Archives for January 2020

Slower growth—but how slow? A recession isn’t in the cards as long as the trade war with China doesn’t escalate.

It’s hard to avoid recession chatter these days. Fueling such talk has been a slowdown in the pace of the economic growth in 2019 and the widespread expectation that the long-running economic expansion, which began in June 2009, is nearing its end. The economy is expected to grow modestly—by 2.2%—in 2020, barely higher than the projected growth of 2.1% in 2019, and much slower than the 2.9% expansion in 2018, when the economy got an initial boost from the federal Tax Cuts and Jobs Act.
Still, National Association of REALTORS® Chief Economist Lawrence Yun says a recession is unlikely in the year ahead. “We expect 2020 will be a year of slower growth but not a recession year. However, an all-out trade war would lead to an economic downturn in nearly every country, including the U.S.,” he says.

1. Unemployment Stays Low

The negative effects of the U.S.-China tariff fight include contracting exports and slumps in investor confidence and business spending. But overall, the economy has managed to grow on the back of strong consumer spending, generating about 2 million new jobs in 2019, with real wages rising. Unemployment reached a low of 3.5% in September, and job openings exceeded the ranks of the 5.8 million unemployed workers. The unemployment outlook remains steady at 3.8%.

2. Mortgage rates to sustain housing demand

“We don’t foresee the Fed raising the federal funds rates in 2020. A rate cut of at least 25 basis points in early 2020 is the likely scenario,” says Yun. With the Fed maintaining a low-interest-rate policy, the 30-year fixed mortgage rate is expected to average 3.8% this year. Rates for 15-year fixed mortgages are also trending downward, from 3.4% to 3.1%. Low mortgage rates make purchasing a home more affordable, especially among the 46.5 million 25- to 34-year-olds who made up last year’s largest segment of home buyers. Given the existing conditions, home sales—existing and new homes combined—are expected to increase by a little over 4%, from 6 million in 2019 to 6.3 million in 2020.

3. Modest improvement in housing supply

Lack of housing inventory has been the primary constraint on the housing market. The housing supply is expected to improve this year, with housing starts expected to hit 1.42 million, up from 1.27 million last year. Still, the new supply will not meet the demand that will be created in 2020 by new household formation, estimated at 1.2 million, and demolished or obsolete housing, estimated at about 450,000. “Ramping up housing construction will continue to be central to improving home affordability and raising the level of home ownership,” says Yun.

4. Commercial

Bright Outlook for Multifamily and Industrial Properties

In the commercial market space, investors are expected to pay a premium for multifamily, industrial, and warehouse properties because of low rental vacancy rates and the sustained demand for ecommerce sales. Cap rates for these properties will likely remain historically low due to the premium for these properties over other assets like offices and retail malls.
Industrial properties are expected to continue to offer good returns for investors given the sustained demand for industrial space from online and traditional brick-and-mortar stores. Both are fiercely competing for consumer loyalty and spending by offering both offline and online shopping options. Examples include Amazon buying Whole Foods, Walmart offering delivery services, quick consumer gratification through one-day or same-day delivery from Amazon and other retailers, and experiential shopping, such as yoga clothing retailer Lululemon offering yoga classes.
The multifamily rental market, including owner-occupied housing, has suffered from inadequate construction. Low rental vacancy rates mean higher demand for apartments and high net operating income for investors. Investments in the multifamily market are needed to address the serious affordability problems for renters. “More multifamily construction, especially of affordable types such as microapartments in San Francisco and more affordable garden-type apartments elsewhere, will help ease the burden for renters,” says Yun.

Affordable Multifamily Housing Strategies

Nationally, nearly half of renters pay 30% or more of their income on rent and utilities. But in 10 states, the percentage of households spending 30% or more on rent is even higher: Florida (56.5%), Louisiana (55.8%), California (54.6%), Hawaii (52.9%), Delaware (52.6%), Connecticut (52.5%), New York (52%), Colorado (51.3%), Nevada (51.1%), and New Jersey (50.9%). Rising rents have spurred California, Oregon, and New York to pass statewide rent-control measures, but rent control is not a sustainable solution to a problem that is borne of a housing shortage. Rising rents can best be addressed by measures that increase the supply of affordable housing:
• Allowing more density in single-family zoned areas (such as in Minneapolis and Oregon);
• Permitting higher-density housing near transportation hubs (Minneapolis);
• Establishing inclusionary zoning policies, especially in opportunity zones that are financially viable for commercial developers and investors (Washington, D.C.);
• Reducing approval time and the uncertainty for project approvals and the associated cost arising from construction delays (such as easing utility and parking regulations for accessory dwelling units in California).

By: Gay Coroaton (REALTOR Magazine)
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Can a mall be reactivated and even stronger with the right makeover—or are malls dead for good?

Is there still room for the mall format in the new retail world? There have been a lot of headlines about the death of the mall, but massive mall makeovers—including the $1 billion Westfield Century City renovation—prove that malls can be revitalized and even more successful with the right plan and upgrades.
“The idea that the mall is going to disappear is fundamentally flawed. Instead, the likeliest result is going to be an evolution of the concept that fits newer consumer behaviors,” Ethan Chernofsky. VP of marketing at Placer.ai, tells GlobeSt.com. “One of the most obvious is a shift away from the cookie-cutter perspective that sees all or most malls following the same pattern with the same types of stores and experiences. Far more interesting is a future defined by many malls creating unique identities and speaking to different audiences. That environment is one that can support a wider variety of offerings that cater to different market segments.”
Following the renovation project at Westfield Century City, the mall had a 92.7% increase in foot traffic. Other mall renovations, like Scottsdale Fashion Square, Westfield Garden State Plaza and Mall at Short Hills, also saw a significant increase in foot traffic following the renovation. While renovation is important, each owner has its own approach. “There is no handbook, but I think the best makeovers have in common a clear sense of direction,” says Chernofsky. “They know what they are looking to achieve and this finds continuity through the tenants, experiences, design and more.”
Successful mall makeovers are well worth the capital investment—which can be significant—but even the less successful ones often result in an improvement. “There will certainly be makeovers that are more or less successful, but that doesn’t necessarily make the decision not worth it,” says Chernofsky. “There is a clear opportunity that many investors are looking to take advantage of, and while not all will succeed, the opportunity is certainly real.”
In many cases, malls will need to take the plunge and invest in revitalization, especially as big box retailers shutter. Many mall owners will need to find ways to utilize that space. “Property owners are getting creative and this is a great thing. From new types of tenants like co-working spaces to expanding food and experiences in place of classic anchors, there is a clear push to innovate,” says Chernofsky. “And this is a big step. Consider co-working spaces, they provide malls with an audience that comes on an ongoing basis, and can provide people to frequent the malls restaurants and stores. This is a win/win for malls giving both ongoing customers and a new sustainable tenant, generally in spaces that are not the most sought after. More important than the type of tenant is the type of thinking that leads to more creative approaches.”
By: Kelsi Maree Borland (GlobeSt)
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Thanks to all of the brokers, sponsors, and guests who attended the January 2020 CCIM NM Deal Making Session and to those who shared their properties.

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