent NAI article, we looked at the advent of the metaverse[SR1] and what this new tech might mean for commercial real estate (CRE). Though we concluded that the answer to how the metaverse might impact the real world remains uncertain, since then, there have been some interesting virtual developments.
To be clear, the “mortgages” in this case are funded entirely by TerraZero itself, rather than an external financial institution, but employ a system of down payment and instalments, much like the real thing. The first one was issued for a piece of land on a platform called Decentraland, where users can own, and sell, virtual assets. And as strange as this all sounds from a real estate perspective, there have recently been several big players setting up shop in the virtual world.
Perhaps the biggest, from a credibility point of view, is global financial leaders JPMorgan who recently launched a “virtual bank”, though at the moment it’s only being used for marketing purposes. In tandem with the purchase, JPMorgan issued a report, where they discuss their expectations for the metaverse’s development, saying:
“The success of building and scaling in the metaverse is dependent on having a robust and flexible financial ecosystem that will allow users to seamlessly connect between the physical and virtual worlds.”
They added that, in just the last six months of 2021, the average price for a virtual plot of land jumped from $6,000 to $12,000.
Despite this apparent endorsement from one of the world’s leading financiers, there are still plenty of metaverse critics urging caution. One of the main points raised is that, unlike physical real estate, metaverse purchases can’t satisfy both property value fundamentals: namely scarcity and location.
Or as Louis Rosenberg, CEO of Unanimous AI and a veteran Augmented Reality (AR) developer, puts it:
“We don’t even know which platforms are [going to] be popular, let alone which locations… so it’s like somebody buying a piece of land anywhere in America and hoping that it becomes San Francisco or New York.”
For many companies though, hedging bets is taking the form of securing their own piece of the virtual pie. The Wall Street Journal reports that accounting firms PricewaterhouseCoopers and Prager Metis have also recently snapped up virtual sites, with the latter spending $35,000 on its purchase of a virtual HQ.
Is the metaverse here to stay?
Though it’s still early days, and impossible to say how the virtual property trend might play out, the recent developments in the space suggest it’s certainly worth keeping an eye on. At the very least, the metaverse poses an interesting proposition, and one a lot of people seem to be willing to speculate on.
SOCIAL: Do you think there’s a future for metaverse property? And if so, how do you see it unfolding?
Over the past few years, the use of drone technology in the commercial sector has seen massive growth, with drones being used for everything from agriculture to law enforcement.
In the commercial real estate (CRE) context, the value of drone technology is also rapidly becoming apparent. Drones deployed for site inspections can save time and money, in addition to keeping personnel out of harm’s way. In the event of disasters and damage to premises, drone photography provides accurate images for insurance purposes and a detailed catalog of damage.
In this latest blog in our ongoing tech series, we explore these applications in more detail, along with other smart technologies that are changing how we approach real estate development and management.
One of the main areas where drones add value is by enabling fast and accurate building inspections. Processes that would normally take a long time for a human team, such as surveying rooftops, can be completed in a single programmed flyover. There is also potential for the technology to be deployed for façade inspections and other critical, but time-intensive, maintenance operations.
The advantage of using drones for these tasks is that they can access areas that are difficult, or even dangerous for human crews. And they do it in a fraction of the time.
When equipped with the appropriate hardware, like thermal imaging cameras, drones can also check on a building’s heat loss profile, potential gas leaks, and even expedite operations during construction, all while making the overall project more sustainable.
Easing insurance and investment
Drone surveys can also add value during dealmaking, with detailed drone imagery that lowers investment risk when properties are changing hands. With a flyover, it becomes a matter of a few minutes to figure out whether a property shows signs of external structural issues. The task of valuation also becomes easier, allowing property sales to proceed smoothly.
As a recent Wall Street Journal article points out, there’s also been wide-scale adoption of drone technology in the insurance industry. The use case here is rapid assessment of claims and the ability to respond to critical situations, such as assessing property damage after a natural disaster.
Quoted in the article, Travelers Insurance VP, Jim Wucherpfennig, puts it like this:
“The technology allows us to write damage estimates more quickly for our customers, pay them more quickly, so that they can begin the repairs to their property and get back on their feet.”
As with maintenance inspections, he adds that deploying drones to these sites ensures that claims professionals are kept out of harm’s way in potentially dangerous areas.
Smart glasses and CRE
A second technology that is gaining traction for site inspections is Augmented Reality (AR) “smart glasses”. In essence, smart glasses allow the user to combine what they are seeing in the real world with superimposed virtual tools, making it easier to measure and quantify key parameters during construction and development.
As an example, on a building site, an inspector equipped with smart glasses could take measurements just by looking at a doorframe or window and then compare their findings to virtual plans. They would also be able to photograph, record and stream what they’re seeing, ensuring no details are missed during an inspection.
Like drones, smart glasses also enhance on-site safety. In this case by ensuring personnel can focus on what’s in front of them, rather than the tablet or smartphone in their hand.
What’s important to bear in mind is that these technologies don’t negate the need for human intervention. Rather, they shift the human element to the controller’s seat.
The photographic surveys undertaken by drones, for example, still need to be interpreted by human experts. Similarly, the video feed from a pair of smart glasses still streams back to the team at the office, who are then enabled to support decision-making processes at the site. So instead of replacing human expertise, these technologies supplement it, providing the means to optimize routine operations.
For CRE professionals, these technologies offer another tool to add to the toolbox. And some extra options for making deal negotiations as smooth and seamless as possible.
Social: Are smart tech and drones already part of your CRE environment? And how do you see this space developing?
One of my favorite types of cuisine is Thai food. I love the variety, flavors and especially the spiciness. Like many, I have my favorite go-to location but was recently in Scottsdale, came across a Thai restaurant and had to give it a try.
While the curry dish that I ordered was fantastic, I made a classic blunder that rendered it almost inedible. With Thai food, it’s common to be able to select a specific spice level, typically expressed as a range from one to 10. At my Lakewood go-to, I always chose a four, which hits me just right. And of course, I did the same thing at this Scottsdale establishment – after all, a four is a four is a four, right? After almost having my eyeballs melt, I was quickly reminded of the danger of assumptions and how a four in Lakewood, Ohio can mean something very different as compared to a four in Scottsdale, Arizona. I know what you are thinking right about now; how is Pacella ever going to tie red curry to real estate? And by now, you likely know the response – read on! The next day on that Scottsdale trip, I met with a developer that was building a flex-warehouse project. The discussion soon settled on economics and this developer quoted a figure that was preceded with the phrase “modified gross.” I immediately hit the brakes on the conversation, as the memory of my scorched tonsils was still very fresh. I needed to understand exactly what the developer’s definition of modified gross was, as this is one of those terms that can mean dramatically different things to different people. This month, we are going to discuss the terminology used to describe the most common lease structures. Along the way, I will point out specific items to be aware of and components that can vary. Leases generally fall into two camps: net and gross. The term “net” is an indication that, in addition to rent, the tenant is also responsible for a portion of the related occupancy expenses such as real estate taxes, insurance, common area maintenance, repairs, etc. The term “gross” is an indication that the rent includes landlord contributions to at least some portion of occupancy expenses.
The following is a hierarchy of lease types, ranging from the types with the greatest tenant responsibilities to the types with the greatest landlord responsibilities.
Absolute net lease This lease structure requires the tenant to pay for any costs related to the premises, including real estate taxes, property insurance, repairs, maintenance, utilities, etc. It also requires tenant to pay for large-scale items such as a roof replacement or new HVAC unit or even rebuilding the structure should it be damaged or destroyed. The best example of this type of lease is a ground lease, where a tenant pays rent associated with the underlying ground and is also responsible for all other types of occupancy cost, including constructing, maintaining, repairing and replacement of any improvements. This type of lease can also be referred to as a bond lease and is most often seen in single-tenant retail properties, especially restaurants.
The term “net” is an indication that, in addition to rent, the tenant is also responsible for a portion of the related occupancy expenses…. The term “gross” is an indication that the rent includes landlord contributions to at least some portion of occupancy expenses.
Triple net lease This is by far the most widely used lease term and, like the term “cap rate,” it is often thrown around with reckless abandon. While some may assume this type of lease to result in the tenant paying for everything, that’s not usually the case. Let’s talk about what the tenant does pay for – in addition to rent, the three “nets” are real estate taxes, insurance and common area maintenance. These can be paid either directly (the tenant contracts for and pays the snow plowing expense) or indirectly (the landlord contracts for and pays the snow plowing expense and then sends a bill to the tenant for reimbursement). Now let’s talk about what the tenant does not pay for. Top of the list is replacement of major items, such as roof, mechanicals, structure or parking lot. And some gray can creep into this, as the lines between maintenance and replacement can be blurry. For example, an HVAC unit may need the belts replaced and a control unit swapped out. Would that be considered a repair (and thus an expense borne by the tenant) or a replacement (and thus an expense borne by the landlord). Another item is rebuilding expense. Suppose part of the property’s façade is damaged due to high winds – is this the tenant’s responsibility to repair or the landlords? While a well- constructed lease document will make situations like these clearer, one cannot simply rely on the term “triple net” as a catch-all. This type of lease is most often seen among multi-tenant retail properties, as well as single-tenant retail, industrial and office properties.
Modified gross lease If ever there was a catch-all term, this would be it. Also known as a double net or a hybrid lease, this structure connotes that some of the expense responsibility falls on the tenant and some falls on the landlord. Unfortunately, that’s as clear as things get. Sometimes, it means that the landlord pays for insurance and common area maintenance and the tenant pays for real estate taxes. Other times, it can mean that the landlord pays for real estate taxes and the tenant pays for insurance and common area maintenance. And still other times, it may mean that the landlord pays for maintenance and real estate.
Full service gross lease typically implies that the tenant pays for all operating expenses, such as real estate taxes, insurance, repairs and maintenance of the grounds and building, etc. up to a set threshold. Future increases in these collective expenses that exceed the threshold are the responsibility of the tenant.
Full-service gross lease
This is a very common structure in multi-tenant office properties in our market. It typically implies that the tenant pays for all operating expenses, such as real estate taxes, insurance, repairs and maintenance of the grounds and building, etc. up to a set threshold. Future increases in these collective expenses that exceed the threshold are the responsibility of the tenant. The tenant is also responsible for electricity usage within their premises, sometimes referred to as “lights and plugs.” But even this common structure has some pitfalls. One is janitorial – sometimes the landlord contracts and pays for cleaning of the tenant’s premises and other times the tenant will be required to contract for cleaning directly. Another is electricity. As electrical usage can be directly metered to the tenant’s premises, it can be sub-metered to the tenant’s premises, or it can be fed via a master meter and then charged on a pro rata basis.
Absolute gross lease This structure is rarely seen, save for one type of tenant. And if any of you have ever been involved with a lease for the U.S. Government, you know exactly what I’m talking about. In an absolute gross lease, the landlord pays for everything for the entire term of the lease. There are no pass-throughs, escalations or separately metered utilities. The day the lease is signed, the tenant will know exactly what they will be paying each month for the entire duration of the lease. There is not a “one size fits all” lease structure and even when we hear a common term, there can still be nuances. As I was painfully reminded in Scottsdale, assuming you know something based on a commonly used term can be a sure way to get burned!
Vancouver, in British Columbia, is one of Canada’s most well-known and densely populated cities. It is positioned on the west coast, just 45km north of the border with the United States. Some 650 000 people live in the “city proper”, while the larger metropole (bearing the name “Greater Vancouver”) is home to almost 2.5 million people. Vancouver is reportedly Canada’s most cosmopolitan city, with an ethnically and linguistically diverse population.
The city is a popular destination for the film industry (nicknamed “Hollywood North”), and for tourists, as well as enjoying a reputation as a cultural hub with many galleries, museums, and theatres. With a busy port, rail network, and as a nexus for the transcontinental highway, Vancouver’s economy was built on trade, and has expanded to include film and TV, tourism, raw materials, construction, and technology. Recently digital entertainment and the green economy are also driving GDP growth.
Like most of the world, Vancouver was rocked by Covid-19, with business shutdowns and job losses. However, it was relatively more resilient than other Canadian metros. The region’s gross domestic product (GDP) is expected to bounce back by 6.8% in 2021, and forecast to grow by 4.1% in 2022.
By September 2021, however, the Vancouver region’s employment figures had recovered in absolute terms. The Vancouver Economic Commission says: “Some jobs have migrated sectors; retail & hospitality are still recovering, while other sectors – such as tech and construction – have gained jobs.” Employment in the Metro Vancouver area hit 101.3 in September 2021, the highest figure in the country and “finally surpassing pre-pandemic levels”.
Vancouver is the country’s most expensive residential market and the most expensive place to live, which means that while it enjoys high scores in quality of life metrics, it has priced a lot of younger buyers out of the market. It enjoys high demand, and is considered a strong commercial real estate (CRE) market – especially for the multifamily and office sectors.
Software and data provider Altus Group says CRE investment in the Vancouver market area “saw a significant surge in the second quarter of 2021”, adding that the robust multifamily and apartment market is “fueled by the highest apartment rental rate in Canada, a shortage of rental product in the construction stage, and the anticipation of border openings to international students and immigration in the near future”.
Commercial vacancies naturally increased during the pandemic (increasing from 4.4% in late 2019 to 7.5% in late 2020) and the “return to office” expectations of 2021 was tempered by news of variants and secondary outbreak waves.
Companies seeking space in the city are increasingly looking to develop former industrial space in the east, according to Business in Vancouver, with particular interest from firms in high tech and the medical and life sciences. They are however competing for space with a powerhouse industrial segment. In Q1 and Q2 2021, investment in the industrial market in Vancouver surpassed $1.1 billion, and lease pricing reached a new record high of $15.50 per square foot.
According to The Washington Post – drawing from the studies presented at the world’s largest climate science conference in December 2021 – extreme weather events as a result of climate change are here to stay, and will get worse. The word from researchers is brace yourselves for a “new era of climate disasters”.
Extreme weather has already had huge ramifications for residential property – planning, building, and critically insuring – and the global commercial property sector must grapple with the same set of issues.
Residential and commercial
In the US, a new report from nonprofit, First Street Foundation and engineering firm, Arup suggests that an estimated “730 000 retail, office and multi-unit residential properties face an annualized risk of flood damage”. The risk assessment they used did incorporate fundamentals like sea-level rise, but – the researchers told CNBC – “focused more on flash floods, also known as pluvial flooding”.
First Street Foundation previously worked with Realtor.com to enable flood scoring for all US-based residential properties, and tools like this and other research models are increasingly going to be a part of the real estate developer’s toolbox.
Harvard finance lecturer John Macomber – writing in the Harvard Business Review – says that “climate risk has become financial risk”, and he argues that owners and developers have five options open to them for risk mitigation or “in investing in resilience” as he calls it. These are “reinforce, rebuild, rebound, restrict, and retreat”.
The challenge, he concludes, is “to look ahead, not behind, and to make these choices with intent”.
New York City (NYC) is virtually synonymous with commercial real estate. It’s a mega sector there, with legendary dealmakers and eye-watering costs. With an incredibly dense population and as a home to a huge number of global headquarters, the city was not only hit hard by the Covid-19 pandemic, but also responded with some of the strongest mitigation tactics seen stateside and in the world. A report from the New York State Comptroller Thomas DiNapoli (published late 2021) now shows the true costs of Covid on NYC’s iconic commercial real estate (CRE).
Setting the scene
In 2019, reads the report, the office sector in NYC employed 1.6 million people, or a third of all city jobs. In the preceding decade, office market property values and billable values (on which property taxes are levied) had “more than doubled”. Off this incredibly strong base, employment in the office sector shrunk by 5.7% in 2020 – certainly a blow, but less than the 11.1% drop in total employment.
The gap here lies in remote work as a mitigation strategy, but that resulted in reduced office space demand. “Asking rents are down 4.2% in the second quarter of 2021, while vacancy rates are at 18.3%, a level not seen in over 30 years in New York City,” according to the report.
Market values down
The result is a steep drop in the full market value of office buildings (463 million square feet of inventory), which fell $28.6 billion citywide – based on the 2022 financial year (FY) final assessment roll. This is the first decline in total office property market values since FY 2000.
In turn, Market Watch’s analysis says, the declines “cost more than $850 million in property taxes in the city’s fiscal 2022 budget.
Charting the return
What the ledger numbers don’t indicate, though, is “what next?”. Partnership for New York says that while the labor market recovery “remains sluggish”, NYC saw “strong income and sales tax revenues and pandemic-era highs in hotel occupancy and transit ridership” during Q3 2021.
The New York City Recovery Index – a joint project of Investopedia and NY1 – puts the state of the city’s recovery at a score of 85 out of 100, or “over four-fifths of the way back to early March 2020 levels”.
The CRE shakeup has also led to some much needed strategic thought and speculation about the future for NYC, including suggestions that empty office space be converted to residential to address the city’s need for affordable housing.
Despite the ongoing uncertainty of the new virulent Omicron variant of Covid-19, there are a lot of positive signs that we can expect in 2022 for commercial real estate (CRE), according to a round-up of sources.
The case for optimism
First, however, an important caveat: Of course, all of these predictions are opinion. No matter how great the historical data used to inform those opinions, they are still not to be considered “financial advice”. Having said that, after a difficult two years (for global business, not just real estate), a little optimism is a welcome break.
“Eighty percent of respondents [to their survey] expect their institution’s revenues in 2022 to be slightly or significantly better than 2021 levels,” writes the report’s authors.
…And so does the data
Meanwhile, Forbes real estate contributor and economic analyst Calvin Schnure has done a list of predictions for the year ahead, starting with this one: “Property transactions will rise further in 2022 as the economic recovery gains momentum, and CRE prices will maintain growth in the mid-single digits. REIT mergers and acquisitions could top 2021 as well,” writes Schnure.
How does he come to this conclusion? It’s a matter of looking at the bigger (data) picture trends, he says – plotting this graph from RCA, Bloomberg and NAREIT data.
Finally, in December 2021, investment and commercial analysis publication The Motley Fool issued a “rare ‘all in’ buy alert” for CRE, offering three key points of their bullish positioning:
“Industrial and multifamily sectors look the most promising in the new year.”
“Retail and office CRE should have its good performers but see more headwinds.”
“REITs remain a promising avenue for overall returns.”
For the nitty-gritty in how they came to this conclusion, read the full analysis by author Marc Rappaport here.
As we said above, a prediction isn’t a guarantee, a forecast isn’t fact, but we think these bold analysts make a great case for optimism and a solid-looking year ahead for commercial property and investing.
From us to you, happy new year to our CRE network and peers!
Extended uncertainty about the anticipated return to the workplace will have ramifications in the securities markets, but commercial mortgage-backed securities (CMBS) are holding strong… for now.
Commercial mortgage-backed securities (CMBS) are a financial product, a type of bond issued in securities markets, and built on the cash flow from pooled mortgages on commercial properties. They are often grouped by region or type of property, such as office CMBS or multifamily CMBS.
Vacancy rate effect
Naturally, the health of the underlying category influences the CMBS itself, although, unlike direct investment, these have a degree of diversification built into the asset which represents a bundle of loans.
In the US, the office sector currently accounts for almost a third of the underlying value within CMBS, and this has institutional investors wary, despite the 38.6% improvement in office occupancy in late 2021, investment specialist Jen Ripper told Commercial Observer.
This means “upcoming lease rolls and loans” would be “under heavy investor scrutiny”, she added.
Trends over time
CMBSes have, however, been resilient throughout the Covid-19 pandemic. CRED iQ – a data company – told the publication that CMBS office debt has remained relatively unscathed, with only 2.89% in “either delinquency or special servicing”. In December, the delinquency rate declined made for a 17-month streak of improvement.
“By property type”, they added, “individual delinquency rates for lodging and retail exhibited modest month-over-month improvements but still remain the two most distressed sectors.
This is largely in line with the results from data provider Trepp, who found the delinquency rate across categories dropped 20 basis points from October to 4.41% in November 2021. Within Trepp’s report, though, lodging and retail “saw the biggest improvements”.
Beyond its relevance for investors, keeping an eye on the strength of CMBS loans can help commercial real estate (CRE) professionals in spotting opportunities and even leads – as it forms part of property debt research.
by Alec Pacella for Properties Magazine January 2022
The dust has finally settled on 2021 and, for better or worse, it looked a lot like 2020. It’s that “better or worse” part that will be the focus of my annual wrap-up column.
I’ve used this theme a few times in past columns, sometimes I termed it “best of times, worst of times’ while other times I called it “glass half full, glass half empty.’ As has been said several times in the recent past, COVID has accelerated trends that were already present and the concept of ‘better or worse’ is no exception. To see what fared better and what fared worse, read on.
So far in this blog series, we’ve looked at some of the most cutting-edge emerging technologies: The Internet of Things (IoT), robotics, and virtual reality. We’ve discussed the potential these developments have to revolutionize the way we do business and work in the real estate space.
While each of those has its applications, none hold quite the same promise for changing the fundamental aspects of how we make, and document, commercial real estate (CRE) deals as blockchain. In this fourth entry in the emerging tech series, we have a look at the implications of this pivotal technology.
Nowadays, blockchain is a term everyone’s hearing with increasing regularity. To start, it’s worth having a brief recap of exactly what the tech is. At its simplest, a blockchain is a ledger – a record of information. Not all that different from the databases you’re already using to record details of properties, clients, or transactions.
The feature that makes blockchain unique is the way that information is recorded. Each “block” can hold a certain amount of data. Once a block is full, a new block is started and the previous block forms part of an immutable chain – essentially a timeline extending outwards from the first block to the current one.
Information on the blockchain is public and distributed across a network of computer systems – meaning that it’s very, very difficult for one person to hack or alter the information stored in the chain.
The opportunity blockchain presents for the CRE space, is the ability to streamline a lot of time-consuming tasks. Imagine having all of the paperwork for a given property digitized, accessible to everyone involved in the deal, and confirmed as accurate by multiple parties.
“There are two areas where I think the blockchain is. There’s going to be the intersection with legal tech, so that’s land registry and recording and ownership, and all of that paperwork that exists in the system… the other is the intersection with fintech.”
Of course, an issue that comes up here is how this system can be used with potentially sensitive information – client details that shouldn’t be a matter of public record. For business networks, private blockchains can be set up to only allow access to specified parties. In this case, the identity of participants is verified in the network as well, unlike public blockchain where users can remain anonymous. Private blockchains function more like a traditional database in this sense, trading off some of the immutability of their data for privileged access.
Sealing the smart deal
Maybe the most promising application of blockchain for CRE deals is being able to deploy “Smart Contracts” for things like tenancy agreements. Smart contracts hard code the details of an agreement on the blockchain, and are uniquely suited to real estate deals, because they can handle conditional clauses.
As an example, startups like UK-based Midasium are already providing a prototype platform that replaces traditional landlord-tenant agreements. Using smart tenancy contracts, clauses of the agreement are automatically enforced when certain conditions are met. This can include paying rent, returning a security deposit, and directly deducting maintenance costs from the rental amount paid across to the landlord.
It’s a system designed for transparency and rapid settlement, and the concept is gaining traction in other parts of the world. An added bonus of using smart contracts for tenancy is the possibility of building up a database of real-time data for rental prices and trends in the rental market.
A growing sector
Overall, enterprise reliance on blockchain is set for rapid acceleration. Forbes, quoting an International Data Corporation (IDC) report notes that:
“Investment in blockchain technology by businesses is forecast to reach almost $16 billion by 2023. By comparison, spending was said to be around $2.7 billion in 2019, and we will see this acceleration ramping up over the coming year.”
Blockchain adoption in CRE, however, is still in the early stages. The tech still needs to overcome a few growing pains – in terms of privacy concerns, operational complexity, and a lack of standardized processes – before we’ll necessarily see it forming the backbone of CRE transactions.
That said, it’s a space well worth keeping an eye on. There’s been growing interest, for example, in CRE tokenization – splitting the value of a given asset into separately buyable blockchain-based tokens. What this means in practice is that instead of looking for one buyer for an expensive asset the value gets subdivided and opened to a much broader market. Which in turn may actually boost the value of the underlying asset.
There’s a lot of potential and little doubt that blockchain will make its way into CRE one way or another. But, like many things in the cryptocurrency and blockchain space, the real challenge will be separating the wheat from the chaff, the fact from the hype, and identifying functional applications of the tech rather than purely fanciful ones.
We’ve all seen how the Covid-19 pandemic gave the industrial sector the shove it needed to go from well-poised to interstellar. Now research from the Commercial Real Estate Development Association (NAOIP) suggests there is no slowing down for commercial real estate’s (CRE) newest darling sector.
The NAIOP’s Industrial Space Demand Forecast for Q3 2021 shows that “sustained growth in e-commerce [and] demand for industrial real estate continues to outpace supply”. This, they say, puts the sector in a state of net absorption that will continue throughout the year and into 2022.
Digging into the numbers
The authors of the report are Hany Guirguis, PhD, Manhattan College and Michael J. Seiler, DBA, College of William & Mary. They write that “the demand for industrial real estate still outpaces supply” even with “nearly 100 million new square feet delivered nationally since the beginning of the year, 450 million square feet currently under construction and another 450 million planned”.
Their data then boils down to net absorption of some 162.6 million SF in the second half of the year, and they state that they’ve “returned to their pre-pandemic confidence levels”.
Triangulating more data The demand has of course been driven primarily by the boom in e-commerce. GlobeSt.com reports that e-commerce sales hit “a quarterly record of $222 billion in the second quarter of this year”, accounting for 13.3% of all retail sales. But there are contributing factors, such as growth in cold storage, materials and construction, manufacturing and medical industries.
With the combination of factors, CRE data analysts such as YardiMatrix are predicting the growth to stay buoyant through 2026. Yardi’s predictions include delivery of 348 million SF next year, 360 million SF in 2023, and up to 370 million SF in 2026.
New growth There are other blooming products and industry categories that will only increase this demand. The cannabis processing industry is hungry for space in deregulated regions and in countries with widespread legalization like Canada and Latin America. Finally, there are superlative predictions for the industrial square-footage needs of the commercial space industry too.
No wonder, NAIOP CEO Thomas J. Bisacquino calls industrial “a bright spot in the CRE industry”.
Reporting in the Evening Standard, based on data from Remit Consulting, indicates improvements in the UK’s commercial property sector. The firm’s data shows that rent collection in the last quarter reached its highest level in the pandemic period, which is partially due to the easing of lockdown regulations in the country.
Data from their REMark Report shows that “…an average of 72.1% of rents due in the UK had been collected with seven days of the September quarter rent day, which covers payments for the three months ahead”. This includes rent for retail and dining establishments, bars, and warehouses. Comparatively, in the previous quarter, 66.5% of rentals due were collected by the same point. Retail rents were sitting at 68.8% (up from 62.3%) and leisure at 57.2% (up from 40.1%).
This is in keeping with a general upward trend, the firm told the newspaper, “which is good news for investors and landlords such as pension funds and other institutions, particularly as the upward trajectory of payments from tenants is similar to the previous quarters of the pandemic.”
…but not all good
Despite the strength of this news, it’s not a unilaterally positive picture, as the data also indicates that this ‘record high’ is still considerably lower than pre-Covid levels. Altogether, since the start of the pandemic, there is a shortfall in rent from commercial occupiers amounting to nearly £7 billion – a considerable chunk for property owners and investors, including institutional investors such as pension funds.
Managing the fallout
The matter of the “missing rents” is something the industry and public service are keeping a close eye on. This report from the International law firm Morrison & Foerster LLP gives an excellent rundown of the public consultation that the UK government has done around trying to establish a way forward for both struggling commercial tenants and landlords.
The policy paper published in August 2021 can be found here, and outlines the government intentions to “legislate to ringfence rent debt accrued during the pandemic by businesses affected by enforced closures” and their intent to formalize a “process of binding arbitration to be undertaken between landlords and tenants”.
Meanwhile, a number of the large and influential property industry associations have called on the government to end the moratorium on evictions that came into effect during the height of the pandemic and lockdown measures.
The way the modern world interacts with physical space is changing. We’ve gone from “bricks and mortar” to “bricks and clicks” as the e-commerce revolution transforms retail, and all our devices are now talking to us and to each other.
The increasing utility of virtual and augmented reality is another contender for our attention as their applications in the commercial real estate (CRE) space become more apparent. These technologies promise to revolutionize the way we do business and interact with both our clients and real estate itself.
In this latest part of our series on emerging tech, we take a dive into some of the applications of these new tools and how they can be used to enhance CRE operations.
For many of us, the difference between virtual reality (VR) and augmented reality (AR) is a little fuzzy, so let’s start there. Augmented reality, according to the brains over at MIT: “superimposes virtual enhancements on real-world scenes in real-time.”
Virtual reality is a little different in that it creates an entire world or scene that you can explore, usually with the assistance of techs like VR headsets and haptic gloves. So, think about viewing an entire virtual mall or building site, or the interior of a space you are leasing out.
The terms are often used interchangeably, and they do overlap to some degree, but they aren’t synonyms. Fortunately, splitting them into neat little boxes is not a prerequisite for understanding how AR and VR can be used to enhance real-life CRE.
Space that virtually sells itself
One of the biggest advantages VR and AR offer is the ability to virtually show spaces, even before they’re built. This means marketing efforts can kick off earlier in the development process, and potential clients get a better, more immersive sense of what a property might look like before there’s even a door to step through.
Existing spaces are also increasingly being digitized through the tech produced by companies like Matterport which specialize in 3D capture. Properties can be staged and shown as a digital, interactive experience that really gives potential buyers a sense of what a space looks like. Recent studies on residential properties using the tech showed that having a virtual tour meant that, on average, a property closed 31% faster and sold for 9% more.
Aside from the obvious financial upshot of those numbers, VR tours also mean less time spent physically traveling to and from sites. That can be a huge bonus for both CRE professionals and clients. Brokers can guide prospective tenants towards a higher number of property options and help those clients curate a shortlist of candidates they’d like to see in person, raising the likelihood of making a deal.
Built to (digital) spec
Other areas where VR is making an impact are in architecture and construction. Modeling buildings under development in VR means that any potential problems can be identified before they’re, literally, cemented in place. Plans can also adapt and change easily, and creative solutions can be “tried on for size” before committing to them. Having a digital model also serves as a point of truth that a team can return to during lengthy development projects. All of which translates into savings in time, money and materials.
Once construction is complete, buildings outfitted with appropriate sensors can also generate a digital twin – a virtual copy of the building and its systems. This is a real-time model of the building and can include information like power usage, air quality, temperature, and occupancy, among other factors. Using this data, it’s possible to streamline a building’s operations to meet energy efficiency goals and once again, reduce costs.
Of course, this is much easier to include as part of a new development. One of the challenges to the wide-scale implementation of this tech is aging building stock, which is costlier to outfit or retrofit with the necessary hardware.
Meanwhile, returning to VR’s more grounded cousin, augmented reality has some interesting applications of its own. Large furniture suppliers like IKEA are already using the tech to help buyers model furniture, or entire room designs, through an app. In CRE, this kind of functionality could see use when staging a space – along with the option to present multiple versions of the room or site to potential buyers.
As mentioned above, AR is also being used for wayfinding. Using digital sensors, a busy mall or office space can be outfitted with virtual markers that visitors can follow to their desired destinations. Retail, in particular, stands to benefit from the ability to guide shoppers to specific areas or products – all while providing additional information and support through a phone-based app.
Steady growth on the cards
As far back as 2016, Goldman Sachs predicted that the global AR and VR market would be worth $80 billion by 2025. While current estimates from Statista are a little tamer – with VR predicted at $12 billion and mobile AR at $26 billion – the trajectory of the industry is clear.
Consumer demand for AR and VR enhanced experiences is likely to climb as these technologies gain traction, and the value to CRE professionals is obvious. All of which makes this a curve well worth getting ahead of for the savvy brokerage.
The National Council of Real Estate Investment Fiduciaries’ (NCREIF) latest report on the performance of daily-priced fund indices (NFI‐DP) indicates remarkable strength in the sphere. The report covers the September 2021 period – the latest at the time of going to print – and the data shows the asset class had its highest monthly returns in a decade.
This would put year-to-date (nine months) returns for this group of daily-priced funds at 13.08%
Performance and make-up
The NFI‐DP at the end of Sept 21 was at 2.36%, up from 1.68% in the preceding month. According to the NCREIF, the index represents “the performance of a group of daily‐priced open‐end funds that invest predominantly in private real estate, generally ranging from 75% to 95% allocation”. The balance of allocation for these funds sits in liquid investments (including cash and securities). This makes for a “small universe of qualifying funds” and returns that are equal-weighted and gross of brokerage fees, as well as advisory and incentive fees.
NCREIF’s data is used by various media and industry analysts as one element (of many) in the determination of market health. They put together various data products, of which this is one, by collecting property and fund level information drawn directly from members – usually on a quarterly basis. The NFI‐DP however is drawn monthly. They have data from over 35 000 properties and 150 funds on their database, which dates back to 1977.
National property index
The decade-high record for daily-priced fund indices (NFI‐DP) noted above is not the only record-level they have noted this year. The last results from the quarterly NCREIF Property Index (NPI) (published in August 2021, representing Q2 2021) show the highest return in the past ten years, sitting at 3.59% up from 1.72% in the previous quarter. This is the top return result since the second quarter of 2011 (3.94%). NCREIF writes, these “are unleveraged returns for what is primarily ‘core’ real estate held by institutional investors throughout the US”.
SOCIAL: What industry facts and figures do you use to inform your understanding of the state of the market?
Digital transformation as a concept incorporates advances in technology and how these are integrating into and changing all aspects of our work and personal lives. With commercial real estate (CRE), digital is truly transformational and CRE professionals and companies are grappling with the myriad ways that it is upending established processes.
This is the thinking behind a series of themed blogs, looking at the emerging technologies that have a bearing property specifically – right from construction all the way to property management. This is the second blog in the series and will delve into artificial intelligence (AI) in the context of CRE.
AI is essentially machines and computer systems simulating “thinking” – not just recording and storing information, but analyzing that info and responding to it. This is built on a base of machine learning too, in which machines are “taught” what to search for and what kind of responses are required.
A practical example is a machine that is “taught” to recognize an object using a (large) database of photos. Another common type is a chatbot, a little piece of software – that has “learned” to recognize what is being asked, and has a system for deciding what info to provide in response. Siri is AI-powered too. There are plenty of other examples and nuances, but those are typical examples that most people have encountered.
Smart or intelligent?
For context, in the first blog in this series, we introduced the idea of “smart things” or the Internet of Things (IoT). A boiler that can be controlled remotely is “smart”. If that system dynamically controls itself, however, and produces insights into energy consumption correlated with use and weather patterns, then it’s crossed into AI territory.
According to Analytics Insight, AI has even been used to independently transact. Specifically, a “soon to market” algorithm that analyzed “large sums of data that included potential economic value, KPIs, property characteristics, and risk factors” selected and completed a property transaction, purchasing two buildings for $26 million.
Customer relationship management (CRM) and sales
The chatbot example mentioned above is one way in which AI can be used to manage and nurture your relationships with existing and potential clients. With both residential and commercial letting, a chatbot is a great early engagement tool as it can answer simple questions and even make appointments for viewings or meetings.
Not all chatbots are created equally, some simply are more capable than others, so be sure you understand what you’re buying before signing on the dotted line for implementation.
In the same vein, not all CRM packages have AI built into them, but as companies glean and store more customer info through their engagement with people, AI tools in CRM are expected to be more affordable and more mainstream. This includes things like lead qualification, credit memo creation, and sentiment analysis, where the system isn’t just capturing information but transforming it into useful and actionable insights.
It is precisely this – insight – where we see AI really shine, and why so many companies are investing in forms of AI on-premises and via the cloud. For example, AI tools can turn mounds of data into performance analytics for your properties. Combined with market conditions data, this can go from deep understanding to far foresight, through predictive analytics.
Furthermore, it is this kind of insight that many believe is needed, firstly to bolster post-pandemic recovery, but also to take CRE to the next level as a sector.
From smart buildings and smart cities to AI and machine learning, there’s little room for doubt that the world is rapidly moving towards a fully tech-enabled society. Forward-looking commercial real estate (CRE) professionals are embracing these new capabilities, and revolutionizing the way we add value to commercial real estate operations.
In the previous article, we discussed the impact of IoT (the Internet of Things) and Artificial Intelligence (AI) in CRE. In part three of this ongoing series, we examine the role robotics plays in moving real estate into the future.
One of the areas where the use of robotics in CRE has really taken off is drone-assisted operations. Drone technology is being used to target some key challenges faced in the industry.
Processes that used to be far more complicated and expensive, like aerially mapping a property, can now be accomplished in a fraction of the time, and at a lesser expense. Part of the benefit is that drones allow developers and marketers to tell a story, as the development unfolds week by week in stunning images from on-high. Large construction sites can also be more easily managed when material stocks and inventory are being monitored with drones.
Another use of the tech is cutting down the time spent on surveying properties for maintenance and compliance purposes. Aerial surveys can easily reveal damage or deterioration and allow owners to address the problem sooner.
Drones equipped with specialized imaging cameras can also detect major issues like gas leaks or help pinpoint areas of heatloss for energy optimization. Given the drive towards cleaner, more energy-efficient buildings, this is a technology that is likely to become a cornerstone of future CRE operations.
Robots have also gained some traction working in building interiors. Machine technology can be used to map interior spaces and even, to present them to prospective tenants.
San Francisco-based operator Zenplace uses small telepresence robots to show properties, complete with a screen for the realtor to interact with clients – all from the convenience of the office. This means a more convenient process for prospective tenants, who can gain access to a property using an app on their phone while cutting down travel time for the agent.
A bot by any other name
Another area where robotics is taking CRE by storm is software robots aka “bots”. Robotic Process Automation (RPA) is the use of bots to automate mundane and repetitive tasks that would otherwise need to be done by human workers. This means time-intensive work like document management or invoice processing can be outsourced, leaving brokers free to focus on larger strategic goals and more creative problem-solving.
Using RPA, brokerages can also extract large amounts of untapped data from existing databases. This is likely to be an increasingly useful application in years to come, as digitization in CRE increases and large volumes of new data start pouring in from a slew of smart buildings being added to existing portfolios.
What the bots can’t currently do is analyze that data – the creative interpretation that task requires is best left to humans.
Reimagining Logistics Assets
On the back of a burgeoning e-commerce industry, robotics is also adding value through streamlined logistics processes. The landscape of logistics assets is changing, with a movement towards micro-distribution centers and multi-purpose retail spaces opening up new opportunities.
In a research report from the Commercial Real Estate Development Association (NAIOP) these new trends, and the robotics enabling them, are explored in detail. Some key findings are that previously underutilized spaces, including areas in malls or old parking garages, are finding new purposes as distribution sites that help solve the Last Mile problem of logistics.
Given their location in urban and suburban centers, these new types of logistic assets are blurring the lines between logistics and retail. Landlords and owners can now install logistics mini-sites in existing buildings, largely thanks to automated storage and retrieval systems that shrink the operational footprint. It’s a new way of imagining space and how assets can best be put to work.
An additional interesting trend is that larger logistics assets are now often being established further away from city centers. While this may sound counter-intuitive, with greater automation the need for on-site staff decreases, and companies can take advantage of cheaper land and operations costs in more remote areas. The NAIOP report goes on to quote ABI Research’s projection that, by 2025, some 4 million commercial robots will be hard at work in over 50 000 warehouses.
The human face of robotics
By now, you could be forgiven for thinking that this sounds like the start of a robot revolution that will put a lot of people out of work in the long run. The truth is, we are far from independently functioning robotics and AI.
Advances in these technologies allow people to do their jobs faster and more easily, taking a lot of the monotonous aspects out. As rapid-fire data-handling, logistics, and site management become the norm, there will also be an even greater need for people to oversee those processes. And the potential robotics offer for improving CRE operations means more ways to add value for customers and CRE professionals alike.
Nestled on Panama’s Pacific coast, Panama City is a bustling commercial hub that houses the regional headquarters of multinational giants like Caterpillar, Dell, BMW, and Philips. The city combines an eclectic mix of towering high rises, commerce districts and old, colonial areas like the charming Casco Viejo.
An international trade hub
Progressive tax laws and the ease of setting up a business in the country have contributed to robust growth. The country is a top economic performer in Latin America and holds a unique position of global trade importance due to the presence of the recently-expanded Panama Canal and the world’s second-largest free trade zone.
Panama has therefore established itself as a trade and logistics hub, with a lot of the resultant economic activity concentrated in, or near, Panama City. Thanks to this focus on a services-based economy, Panama also attracts large amounts of foreign direct investment (FDI), leading the Central American region in 2019 with $4.835 billion claimed.
The flip-side of having an economy rooted in world trade and foreign investment is that the pandemic hit Panama particularly hard. The country recorded a 17.9% GDP contraction in 2020.
CRE crunch through the pandemic
Due to the hard lockdown measures implemented from March 2020, real estate sales in Panama City came to a halt. As in many other cities, industries like tourism also took a hefty hit, and the retail sector faced challenges as the hard lockdown extended into June.
For Panama City’s office market, the pandemic came at a particularly inopportune moment, hot on the heels of an oversupply phase in 2019. The boom in office construction was the result of a period of sustained growth during 2013-2015, which saw a large amount of development undertaken in subsequent years.
At the end of 2020, the office property sector recorded a vacancy rate of 24.2%, with increasing competition between rentals. This includes Class A and A+ offices, which showed a 25.7% to 26.5% increase in vacancies quarter-on-quarter by Q4 2020.
Similarly, in the first quarter of 2021, general property prices in the city have dropped, following a 10-15% drop-off in rents in 2020.
A strong recovery expected
Despite the hard impact of the pandemic, the overall investment sentiment in 2021 is positive. Early in the year, Panama gained a vote of confidence with the extension of a $2.7 billion precautionary credit line by the International Monetary Fund (IMF).
The city has also resumed key development projects, like a twin cruise ship pier that will open up new tourism opportunities to bolster the local economy. And as far back as May 2020, Forbes listed Panama City as a strong contender for an investment with a short-term horizon, even in the midst of the pandemic downturn.
Charting a course
This strength is reflected in the extensive measures being taken by the Panamian government to encourage investment and build confidence.
According to President Laurentino Cortizo: “We have an economic recovery plan that has five pillars. We cannot talk about economic recovery if we do not have a good vaccination strategy […] that’s the base of that. We do have programs for small, medium-sized enterprises. We have infrastructure projects that generate quite a lot of employment. We have also […] some resources for our financial sector, and the bigger economic activities, for example construction. And the last one […] is related to the attraction of foreign direct investment.”
The reopening of international travel in October 2020 also saw an influx of FDI, as buyers jumped at the lower prices on offer in the Panama marketplace. Property tax exemptions and the opportunity to obtain resident status through real estate investment are additional contributing factors to the country, and Panama City’s, appeal.
IoT in CRE: The smart development, and smarter CRE professional
It is a well-established fact that digital transformation and the integration of technology have impacted almost every aspect of human life including our workplaces – and commercial real estate (CRE) is no exception.
With this in mind, we’re taking a look at the emerging technologies that are changing property in a new series of blog posts. This is the first, and in it we will look at the current and future possibilities of internet of things (IoT) technology in CRE.
Smart things 101
First off, let’s start with a basic definition of IoT. IoT makes “dumb” things “smart”, or disconnected things into connected ones. It includes a range of sensors and communication modules so that physical things – doors, parking booms, lighting arrays, heating, ventilation, and air conditioning (HVAC) systems, boilers, etc. – can be monitored and controlled remotely.
IoT also supports further digital transformation, such as machine learning in which data can be used to teach a system to the point of a high degree of autonomy.
Green ambitions and controls
IoT has a large number of applications in our CRE developments already, but one of the most common (and commonly understood) is how they can aid in managing energy and systems like lighting and HVAC – from the simplest option of running on a thoughtful schedule to dynamic adjustment in response to factors like the weather and footfall.
SpaceIQ is a company that offers a suite of software solutions for companies that want to improve workplace productivity. They talk about the efficiency these types of systems provide, explaining: “sensors that integrate with your lighting system can track room occupancy and activity. Based on the occupancy data, the sensors can automatically turn lights on and off. Having lights automatically turn on only when rooms or spaces are in use can translate to significant energy savings”.
These types of sensors can be used to adjust cooling and heating too, based on the real-time occupancy of a building. This is not just efficient energy use but can boost the experience of a space, for workers in an office and for shoppers in a retail center.
This is why IoT in facilities management is becoming an exciting area, as well as a means to maximize profit and curtail costs. With well implemented data collection, we are now able to produce “digital twins” to our buildings, or a virtual representation of a building that can show in real time the state of that building and its systems.
Forbes has a recent article on this, quoting John D’Angelo, US real estate leader from Deloitte Consulting. D’Angelo explains that insights gleaned from using IoT data can be used to track “how the building operates to make [..] operations more efficient, improve occupant (shopper, resident and patient) experiences and identify issues or potential issues”.
Wide use potential
Yahoo Finance – quoting from a new market study published by Global Industry Analysts Inc., (GIA) – says that the “IoT Analytics Market” is expected to be worth some $40.6 Billion by 2024. The breakdown of the in-demand IoT functions to watch over the next two years as “demand response, distributed energy generation and storage, smart meters, and fleet management” predicting these “will emerge as largest IoT spending categories”.
“Applications with medium-term potential include automated inventory management, and predictive equipment maintenance,” they add.
Although the potential for these systems is almost limitless, we must caution that connecting a boiler – for example – to the internet for remote monitoring and maintenance, also means opening that boiler and system up to the possibility of bad actors or “hackers”.
One needn’t look beyond the headlines for multiple examples of how important this factor is – as the recent Colonial Pipeline attack so clearly illustrated.
Any connected system will require security too, ideally from an expert in IoT systems – as the connection protocols for physical objects (whether retrofitted with comms tech or designed to be smart) can be vastly different from those of our phones and computers.
Data from the seventh annual industrial market report by WealthManagement.com Real Estate (WMRE) remains clearly bullish on the industrial sphere of commercial real estate (CRE), particularly on the points of sentiment, occupancy, and rent growth.
The report is based on an April 2021 survey distributed to readers of Wealth Management Real Estate. Respondents include private investors, financial intermediaries, developers, lenders, occupiers, and service providers, with over 50% of respondents in senior management and ownership roles.
It is in keeping with other market analysis sources. The industrial deal volume was up 18%, in comparison with 2015 to 2019 averages, according to RCA’S most recent U.S. Capital Trends report
Ecommerce at the core
The prospects of e-commerce and fulfillment, they write, were strong drivers before Covid-19: “The demand for home delivery of more types of goods and services provided extra fuel for fires that were already burning even before COVID-19… The strong and consistent performance also caught the eyes of new investors looking for a safe haven.”
The report draws from the U.S. Census Bureau information which shows how e-commerce made up 14% of total retail sales in Q4 2020 (up from 11.3% in Q4 2019), and from other sources that suggest e-commerce is to grow to some 21% of global sales by 2025.
Around the world, top corporates seem to be continuing their acquisitive streak in this space:
A mid-Aug release from Amazon announced their plans for a robotics fulfillment center and five new delivery stations in Florida.
Australia and the UK are also seeing news of large industrial deals, as companies seek strategic assets for “e-commerce, on-shore manufacturing and a desire to be positioned close to the end-consumer”.
Expansion is expected to last
Even with the need for social distancing measures on the decline, the WMRE report’s respondents show faith in “a lot of runways to go for what’s already been a long run of expansion for the sector”.
Frankfurt is one of Germany’s largest and most economically significant cities. With just under a million inhabitants, it’s the fifth most populous city in Germany. It is also an economic center for the country, with the sectors of finance, education, events, tourism, and transportation being particularly well represented therein.
Economic and travel hub
Frankfurt is considered the financial hub of Germany, and an internationally significant finance hub at that. Many global and multinational corporations maintain major offices and are even headquartered in Frankfurt, including Deutsche Bank, The Frankfurt Stock Exchange, and the European Central Bank.
In addition, it is a major transport connection, with Frankfurt Airport being the busiest in the country. As home to the world’s largest internet exchange point too, it is fitting that many European and German startups and digital-focused firms have chosen the city for their base.
The flipside of this is that it has high exposure on the office space side of CRE, which understandably took a hit under the lockdown measures during the Covid-19 pandemic.
According to Bloomberg, for example, reports the financial district in particular, remained “eerily deserted” in June and this was expected to continue until high vaccination rates are achieved: “The proportion of people fully vaccinated in Frankfurt was only at about 25% as of June 20,” Bloomberg says.
Logistics and warehousing in the region are on the up, however, the uptake of space in industrial and logistics in the first half of 2021 exceeding 300,000 m2 for the first time since 2018. Among other deals, DHL Supply Chain confirmed in July 2021 that they are building a 32,000 m2 logistics center just north of Frankfurt.
Recover on the cards, but slow
Its long history, established markets, and central position mean Frankfurt has been a relatively safe haven for developers and investors for years. Thankfully, it was largely spared from the worst of the flooding seen in the country in 2021.
Still, it has a way to go before returning to pre-Covid activity, Bloomberg argues: “Weekday workplace mobility data from Google for the region is still down 17%, while passenger numbers at Frankfurt airport—one of Europe’s busiest hubs—remain less than half their pre-crisis level”.
NAI Apollo is the NAI Global partner on the ground in Germany, with offices in three locations including Frankfurt where they are headquartered and have operated for over 30 years.
The New York City (NYC) property market has long been the most expensive and competitive in the country and often the world, the bleeding edge of commercial real estate (CRE). Not only is it the most populous city in the US, but it is a center of industry and commerce, synonymous with big deals, ambitious developments, and the American dream.
There are so many contributing factors at play here, but this info sheet from Crexi provides a fantastic summary for Manhattan and other boroughs and counties, including some insight into why the NYC market is the trend-leader that it is:
“The New York MSA is the unofficial capital of the world, the most populous MSA in the U.S., and has a GDP larger than many first-world nations”;
Some “73 of the Fortune 500 Companies are located in the New York MSA, including JPMorgan Chase, Verizon Communications, Citigroup, MetLife, Pfizer, Goldman Sachs Group, and Morgan Stanley”.
The costs of 2020
When the shine came off the Big Apple ever so slightly in 2020, it caused major ructions and ripples across the broader CRE sphere – nationally and abroad.
As CNBC has reported: In Q2 2020, “Manhattan apartment sales saw their largest percentage decline in 30 years, as residents fled the city during the Covid pandemic and brokers were largely unable to show places to prospective buyers”. It was the worst sales quarter on record for the city, and even media prices decline some 18% – the biggest dip in a decade. Developments were stalled and offices emptied out.
According to Curbed, among others, the origins of the slump pre-date the pandemic though. They write: “…beginning in 2017, a series of changes to state and federal tax law put a chill on the city’s sales, particularly at the high end in Manhattan”. This includes the 2019 state law that levied a one-time sales tax on homes over $1million. By the end of 2020, offices had a vacancy rate of over 15% – another three decade high.
State of 2021
The 2020 pandemic then effectively shut down the property sector, causing a crash in the data trendlines, and a strong correction as the sector opened up again.
In July 2021, the mood seems to shift towards sustained optimism, with some declaring “New York is back”. Data from appraisal firm Miller Samuel says average sale prices (residential) rose 12% in the quarter, topping $1.9 million. Plus, the Real Estate Board of New York’s latest quarterly Real Estate Broker Confidence Index shows that commercial brokers are feeling positive about both current conditions and expectations.
Reading the signs
Clearly, this is still a shifting story as the economy recovers and people and workplaces adjust. Some trends that may still shape the CRE market include ongoing rent concessions and eviction moratoriums, as well as office-to-residential conversions and office subleasing. As we know, however, the re-opening of the economy hasn’t been linear, so the CRE data continues to show pockets of sunshine and considerable volatility.
Dublin – the capital of the Republic of Ireland – has been making a name for itself as a center of finance and tech excellence for a number of years. Companies like Google, Accenture, Stripe, SAP, HubSpot, and Microsoft all maintain big offices there, and this has driven demand in both residential and commercial real estate (CRE) over the years.
In fact, the average disposable income per person in Dublin is 110% of the national average – but Dubliners need that extra cash because it’s also one of the most expensive cities in the European Union (EU). In fact, this was becoming a major talking point about the city in 2019.
So how are they faring now with the effect of the pandemic? Here’s what you need to know about CRE trends and news in this region…
Dublin is both the biggest city and the economic hub of Ireland. Because it is the seat of the Irish parliament, civil service is a big employer in the city. It is considered a magnet for technology-related businesses too, hospitality, retail, financial services, education, and more.
Like most major cities, the effect of Covid-19 on the economy was profound – especially on customer-facing businesses like retail, dining, and tourism, with considerable job losses at the peak of 2020 lockdown. The government is instituting a robust recovery plan aimed at mitigating the effects.
State of recovery
There are positive signs though that Ireland has positioned itself nicely to see good recovery signals in the second half of 2021. Significantly, more than two million people in Ireland are now fully vaccinated (two doses), reports the BBC.
About 70% of the adult population has had at least one of their vaccination injections, and 50% of the adult population has received two or two injections.
Despite this, the government is being responsible and cautious in reopening. Many major events, including the Dublin Marathon, are being pushed out. Dublin is considering the use of the proposed EU digital certificate (for fully vaccinated people) as part of their efforts to facilitate regional travel again.
Taking the CRE pulse
After a dismal 2020, Dublin is showing signs of vigor again. Independent.ie reports: “This year has seen health insurance rises, home-heating oil increases, rents surging and property prices increasing at rates last experienced during [boom times]”.
Residential housing prices in the EU are already gaining comfortably, with Ireland seeing 3.1% growth year-on-year, but being such an expensive city for living, Dublin has been rocked by the remote work movement which has led to record low occupation rates.
Irish Times, quoting a Virgin Media survey, reports that 43% of people surveyed want to work at home three days a week with two days in the office. This, they predict, will drive an even tighter crunch in office real estate, but that’s not scaring off the big businesses still interested in Dublin.
Salesforce, for example, recently told Diginomica it plans to invest more in these offices, with a view to changing how they use the space at hand. Bret Taylor, president, and COO of Salesforce explained he’s thinking of the office as “a place that you go to collaborate with your team…That’s changing the shape of our real estate, you know, more team spaces and fewer individual desks.”
It’s been a rollercoaster 18 months for everyone including market analysts who have had to provide insight and predictions on an unprecedented event, as the world bounded through recession, recovery, and reconfiguration. As it stands now, the US recovery has been swift, if uneven.
GlobeSt’s latest piece on this makes the argument for understanding this recession in different terms from so-called traditional ones, writing: “The COVID-19 recession was not caused by monetary factors, rather it has been a disruption akin to an unanticipated natural disaster which typically temporarily interrupts economic activity while leaving intact the underlying demand and supply of goods and services.”
The above forms part of their outlook reporting for hotel sales, and as has been well-established hotels, tourism, and hospitality were dramatically affected during the peak of the pandemic travel-bans and “shelter at home” orders.
GlobeSt points to some encouraging signs, including the volume of startup businesses launching, low levels of household debt-service burdens (in relation to net income), rising house prices, increases in personal savings, and the Dow Jones Industrial Averaging gaining some 18% compared to Feb 2020 (a pre-pandemic peak for the index). Altogether, these are positive signs that the American consumer may well have additional discretionary spending in the coming months, and the tourism space could be on the receiving end.
Corporate travel is expected to increase in the second half of the year, on top of the increases already evidenced in daytrippers and weekend travel. As schools reopen, they are anticipating patterns to shift from leisure to work trips.
Early 2021 winners
The Wall Street Journal reported earlier this year that real estate investment trusts (REITs) and companies with holdings in retail and hotels “mounted a first-quarter comeback”.
“Real-estate investment trusts overall rose 9% during the three months, beating the S&P 500’s 6% gain,” according to data-analytics firm Green Street. Fueling the REIT rally was an 18% rise in the shares of lodging owners and a 32% gain by mall owners.
Creative strategies Additionally, according to CNBC, distressed hotels were in demand from buyers looking for possible redevelopment and conversion projects, and other creative solutions to the low supply of affordable housing. “So-called Class C housing stock is now 96% occupied nationally and 99% occupied in the Midwest, according to RealPage, a property management software company,” CNBC writes.
And for hotels with no intentions of conversion – the vast majority – the pandemic also provided a kind of reset that allows for model innovation. “Similar to the airline’s ala carte approach, the hotel industry is attempting to move guests toward an opt-in choice for various services, such as daily room cleaning,” reports GlobeSt.
Counting the deals This article provides a deep dive into specific deals and statistics from hotel sales and performance in 2021 so far and is a recommended read for those CRE professionals servicing the submarket.
It will also make for interesting reading from a capital markets perspective as it details funding activity: “As the U.S. hotel industry continues to emerge from the carnage induced by the global pandemic, an abundance of capital is beginning to fuel increasing activity with lodging sector mergers, acquisitions, and spinoffs,” they wrote.
Since April 2020, the National Association of Industrial and Office Properties (NAIOP) has been keeping track of the pandemic’s impact on CRE with their regular COVID Impact surveys. NAIOP’s June 2021 survey collected data from 239 US-based members, including brokers, building managers and owners, and real estate developers. A recurring theme in this latest survey was the increasing challenges commercial real estate (CRE) is navigating associated with supply chain disruptions and materials costs.
Supply and delay With more than 86% of developers reporting delays or materials shortages, it seems the impact of COVID on supply chains is set to become one of the longest-lasting effects of the pandemic. Adding to difficulties, 66% of those surveyed reported delays in permitting and entitlements, a figure that hasn’t changed since June 2020.
Fixtures and equipment for stores are also in short supply, with order backlogs stretching into months for some retail sectors. While this isn’t necessarily surprising, given setbacks in manufacturing in key suppliers such as China, the CRE market shows promising signs of being on-track for continued recovery nonetheless.
Development despite setbacks Despite the issues highlighted in the report, the survey still showed an increase in retail prospects. New acquisition of existing retail buildings was indicated by 39.1% of respondents, while 31.3% mentioned new development going ahead. Both of these figures represent a strong improvement from a previous survey in January. Deal activity was also noted to be on the up, with figures doubling for office and retail properties over the course of a year, and industrial deal activity increasing over 20% since June 2020.
“Bricks and clicks” International industry players have also noted that, though larger spaces are still facing delayed rental uptake, 20,000-30,000 square-foot sites are garnering increasing interest. The potential for these spaces is as part of a multichannel retail/warehouse approach – the “bricks and clicks” strategy. As the demand for online retail increases, logistic assets, and storage spaces become more valuable, contributing to an overall uptick in both virtual and brick-and-mortar marketplaces.
A promising prognosis Even with the supply chain challenges facing the industry, the Federal Reserve agrees with the trend data gathered from NAIOP participants. In their June 2021 Beige Book, the Fed noted upward movement in industrial output and consumer demand. Though economic gains were noted to be slow, the outlook remains steady and positive.
President and CEO of NAIOP, Thomas J. Bisacquino, puts it like this: “The materials and supply chain issues are lagging effects of the pandemic, and they are affecting every industry. While the pandemic’s impact was deep, there’s a sense of optimism among NAIOP members, with deal activity rising and an increase in people returning to offices, restaurants and retailers.”
Your new build might pack the best-of-breed technologies and energy solutions – but did you know that it would take roughly 65 years for an energy-efficient new development (with as much as 40% recycled input materials) to save or recover the equivalent energy lost through demolishing? This is according to the United States Environmental Protection Agency.
Viewed through that lens, our approach to green buildings and energy efficiency may need a serious rethink. There is another approach to take, of course, and that is adaptive reuse. A strategy that although not strictly new, is quickly becoming a conversation starter and “darling” of sustainable commercial real estate (CRE) circles.
Adaptive reuse is not just about redesigning or redeveloping, it can be viewed as breathing new life into buildings, updating their use case as much as their construction, and a smart green step to take. They can also be beautiful, and simply “cool” – as this article in Architectural Digest details in its review on Cool Is Everywhere: New and Adaptive Design Across America, by photographer Michel Arnaud.
With adaptive reuse, developers and architects are starting on a green foot – using an existing building shell, rather than having to construct right from scratch. That means less material use, often less waste, and can reduce the number of shipments of materials needed, which contributes significantly to a building’s carbon footprint.
Adaptive reuse can also contribute to a neighborhood – in feel and in service provision – and is a popular way of making space for more offices and workplaces in an area with a declining manufacturing industry, or unlocking dining and entertainment offerings as the demographics in a neighborhood change. Urban Stack, for example, is the oldest standing building in Chattanooga. It was previously the Southern Railway Baggage Depot.
The old drill hall in Guelph, Ontario, Canada, is another such example. The local press describes it as “a building without a purpose – at least not a contemporary one”, in this report on the City’s plans to repurpose the building which has stood empty for over a decade.
And on campuses, like that of Boston University, adaptive reuse enables a strategy of densification and reuse, rather than trying to expand in this already bustling and developed city.
News broke in late July that Apple was pushing back its ‘return to the office’ expectations by at least a month. CEO Tim Cook had previously flagged September as a likely date for the majority of its office-based staff to resume in-person, on-site work – based largely on the availability of the vaccinations.
Now Bloomberg – citing unnamed sources – says the technology giant is feeling less confident in this push to return as many in the US remain unvaccinated and new variants continue to plague health services.
This is a blow to the “return to the office” rhetoric which has dominated the news in recent months and may have knock-on effects for the commercial real estate (CRE) industry – in terms of development planning, new builds, and investor sentiment.
Mask up orders
This decision is informed by government mandates, according to the sources. Drawing from the New York Times stats, Bisnow writes: “The average number of new daily coronavirus cases in California, where Apple is headquartered, has tripled in the past two weeks”. In addition, they report, Cupertino – Apple’s ‘home city’ – and the Santa Clara County in which it sits has issued a statement calling for the return to mandatory mask-wearing.
The county’s collective statement reads: “[we] recommend that everyone, regardless of vaccination status, wear masks indoors in public places as an extra precautionary measure for those who are fully vaccinated, and to ensure easy verification that all unvaccinated people are masked in those settings.”
This, as well as news on the effect of the Delta variant of Covid-19, has seemingly subdued sentiment on the markets, with the S&P500 taking a knock – dropping the most it has in two months, according to an additional Bloomberg report.
Despite this, many real estate investment trusts (REITs) and related investment vehicles are rallying. A contributor on the Nasdaq website takes a look at this counter-intuitive trend, pointing out that: “Vanguard Real Estate Index Fund ETF Shares (VNQ) added about 24.1% this year compared with 16.1% gains in the SPDR S&P 500 ETF (SPY)”. They argue that inflation, housing price increases, “booming cloud business” are among the factors underpinning this resilience.
Finally, the relatively high yields of real estate are setting them apart from other investments, writing: “The benchmark U.S. 10-year Treasury yield was 1.38% on Jul 1. Against such a low-yield backdrop, dividends offered by real estate ETFs are quite sturdy.”
A standout memory of my youth was going to the movie theater to see “Caddyshack.” While I’m sure some of you are rolling your eyes right now, others are smirking as you picture Judge Smails and the gang. The movie was one of the hits of 1980, grossing $40 million. Seeking to capitalize on this success, “Caddyshack II” was released a few years later. My memory of that was much different. To read the fully article, click here http://digital.propertiesmag.com/publication/?m=15890&i=714009&p=46&ver=html5
We’ve been on a mission lately, to share best practices and some of our favorite commercial real estate (CRE)-related technology tools in a series of blogs. This is our fifth in the series, and explores the uses of Salesforce. For clarity, this is NOT a paid or sponsored blog. We are motivated only by sharing information with our network. We want to hear from you too: What are your favorite tech tools? Is there a CRE digital solution we should know about?
Below we provide just a few reasons why they make our top tech list, and you can also visit them directly on http://www.salesforce.com/.
What is Salesforce?
First off, the basics: Salesforce – the company – is listed on the New York Stock Exchange, and Salesforce – the platform – is essentially a customer relationship management (CRM) tool. It is enterprise-focused, providing companies with the means to streamline all their sales and marketing functions, in order to promote goods, services and more sales – and because it is cloud-based, it’s accessible to anyone anywhere with a browser.
It is, we’ve read, the top CRM platform in the world. If you need to communicate with customers and manage your customer base, automate processes, or manage events, these are all to be found under the Salesforce umbrella.
Real estate is a field that has traditionally been seen as high customer touch and low tech – especially on the residential side of the industry. The scope of the CRE market however demands a lot more than a mental rolodex. A CRM strategy informs how you manage your stakeholder engagements and a CRM system, like Salesforce, brings together all customer touchpoints – email, website, phone, social, and more – and gives you a single, smart view of all interactions with an individual.
For both clients and for customers, you can see how powerful that would be. No more wondering if your colleague followed up or what the last status of your discussion was. It will all be viewable and linked in one place.
In June 2021, Salesforce also announced the launch of their Einstein Relationship Insights (ERI) tool which makes use of artificial intelligence (AI) research to gather meaningful insight into the relationships you enjoy with companies, customers, and prospective clients. This will be a very interesting addition to watch. Venturebeat says “ERI can help sales reps close deals faster by acting as a virtual agent for salespeople in all industries, scanning news articles, social media, collaboration apps, email, and other online sources to uncover and deliver account and contact information”.
The kind of data that goes into a CRM – and can be extracted from one – can give your marketing and communications the edge. For example, you can capture a client’s personal contact preferences, so you always know what’s the best way to start a chat on their preferred medium.
Salesforce also offers things like an email studio so you can send gorgeous and relevant mailers – as well as mobile, social, and advertising studios – and a journey builder so you can guide customers through the steps, channels, and departments as needed.
What is your top tech tool for CRE? Share your favorites with us.
Real Capital Analytics (RCA) has released their latest US National All-Property Index data for industrial, apartment, retail, and office sectors, which shows index growth of 8.4% year-on-year to April 2021.
The biggest gains were evident in Industrial (up by 9.4%), which we all know has been one of the few spaces for which Covid-19 proved to be a boon. But GlobeSt analysis of Crexi data and Moody’s Analytics suggests that a “market correction” may be on the cards
In the monthly Crexi National Commercial Real Estate report, they write, ‘for industrial… prices dropped 6.68% over April Figures, forcing cap rates up slightly in response”. However, occupancy rates in Industrial have increased over six months, by some 11.59%, and the asking rate per square foot is not at its highest levels since before the pandemic.
Multifamily prices, by contrast, increased some 10,5% but their occupancy rate declined slightly.
Moody’s data also shows that rent for warehouse/distribution was “positive nationally for every quarter” of 2020, and they anticipate it will also prove to be the “strongest rent of all asset classes this year”, with rental growth of 2.8% predicted.
Areas that are particularly well placed for Industrial and warehousing spaces – or those that have higher demand – will reap the rewards of this ongoing strength.
Florida, for example, reportedly has much need of at-home deliveries. Lawyer Bruce Lowry in a recent article said: “This area has spiked. The vacancy rates are extremely low, if not at zero, for warehouse space.”
He argues that this trend will hold for the immediate future as older consumers have become comfortable with delivery services “rather than having to go into a store”, and that the need for warehouse space to address this is not yet up to demand.
Other factors to consider is the rise of “subcategories” like eWarehousing, fulfilment, outsourced or third-party logistics. As smaller companies adjust to offer robust online sales and delivery, or through microfulfilment, shared space providers are having to grow and accommodate newcomers.
Those who have run on a “just in time” model, are having to find space for large stockpiles, and the last mile means that industrial is coming into closer proximity to the city centers and suburbs they’ve never featured in before.
For a rundown of the options, this GlobalTradeMag article offers an accessible guide to the types of industrial sub-categories that are going to be of increasing interest.