Archives for November 2021

It’s not just the pandemic. The BTR market has been growing rapidly for the last several years.

It’s not just the pandemic. The build-to-rent market has been growing rapidly for the last several years. In fact, going back to 2017, BTR properties have outperformed multifamily, according to Dennis McGill, director of Zelman & Associates, who spoke on the fundamentals of the BTR market during Beyond the Basics of Build to Rent, a webinar hosted by Walker & Dunlop.

From 2017 to 2019 the blended rent growth of BTR properties averaged 4.1% from 2017 to 2019. During the same timeframe, multifamily properties had 3.2% rent growth. Growth in the BTR space only accelerated during the pandemic, outperforming multifamily ever quarter since the onset of the health crisis in 2020. Over the last four quarters, rents have increased 6.3%, an increase of 1.5x the rent trend prior to the pandemic.

The widest gap between BTR and multifamily was during the fourth quarter of 2020, according to McGill. The narrowest gap came in the third quarter of this year as the multifamily market rebounded from the pandemic. Multifamily had 8.2% blended rent growth during the quarter, while BTR product rents grew 8.6%.

While the gap narrowed, McGill cautioned that the data was not indicating that multifamily is catching up. “This does not capture the cumulative effect since the onset of the pandemic. We indexed our two data sets to 4Q19,” he said. “Single-family rents are up 9% since then, and they are almost 2% higher than the pre-pandemic trend. Adversely, even with the most recent surge in multifamily lease rates, blended rents are only 3% higher than in 4Q19 and are actually 2% lower than the pre-pandemic trend. Obviously, there is substantial variation depending on the urban and suburban mix.”

BTR also outperforms multifamily occupancy trends. Seasonally adjusted BTR occupancy is 98% for the third quarter 2021. “This is a record for our data and up a robust 210 basis points from 3Q19, said McGill. Multifamily occupancy was also a strong 96.2% for the same period—the highest occupancy in recent history for the asset class. However, McGill said that when adjusting for bad debt expense—a common theme following the pandemic—the occupancy rate falls. “Adjusting for the increase in bad debt expense, the occupancy figures moderate. The single-family sector would still be higher than in 3Q19, but multifamily would not,” he said. “This is something to keep in mind as eviction moratoriums end, stimulus fades and supply accelerates.”

With such strong and sustained fundamentals, it isn’t surprising to hear that institutional capital is increasing its exposure to the asset class. According to McGill, there is $75 billion of institutional capital for build-for-rent projects, and the vast majority was announced in the last 12 months. McGill added, “It is seemingly growing by the day.”

Source: “BTR Has Outperformed Multifamily for the Last Five Years“

Occupancy fell by 2 million square feet as of November, compared to the third quarter in 2021.

Even before the emergence of the Omicron variant, it was clear that the office recovery had started to falter in the face of the ongoing recovery.

Occupancy fell by 2 million square feet as of November, compared to the third quarter in 2021, bringing the total loss in office occupancy to 133 million square feet, according to the National Association of Realtors. This was despite an increase in occupancy of six million square feet during the third quarter and a decline in work-at-homes from 35% of American laborers during the pandemic to 12% in October.

“The factors of the ongoing pandemic, more people working from home (fully remote or hybrid) compared to the pre-pandemic level, the decline in office space per worker, and the tight job market all pose headwinds to absorbing this enormous amount of office space,” wrote NAR Research Economist Scholastica Cororaton.

The economist predicted the pandemic-spurred factors are likely to help keep vacancy rates hovering at over 10% until the end of 2022.

For instance, even with the rise in people returning to offices and other job sites, Cororaton cautioned the number of office-using workers who work from home is still 3.6 times the number of workers who worked from home prior to the pandemic.

At the same time, office workers teleworking use nearly four times less pre-pandemic levels of office space, she noted.

The decline in average square foot per office worker started before the pandemic with a decrease to 243 feet at the start of Covid-19 from 273 in 2011 from the use of flexible spaces and hot-desking, according to the report.

The study added there is a strong demand for office-using jobs but only half of the job postings can be filled as workers can’t move geographically to where the jobs are for reasons such as the high cost of housing or due to personal reasons.

As of November, the metro areas that have suffered the largest loss in office occupancy are the centers for the headquarters of major tech, financial, and business corporations New York (-31 million square feet, or MSF), Los Angeles (-11.5 MSF), San Francisco (-11 MSF), Washington, DC (-9.8 MSF), and Chicago (-9.5 MSF)..

Secondary or tertiary metro areas have been less impacted with the regions that have seen an increase in office space occupancy led by Durham (+1.4 MSF), Boise (+1.4 MSF), San Antonio (+1.4 MSF), and Palm Beach (-1.3 MSF).

Source: “The Pandemic Takes Another Shot at the Office Asset Class“

Benefits are more than just the push to meet net-zero carbon goals, JLL reported.

Buildings made from timber have long been billed as a route to addressing the real estate industry’s net-zero carbon emission goals.

Recent developments suggest the pace is picking up, with projects becoming more ambitious, according to a recent post by JLL. It points to the example of a six-story academic building in Singapore being constructed with mass engineered timber. When completed next year, it will be one of Asia’s largest wooden buildings.

A recently completed 20-story timber cultural center and hotel in Swedish eco-town Skellefteå is primarily made of glued laminated timber (glulam) and cross-laminated timber, and can withstand a higher load-bearing capacity than both steel and concrete, while offering plenty of environmental benefits, JLL also notes.

In the US, a 25-story apartment building in downtown Milwaukee called Ascent will take the title of the world’s tallest hybrid mass timber building when it opens in July 2022.

Potential Blueprint for Greener RE Construction

“The rise in the use of engineered timber products such as cross-laminated timber (CLT) is driven by two factors—the desire to decrease the cost of construction and the necessity of making the projects we build more ecologically sustainable,” Adrian Washington, CEO & Founder Neighborhood Development Company, tells GlobeSt.

“On the cost side, timber buildings can produce significant savings on material used, time to construct, and the amount of labor needed on site.  In terms of sustainability, timber buildings reduce the need for cutting down new trees, create less scrap loss, and perform better on almost any measure of thermal efficiency.”

Avoiding Carbon-Intensive Steel and Concrete

Major real estate developers are leading the charge in lowering the carbon footprint of buildings.

“On top of managing their operational efficiencies, developers have been finding ways to design and construct in a more sustainable manner, such as avoiding carbon-intensive materials like steel or concrete,” said JLL’s Sam McCrea, Solutions Lead, Energy & Sustainability Services, Asia Pacific during the Future of Sustainable Spaces panel discussion.

Truss structures—those crisscross arrays of diagonal struts used throughout modern construction, in everything from antenna towers to support beams for large buildings—are typically made of steel or wood or a combination of both.

But one of the main stumbling blocks has been the lack of access to affordable sustainable materials, which requires a coordinated effort between different stakeholders, JLL reported.

Building partnerships with sustainable suppliers—supported by investments from the private sector, the construction industry and governments—will make the use of sustainable building materials commercially viable and more accessible to everyone, says McCrea.

“People don’t realize that the overall cost of the project can drop if you use the right materials,” says Parag Shinde, Group Energy and Sustainability Manager, Property NSW, during the Future of Sustainable Spaces panel.

Source: “Developers Get Smarter in Their Embrace of Timber“

Industries servicing the last mile continue to see an increase in leasing as consumer pressure for speedy deliveries soars across urban cores

The industrial real estate sector continues to break records going into the tail end of 2021. The increase in online shopping has become a primary driver of demand for smaller logistics facilities, making the most popular size segment for leasing 10,000 to 49,000 square feet in the third quarter, according to JLL’s Q3 Industrial Report. Nationally, more than 137.9 million square feet of total industrial product was leased in Q3, a new high for 2021.

More than half of leasing in the U.S this quarter came from users looking for space below the 100,000 square foot threshold. The surge in ecommerce, labor shortages, and consumer expectations, in terms of speed and delivery of product, have added more pressure than ever to the supply chain and its operations. As a result, industries servicing the supply chain and e-commerce, continue to experience an increase in demand.

In Q3 the Logistics and Distribution and third-party logistics (3PL) industries accounted for 28.3 percent of total leasing volume. As more and more companies continue to outsource their operations to meet consumer online demand JLL expects these industries to flourish, especially within the 3PL sector.

“With demand for industrial space showing no signs of slowing down, new inventory will be needed to bring supply and demand closer to equilibrium and negate a future shortage of industrial space,” said Craig Meyer, President, Industrial, JLL. “As ecommerce grows, now more than ever Logistics and Distribution and 3PL will be at the forefront, especially with the upcoming holiday season and impending impacts from the cargo ships backup logs observed at the close of the quarter.”

Another strong indicator of demand can be measured by rapid growth in urban logistics, specifically of light truck driver hiring. While the U.S. has seen a 15 percent increase in light truck driver hiring since 2019, the Outer Boroughs of New York City have seen a 24 percent increase in hiring over the same time frame according to a JLL analysis of EMSI data, showcasing the demand for last mile in prime urban cores. Additionally, according to JLL research, in Q1 2019 there was 542,680 square feet of overall industrial space under construction in the Outer Borough’s development pipeline, and by the end of Q3 2021, that has already grown to 3,464,160 square feet under construction.

“In a world of two-hour shipping, consumers have come to expect a specific window for their goods to arrive. The growth in online shopping and the need for fast delivery times is driving demand for urban industrial space unlike ever before,” said Leslie Lanne, Executive Managing Director, Urban Logistics, JLL. “Ecommerce will keep driving the need for vertical space, and as a result we’re going to see this new urban logistics asset class spark progressively more developer and investor interest.”

Small bay warehouse facilities in NYC and Northern NJ, specifically those under 100K square feet, have seen a steady increase in both square footage and leasing since 2019. According to JLL data, at the end of Q3 in 2019, the region accounted for 148 small bay leases totaling 4,480,374 square feet. Now at the end of Q3 in 2021, the region accounts for 213 leases totaling 6,005,999 square feet.

Investors searching for yield identify this space as a growing opportunity segment and are deploying capital toward acquiring scale. For example, a joint venture formed between Arden Group and Arcapita Group recently announced plans to invest up to $2 billion in acquiring small- and medium-bay multi-tenant warehousing space across major U.S. markets.

“With the tremendous leasing velocity that we are seeing in every market around the country, buy-side underwriting and investor demand for this segment of the market is stronger than what we currently see within the big-box segment,” added Trent Agnew, Capital Markets Platform Co-Leader for JLL. “The primary driver for this product type is rent growth, as we are seeing renewal rents on smaller spaces routinely push up 30 to 50 percent at expiration, driving significant NOI growth.”

With construction costs continuing to increase, investor demand for small bay warehouses is expected to continue increasing, which is anticipated to drive further cap rate compression in 2022. Select core markets are seeing class B product trade at a sub-4 cap.

Source: “Small to Mid-Size Industrial Real Estate Dominating the Leasing Market“