Archives for April 2022

The true level of this activity is out of touch with the rhetoric.

Narratives around the so-called “flight to quality” are failing to move the needle on capital market performance, as the majority of Class B and C properties are slightly outperforming Class A counterparts.

“This doesn’t mean that trading up is not occurring, but it’s more likely that the true level of this activity is out of touch with the rhetoric,” Moody’s Analytics’ Thomas LaSalvia writes in a new report in the Scotsman’s Guide.

That includes the fact that many office-using companies “have done quite well” throughout the pandemic,” LaSalvia says in the analysis.

“Greater profits, higher stock prices and an expectation of further growth are not uncommon, especially among many large office-using firms,” he writes. “Combining this business performance with the potential for rent concessions or discounts within certain markets, and decision makers may think that now is the right time to trade up.”

In addition, the tight labor market has emboldened many workers to work less in the physical office—and many are also saying they’re willing to leave if they don’t get what they want.

“Even if this threat isn’t credible, companies will have to compete for workers and entice them to the office if that is what business leaders deem necessary. Class A space may be required to gain access to the best and brightest talent,” LaSalvia writes.

But that’s not the whole argument, he says, opining that some leaders may have “more of a suburban mindset,” and are thus endeavoring to be closer to their workers. Instead, parsing the data for both capital- and space-market activity shows that the flight to quality argument is actually quite minor.

Just 24 of the 82 markets Moody’s analyzed posted situations where Class A assets outperformed Class B and C properties, leading LaSalvia to write that “the flight-to-quality trend has its merits in the post-pandemic world, and some businesses will find it worthwhile to trade up.”

But “the data does not support a widespread proliferation of this phenomenon, at least as it amounts to the performance of Class B/C versus Class A properties,” he writes. “If trading up is occurring in substantial numbers, it is likely occurring within the same asset class and not between classes, which is something beyond the scope of this analysis. Changing buildings for better natural light, a slightly better view or space that is more environmentally friendly is likely. It is on the margins where this phenomenon may truly lie.”

Source: “Beware the False Flight To Quality Narrative for Office“

The new Redevelopment Tax Abatement program offers a seven-year incremental property tax abatement to development in Metropolitan Redevelopment Areas. The program no longer requires applicants to also receive a city bond, reducing the cost and administrative burden.

By restructuring this incentive and providing clear applicant criteria we hope that more developers, including smaller developers and adaptive reuse projects, will apply. The new program also reduces administrative discretion and provides a clear rubric to ensure projects include sustainability, equity, placemaking, and community benefit elements.

Learn more about the Redevelopment Tax Abatement here.

Year-over-year inflation ticked up to nearly 10% in cities like Atlanta and Phoenix.

Continuously strengthening in-migration patterns across the Sun Belt are raising affordability concerns in the market, which has seen explosive population and rent growth since the onset of the COVID-19 pandemic.

Average rents ticked up 16.8% across all property sizes in the region year-over-year in January, according to a Chandan Economics analysis of properties managed by independent landlords and using data from RentRedi. Meanwhile, rents have increased just 5.1% on average in other regions of the US.

And within that data, single-family rentals continue to dominate. Average rent charges for single-family rentals clocked in at $1,400 in January 2022, up from $1,200 the year prior

“The Sun Belt was already benefiting from a strong labor market, low tax rates, and lower overall cost of living relative to other parts of the country before the pandemic. However, the region’s popularity has only increased during the past two years as workers became more mobile and able to take advantage of the lower cost of living in cheaper metros,” Chandan’s research team notes in an analysis of the RentRedi data. “Increases in home prices amid strong household balance sheets and constrained home-for-sale inventories have converged to create an influx of rental housing demand in the Sun Belt.”

Those rental increases are leading to higher overall cost of living within the Sun Belt region, as evidenced in part by a reduction in on-time payments last year and into 2022. On-time payments in Sun Belt cities have underperformed other regions of the US in eight of the last 13 months, and Chandan’s first estimate of January 2022 on-time rates showed that 79% of units within the region paid on-time as opposed to 81% elsewhere.

The firm expects rents will continue to climb this year, further compounding affordability issues.  However, some experts maintain that rising wages have partially offset rental increases in these cities.

“We look closely at the rent-to-income ratio. The rent-to-income ratio is up in the Sunbelt markets, but it is only up modestly. So, rents aren’t all of the sudden unaffordable, and that is because wages are helping to offset some of that increase,” Jeremy Katz, co-head of CP Capital, told GlobeSt.com in an earlier interview, adding that wage growth in the region has been at about 5% or 6% in the last year.

But that’s on top of rising inflationary pressures: according to the Bureau of Labor Statistics, year-over-year inflation ticked up to nearly 10% in cities like Atlanta and Phoenix. According to the National Association of Realtors, the average consumer is spending nearly $500 more a week for monthly items other than housing, but wages haven’t kept pace, rising by just $212 per month.

Source: “Rent Increases Threaten Sun Belt Affordability As Inflation Rises“

Cannabis real estate owners have limited access to capital, but if passed, the Safe Banking Act could change that.

The cannabis industry is growing rapidly, but for real estate owners, working with cannabis businesses still poses significant risk. Cannabis-occupied real estate has limited access to capital as well as some uncertainty around collection of rent and other income due to the federal illegality of the business. The Safe Banking Act could help to mitigate the risk by prohibiting regulators from penalizing banks and other lenders from providing banking services to a legitimate cannabis-related business.

“Cannabis tenant limit the landlord’s ability to refinance the property. This can vary from landlord to landlord, depending on if there is financing on the property and the timing of when they are planning to refinance,” Matte Namer, founder and CEO of Cannabeta Realty, tells GlobeSt.com.

The Safe Banking Act first passed in 2021 in the House, but it has yet to pass the Senate. Namer believes that it has a real chance of passing in the current legislative session. With increased confidence that the act will pass, banks are starting to provide capital for cannabis-occupied real estate. “I think that many banks see that there is an increased chance of the Safe Banking Act passing this year,” says Namer. “That is having a little bit of an effect on the premium that landlords are looking to get from cannabis companies, because presumably when Safe Banking passes, there won’t be this discrepancy in terms of financing.”

In some ways, the Safe Banking Act is better for the cannabis business than federal legalization, which would create abundant competition. “The idea of federal legalization scares landlords and cannabis cultivators that are operating in states where the climate is not as ideal for greenhouse growing,” says Namer. “There is a fear that facilities in these places could be obsolete in an area where there is unabridged interstate commerce of cannabis.”

While the Safe Banking Act could open the flood gates for banking institutions to pursue these deals, Namer says that there is no guarantee that they will. “Presumably, it will allow for a lot more access to the banking industry and it will help lenders be more comfortable with issuing mortgages on properties leased to cannabis operators,” Namer explains. “Large banks could still decide that they don’t want to issue mortgages on cannabis real estate because they may just determine that it’s an asset class that they don’t want to be exposed to.”

Source: “Safe Banking Act Could Open Opportunities in Cannabis Investment“