Archives for November 2020

After a year of record-breaking disasters, the need for real estate resiliency is clear.

Tony Liou

There is no denying that the number of natural disasters and their severity have increased over the years. Wildfires have burned more than four million acres in California in 2020, which is double the previous record of two million acres that was set in 2018. On the other side of the country, the 2020 Atlantic hurricane season has also broken multiple records.
All these extreme weather events mean that buildings need to become more resilient to the changes that have happened and changes that will continue to occur. Whether one is managing a portfolio of assets worth billions or a single multifamily building, real estate resilience—the ability of a property or facility to adapt to and withstand extreme weathers and man-made disasters while maintaining its function and structure—is no longer just a nice-to-have but a necessity.

The financial case for real estate resilience is an easy one. Real estate managers who manage capital on behalf of institutional investors have a fiduciary responsibility to not only identify climate related risks that affect the assets they manage, but also to make material investments that can help mitigate those risks and increase the overall asset value.
More often now, potential investors are also asking about resiliency plans and management best practices, i.e. procedures for identifying, mitigating, and disclosing climate change and natural disaster risks.
Some obvious risk factors, such as flood, hurricane, and fire, are already addressed by insurance policies. But what investors care about is maximizing rent by minimizing risks, and this is achieved by taking preventative measures.
For example, investing in resiliency projects such as reducing fire risk by cleaning detritus around buildings or relocating mission critical equipment away from flood-prone areas, will minimize property downtime due to expensive and long repairs during which the property may need to be vacated.
Addressing building resiliency is a multi-step approach.

The first step is to evaluate the potential climate change and natural disaster risks in the region and at the property site, such as fire and flooding, but also items like high winds, lightning, precipitation amount, and biodiversity habitat. Man-made risks like greenhouse gas emissions and air quality also need to be calculated.
After the risks have been identified, then it’s time to determine which mitigation measures to adopt based on cost and other business plan related factors. For an existing property, the building needs to be assessed based on its historical energy data, property condition and age, as well as the regional climate data in order to determine all the possible risks and mitigation measures. Factors also shift depending on the business plan, whether one is investing in multifamily, industrial or office space, and whether it’s a short- or long-term hold.
The final step is assessing whether you have adequate insurance coverage for risks that are too costly to mitigate.
With so many considerations, it can be overwhelming for investors to know where to start. This is why we’ve developed the Real Estate Resiliency Assessment as a screening tool that can be done within the due diligence process, and can be added on to a Property Condition Assessment.
In addition to natural disasters, 2020 became the year of Covid-19, a worldwide pandemic that no one could have foreseen. Fortunately, we can forecast climate changes and take control by mitigating potential building risks now.
Source: “Real Estate Must Become More Resilient“

The recovery of office-using jobs in the third quarter suggests a bright future for physical offices.

Don’t count office out yet. While the office sector has clearly struggled through the pandemic, office-using employment recovery indicates future demand for physical workspaces.
In the third quarter, office-using employment rebounded quickly. According to data from Newmark, more than 30% of private sector office-using jobs lost in second quarter were recovered by the end of the third quarter. The 15 largest office markets in the country—many of which have been the hardest hit by the pandemic-driven downturn—have seen the strongest recovery in office-using jobs. Typically, the recapture of lost jobs is much slower during a recession, making the speed of this recovery all the more reassuring for both office and multifamily landlords.
Professional and business services drove the recovery of office-using employment during the third quarter, accounting for the largest number of recovered jobs. The Seattle and Dallas markets regained 94.1% and 71.8% of jobs in this sector, respectively. The financial activities sector had the fastest recovery with several markets, including Dallas, Seattle and Riverside regaining more jobs than were lost in the second quarter, according to the research from Newmark.
Other office-using sectors have yet to experience the same level of recovery. The information sector specifically has not experienced strong job growth in most markets. New York City, Los Angeles and Seattle did see some recovery of lost information sector jobs, but not more than 25%. The additional top seven US information markets continued to lose jobs through the third quarter. These companies have also embraced remote work policies, which could hamper future office demand in this sector.
Still, the third quarter jobs gains have been encouraging, considering the rapid loss of jobs in the second quarter. More than 20 million non-farm jobs were lost at the beginning of the pandemic, and 3.1 million of those jobs were from private sector office-using companies.
The recovery has been promising news for investment capital. NCREIF is now predicting improved office return rates in all top markets, although in many cases the boost isn’t enough to push returns into the positive. Seattle and Boston did show positive office return rates; however, most markets continued to show negative return rates. Although rates have yet to bounce back, Newmark notes that office-using employment numbers have historically been a major factor in determining office returns, and the recent rebound in these numbers is a positive sign for the office market.
Source: “Office Jobs Are Recovering Faster Than Usual For a Recession“

If banks don’t become restaurants, they can also work as medical, office, food service, or general retail space.

While many banks may be looking to close locations over the next few years, there is some good news for owners of those assets: COVID-19 has shown value in having a drive-through.
“The good thing about banks is they have that drive through zoning,” says Noah Shaffer, senior director of asset management for Confidant Asset Management (CAM). “Once you figure out how to work around the bank vault and the installation of restaurant equipment and fixtures, the existence of a drive-through will help the permitting process for a retrofit to a restaurant.”
If banks don’t become restaurants, they can also work as medical or general office and retail space, such as cellular stores or funeral homes, according to Shaffer. Regardless of the use, they are usually attractive options for tenants.
“Somebody else will want to be in a decently well-profiled location,” Shaffer says. “They’re usually in a nice-looking building, with high quality building materials, in a retail corridor, but the new tenant is just not going to pay the same rent as the bank would. But we typically see some restaurants and then maybe general retail, such as a cellular store or something along those lines move into those spaces.”
While COVID-19 proved the value of drive-through for pharmacies, restaurants, banks, coffee shops and liquor stores, Shaffer says many tenants are not seeking drive-through space yet.
“We’ve had a lot of conversations with tenants who are beginning to think along those lines, but they’re just not making that call yet,” Shaffer says. “They aren’t actively reaching out and saying like, ‘Hey, we’ve figured out that this is what we’re going to do. Let’s sign the lease because we’re going to do a drive-through mattress pickup store now. I think every tenant who is contemplating a shift in real estate strategy still has seven or eight ideas on the chalkboard, but they haven’t figured out exactly what strategy to execute going forward, and there is going to be a lot of speculation.”
But, right now, if a retailer didn’t have plans for a drive-through before COVID-19, they’re not talking about it meaningfully now, according to Shaffer. “We just haven’t seen anybody sign those leases or have those conversations in a meaningful way yet,” he says.
But between ghost kitchens, Starbucks and other retailers, Shaffer expects a lot more interest in drive-throughs over the next few years.
Other restaurant chains are also rolling out more drive-throughs. “Panera was doing a pretty big roll-out plan, moving from inline stores to drive-throughs,” Shaffer says. “Those are different stories and are on the fast track. Maybe they were trying to do drive-throughs at 10% of their stores a year. Now it may be 25%.
Regardless of what tenant moves into retail space, many landlords who lease to banks will soon need new tenants. As these bank leases roll over, Shaffer sees some moving out of current locations.
“They’re just not going to pull the trigger on a renewal unless it makes sense,” Shaffer says.
Source: “The Many Uses of Old Banks“