Archives for December 2017

Deep Labor Shortage To Drive Construction's Future

December 19, 2017 by CARNM

The historically low US unemployment rate will shape the industry in 2018 and beyond, according to JLL.

The US unemployment rate now hovers at around 4.5%, the lowest in many years, and the recent construction labor shortage continues to deepen across the nation, according to the latest government report. This workforce has not grown significantly during the last nine months, and researchers see no sign of an increase. Therefore, industry professionals expect wages to increase at a faster rate. Furthermore, they believe many builders will begin using new construction technologies to offset that challenge.
Despite the headwinds, commercial real estate kept expanding in the third quarter, according to a new report from JLL that tracks national construction trends. Construction spending was up 1.9% over 2016 levels and contractor and subcontractor work was also up 1.4%.
“The construction industry remains strong, but the volume of incoming workers has come close to a halt,” says Todd Burns, president, JLL project and development services. “There are new technologies within reach that will improve productivity, enhance worker safety and create higher quality buildings for the future.”
JLL points to several recent innovations that could have a profound impact on builders’ efficiency and productivity in 2018 and beyond.
A central Building Information Modeling platform, for example, provided by companies like AutoDesk and GRAPHISOFT, facilitates the use of 3D printing, cloud-based collaboration, robotics and artificial intelligence. “Gathering, storing and analyzing large sets of data has become increasingly easier and cheaper over the last several years,” according to JLL. “Big data and AI is already being used to drive autonomous equipment, track and optimize worker positioning and schedule materials delivery – all working towards more efficient and timely job sites. “
And JLL believes an increasing number of general contractors will turn to prefabrication and offsite construction facilities to create buildings with semi-skilled labor in safe, weather-controlled environments. The use of such prefabrication facilities now allows contractors “to tackle everything from individual walls, to fully built bathrooms and offices offsite.”
“As a whole, the US economy has seen consistently strong growth over the past eight years, demonstrating that commercial real estate does not require rapid economic growth to perform well,” adds JLL. “If the economy continues to follow its current trajectory, growth will continue for the next 12-18 months.”
Topline construction spending keeps increasing, but consecutive quarters over past years show smaller and smaller gains, pointing to a tapering growth curve. And while the volume of new ground breaks for large scale private projects have begun to scale back due to the long-term nature of the timelines, renovation and fit-out work demonstrate continued strength, which will prevail into the next several quarters and beyond.
“Lenders are seeing less interest in large scale development loans as developers begin to look more cautiously at the future,” says Mason Mularoni, senior research analyst, JLL project and development services. “Available prime development sites across major U.S. cities also continue to decline, which has developers setting their sights on adaptive reuse and innovative renovation projects, which they can bring to the market quicker with less upfront capital spend.”
By: Brian J. Rogal (GlobeSt)
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Apartment Investment Conditions Decline Y-O-Y In Q3

December 18, 2017 by CARNM

On a more positive note investing conditions grew modestly stronger in many metro markets during the quarter compared to the preceding quarter, according to Freddie Mac.

In the third quarter multifamily investing conditions grew modestly stronger across many of the metropolitan markets tracked by the Freddie Mac Multifamily Apartment Investment Market Index, or AIMI. AIMI is an index that measures apartment investment conditions by measuring multifamily rental income growth, property price growth and mortgage rates.
In the third quarter, AIMI experienced a quarterly increase in 11 of the 13 markets it tracks, while at the national level, it remained largely flat (0.01% growth). Only Atlanta (AIMI: -0.43%) and Seattle (AIMI: -1.34%) saw declines.
A growth in net operating income in 10 markets and nationally were the drivers behind the quarterly numbers, Freddie Mac said, although none of the markets produced exceptionally strong NOI growth. Meanwhile, three markets — Chicago, Washington, D.C., and Seattle — saw NOI contraction. In addition, every market experienced property price growth over the quarter, albeit minimal in some cities such as Chicago and Philadelphia. Finally, like the second quarter, this quarter saw declines in mortgage rates. This latter factor played the largest role in AIMI’s quarterly increases.
On an annual basis, the index looked quite different. AIMI decreased nationally and in every market except for Orlando (AIMI: 1.10%). Annually, NOI grew nationally and in 12 metro areas, with only Houston failing to experience NOI growth. Annual property prices grew in every market, but in 11 areas those prices rose at lower rate than the pre-recession average. New York, Philadelphia, San Francisco, Washington, DC and Orlando were among the most significant examples of price growth below the pre-recession averages. Here too mortgage rates played a significant role — in this case jumping 24 basis points year-over-year — driving AIMI’s decline (in this case) in most markets.
“In the third quarter, modest growth in net operating income, taken together with declines in mortgage rates, resulted in moderate increases in AIMI from the previous quarter,” said Steve Guggenmos, vice president of Freddie Mac Multifamily Research and Modeling. “Annually, NOI growth was more significant and more pervasive. However, increases in mortgage rates over the past 12 months were more impactful, and once again drove AIMI’s annual declines.
By: Erika Morphy (GlobeSt)
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CRE Values Will Hold Steady In 2018

December 18, 2017 by CARNM

Even as retail is tied with industrial for the best value, Situs RERC’s Kenn Riggs says that “pricing for high-quality retail is holding up although the market is quiet on the transaction side.”

Commercial real estate values are widely expected to hold the line in 2018, according to valuation experts surveyed by Situs RERC. Meanwhile, most expect the “tremendous” CRE price growth we’ve seen over the past cycle to continue, and also that “the eventual correction in values will be minimal.”
Eighty percent of those surveyed said CRE values would remain the same next year, while 20% predicted they will increase by 1%. The experts surveyed by Situs RERC also felt that cap and discount rates lately have moved from being “reasonable” to “aggressive,” reversing a trend they’ve seen over the past two years, although they’re expected to remain generally flat over the next 12 months.
Along similar lines, Situs RERC’s valuation trends experts considered CRE overall to be overpriced relative to value during the third quarter, a shift of opinion that represents “a significant change” from Q2, when they believed assets were fairly priced relative to value. In fact, Situs RERC says the overall value vs. price rating for Q3 was the lowest recorded since the company began compiling the ratings in Q2 2014.
“During most of the quarters, CRE has been slightly overpriced or fairly priced,” with the notable exception of Q4 ‘14, when Situs RERC’s experts said CRE was underpriced, according to the firm’s Q3 Real Estate Report. “With high liquidity and cheap debt in the market, these ratings come as no surprise.”
At the property sector level, industrial was deemed to represent the greatest value relative to price for the fifth quarter in a row. More precisely, industrial tied with retail for this distinction. Although industrial value dropped slightly in Q3 from the previous quarter, it still represented one of the highest ratings since Situs RERC began collecting the data, and held enough value to come in on par with retail, which jumped in value from Q2.
Despite concerns about the future of certain segments of the retail sector, ValTrends experts were more optimistic about values supporting prices for the overall retail sector than the office, hotel and apartment sectors, according to Situs RERC. Relative value vs. price ratings declined for the office and hotel sectors but rose slightly for the apartment sector between Q2 and Q3.
Similar to the industrial sector, Q3 2017 retail rating was among the highest since Situs RERC began collecting these data. However, “investors should be particularly cautious about the retail sector as the industry continues to evolve in order to compete in a digital world,” according to Situs RERC’s report.
Indeed, Situs RERC notes that “the world is now built on Amazon,” which represents both a boon for the industrial sector as online retailers need more space for logistics and fulfillment centers and a serious challenge to retailers as shoppers are doing more of their purchasing online. “The market is penalizing all retail for e-commerce’s effect on brick-and-mortar retail,” says Ken Riggs, president of Situs RERC. “Pricing for high-quality retail is holding up although the market is quiet on the transaction side. The reality is that e-commerce is clearly having an impact, but we are way over-retailed by 40%; many malls were built 40 years ago, and retail has always been a Darwinian environment.”
As the sector “shakes off the oversupply of retail space,” investors will need to consider property-level factors such as location, infrastructure and tenant improvement costs to determine where to find the best opportunities,” according to Situs RERC. “Retention and quality of the anchor tenant is very important as many traditional mall anchors become obsolete. Investors still want shopping centers, but their preference is straying from the traditional enclosed, two-story centers toward open-air lifestyle centers with theaters, hotels, offices, restaurants and shops that are siphoning tenants from traditional malls.”
By: Paul Bubny (GlobeSt)
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How The Conference Committee Tax Reform Measure Handles CRE

December 18, 2017 by CARNM

In many respects, CRE was unaffected with current law kept in place for several issues.

Late on Friday the House of Representatives and the Senate conferees released the legislative compromise of the tax reform bill. Congress will vote on the measure this week and barring an unexpected surprise, it is expected to pass.
The top line decisions: there is a top individual tax rate of 37%, a 21% corporate tax rate, a 20% deduction for pass-throughs, as well as the repeal of the Affordable Care Act’s individual mandate.
For the CRE industry, the new tax regime for pass-throughs is significant, according to Real Estate Roundtable CEO Jeff DeBoer. He said in a prepared statement:

These pass-through entities are the backbone of the American economy, representing over 60% of all business income and creating more than 60% of all jobs in America over the past 25 years.

At the same time, it will be unclear exactly how the new pass-through tax rules will play out. There are many provisions in the bill, including with the pass-throughs, that will require the Treasury Department to draft interpretative regulations, according to DeBoer. He said:

This process will be critical in maintaining needed guardrails to prevent abuse, but also to make certain the new rules function as efficiently as possible and result in robust economic activity.

What Stays The Same

For many of the areas directly involving CRE, the current law has been maintained.

Current law is maintained on the deductibility of interest related to real estate trade and business debt, while other types of business debt is severely limited.
Current law is maintained on like kind exchanges of real property — all other types of property trades will now be taxable.
Current law is essentially maintained on the low income housing tax credit and private activity bonds. There are modest revisions to the historic structures tax credit but this credit is maintained as well

What Has Changed

The new tax regime for pass-through business entities.
The holding period to qualify carried interest as capital gain is increased from 1 year to 3 years. REIT shareholders will see the tax on their dividends drop from 39% to 29.6%.
The bill also preserved the home mortgage interest deduction but lowered the qualifying debt from current law’s $1 million to $750,000 on new home purchases.
The deduction allowed for state and local tax payments (SALT) now allows only a total $10,000 deduction for an individual’s state and local income, property and sales tax payments.

What Didn’t Make It Into the Bill

The Unrelated Business Income Tax (UBIT) provision, which was included in the House-passed version of the bill is not in the final Conference Report. Therefore state and local government pension plans will not be subject to a new UBIT tax on their gains from investing in funds, including private equity or real estate funds.

By: Erika Morphy (GlobeSt)
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