Archives for February 2020

February 2020 Commercial Real Estate Trends & Outlook

February 13, 2020 by CARNM

Highlights

This latest Commercial Real Estate Trends & Outlook Report discusses trends in the small commercial market (transactions that are typically less than $2.5 million) based on a survey of commercial REALTORS® about their 2019 Q4 transactions and the latest publicly available data.
Respondents reported commercial dollar sales volume rose 4% in 2019 Q4 from one year ago, new leasing dollar volume rose 3%, and commercial development (in square feet) rose 5%.
Among respondents, the median commercial sales price growth in 2019 Q4 from one year ago was 3%. Apartment, industrial warehouse and flex, and office class A properties had the lowest cap rates, with a median of 6.5%. Among respondents, the median cap rate for retail mall properties was also 6.5%. The retail trade industry appears to be adapting to the challenge coming from robust e-commerce sales. In November 2019, the retail trade industry gained 15,300 net new jobs from one year ago, in contrast to the job losses in past months

Download the PDF here.

By: NAR
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Forget WeWork’s Woes, Research Shows Most Flexible Offices Are Turning A Profit

February 12, 2020 by CARNM

The ginormous losses unveiled by WeWork during its IPO process last year linger long in the mind. But new research shows that a large majority of flexible offices around the world are actually turning a profit.
However, how you configure your flexible office makes a big difference to revenue, according to the global annual flexible office benchmark report compiled by Workthere, the flexible office advisory brand of Savills.
Here are the key numbers from the report, which examined 64 flexible offices in Belgium, France, Germany, Ireland, Singapore, Spain, the Netherlands, the United Kingdom, the United States and Vietnam.
79%: According to Workthere, 79% of all flexible offices are profitable at an operating profit margin level. More than 50% of the offices it researched were marking an operating margin of 11% or more. Workthere defines operating profit as revenue minus operating costs. It does not include depreciation, amortization, interest paid on debt or tax in operating costs.
65%: Within flexible office buildings, 65% of the space is allocated to fixed offices, 25% to coworking, and the rest split between meeting rooms, fixed desks for individuals and communal space. But there is a mismatch that could be hindering profitability for operators.
“It appears that we are currently seeing an imbalance between profitability and the allocation of space,” Workthere Global Research Analyst Jessica Alderson said. “The average area assigned to private offices currently sits at 53%, yet it accounts for 65% of revenue, whereas coworking space accounts for 25% of space but only 16% of revenue.”
As the market matures, operators are likely to convert coworking space to fixed offices, she added.
1.5 Years: The amount of time the average flexible office takes to reach normalised occupancy. Only 14% of flexible offices that have been open for more than a year and a half are unprofitable, Workthere said. Survivorship bias played a part here: The ones that are unprofitable might have closed. Of the offices open for less than a year and a half, 38% are unprofitable.
81%: That is the average occupancy level of the offices it sampled, up from 76% the year before. That is the kind of level operators need to get to to hit profitability.
-2%: While most flexible offices are profitable, and demand is shown by the fact that occupancy increased last year, prices are falling for operators. The average price for a fixed desk fell 2% last year, coworking desk prices fell 5% and meeting room prices fell 7%, all as a result of quickly increasing supply.
15: The average size of a company that occupies space in a flexible office is 15 people. Startups of two to 20 people occupy half of all flexible office desks, whilst corporates of more than 100 people occupy 13%. The average member life span is one and a half years, with a range of five months to five years.
By: Mark Phillips (BisNow)
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Why Build-To-Rent Is Garnering Multifamily Investors' Attention

February 12, 2020 by CARNM

Real estate investors are always looking for the next big thing. In the near future, I predict that that could be full neighborhoods with nothing but build-to-rent single-family homes, as investors like me are finding yields that are 100 to 200 basis points higher than traditional single-family homes or multifamily rental properties.
Build-to-rent single-family home neighborhoods, often with more than 100 homes, are built from the ground up, feature many of the same amenities as new, high-end apartment complexes and are built specifically to be occupied by renter. Typically, when people think of single-family rentals, they picture a portfolio of houses sprinkled throughout multiple neighborhoods, where some families rent and some own. When they think of multifamily rental communities, it’s usually in the context of a large apartment building.
As an active real estate investor since 2005, I’ve had success in both traditional single-family homes and traditional apartment buildings. I started with a $9,800 investment in a single-family home in Nashville, and eventually bought and sold more than 300 single-family homes throughout the Southeast. I’ve also bought and sold seven apartment complexes, the largest being 162 units.
Despite this success in traditional rental strategies, I have jumped headlong into the build-to-rent single-family home market, as there are several factors fueling potential growth: Millennials, consumers between ages 24 and 39, have reached or are coming into prime housing age; high student loan debts are making home ownership more challenging; there is easy access to low-interest capital from Fannie Mae and Freddie Mac and stable renters and higher net yields provide an attractive investment.
The Millennial Attraction
First, let’s look at why millennials are driving growth. Many among this group of consumers are beginning to grow out of the apartment rental phase. Now with spouses and children, they would like to put down some roots. Yet home ownership can be an elusive dream as millennials carry the largest share of today’s record $1.6 trillion in student debt.
Build-to-rent single-family homes are often more appealing than traditional apartments to families of all ages. Many parents want a yard for their kids to play in and yearn for the stability of a traditional home and neighborhood. This desire for stability also makes families great renters: They are more likely to stay in a home longer and keep up on their payments regularly. This ultimately helps investor cash flow by creating stable, positive rental revenue.
Access To Capital
Next, access to capital for build-to-rent single-family home neighborhoods is more accessible than ever. Agency debt through Fannie and Freddie can be obtained for as low as 3%. These programs are only offered for complete subdivisions made up entirely of single-family rental houses. Real estate investors and builders are actively seeking these loans, which is leading to more of these neighborhoods.
The low finance rates, high demand and stable rental rates all combine to help boost net yield. At my firm, we are seeing net yields of 6% to 7%. If a build-to-rent single-family home neighborhood and an apartment complex have similar amenities — think granite countertops, high-end fixtures and a clubhouse with a community pool — the neighborhood almost always has a higher yield.
A Smooth Exit
Finally, a build-to-rent single-family home has more options for a faster exit strategy when compared to a traditional apartment building. The property often can be sold to the tenant in a rent-to-buy scenario or sold to a traditional buyer; it can be sold to a publicly traded real estate investment trust or to another single-family rental home investor. An apartment building typically has one option — sell to another apartment building investor.
All of these factors — high demand from millennials and families, easy access to capital, stable renters, higher potential yields and easier exit strategies — make the build-to-rent single-family home and neighborhood a phenomenon likely to flourish in the next several years. In my humble opinion, it’s a good time for investors to take a serious look.
By: Bruce McNeilage (Forbes)
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Data Security Has Become a Pressing Issue for the CRE Sector

February 12, 2020 by CARNM

CRE tech experts caution against increasing cyber threats to data privacy.

There’s an ever-growing volume of commercial real estate industry business being conducted online. Terrabytes of documents and data get swapped and more sensitive information than ever is archived in cloud storage. Such information provides juicy targets for hackers and identity thieves, making data security a growing issue for the sector.
“There is a thriving, active criminal market for data, for systems, and to ransom and control and extort from companies,” says Jonathan Fairtlough, managing director with Kroll’s cyber risk practice, based in Los Angeles. “Property systems, property groups, malls and real estate [are] no exception to this growing trend. And with the ongoing investment [into proptech], it is in our belief that it will become an even more attractive target.”

Global proptech investments reached record levels in 2019, according to data from CRETech. Unlike 2018, where the industry tightened investments in real estate tech companies, 2019 saw a surge in both deal and dollar volume. But that surge in investment only garnered more attention to the space from hackers.
“For the last few years, the amount [hackers] have been asking for has been going up,” says Aloke Chakravarty, co-chair of Snell & Wilmer’s Investigations, government enforcement and white-collar protection practice group focusing on cybersecurity, data protection and privacy. “More recently, the demands have gone up, and I think it’s more than just inflation. There are many more threat actors out there. That has led to a proliferation of ransomware attacks.”

Because of the nature of the real estate business, there’s an abundance of personal information being kept during the process of buyers and sellers. That information can create privacy breach issues if exposed, says Fairtlough. Attackers can access this information through devices connected to the internet, controlled by the internet or accessible via the internet.
This includes anything from HVAC systems, security systems, alarm systems, air temperature monitors to even elevator and escalator systems. By breaking into these networks, hackers can steal valuable data such as asset income, bank account information, social security information and tax information.
“Once the attacker gains access to the network, they have a look around, because what they’re looking for are the systems they think are going to be the most critical. What they’re going to target are financial systems, payment systems, email systems, communication systems and if there happens to be a portal or something that is part of the business, that will be targeted as well,” says Fairtlough. “Once they’re in the system and they identify what’s there, first thing they’ll do is turn off the backups. Most of us are now using electronic backups that are run through the network, so if they have the right credentials, they simply turn them off, and then they will zero them out, meaning they will erase them but leave indications that data is still there, basically turn the backup into a bunch of nothing.”
Along with implementing smart data privacy education to employees and software and hardware tools, Fairlough and Chakravarty also recommend cyber insurance. Around 86 percent of firms already have cyber insurance, while 14 percent do not, according to Draper and Kramer research. But not all cyber insurance covers the same threats.
“I think it’s absolutely critical to have robust cyber security insurance. A typical insurance does not cover the types of cyber-attacks that we’re seeing. There can be a lot of variants of cyber insurance,” says Chakravarty. “Unlike other insurance though, there is less transparency. So, it’s important to [find] what those policies are protecting against compared to that assessment of your own vulnerabilities and risks and where your valuable data is. One of the things you want to look for, particularly in this industry, is first-party liability and third-party liability because of the various vendors or customers who may have access to your data. It is likely you want to have that third-party insurance.”
Fairtlough says this discussion of data privacy needs to “become a conversation at the executive level.” He says firms should identify where their vulnerabilities are, and where they are most susceptible to cyber attacks.
“This concept of this risk discussion, the data map, understanding what you have, it’s going to move from a good idea to a requirement,” says Fairtlough. “There’s a change coming in what data you can keep, how you can use it and how you have to account for it. A smart firm will start by understanding what they’re keeping, and why they need it. And if you don’t need data, don’t keep it. Limit your exposure by controlling the information. Don’t give things out of a ‘what if’ or a potential or a ‘I might need to go back to it someday.’”
By: Sebastian Obando (NREI)
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