On October 18, 2017, roundtable questions were distributed at the Leasing Information Network for the three market segments discussed: Industrial, Office, and Retail. View Results.
Archives for October 2017
If You Build It When the Vacancy Rate is 25 Percent, Will They Come?
At a NAIOP luncheon in February, Mayor Richard Berry touted a new competition that would alter the city’s skyline by at least 360 feet in height with a new building.
“It has been 27 years since Albuquerque has seen an iconic high-rise building,” Berry said. “I believe it’s about time to add to our skyline another building that will further spur economic opportunity in the heart of our city.”
The U.S. Eagle Federal Credit Union building – currently Downtown’s tallest building – is 22 stories.
Berry’s administration was dreaming big, looking for a “monumentally designed building” to transform a city-owned paved parking lot. They wanted it to be tall, create a buzz Downtown and join other multimillion-dollar projects Berry has advocated: One Central, Innovate ABQ and Albuquerque Rapid Transit.
Downtown has been in the spotlight lately as Berry has used these projects – and now the skyline competition – in a push to revamp the area. How well that effort fares will help to shape how Berry’s legacy is seen in years to come.
Right now is the right time, Berry will tell you.
Also happening now are the final days of his mayoral term.
“We are going through one of those resurgence[s] in our economy right now and it feels all right for me as a mayor to put out a competition. We got some taxpayer assets that amount to either dirt lots or parking lots and this is a higher and better use for those,” he told Albuquerque Business First.
He cited the creation of thousands of jobs since the recession and $150 million in other investments Downtown – pointing to Albuquerque Rapid Transit, the Civic Plaza remodel and Convention Center renovation – as indicators that this project should be happening right now, saying Albuquerque is undergoing a “Downtown renaissance.”
Spokeswoman Rhiannon Samuel said the number of jobs Berry referred to comes from the Bureau of Labor Statistics, as cited in his 2017 State of the City Address. BLS data shows the unemployment rate for Albuquerque was at 6.1 percent in August.
David Silverman, a principal at Albuquerque-based Geltmore LLC, agrees now is the right time. Geltmore is among the developers that put together a proposal for the skyline called Symphony Tower. He said there is positive economic momentum in Albuquerque right now and a project like this will keep the ball rolling.
However, some other major developers in Albuquerque are questioning the return on investment that can be created by a project like this. The main concern on developers’ minds: vacancy woes.
“Laws of supply and demand should dictate when buildings are built,” said Peterson Properties President Douglas Peterson. “City and county government are now routinely skewing reality by subsidizing developments for which there is no true demand, such as the One Central project at Central and First and Innovate Albuquerque at Broadway and Central.”
According to CBRE market reports, Downtown offices were at a 24.8 percent vacancy rate in the second quarter of 2017.
Peterson, a local real estate landlord and developer, used one of his properties, the Simms Building, as an example, saying despite a $10 million remodel and a 90 percent occupied rate, the building was valued at a third of its replacement value. He says that’s because rents have to be so low to fill the space and based on income capitalization valuation, which takes into account the earnings on the property and either the gain or loss of the investment, the property wouldn’t be worth rebuilding.
Kurt Browning, Albuquerque-based Titan Development’s chief development officer, mirrored the question of who would fill the space. He said the office market is struggling and it doesn’t look good to have empty office space in the city.
“It’s great to get ideas on paper,” he said. “But to break ground you need tenants lined up.”
Planning Department Public Information Officer Melissa Perez told ABF that the city doesn’t have any tenants ready to move in and they “leave that up to the developers.” It is not a requirement in the project RFP to have tenants in the queue.
“If they have a soft or firm commitment from a tenant, then revealing that will assist in the ad hoc committee and/or [Albuquerque Development Commission] decision when looking at the proposal,” said Perez.
The mayor also confirmed the city does not have anyone at the ready for the project that has drawn in 330,000-square-foot proposals.
“When people bid these, I assume that they have people in mind that would have a net income and provide an income that would go into these buildings,” said Berry.
But the proposal that has been pushed forward to build the skyscraper doesn’t have tenants lined up yet either. Silverman said he has a “categorical sense” of who would move into the proposed Symphony Tower and has members on the proposal team to try to secure future tenants.
“What people often forget is the existing stock of Class A office space is all 30 years old,” he said. “There isn’t any existing space that moves the needle. So we think what we are doing isn’t a relocation game. We think new-to-market companies will be interested in it and, frankly, be able to afford it.”
He also noted about 7,500 square feet of the proposal is office space, while the rest is retail, hospitality and other mixed uses. Silverman said retail and hotel tenants are not lined up.
Michael Sapir, Sapir Real Estate Development CEO working out of California, sees the potential in the project and said it could attract business to the state. He said this is a chance to bring in out-of-state developers, enticing them with having their name on the city’s tallest building. Perez also noted the RFP allowed for out-of-state developers to submit.
Sapir said competitions like this have been used in L.A. and New York to attract new developers to the community.
It is unclear at this time how much taxpayer money will be used to foot the bill of the skyscraper. Perez said the developer’s cost is unknown and, therefore, the city financial assistance requested by the developer is unknown.
“Once we know that, we will be able to determine where funding for any requested city financial assistance will come from,” she said.
Developers and business leaders also expressed concerns about what will happen to the project once Berry is out of office. Perez said there are no specific measures in place to ensure that construction will move forward under a new mayor and no funding is secured because there isn’t a finalized cost or agreement. Albuquerque’s mayoral election will come down to a runoff Nov. 14 between New Mexico State Auditor Tim Keller and Albuquerque City Councilor Dan Lewis.
Keller told ABF, “While I strongly support business and cultural improvements for Downtown, including this concept and other public and private partnerships, I think we need to be thoughtful about this project, and what it should include in terms of public amenities, before rushing into more office space in a Downtown with existing high vacancy and parking issues.”
The RFP requires any redevelopments to provide enough off-street parking to meet the demand of the project. The skyscraper site has 212 off-street spots. Proposals are required to keep those and account for any additional parking needed.
Lewis said if elected, he would consider the project and take a closer look, but he isn’t committing to it just yet.
“We will certainly look at the proposals to see if it’s the very best the city can put together,” he said.
By: Shelby Perea (ABQ Business First)
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Commercial Real Estate ALERT: Analysis of the Latest Emerging Risks and Trends
This recent study by Swanepoel T3 Group –– Commercial Real Estate ALERT: Analysis of the Latest Emerging Risks and Trends –– discusses the top emerging risks and trends influencing the Commercial real estate industry. Unlike other reports, ALERT includes the perspectives of Commercial real estate practitioners as well as many other sources of research and analysis about the sector.
Commissioned by the National Association of REALTORS®, the extensive yet digestible report covers such topics as:
- Capital Markets
- Regulations
- Technology
- Crowdfunding
- E-Commerce
- Demographics
For those on the run, each chapter of the ALERT includes an Abstract and Takeaway section. Within 30 minutes, you’ll gain a high-level overview and can dig into the full report later.
Download the Commercial Real Estate Alert
By: REALTORS Property Resource
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By How Much Should You Raise the Rents at Your Apartment Building?
Many renters have already been pushed to the limit financially. Another rent hike could force them to move out.
How high can landlords raise the rents at their apartment properties before they begin to lose tenants?
In the current market, many markets have very few apartment vacancies, and face little competition. That would usually be a sign to raise rents. But many renters have already been pushed to the limit financially. Another rent hike could force them to move in with roommates or their families—or simply to miss the next rent payment.
“A growing number of renters are spending less on non-essentials to make up for increasing rents,” says a spokesperson for the government agency Freddie Mac.
Fortunately, the data shows some clear patterns that can help landlords and property managers decide when—and by how much—to raise their rents.
More renters resist rent hikes and luxury renters have lots of choices
As rents rose sharply in recent years, more renters are looking for other options. “A growing number of renters are planning to move because of changes in rent,” says the Freddie Mac spokesperson. That percentage has jumped to 44 percent in March 2017, up from 34 percent the year before, according to a preview of Freddie Mac’s soon-to-be-released 2017 Renter Survey.
Managers of class-A apartment complexes can easily gauge the threat that their residents will move out by checking the local property listings.
These wealthy renters also have the most money to spend on the cost of moving. The renters at professionally-managed class-A+ apartments have an average income of more than $80,000 a year and spend only about 20 percent of that on rent, according to data from RealPage, based on an analysis of leases at properties managed using the RealPageproperty management software system.
Class-B renters have solid incomes and fewer choices
Owners of luxury apartments that are no longer brand new are in a much better position to raise their rents.
The people who live at professionally-managed, class-B properties earn more than $50,000 a year on average and spend less than 24 percent of that on rent, reports RealPage. These residents can generally afford rent increases without breaking the bank.
In addition, “Class-B apartments are typically priced far below newer product—and that’s more true today than ever before,” says Jay Parsons, vice president for MPF Research, a RealPage company, headquartered in Carrollton, Texas.
So property managers can increase their rents sharply and still offer much less expensive units than the new apartments available in their market, even if the new properties come with concessions or free rent.“There is potential for further rent growth, and we do expect class-B to drive overall apartment rent growth in the next few years,” says Parsons.
Renters stressed at professional-managed class-C and class-D buildings
The renters who live at professionally-managed class-C and -D properties are closer to the edge, financially.
These households earn less than $30,000 a year on average and pay roughly 30 percent of that income on their rent, according to data from properties managed with RealPage software. The incomes of these residents probably haven’t changed that much since they qualified to sign a lease and move in.
Class-C and -D property managers typically work hard to keep these residents.“Class-C units tend to sit vacant longer than an A or B unit, and turn costs eat up a bigger share of the revenue stream at a class-C property,” says Parsons. Higher turnover costs combined with a less transient renter base explain why retention rates tend to be highest at class-C properties.
“The risk of increased turnover will limit how much many property managers are willing to push rents,” says Parsons. “Class-C apartments are rarely able to sustain meaningful rent growth.”
Renters on the brink
The challenge is even more severe at the apartment properties that are typically not included in data sets of professionally-managed, “investment-grade” properties.
Millions of renters live at smaller apartment properties or single-family rental houses that don’t check the income or credit reports of potential residents. Many of these renters can’t show enough income to live at properties with professional managers and some may be near the breaking point financially.
There were 11.1 million renter households that paid more than half of their income on rent in 2015, the most recent year for which data is available. That’s an increase of 3.7 million since 2001, though since 2011 the number has stayed at a little over 11 million, according to the State of the Nation’s Housing 2017 report from the Joint Center for Housing Studies at Harvard University.
The owners of smaller rental properties may not have as much information on their residents as the owners of investment-grade properties typically gather. They should be even more careful as they raise their rents.
“If owners choose to aggressively push rents, they will face turnover. If they are overly aggressive, they may face prolonged vacancies, which in turn hurts their yield,” says John Chang, first vice president of research services for brokerage firm Marcus &Millichap.
By: Bendix Anderson (National RE Investor)
Click here to view source article.
