Archives for November 2020

Update: The Business of Real Estate under the Current Public Health Order Effective December 2, 2020

November 30, 2020 by CARNM

Under the most recent Public Health Order, effective December 2, 2020 (“Order”), real estate falls within the “All Other Businesses” category, which allows brokers and brokerages to continue to conduct business.

The new Order creates a tiered system for how business may be conducted based on the new COVID-19 case incidence rate and/or positive COVID-19 testing results in the respective county in which the brokerage is located or the real estate business is being conducted. The framework divides the counties into green, yellow, and red levels

Red-Level Counties: those with a new COVID-19 case incidence rate of greater than eight (8) cases per 100,000 inhabitants during the most recent two-week period and an average percent of positive COVID-19 test results over the most recent 14-day period of greater than five percent (5%).
Yellow-Level Counties: those with either a new COVID-19 case incidence rate of no greater than eight (8) cases per 100,000 inhabitants during the most recent two-week period or an average percent of positive COVID-19 test results over the most recent 14-day period of less than or equal to five percent (5%).
Green-Level Counties: those with both a new COVID-19 case incidence rate of no greater than eight (8) cases per 100,000 inhabitants during the most recent two-week period and an average percent of positive COVID-19 test results over the most recent 14-day period of less than or equal to five percent (5%).

What does this mean for real estate?

Currently, all counties are Red-Level Counties, with the exception of Los Alamos. In Red-Level Counties, real estate brokerages can open and work at a 25% capacity or 75 customers at one time, whichever is less – meaning that the number of people permitted in the brokerage at any given time may be 25% of the office’s capacity or 75 people, whichever is less.

Showings, inspections, repairs, appraisals can all take place with adherence to the mass gathering restrictions of no more than five (5) people gathering together at any given time. Masks must be worn at all times and all other COVID-Safe Practices must be followed.

In Yellow-Level Counties, real estate brokerages can open and work at a 25% capacity or 125 customers, whichever is less– meaning that the number of people permitted in the brokerage at any given time may be 25% of the office’s capacity OR 125 customers, whichever is less. Showings, inspections, repairs, appraisals can all take place with adherence to the mass gathering restrictions of no more than five (5) people gathering together at any given time. Masks must be worn at all times and all other COVID-Safe Practices must be followed. Currently, Los Alamos County is the only county that falls within these guidelines.

In the Green-Level Counties, real estate brokerages can open and work at a 50% capacity – meaning that the number of people permitted in the brokerage at any given time may be 50% of the office’s capacity. Showings, inspections, repairs, appraisals can all take place with adherence to the mass gathering restrictions of no more than 20 people gathering together at any given time. Masks must be worn at all times and all other COVID-Safe Practices must be followed. Currently, no New Mexico County fall within this tier.

The New Mexico Public Health Department will maintain a map containing each county’s current level. The map will be updated on Wednesday, December 2, 2020 and on every other Wednesday thereafter.

CRE Crowdfunding Navigates the Pandemic

November 30, 2020 by CARNM

COVID-19 has helped fuel activity in a burgeoning part of the commercial real estate finance and investment world.

In an environment where more activity in general has been forced online, investors are getting increasingly comfortable buying and selling commercial real estate that way as well, including in the small, but burgeoning world of crowdfunding.
Depending on the scope of their platforms, groups including Realty Mogul, ArborCrowd and Crowdstreet have raised hundreds of millions of dollars from both accredited investors and non-accredited investors since the start of the crisis caused by the coronavirus.
“We have experienced explosive growth over this pandemic,” says Adam Gower, founder of GowerCrowd. “Trends that had begun pre-COVID have accelerated due to the pandemic.”
Platforms like Realty Mogul and Fundrise allow individuals to make investments as small as a few thousand dollars in commercial real estate properties and apartment buildings through online marketplaces. Increasingly, there are a wider range of investment opportunities new markets and property types at varying minimum investment levels and in deals on both the debt and equity sides of the ledger.
“If you could legislate the perfect world to promote crowdfunding, you would tell everyone to stay at home and say you can’t meet anyone in person,” says Gower. “People are looking opportunities to invest online.”

These platforms are still a relatively small part of the $3.4 trillion world of multifamily finance and investment. Fundrise, for example, reports that it has closed $4 billion in deal over the last few years. “They are not massively big—but they do provide an alternative source of money,” says Dave Borsos, vice president of capital markets for the National Multifamily Housing Council, based in Washington, D.C.
These platforms have also come a long way from their humble beginnings.
“When it first got going, it was a way to let small investors get in the door,” says Borsos. “They’ve evolved to some pretty sophisticated funding sources… Now all these people have much more sophisticated underwriting and more straightforward deals.”
In the past, the crowdfunding platforms generally offered investors an opportunity to fund non-secured senior or mezzanine loans to small properties. If the property did not attract enough investment on the crowdfunding platform, the deal would often fall apart.
“When I first registered as an investor of these sites in 2015, some of the properties listed were as weird as some investment house in Austin, Texas,” says Boros. “It could be my neighbor.”
The largest crowdfunding platforms now give their investors a chance to help fund mezzanine debt or preferred equity to more substantial apartment properties, which are often able to qualify for senior financing from Freddie Mac or Fannie Mae.
Investments made on crowdfunding platforms are also now more likely to close. Platforms like Fundrise, Realty Mogul and Arbor Crowd now often use their own capital to buy apartment properties and then replace their equity investments with capital from crowdfunding investors. These platforms are also more selective of the properties they offer.
“It’s very hard to get listed on a marketplace,” says Gower. Many leading crowdfunding marketplaces only accept 1 percent of the deals the sponsors submit to them.
However, crowdfunding platforms still offer investors competitive yields. Nearly half (40 percent) of crowdfunding investments provide an 8 percent preferential return, according to Gower. Another 30 percent provide a 10 percent return.
Project sponsors have kept those yields high over the last few years to attract investors, even though crowdfunding platforms have gained great acceptance and more investors as they improved their underwriting of deals. Most investors choose the deals that they invest in based first on the yield provided by the investment, according to survey conducted by Gower.

New companies experiment with deal structures

New companies keep finding new twists on crowdfunding. For one example, Red Swan CRE Marketplace, a real estate company headquartered in Houston, uses blockchain, the technology behind the cryptocurrency Bitcoin, to trade equity shares in apartment properties on its crowdfunding website, which has already facilitated about $2.5 billion in deals since it launched in June 2019.
“In the pandemic, people are using more technology to make investment decisions than ever before,” says Ed Nwokedi, founder and CEO of RedSwan.
Red Swan, like many crowdfunding platforms, allows investors to buy equity stakes as small as just a few thousand dollars apiece in the properties on its platform. For each property, the total value of these investments adds up to millions of dollars. What makes Red Swan different is that its investors buy equity stakes in the properties on its platform in the form of blockchain “shares” that that they can easily traded and retraded.
“You have the ability to sell the shares anytime you want,” says Nwokedi. “In the typical real estate deal, you have to call the sponsor, who has an individual right of refusal.”
Another new marketplace, Gold Gate, allows investors to buy equity shares in super luxury condominium units and single-family homes. In this case, the shares take the form of months of time. When the Gold Gate marketplace opens in 2021, buyers will have the right to live in their mansion or penthouse condominium unit during the months of the year that they buy, in addition to owning an equity stake in the property.
“We are starting to reach out to brokers for these penthouses in New York City,” says Dalton Skach, CEO and founder of Gold Gate, based in Austin, Texas. “This is for brokers or owners hoping to liquidate a property in a creative way.”
Source: “CRE Crowdfunding Navigates the Pandemic”

Women Leaving the Workforce Is a Big Problem. Creative Space Use Is a Partial Solution.

November 30, 2020 by CARNM

Companies can turn unused or short-term office space into online learning hubs, allowing parents to bring older kids to work while staying productive.

Women have been leaving the workforce at alarming levels during the Coronavirus pandemic. The reasons have long been in place but heightened by Covid-19: basically women are finding it harder and harder to juggle the dueling responsibilities of work and child care, now that many schools have switched to remote learning.
The numbers are grim: Four times more women than men dropped out of the labor force in September, according to the National Women’s Law Center. Another study published in September by McKinsey, found that one in four, or two million, women are considering downshifting their careers or leaving the workforce altogether, including many women in senior positions.
It likely doesn’t help that many corporations do not have policies and principles in place regarding alternative work arrangements. In a survey by Willis Towers Watson, which was cited in CFO.com, just 37% of companies had such regulation in place. One-quarter of them (25%) created formal policies this year, while three-fifths (60%) said they were planning or considering adopting one this year or next.
New Space Configurations Could Help
The good news is that there are signs that companies are starting to move to adopting more flexible policies for working at home. In truth, though, this issue requires a multi-pronged approach that also includes new expectations of workloads, reexamined performance metrics and better employee communication, according to McKinsey.
There is one other component that should be considered, says JLL: space that has been carved out specifically to address women’s needs.
“You’d think that working from home would be better for caretakers, but many also need the physical space to separate and concentrate,” says Gabrielle Harvey, VP, brokerage, Integrated Portfolio Solutions at JLL.
Some companies provide on-site childcare, allowing mothers to watch their children throughout the day while also having the time, and separation, to concentrate at work, she said.
Additionally, corporations can turn unused or short-term office space into online learning hubs, allowing parents to bring older kids to work while staying productive.
“The actual utilization rate in office space pre-COVID-19 averaged 60%, according to JLL’s occupancy benchmarking guide,” Harvey noted. “While the pandemic has obviously created many challenges, in this case, it’s actually giving companies some breathing room to make changes that will help them retain and attract women.”
A New Generation of Flex Space
Just about any solution likely will involve flex workspace. Luckily, a new generation of offerings is poised to come to the market, according to a report by Colliers International.
Flex space currently accounts for 25% of total office inventory worldwide, but the report predicts that the supply of flex space will grow by two to three times in the next five years.
This space will accelerate new work models for companies and their employees, observers say.
“If Flex 1.0 was about where people work; Flex 2.0 will be increasingly centered around how people work,” Knotel CEO Amol Sarvar said in the report.
Source: “Women Leaving the Workforce Is a Big Problem. Creative Space Use Is a Partial Solution.“

Understanding the Role of Cap Rates in Determining Self-Storage Facility Value

November 30, 2020 by CARNM

Capitalization rates can be confusing, but they’re essentially a measure of investment risk. Learn how they’re used by investors and brokers to determine self-storage facility value.
Let’s talk about the capitalization (cap) rate, that fuzzy, malleable metric outside your control that seems to yield a different answer each time someone asks, “How much is my self-storage facility worth?” Simply put, the cap rate is a measure of risk. Mathematically, it gauges the relationship between net operating income (NOI) and facility value. When you increase NOI, an increase to value directly follows.

To get a firm grasp on the cap-rate concept, we need to split the context of the conversation between micro and macro. The micro portion can be summarized as, “Cap rates drive the value of your facility,” while the macro portion is, “The market drives cap rates.” Together, this tells you: “The market determines the value of your facility.” No doubt, you already understand that notion, but let’s break it down, factoring in the cap rate.

Understanding the Micro

At the micro level, the cap rate is your friend. It’s the great and divine multiplier that turns $1 of profit into $20 of value, or $5,000 into $100,000. How?
Let’s say you rent your 10-by-10 self-storage units for $100 per month. This will increase your bottom-line profit by $1,200 annually. If you’re in the market to sell or refinance your facility, a buyer or lender won’t just look at the value of that unit in today’s terms; they’ll project the value of that lease 15 to 20 years into the future. This is because they believe that if that unit can be rented today, it’s highly likely it can be rented tomorrow. So, $1,200 each year factored over 15 to 20 years is a value increase of $18,000 to $24,000! Remember, that’s just for renting a single $100-per-month unit.

Of course, this works both ways. If your occupancy is low, or takes a dramatic dip, your facility value will also take a hit. This is because investors (whether buyers or lenders) will lack confidence in the property’s ability to get and stay full. A certain portion of units aren’t rented now, so they have to wonder, why would the future look any different than today?

Applying the Macro

In the big picture, cap rates are used by investors to indicate the level of risk among a group of commercial real estate assets. For example, they might want to compare self-storage facilities in Phoenix to those in Tampa, Fla. The cap rate helps show how risky an investment is, based on the market. If investors think Tampa is a better bet than Phoenix, they’ll be willing to pay more for a Tampa property than they would for an exact replica in Phoenix.
Just keep in mind that your local market is just one of dozens of attributes investors will use to assign a cap rate to your property. If two brokers give you two different opinions of value for your facility, even though you’ve given both the same NOI, it’s likely because they’re applying two different cap rates based on facility features they’re seeing (or ignoring).
For example, let’s say your facility offers outdoor RV parking. This product typically fetches a lower value (higher cap rate) than self-storage. For the sake of easy math, let’s say it generates half your income. The market will bear a 10 percent cap rate on the RV parking and a 5 percent cap rate on self-storage. This means your blended cap rate is 7.5 percent.
One broker may astutely make note of this investment market knowledge and quote your value with the blended cap rate, while the other may just use the 5 percent self-storage cap rate for the entire facility. If you have $200,000 of annual NOI, the broker who acknowledges that outdoor parking is worth less than self-storage may quote a price of $2.7 million, while the other may quote $4 million. That’s a huge differential.

Improving Your Cap Rate

All this begs the question: Is there anything you can do to affect the cap rate assigned to your self-storage property? If the cap is based on sales comparables (comps) for facilities with similar features, then perhaps you can change the narrative by highlighting or altering certain site attributes, thereby giving the property a different set of relevant comps.
For example, if you own an aging facility in a tertiary market, you likely have a cap rate somewhere near 7 percent. But if that market sits strategically between two primary markets, plus the facility is on a major thoroughfare and all that’s needed to be aesthetically pleasing is a fresh coat of paint and a drive-aisle overlay, then you might be able to earn a 6 percent cap rate. In this example, lowering the cap rate by 1 percent increases facility value by $238,000 for every $100,000 of annual NOI!
At the end of the day, cap rates are just a story reduced to a single number intended to represent a level of risk. All stories are subject to fuzzy, malleable embellishments. It’s just a matter of who constructs the most convincing narrative that counts.
Source: “Understanding the Role of Cap Rates in Determining Self-Storage Facility Value“