Archives for February 2021

Many Opportunity Zones Post Double-Digit Price Increases

February 18, 2021 by CARNM

Opportunity zones are proving to be a profitable investment to those who’ve turned to the tax break to redevelop low-income areas across the country.

Median home prices increased from the fourth quarter of 2019 to the fourth quarter of 2020 in 77% of opportunity zones with sufficient data. What’s more, median prices rose by more than 10% in nearly two-thirds of the areas—in line with growth seen in areas outside opportunity zones, according to a new report from ATTOM Data Solutions. The real estate data firm tracked 3,588 zones around the U.S. in the fourth quarter of 2020.

Congress established opportunity zones in the Tax Cuts and Jobs Act of 2017 to help revitalize low-income areas and offer investors significant tax breaks to those who do so over several years. More than 8,700 communities across the country have been designated ripe for revitalization and fall within “opportunity zones.”

“The country’s long run of home price increases continues to leave no part of the housing market untouched, boosting fortunes from the wealthiest to the poorest parts of the United States,” says Todd Teta, ATTOM Data Solutions’ chief product officer. “The latest evidence is the fourth-quarter 2020 data showing prices going up in opportunity zone neighborhoods at the same rate, and sometimes more than in more well-off communities.”

Still, prices remain substantially lower in opportunity zones, Teta adds. About 38% of these areas still have median prices of less than $150,000 as of the fourth quarter of 2020, the report notes. The Midwest continued to have the highest number of opportunity zone tracts with a median home price of less than $150,000 at 59%, followed by the South (49%), Northeast (40%), and West (6%).

While prices are low for the area, “the fact that they often rose by double-digit percentages in Q4 is significant,” Teta says. “Not only does it show the market strength, but it also suggests that many distressed communities are ripe for the redevelopment that the opportunity zone tax breaks are designed to promote.”

Source: “ATTOM Data Solutions“

CRE’s Pricing Disconnect

February 18, 2021 by CARNM

There is a disconnect in the public and private markets and across sectors.

Since COVID hit, there has been a disconnect in the market
While listed real estate markets have been volatile and private markets have enjoyed relatively steady valuations, according to MSCI’s head of Real Estate Solutions Research, Will Robson.
Some small disconnect isn’t anything new. “There has always been a disconnect between the markets and the private markets, probably because there is leverage within those [public] companies, and it is pricing the company, rather than just the underlying assets,” Robson says.
However, when COVID hit, Robson says there was significant repricing on public assets. But valuations on the private side didn’t move as much, especially in the first quarter of 2020. “We saw a bit of movement in the second quarter, but it was in the low single digits when you look at US real estate as a whole,” he says.
Robson says this adjustment occurred to account for the short-term COVID income disruptions.
“When you see three months or six months’ loss of income and when you price that in, you’re generally looking at low single digits in terms of valuations,” Robson says.
In the second half of the year, Robson says there was a correction in the listed markets. Things like positive vaccine news increased valuations by the end of 2020. Now, there aren’t massive gaps between the private market and the public market.
Looking across all sectors, Robson sees a divergence in pricing. In retail, he says there is a direct link between the revenue a tenant makes in a store and the rent it pays in that store. But that isn’t the same in other sectors. “In offices, the link between the revenue of the company and the worth to the tenant is less direct. So most of the tenants are going to pay rent through COVID, even though they’re not using that space.”
But that could soon change, which could hit office valuations. “As tenants come through to the lease expiration or the rent review date, they’re thinking through their longer-term plans about how they’re going to use office space going forward,” Robson says.
Robson sees many of the same sector wide trends that others do. “Industrial has continued to be very strong and even accelerated in some markets,” Robson says. Office has been in the middle because it didn’t have the same hit on the tenant’s business models and their ability to pay rent.”
Even inside some sectors, pricing varies dramatically.
“Obviously, retail has been hit the hardest,” Robson says. “There was already a negative story around a lot of retail sectors before COVID hit. And COVID just accelerated that and entrenched that narrative.”
Pricing has been hit hard in those sectors. On the other hand, supermarkets and other essential retail have held up much better.
“Essential retail is obviously on the other end of the spectrum,” Robson says.
Source: “CRE’s Pricing Disconnect“

Amid Many Unknowns Here’s What We Do Know About the Office Sector

February 17, 2021 by CARNM

After a difficult 2020, things should stabilize by 2022.

Much of the future of the office sector is cloudy. We don’t know how many people will return to the office. We don’t know when they will return to the office and what working spaces of the future will look like.
The one thing that isn’t in doubt is that 2020 was a challenging year for office landlords with 104 million square feet of negative absorption, according to C&W Chief Economist Kevin Thorpe. That was more than the market lost throughout the entirety of the Great Financial Crisis. Before the pandemic, vacancy was 12.9% before hitting 15.5% by year-end.
As companies look at 2021 and beyond, there are many facts on the ground to help guide them despite the overall uncertainty, Thorpe says in a new report
Thorpe’s main takeaway is that the vaccine’s rollout and the return to the office will take time. Amid this uncertainty, most companies are in wait-and-see mode. In fact, almost one-third of renewals last year were for one year or less. That is triple the usual number.
“Many are just kicking the can down the road until they have more clarity,” Thorpe writes.
Even with uncertainty in the market, Thorpe doesn’t think businesses are leaving CBDs or large cities. With some people moving to the Sunbelt, Thorpe says it’s important to keep an eye on migration data. But he still thinks it’s best to wait and see and not make bets one way or another. So far, the majority of movements seem to micro and not macro-based. That means people and businesses will be more likely to relocate within the same city and less likely to relocate to a different city.
One thing that isn’t changing is the draw of talent. Thorpe says that businesses will continue to be drawn to labor.
Eventually, real GDP should grow to 4% to 5% for the year. With the worst of the pandemic probably behind us, Thorpe thinks the future looks bright for office.
Still, rents will decline in 2021 as tenants start to make more decisions and take advantage of the oversupply in the second half of 2021. However, C&W believes rents will bottom in most markets in the first half of 2022.
And none of this is to discount the headwinds the sector is facing. In a recent report, Green Street said that slipping job growth and an uptick in real interest rates pose a significant risk to the office sector. While an increase in remote work remains enemy number one for the foreseeable future, a score of other factors are also at play.
The Green Street report notes that the outlook for job growth in office-dominant industries—likely driven at least in part by increased automation—is less favorable than in years past, and a slowdown in “TAMI” sectors (tech, advertising, media, and information industries) has further decreased office demand.
Source: “Amid Many Unknowns Here’s What We Do Know About the Office Sector“

Multifamily Construction Is Shifting to the Suburbs

February 12, 2021 by CARNM

About one-third of multifamily building has moved to low-density markets in the suburbs and exurbs, which are seeing populations increase faster than are city centers over the past year, the National Association of Home Builders reported during the virtual International Builders’ Show on Thursday. The suburbs have been outpacing higher-density markets over the last four quarters, following a trend evident in single-family home construction too.

During the pandemic, the property share of 50-plus, high-rise units are on the decline as low-density rental options and single-family rentals are on the rise as renters seek more space and less density and are growing leery of buildings requiring elevators and common spaces.

Two- to four-unit buildings will likely continue to grow in suburbs and outlying city areas.

Robert Dietz, chief economist of the NAHB, also noted an uptick in demand for single-family build-for-rent housing—a bridge between single-family homes and multifamily.

“There’s a window of opportunity for gains there,” Dietz says. “You do have people who want single-family structures rather than a high-rise, but they don’t have a down payment saved to own yet.” The single-family build-to-rent market has grown recently to about a 4% share of single-family starts recently. Dietz predicts that share to jump to between 5% and 6% over the next two to three years.

Dietz also predicts the stalling townhouse market from 2020 will eventually get revived, and possibly grow to a 15% market share over the next few years from its current 11%. Townhomes offer medium-density housing solutions that can cater to the middle class and offer lower-cost housing options to help meet the demand for lower price points of housing.

Multifamily Design Trends to Watch

Daniel Gehman with Danielian Associates in Newport Beach, Calif., and Walter Hughes, with Humphreys & Partners Architects in Dallas, offered some of their predictions on multifamily design and architecture trends going forward in a separate session during the 2021 International Builders’ Show, including:

Greater adoption of technology: More technology will help decrease touch points in units and common spaces and streamline leasing processes as well. For example, technology could fuel management applications and touchless options for doors could grow in common areas. Virtual reality and virtual tours could help in leasing units. Also, robots could be the future in delivering packages and groceries to tenants.

Home offices included in floor plans: As remote work grows, more buildings may create spaces or nooks for residents working from home. These home office spaces will need to incorporate privacy and natural light to appeal to tenants, the speakers said.

Infusing distance, light, and air: Multifamily units will look for more ways to have indoor and outdoor spaces flow together between common areas and individual units, such as the use of sliding screen doors. Developers also will look to improved ventilation in their buildings, and Gehman believes “posse pods” will catch on—communal spaces for gatherings of smaller groups of six or eight people in a building’s social areas rather than expansive clubhouses for big gatherings.

Greater sustainability: Multifamily buildings also likely will look to eco-friendly products and healthier building materials that can help them offer cleaner air in their units and also lessen utility costs. They may look to use solar panels or more water-saving features. Buildings also may look to adopt more recycling and composting programs.

Source: “Multifamily Construction Is Shifting to the Suburbs”