Archives for January 2022

Expansions in primary markets climbed to 24% last year from 17% in the final three quarters of 2020.

More companies are expanding their footprints than contracting, according to new research from CBRE, suggesting tenants may have more long-term confidence in the market than would appear at first glance.

Data from the first three quarters of 2021 shows that office tenants in major US markets shifted to more relocations and expansions and focused less on status-quo lease renewals and space contractions.

Expansions in primary markets—Manhattan, Boston, Chicago, Washington, D.C., Los Angeles and San Francisco—climbed to 24% by square footage last year from 17% in the final three quarters of 2020, while relocations within the market increased to 33% from 23%. In those cities, “relocations reflected a flight-to-quality trend—especially in primary markets like Manhattan and Washington, D.C.—that supports tenants’ efforts to attract employees back to the office more regularly,” the report notes.

Meanwhile, space contractions in primary markets dipped to 5% from 10%.

The same held true for secondary markets like Atlanta, Dallas-Fort Worth, Philadelphia, and Seattle, but with a twist: those cities saw a bigger increase in new-to-market activity, with an increase to 17% in 2021 from 10% in the last three quarters of 2020. Most of that activity was concentrated in Texas and the Southeast. Around 42% of new-to-market leasing overall took place in markets with no state income-tax, like Dallas/Fort Worth, Nashville and Miami.

The report also notes that “companies’ migration to new secondary markets mirrors the movement of population to lower-cost and less-dense metro areas during the pandemic,” adding that the average lease size for companies expanding into secondary markets increased by 17% in 2021 from 2020 levels. This suggests that companies are making bigger commitments to these markets.

“Many companies are now leasing more and better space to entice employees and new hires into the office. And many are expanding into new markets,” said Julie Whelan,  CBRE’s Global Head of Occupier Research. “While the ongoing impact of COVID-19 variants on activity remains hard to predict, office market resilience amid the Delta variant in 2021 provides reason for optimism.”

Overall, CBRE says leasing activity rebounded in 2021 despite uncertainty posed by the delta variant.

“A preponderance of renewals in the last three quarters of 2020 during the height of pandemic-related restrictions gave way to more long-term commitments in the first three quarters of 2021,” the report notes. “Although the omicron variant could cause short-term disruption, this data suggests that new leasing activity likely will continue to gain momentum as 2022 progresses.”

Source: “More Office Tenants Are Expanding Than Contracting Space Needs“

The cyberattack that’s hobbled Bernalillo County has introduced some new challenges for the local real estate community, but industry representatives say it could devolve into a full-blown mess if the situation is not resolved soon.

The Jan. 5 ransomware attack has forced a lockdown at the Metropolitan Detention Center, prompted county officials to close some buildings and halted certain services.

It also has paralyzed the Clerk’s Office, which relies entirely on the network for its filing and recording system, and has kept the Treasurer’s Office from fully updating tax payment information.

“We all ride the same horse at Bernalillo County,” clerk Linda Stover said.

“Until that horse gets going, we’re all kind of at the hitching post.”

The county has not yet provided any estimate for when it expects to have its systems back in full operation.

Stover said she is hopeful it will not take much longer.

“People are getting antsy, and I don’t blame them,” she said. “We’re antsy, too.”

What records and functions are limited? Stover’s office typically records between 600 and 800 documents per day, she said. That includes real estate contracts, property transfers, mortgages, liens, marriage certificates, powers of attorney and deeds of trust.

Some functions are available in other jurisdictions – engaged couples seeking a marriage license, for instance, can get it from clerks in other counties. But paperwork for real estate transactions must be filed in the county where the property is located, and Bernalillo County currently has no way to record it.

“We are web-based; (without the county’s computer systems), we don’t have a way to track anything; we don’t have a way to assign numbers,” Stover said.

Her staff of approximately 40 people is in many ways biding its time right now, Stover said, doing things like cleaning the office. She said people have bombarded her office with questions about the situation but have remained polite and understanding.

People looking for certain details on the county website may also be hitting dead ends. Click on a link to search property tax records and a notice appears saying “Bernalillo County is continuing its assessment of the suspected ransomware discovered on Bernalillo County systems. The county has taken affected systems offline and has severed network connections. We are sorry for the inconvenience.”

The normal 10-year property tax record is not presently available on the site. Treasurer Nancy Bearce said there are some ways to check if an owner is up to date, though they remain imperfect.

Are people buying and selling homes being impacted? For people in the process of buying or selling a home in Bernalillo County, the attack’s impact likely will depend on how far along they are in the process.

Jack Thompson, president and CEO of Albuquerque-based high-volume home mortgage lender Legacy Mortgage, said Wednesday home sales are proceeding – for now, and with some caveats.

Thompson said he doesn’t expect buyers and sellers who are heading to the closing table in the next two to three weeks to be too impacted. Title research for those transactions likely is well-advanced, giving lenders and title companies the information they need on questions like whether back taxes are owed. That’s allowing those buyers and sellers to close on home sales, with the understanding that the sale will be recorded at the county once it’s back open. Thompson said those buyers and sellers are being asked to sign additional paperwork to state they’ve been informed of the delay in final recording.

Are commercial real estate deals being affected? It’s not clear to what extent commercial transactions might be affected by the attack. Michelle Coons, New Mexico regional president for WaFd Bank, said Wednesday WaFd Bank is evaluating its options after receiving legal advice not to close on major commercial projects in Bernalillo County until sales can be recorded again.

Coons said there may be as many as 20 such projects in the pipeline right now in Bernalillo County.

“It’s a complex issue, and I think everybody’s trying to figure out how to deal with it,” she said. “… I’ve been in banking 38 years, and I cannot remember (a situation like) this.”

One local attorney who specializes in real estate said the disruption at the county is costing some of her clients money.

“If you have a loan on a property and you have to wait two weeks to close, you are accruing two more weeks of interest on that loan,” said Debbie Ramirez of the Rodey Law Firm. “On a commercial property, that’s a lot of interest.”

What about sales set to close a little further out? The longer the county’s systems are down, the bigger the problem could become.

Thompson said since the attack, title companies haven’t had access to research titles on new deals coming in. If that research can’t be performed within two to three weeks, “it does pose a substantial threat” to buyers and sellers meeting closing deadlines because lenders won’t have good access to up-to-date tax information.

Coons agreed the timeline will be crucial, and said she will start to get worried in about 30 days if the systems aren’t up and running. “I think it’s just going to continue to unravel,” she said.

Coons said she’s also hearing from her staff that the attack is affecting appraisals.

“We’re seeing an extreme delay in appraisals because the appraisers need to access the Bernalillo County property records … which is holding up transactions,” Coons said.

Thompson said he’s not heard that complaint from his staff in connection with the attack, but said appraisals are generally taking much longer than in years past because the home real estate market is so busy.

Can deals be protected? Bridget Gilbert, a real estate agent with ERA Sellers & Buyers Real Estate, said she’s also seeing title companies providing insurance so titles are covered between closing and when the sale is recorded.

“I think everybody has come together really well on this,” said Gilbert, who is also the 2022 board president of the Greater Albuquerque Association of Realtors. “… The title companies are providing gap insurance that will allow us to go ahead and close and fund the deal.”

However, Coons, New Mexico regional president for WaFd Bank, said the bank’s external legal counsel has advised her that gap insurance is not allowed in New Mexico. She also said she’s learned of at least one major title company that’s not closing transactions at this time. Calls to several title companies doing business in Bernalillo County were not returned.

“The title companies will say ‘Yes, we’ll provide insurance,’ but they’re also having parties sign that indemnity agreement saying we understand there is a delay in recording and we agree to cover any losses sustained by the title company because of that delay,” Ramirez said.

Is the attack affecting people trying to refinance? It may be, again because of the need for lenders to access up-to-date property tax information. The county has continued to collect property taxes, and the deadline for first-half payments for most owners was Jan. 10. County Treasurer Bearce said she’s showing title and mortgage companies how to use the county’s website to see if some properties are up to date; however, the currently available information does not include those who made recent payments via check or money order. Those payments are still sitting in a vault as the county tests new systems for processing them.

“We have little bits and pieces (of information); unfortunately, that’s how it works” right now, Bearce said.

Thompson said Legacy Mortgage is collecting six months of taxes rather than the usual two during refinancing. When the system is back up and running, people who overpaid will be refunded, he said.

What about property insurance? It’s not clear whether a lag in recording property sales will impact coverage. Thompson of Legacy Mortgage said Wednesday he hasn’t been able to get a clear answer on the issue.

Coons of WaFd Bank said she recommends consumers and financial institutions carefully check property insurance policies to make sure newly purchased property is covered in case it’s damaged before the sale is officially recorded with the county.

Can the county temporarily switch to pen-and-paper methods? Stover said her office cannot do its work without the computer systems because so much is connected.

“We can’t attach any information they filed to any property they’re dealing with because it’s all within our system,” she said.

What happens when the systems are back up and running? Both the Treasurer’s Office and the Clerk’s Office will be looking at a processing backlog.

Once the Clerk’s Office reopens, Stover said her staff will work as quickly as possible to catch up on whatever backlog awaits.

“I’ve got a staff that cares about what they do and when this goes back online – and I don’t think it will be that much longer – they will work overtime, they will work constantly,” she said earlier this week.

Source: “ABQ Real Estate Industry Grappling With Ransomware Fallout“

As vaccinations continued, the Delta variant receded, and the federal unemployment insurance top up ended, it appeared that the Butterfly Recovery had ended, only to be followed by an emerging Omicron variant. Early indications suggest that Omicron is a fast spreading but mild strain, but many questions remain including whether existing vaccines will be effective against it. If Omicron is as impactful as Delta, the economy will continue to grow but slower than the 4.5% otherwise expected pace. However, if Omicron does not gain traction (i.e., does not defeat vaccination progress), it is difficult to paint a scenario where 2022 fails to see real GDP growth of at least 4.5%. Individuals (and firms) have built up savings (reserves) and paid off debt, waiting for the opportunity to purchase the experiences and investments they desire.

Bank deposits are 72% higher than at yearend 2019 due to involuntary savings and generous government transfer payments. This pent-up demand centers around travel, leisure, and entertainment, but also includes items like new clothes and personal care products and services. Resurgent demand will push employment upwards, as people once again must work to afford their lifestyles. Hiring was slowed by 3-4 million jobs due to Federal unemployment insurance payouts, which left about half of the unemployed with higher incomes than if they had worked.

A broad cross-section of sectors is experiencing growth. Banks are generally performing well and have massive reserve cushions, which allowed loans outstanding to fall only 1.7% in 2020 despite enormous borrower stress. Meanwhile, airlines are hiring, and U.S. air traveler volume over the Thanksgiving weekend was up to 82% of 2019 levels (from a low of 4%). Restaurants added an estimated 4.8 million jobs between the April 2020 low and November 2021, but the sector is still 4.2% below the pre-pandemic employment level.

According to the Robin Return to Office Report, the average U.S. office capacity was 25% in October 2021, the highest since the start of the pandemic. The U.S. saw a 19% increase in workers returning to the office in October, with Boston (34%) and New York (22%) seeing above average increases. In the U.S., the share of people in the office varies by city but most are averaging 25-35% of pre-pandemic levels. This will rise in 2022 though will depend on how the impact of Omicron unfolds.

Walmart was one of the first major companies to mandate vaccines for employees at its headquarters, requiring them to be vaccinated by October 4, 2021. In late July, both Google and Facebook announced that their workers also must be vaccinated. The Biden administration has passed emergency regulations requiring people to be vaccinated if they are employed by the federal government (including members of the armed services), federal contractors, healthcare providers in the Medicare and Medicaid programs, and companies with 100 or more workers. However, several courts and legislatures issued blocks counteracting these regulations. Most recently, the 6th U.S. Circuit Court of Appeals in Cincinnati ruled on December 17 that vaccine mandates for larger private employers could move forward, overturning an earlier ruling by another court that had blocked the mandates. Stay tuned for more legal wrangling.

We continue to update our analysis of key economic indicators versus their respective historical trends. Real median home prices from both the Federal Housing Finance Agency (FHFA) and the Census, real retail sales, real per capita household net worth, the unemployment rate, consumer confidence, median weeks unemployed, capacity utilization, median home price-to-per capita DPI, after-tax profits, the percent of industries adding workers, and both multifamily and single-family housing starts are at or above their respective trends. In November 2021, multifamily home starts were 1.7 standard deviations above trend, amplified by a long-term declining trend. Strong production in November also kept single-family home starts above trend by 0.9 standard deviations. In the third quarter of 2021, real home prices based on Census and FHFA data were above trend by 0.9 and 1.3 standard deviations, respectively. The latest consumer confidence and ratio of median home prices-to-per capita disposable personal income indices were also above trend, by 0.4 and 1.4 standard deviations, respectively. After-tax corporate profits were above trend by 0.6 standard deviations in the third quarter of 2021. Other key economic metrics remain below their long-term norms, with October 2021 auto and light truck sales and employment lagging trend by 1.6 and 0.9 standard deviations, respectively.

At nearly $22 trillion in the third quarter of 2021, real GDP (2020 dollars) surpassed the year-end 2019 level by 1.4% ($301 billion). In comparison, real GDP per capita was $65,920 in the third quarter of 2021 and stood 0.3% ($210) above the fourth-quarter 2019 level. These figures are notably improved from the economic lows in the second quarter of 2020, when real GDP and real GDP per capita were 10.1% and 10.2% below pre-pandemic levels, respectively. Real GDP grew by 0.5% in the third quarter of 2021 and by a robust 4.9% year-over-year, marking three consecutive quarters of positive year-over-year growth.

Real GDP and real GDP per capita are 1.1 and 0.3 standard deviations below trend, respectively. About 48% of the gap relates to the under-production of single-family housing over the past decade. Robust year-over-year real GDP growth of 12.2% and 4.9% in the second and third quarters of 2021, respectively, was a heartening increase over the first-quarter year-over year growth of 0.5%. That said, real GDP is still about 4% below where it would have been absent COVID, assuming the economy would have otherwise grown by 2.5% per year. Meanwhile, 3.9 million net jobs were officially lost between February 2020 and November 2021, a 2.6% decrease. This compares to the 22.8 million jobs recovered after the Financial Crisis. We expect solid real GDP in 2022 due to significant pent-up demand across a broad range of sectors, with the U.S. economy making up lost ground in overall growth, jobs, housing starts, and auto production. The economy will not go back to full speed overnight but look for robust growth over the next three years. Expect 2022 GDP to grow the “normal” 2.5% plus half of the 4% shortfall, or about 4.5% in aggregate. Capacity shortfalls will keep annual growth from achieving the 6% required to fully catch up in 2022. We expect another 4.5% of GDP growth in 2023.

Source: “The Butterfly Recovery is Finally Over, or is it?“

Predicting the Headlines of 2022

Should we start with the good news or the, well, not so good? On the good news side, the industrial market is pretty much where we left it in SIOR Report’s Q2 market update. Namely, the national market is so tight that B product is still gaining allure for prospective tenants, even those who a few years ago would have considered only A product for their needs.

Further, “CBRE researchers anticipate that another 300 million square feet of industrial space will be absorbed on the back of e-commerce alone,” the article continues. “However, due to the need to research and develop, produce, and store COVID-19 vaccines, the explosive growth of life sciences and cold storage have also thrived in the pandemic and are expected to continue.”

Clearly, industrial is a market enjoying robust interest from tenants and investors alike, a far cry from the current situation that exists in the office sector. “Overall U.S. office absorption remained firmly in the red in Q2 2021,” reports Colliers, placing it at negative 18.6 million square feet. The report does give a nod, although slight, to a little good news, stating that at least this is “markedly lower than the negative 46.1 million square feet seen in Q1 2021, which was the worst quarterly total on record.”

Let’s get back to the good news. “The industrial market remains strong as e-commerce continues to gain more and more share of the sales that would normally go to retail brick-and-mortar stores,” agrees Sim Doughtie, SIOR, president of King Industrial Realty, Inc./CORFAC International in Atlanta.

Of course, this is not to say the industrial market is without its own woes, as major, months-long disruptions in the supply chain—also noted in Q2—continue to plague the industry, both in terms of on-time deliveries to e-commerce clients as well as the building delays and price hikes caused by hang-ups in the delivery of construction goods. “If you ordered steel to build an industrial building on Oct. 1, you won’t get the steel to the site until July of 2022,” says Doughtie.

One possible solution, in motion as we speak, is more onshoring and nearshoring with a greater reliance on backyard countries such as Mexico. “China has had significant labor increases over the past 10 to 15 years,” says Dallas-based Conrad Madsen, SIOR. “When you factor in the logistics costs, port delays, and challenges with China, Mexico is now on the same playing field for manufacturers.”

In fact, Madsen, who is cofounder of Paladin Partners, has personally handled, “dozens of deals” on the other side of the Rio Grande river over the course of his career. “Final product can be in your distribution center in Dallas/Fort Worth or San Antonio within a day’s truck drive from any of those border towns, and in your customers’ hands in literally days as opposed to four to six months from the east.”

That assumes, of course, that labor shortages and rising fuel costs don’t continue to plague the trucking industry. Madsen adds parenthetically that other offshore nations such as Thailand and Vietnam, nations with whom we have smoother relations than with China, could also share in global shifts in supply chain sourcing.

In the meantime, delivery issues can be seen as a boon, at least for brokers, if not for tenants. “In the past 10 to 20 years, most manufacturers relied on just-in-time inventory,” he says. “Now the trend is more toward just-in-case inventory strategies, meaning that they need extra space for additional storage. Most are seeking 10-15% extra inventory to prevent future supply chain interruptions.”

Which, of course, cranks up the demand still further for those landlords. “It’s great news for the industrial sector,” he says.

THE HEADLINES FOR 2022

“Sheds and Beds,” says Madsen frankly. “That’s the headline for next year.” He explains that industrial and residential (including single and multifamily) are the “two most attractive asset classes in commercial real estate for institutional and private capital, far out-distancing office and retail,” both of which are “currently on the backburner. We’re pre-leasing a speculative distribution center just north of the (DFW) airport. We broke ground three weeks ago, and we have countless proposals on the table right now.” He says the owner won’t even consider tire-kickers or anyone looking for less than a 10-year term, “That’s how robust the market is for well-located industrial.”

Office might be taking a temporary pause in Dallas. But the ups and downs of commercial real estate’s fortunes shift from market to market. Unequivocally, for brokers such as Ted Konigsberg, SIOR, president of Infinity Commercial Real Estate in Miami, the 2022 headline will be “Commercial Markets on Fire.”

An influx of corporate tenants is driving what Konigsberg calls “a shift in population and capital flows. In effect, the northeastern markets and—believe it or not—the far west markets, like California, have descended upon us. The investment community perceived our purchase prices, lease rates, and lifestyle as significantly better than what they were experiencing.” The adoption of technology enabling remote work during the pandemic has only accelerated the trend.

CBRE research seems to agree, reporting that in Q2, some 1.1 million square feet of “new-to-market” tenants have indeed stormed the so-called Magic City. In downtown Miami alone, investors splurged to the year-to-date tune of $763 million, with “another $203 million in Airport/Doral and Aventura for a grand total of $966 million, exceeding total investment sales in pre-pandemic 2019 at the mid-year point.”

But don’t go by the headline alone, not without reading down the column. Konigsberg adds that the office market is subject to nuances that are less than stellar. He sees the suburban markets as stronger currently, owing in part to a rise in hub-and-spoke leasing strategies and more remote and hybrid work policies. And older vertical buildings in the central busines district can’t hold a candle to newer construction coming out of the ground. (CBRE reports more than one million square feet has been developed year-to-date in the suburbs.)

In fact, Konigsberg is pushing more into secondary markets due to the tightness of space in Miami, especially due to a lack of developable land. “An enormous percentage of our business now is in secondary Florida markets around the state with good infrastructure and amenities.” He does add, happily, that through his SIOR network, his firm is making further inroads nationally.

CAUTION IS STILL A MARKET FUNDAMENTAL

However, even markets riding a counter-cyclical wave of leasing and investment activity cannot escape the ongoing impact of COVID-19, now in the form of its Delta variant. And while the industrial market by all counts seems to be on an ongoing growth trajectory, “caution” is still the word of the day.

So, not surprisingly, on one hand, Konigsberg says he’s optimistic about the long-term outlook, yet he admits to being “conflicted in the short term.” And the major cause is the ongoing health issues as COVID-19 rolls into more variant strains.

But he’s also concerned about potential changes to interest and cap rates, as well as the cost of funds. “You can buy something at a four cap and still make money,” he says. “But what happens when the Fed starts tightening up the bond market? Between the funding market and our national health situation, there’s too much that’s out of our control to be completely optimistic about the short term.”

Doughtie piles on with other concerns of a political nature: “The outlook really depends on our government and if their policies will help or hurt the markets.” On one hand, he supports the $1 trillion infrastructure bill that’s currently being kicked around inside the Beltway. “It’s something the country needs, as long as the dollars actually go to infrastructure.”

But the $3.5 trillion “Reconciliation Bill,” has him a bit nervous. “It would increase taxes on everyone,” he says, “and that would cause our economy to slow down.”

On a scale of one to 10, he puts his overall optimism quotient at eight. It’s an optimism based more on the private sector than on politicians. “It takes into consideration that the government will continue to make mistakes, and the free market and smart businesspeople will find a way to make it all work.”

Madsen too is conflicted, but his focus is closer to home—on the fundamentals of industrial and office asset classes. Not surprisingly, “in terms of industrial in Dallas/Fort Worth, and on a scale of one to 10, I’m at 11,” he says. “DFW is the most diverse and prosperous economy on the globe today. We’re the catcher’s mitt for the majority of the large corporate relocations, the epicenter for logistics in North America and we see almost 400 people a day relocate here. I would not want to do business anywhere else in the world right now.”

Also not surprisingly, the office outlook for 2022 raises a bit more caution. “Too many firms, especially the Fortune 500, are still trying to figure out how to move forward. They’re scared to make a decision due to liability concerns, which is odd because all of the Fortune 500 paused only briefly on industrial-sector operations because they had to crank up the assembly lines and distribution centers to get their product to the customer. Ultimately, they cannot continue to kick the can down the street concerning their office footprint operations.”

And as long as uncertainty overhangs the office market while the light continues to shine on industrial, “that will be the headline for 2022.”

Source: “Looking Ahead“