Archives for May 2017

A new report examines the risks and opportunities presented by trends in technology, demographics, lending, and politics.

The National Association of REALTORS®’ Strategic Thinking Advisory Committee on Wednesday released a new report, Commercial Real Estate ALERT: Analysis of the Latest Emerging Risks and Trends, which aims to function as a sort of D.A.N.G.E.R. report for the commercial industry. NAR commissioned Stefan Swanepoel’s T3 Sixty Inc. consultancy to create the report, which is a compilation of thoughts and data from interviews with more than 20 senior industry executives between November and February, as well as a wealth of reports and research from all corners of the real estate industry.
The data was collected after the contentious election of President Donald Trump, so the report reflects attitudes toward an unpredictable future for real estate. “There’s a lot of uncertainty about what’s going to happen,” Swanepoel told members of NAR’s Commercial Committee during a presentation at the REALTORS® Legislative Meetings & Trade Expo in Washington, D.C.
Some respondents in the report told T3 Sixty researchers they believed that the new president’s policies increase the risk of another recession, while others said they will not dramatically impact the economy or commercial real estate. Swanepoel said his company worked to synthesize different points of view and research outcomes: “This does not cover our opinion; this is your opinion.”
Some of the major trends and shifts to watch include:

1. Low interest rates and strong economic indicators in the United States indicate the country will continue to be a safe harbor for international investors. The report also predicts more foreign capital will flow into smaller cities and secondary markets.
2. The report predicts uncertainty will persist in commercial lending as regulations are slowly rolled out over the coming years. New regulations will likely increase borrowing costs and reduce credit capacity, which may price many lenders out of the market.
3. Crowdfunding portals appear to be gaining ground and could become a principal method for developers to gain access to capital. Whether it disintermediates real estate professionals or offers cheaper, faster credit to more investors is still an open question in this largely untested market.
4. Technology—particularly in the forms of increased connectivity, better data analysis, and smarter buildings—will transform the way commercial real estate professionals use, build, assess, and sell properties. Blockchain technology will offer increased automation and enable faster transactions. Autonomous vehicles will blur lines between urban and suburban areas and offer new development opportunities in transforming excess parking in the urban core.
5. With e-commerce sales continuing to take up greater shares of the retail marketplace, demand for “last-mile” distribution points in major cities will continue to grow. While this development will impact retail spaces negatively overall—one study indicates roughly 20 percent of all anchor space in U.S. malls will close over the next few years —it’s likely to be a net positive for industrial real estate, as brands will buy up more logistics space in order to serve customers more efficiently.
6. Shifting demographics will result in increased demand for flexible commercial spaces. While aging boomers will drive up demand for senior housing and medical office buildings, the lifestyle preferences of millennials will challenge all sectors of the commercial real estate industry. The report cautions against discounting the influence of the smaller Generation X, as it sets the tone for the transition between millennials and boomers.
7. Although many in commercial real estate are currently focused on short-term cost saving rather than a long-term environmental strategy, sustainability will become a more important factor in evaluating property as energy and water shortages accelerate.
8. With the new presidential administration, some worry about what the potential loss of 1031 exchanges and carried interest could do to the industry, while infrastructure spending could improve manufacturing and industrial real estate. Changes to international trade agreements and financial regulations are also important political discussions for REALTORS® to watch.

By: Meg White (National Association of REALTORS®)
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“Apartment cap rates, and cap rate spreads, are declining,” says Jim Costello, senior vice president with Real Capital Analytics (RCA), a New York City-based research firm. “However, deal volume is also down considerably.”
This year is likely to be starkly different from 2016 in the volume of apartment properties that are traded. “It is going to be incredibly difficult to surpass the volume of both single asset sales and portfolio transactions we experienced in 2016,” says Will Matthews, senior vice president with real estate services firm Colliers International.
Investors finally began buying apartment properties again in April 2017. Sales volume for the month was up 6.0 percent compared to the year before, according to RCA. However, one active month can’t make up for the incredibly slow first quarter of 2017. “The trepidation that was prevalent at the start of the year due to the election, anticipated interest rate hikes and geopolitical uncertainty, led many groups to sit on the sidelines in the first quarter,” says Matthews.
As a result, it’s unlikely that this year’s sales volume is going to catch up to last year’s levels. In 2016, the multifamily market saw just under $170 billion in investment sales, according to research firm the CoStar Group. This year, there will likely be less than $140 billion in sales, says John Affleck, a research strategist with CoStar.

Some uncertainties have eased for investors since the beginning of the year, but not as much for multifamily investors. “Higher interest rates have dampened deal volume,” says Affleck. But the sector is also experiencing weakening property fundamentals, concerns about the direction of government policy and competition from the housing sector.
Still, “we anticipate many sellers [to] get off the sidelines and take advantage of a dynamic seller’s market. For the remainder of 2017, we predict single asset transaction volumes [will] increase significantly, with a more favorable interest rate outlook and a mountain of loan maturities,” says Matthews.
Interest rates have become more favorable for investors as the 10-year Treasury is back to 2.25 percent, Matthews adds. “There is little to no impediment for sellers as evidenced by a lack of available supply driving a compressed cap rate environment… Holding back buyers is simply immense competition.”
Cap rates are also trending lower because apartment properties, and value-add apartment properties specifically, remain attractive to investors relative to their other options. Average apartment cap rates dropped to 5.5 percent in April, down 20 basis points from a year earlier, according to RCA.
“We anticipate this to be the new normal, with still remarkable demand fundamentals, fewer active listings creating less transaction volume and more equity and debt available,” says Matthews.
By: Bendix Anderson (National Real Estate Investor)
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Commercial real estate advocates offer a snapshot of the intersection between commerce and real estate.

Left to right: Emily Naden, Jennifer Platt, Sharon Whitaker
Commercial real estate experts discussed ideas for making transactions flow more smoothly and disspelled negative narratives about the retail sector and e-commerce during the REALTORS® Legislative Meetings & Trade Expo in Washington, D.C., on Wednesday. At a meeting of the National Association of REALTORS®’ Commercial Legislation and Regulatory Advisory Board, Sharon Whitaker, vice president of commercial real estate for the American Bankers Association, praised the committee for inviting several organizations to share their priorities. “Without each spoke in the wheel, it doesn’t move forward,” she said.
Jennifer Platt, vice president of federal operations with the International Council of Shopping Centers, focused on the positive aspects of retail, particularly strip malls. “We’re actually seeing opportunities and really low vacancy rates,” she told meeting attendees. “We’re seeing new tenants; we’re seeing different types of tenants.” She added that many retail spaces are being filled by companies that concentrate on experiential offerings, such as health care and wellness offices, restaurants, and educational offerings.
One of the elements undergirding the less-than-positive narrative about brick-and-mortar retail is the rise of e-commerce. Many states do not charge sales tax for online transactions, putting local stores at a disadvantage. Commercial Legislation and Regulatory Advisory Board Chair Michael Schoonover noted that leveling the playing field between online commercial activity and Main Street should be among the issues addressed by REALTORS® on Capitol Hill. “Those are jobs issues,” said Schoonover, GREEN, SFR, manager with John L. Scott Real Estate in Federal Way, Wash. “Congress loves to talk about jobs.”
Platt agreed that an important talking point to share with Congress is the fact that for every four brick-and-mortar jobs, there is only one job in e-commerce. She encouraged NAR members to talk to their representatives about the Remote Transactions Parity Act of 2017 (H.R. 2193), which would give states the authority to charge sales tax in online transactions. “There are some opportunities for that legislation to move forward in the next year,” Platt told the committee. She noted that more than half of states are projected to have a budget shortfall this year and that many lawmakers are looking for legislation that offers “a solution to a problem rather than a problem they have to deal with.” Even if there’s no meaningful increase in internet sales over the next 10 years, Platt said empowering states to collect taxes from online transactions could generate $260 billion in local revenue.
The event that precipitated the imbalance between online and brick-and-mortar sales is the 1992 Quill Corp. v. North Dakota case, where the U.S. Supreme Court ruled in favor of the office-supply company after North Dakota attempted to impose a use tax on its online sales. Platt said an appeal of that case will likely be heard in August by the North Dakota Supreme Court, setting the plaintiffs up to file a petition to be heard by the U.S. Supreme Court in spring 2018. Platt said newly appointed Justice Neil Gorsuch appears to be ready to side with those who support states’ rights to tax online sales, along with fellow Justice Anthony Kennedy. “We’re very bullish on the court case,” Platt said.
With financial shortfalls, possible Medicare cuts, and the ramifications of future tax reform threatening many states, Platt warned that other revenue-generating opportunities will become more tantalizing: “If you don’t deal with this, the states are going to do something.” Emily Naden, director of federal affairs for the Building Owners and Managers Association, pointed to Florida’s recently renewed sales tax on rent as one localized result of this need. “That’s a direct response,” she told the committee.
Committee member Jared Booth, CCIM, with Coldwell Banker Commercial Advisors in Salt Lake City, said his local government is coming after the wages of real estate professionals in order to plug a shortfall. “They’re looking at a tax on services for our commissions because they are losing tax revenue from online sales,” he said. “We have to get behind this.”
By: Meg White (National Association of REALTORS®)
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Determining how and where people work has massive impacts on productivity, employee engagement, competitiveness and an organization’s brand and reputation.

 
Changes in the workplace have come fast and furious over the past few years, with new technologies advancing digital mobility and giving rise to worker demands for a flexible work environment. Office users have responded by creating open, collaborative office environments with a variety of workspaces and amenities to attract and retain talent.
A “fourth industrial revolution,” driven by rapid technology innovation, is infusing digital into every aspect of society, notes a new report from real estate services JLL on “The Future of Work.” The report was developed with input from a C-suite of 20 clients that included top executives in real estate, finance, human resources and IT, as well as leaders from other disciplines.
The report explores how to manage uncertainty following fast, profound change and leverage disruption to “create an agile workplace and adaptable model for achieving ambitions in an environment where stability is an illusion or, worse, a sign of stagnation.”
According to Paris-based Marie Puybaraud, PhD, JLL’s global head of research for corporate solutions and leader of the Future of Work project, the three game-changers affecting an organization’s financial performance and operational excellence, in order of importance, are: the human experience, digital technology and innovation—how collaborative and cooperative are changes in an organization.
“The two pillars that most concern our clients are digital drivers and human experience,” she says. In the past, JLL’s technical conversations with clients revolved around issues involving their service lines, Puybaraud notes. Now clients are encouraged to think about work as a living organism that continues to evolve and how that impacts real estate.
The report noted that one essential reason for adopting a broad view is that nothing occurs in isolation anymore. As organizations place a premium on creating engaging workplaces as part of the war for talent, that focus on the human experience requires innovation, touches upon digital capabilities and impacts financial performance and operational excellence.
While the integration of digital technology with real estate is the driving force behind the changes, the challenge is how to integrate disruption into a real estate strategy that engages and empowers workers to fulfill their ambitions, as well as achieve the organization’s goals, Puybaraud says.
She notes that addressing the human dimension requires going beyond the physical environment, reaching across all aspects of the human experience and behavior—leadership, community life, education, salaries, health, choice, values, the environment and corporate responsibility.
Determining how and where people work has massive impacts on productivity, employee engagement, competitiveness and an organization’s brand and reputation.
The Future of Work model developed by Puybaraud’s team comprises five interrelated dimensions.

• Harnessing digitization and rich data to enhance performance;
• Enhancing user experience through engagement, empowerment and fulfillment;
• Combining new ideas, solutions and processes to drive value creation and accelerate transformation;
• Managing spending to enable growth and enhance return on investment (ROI); and
• Optimizing enterprise resources and service delivery to increase productivity, mitigate risks and ensure high performance.

All five dimensions are vital to running a thriving organization, noted the report, but how they are addressed and the priority given to each will vary by organization and industry.
When presented to JLL’s 20 clients, Puybaraud notes that they saw this model as a way to engage with their own executives.
“All of our clients use real estate to recruit and retain talent—they actually see it as a weapon in the talent war,” she says, but notes that the office is increasingly competing with off-site workplaces where people may prefer to work. In fact, a recent JLL survey revealed that 54 percent of people work at home more than five days a month and 33.6 percent work regularly in other places, including internet cafes, public libraries or co-working spaces.
“In the future, the driving force will be to create more and more real estate transformations to wrap around a liquid workforce, spaces where people can come together and disperse quickly,” Puybaraud says.
Planning office space will no longer involve squeezing a certain number of people into a specific space or allocating a pre-determined amount of space per employee. Rather employers will think about investing in different types of spaces, Puybaraud notes. The report predicts that by 2030, 30 percent of corporate real estate portfolios will comprise flexible space, including co-working, incubator and accelerator spaces.
While Millennials initiated the movement to a mobile workforce, Puybaraud says workers of all ages are demanding flexibility in when, where and how they work. Noting work dynamics are changing fast, she predicts, “The next wave of new office workers will ask for a different type of work, not a difference workplace.”
In addition, a report from consulting firm Deloitte, “2017 Commercial Real Estate Disruptors,” identifies disruptive trends office owners can use to make physical space future-ready.
Among the trends is occupant health and wellness. Companies are placing equal emphasis on mental, social and physical health and wellness within the built environment to recruit and retain tenants, improve productive and lower absenteeism, the report notes. Landlords are advised to adopt design elements that promote health and wellness, collaborating with tenants to understand their health and wellness requirements, as well as using the Internet of Things (IoT) to track, adapt and optimize resource usage and share IoT sensor data with tenants to help them enhance employee productivity.
IoT-enabled physical space will impact office owners in multiple ways, improving building performance and profit margins through cost savings and operational efficiency that lowers operating costs, facilitates predictive maintenance and increases security.
IoT technology can also create competitive differentiation and improve topline growth for landlords through service innovation, including leveraging sensor data to offer tenants more customized design and experience by capturing and analyzing end-user behaviors.
Footpath technologies also enable office property owners to provide key insights on employee interactions and movements to help design more comfortable workspaces.
The Deloitte report advises landlords to determine the types of IoT applications most beneficial to operational efficiencies and other desired outcomes, ensuring seamless integration and interoperability with existing technology systems. Then look for ways to monetize the investment by recording, aggregating and analyzing sensor data to offer analytics as a service to tenants and third parties to generate new revenue.
Demographic data and predictive analytics will play a disruptive role in real estate development, the report claims. Predictive analytics will help investors make better-informed decisions by using data in helping them understand a region’s unique demographic profile, both now and in the future.
These tools can also potentially assess whether the existing commercial real estate infrastructure aligns with requirements of market inhabitants, property ownership and management costs, upcoming developments in the region and transportation infrastructure. This data can help investors decide on the location and scale of new development or redevelopment of existing properties.
Companies can further use demographic data and predictive analysis in leasing activities, as well as for driving tenant engagement and loyalty. Data and analytics can add rigor to existing property valuation methodologies by registering nuances around location dynamics and building usage by occupants.
By: Patricia Kirk (National Real Estate Investor)
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