Archives for July 2022

It’s a weekday in mid-July and small businesses are using the kitchen and freezers at the South Valley Economic Development Center, readying their business for sales later in the week.

Workers at the Agri-Cultura Network, a farm-to-table cooperative that brings produce from South Valley growers to local supermarkets, are hard at work washing vegetables before they hit store shelves.

The cooperative has a long-standing partnership with the Rio Grande Community Development Corp. — the organization that oversees SVEDC and other initiatives focused on food insecurity and business incubation.

Just down the street, organizers with a group focused on getting underserved communities to vote is holding a meeting in one of the spaces at the Social Enterprise Center, a building that is privately owned and run by Partnership for Community Action.

PCA has a focus on education, economic sustainability, health equity and immigrant rights. The organization does a little bit of everything that helps residents in this area succeed. The center has a main tenant — Southwest Creations Collaborative, an industrial sewing manufacturer — that leases space in the building, providing jobs for many Spanish-speaking residents in the area. When the center opened in June, PCA said it would directly support 77 jobs over the next nine years.

PCA and RGCDC are just two of a few organizations in the area looking to change the negative perception of the South Valley as an area with low economic potential, and are providing residents in this area with jobs and an opportunity to bring their ideas to fruition.

“At the end of the day RGCDC was created for the community to have a voice and have a way to make change,” said Josue Olivares, executive director of RGCDC. “And that’s something that we need to make sure that continues to happen.”

Incubating business, providing opportunity

RGCDC was founded in 1986. The organization’s original focus was to serve the needs of residents and businesses in the area.

That mission has continued in recent years, with a primary emphasis on incubation of small businesses that focus on food.

The organization does that through the SVEDC, which offers a commercial-grade kitchen for businesses to test and create their products.

There’s the Semilla program that introduces prospective or early-stage small business owners to a wealth of information to determine whether their business model or food product is viable for long-term success.

There is also the Mixing Bowl program, which allows small business owners to take advantage of the commercial-grade kitchen to produce their food products in larger quantities with the hopes of eventually getting those products into stores.

But RGCDC’s initiatives aren’t necessarily limited to incubating businesses, however. The organization also has another initiative, Delicious New Mexico, that focuses on small- to medium-volume distribution services for local farmers and food producers in the South Valley.

Delicious New Mexico has developed relationships with stores across the state.

“We found a lot of gaps within small markets being able to get into retail, along with distribution issues and making connections throughout the state of New Mexico,” said Sean Humphrey, the manager for Delicious New Mexico. “Another side of it also is looking at food deserts within the state (and) getting enough food access to those areas as well through the distribution.”

Olivares said RGCDC is always looking for new opportunities to serve the community, whether that’s partnering with other local organizations to make that happen or even finding new programs and initiatives to offer. In fact, the SVEDC is expanding with an additional 16,000 square feet of space for cold storage and production — paving the way for the organization to serve an even larger array of entrepreneurs in the future.

Enterprise center

Southwest Creations Collaborative operates as the main tenant down the street at the newly opened Social Enterprise Center.

SCC fills about half the space at the 14,000-square-foot facility. Women who work at the facility are offered child care that costs just 25 cents an hour, making it easier for them to support their families.

More than 40 people currently employed by SCC — mostly Hispanic women — sew a variety of products from dog collars to tote bags and everything in between for both local and non-local companies.

SCC Executive Director Susan Matteucci said the sewing business — which is registered as a nonprofit — is more like a family than a typical job where you come in from 9 a.m. to 5 p.m.

“I think what the Social Enterprise Center does is build on the strengths of the community, not the weaknesses,” she said. “And why I say that is a lot of nonprofits and social enterprise (centers) focus only where people think the employment sector would be. … It’s not based on the fact that people need access to good jobs that are consistent, that are well paying, that value them as a person, that value their families, that value what attitudes they could add.”

PCA’s associate director Nichelle Gilbert, the organization that runs the Social Enterprise Center, said they also have a focus on helping small businesses in the community, pointing toward the help they provide in the child care sector. Gilbert said the organization helps these people with understanding licensing and connecting them to resources to get their business going.

“Being able to act as a resource for that group to make the business side more accessible to help to invest in a structure as they go from serving six children to 12 children, or they grow from needing to modify their house or their background for a playground — that’s this idea of incubation,” Gilbert said.

Overcoming stereotypes

The South Valley is known for many things, but crime and poverty have often overshadowed the area’s rich history.

Words like “deficient” and “struggle” are how outsiders tend to view the South Valley. But local leaders say the residents of the South Valley are better described as passionate, creative, vibrant and committed, said Javier Martínez, executive director for PCA and a Democratic lawmaker in the New Mexico House of Representatives.

“These are people that don’t give up,” Martínez said. “Regardless of how other communities or other politicians might view us, we are relentless and we are powerful. … For all the perceptions about us, we’re proving them wrong.”

Editor’s note: An earlier version of this story misstated the nature of the Social Enterprise Center. The center is privately owned. 

Source: “‘Proving Them Wrong’: South Valley Groups Spur Economic Growth“

With a shrinking delta in cap rates between assets of different vintage, many investors opt to go with lower risk newer properties and fewer capital expenditures.

Over the past few years, the delta between cap rates and valuations for older multifamily properties—those completed before 1996—and newer properties has narrowed. In fact, it’s narrowed so much so that investors who’ve traditionally preferred to buy older apartment assets are now “trading up” to much newer properties.

Orion Real Estate Partners is one such investor. The Los Angeles-based firm recently acquired Remington Ranch, a 180-unit apartment community in San Antonio that was built in 2008. With 80 percent of the property’s units in original condition beyond cosmetic repairs, Remington Ranch is “an ideal candidate for a value-add unit renovation,” according to Marc Venegas, principal with Orion Real Estate Partners.

While Remington Ranch features all the physical amenities that residents expect in a newer property, it lacks the quality of finishes of a recently completed building. This “makes it easier” for Orion to execute its business plan, Venegas notes, adding that the firm plans to invest approximately $2.6 million in interior and exterior improvements.

“Historically, when you bought an older property, you got a better price per unit and a better cap rate than you would on a newer property, which gave you more ability to push rents and make a return,” Venegas says. “But over the last few years, those spreads went away, and investors weren’t getting the same benefit for buying older properties that they used to. Old or new, you were almost paying the same cap rate.”

That’s why Orion decided to go new or go home. “We thought: if we’re going to be paying these prices, we might as well look for newer, nicer properties so if the economy turns, we can hold for the next 10 years and not have to spend money on deferred maintenance like boilers and roofs,” Venegas says. “While all that is important, it doesn’t generate any additional rent or better returns.”

Delta between older and newer narrows

At WMRE’s request, real estate data firm CoStar Group conducted an exclusive analysis of multifamily deal volume over the past several years, focusing on cap rate compression for properties built within the past 15 years and those built prior. From 2014 to 2022, the average cap rate for both older properties and newer properties decreased substantially.

The average cap rate for older properties compressed to 4.3 percent from 6.2 percent, while the average cap rate for newer assets compressed to 3.8 percent from 5.3 percent, according to CoStar.

“Over the past five years, older properties really got priced up,” says Andrew Rybczynski, a principal consultant for CoStar Advisory Services who conducted the analysis. “They’re not trading at the same discount they used to.”

A more relevant number, however, is the delta between cap rates for older and newer properties: in 2014, the delta was 0.9 percent vs. 0.5 percent in 2022.

As prices for value-add apartment properties were built up during the prior cycle, investors started facing lower yields on cost when compared to their long-term cost of debt, according to Kai Pan, managing director and head of multi-housing property sector with JLL Valuation Advisory. “The rapidly rising prices for value-add apartments presented a challenge for investors to find deals that would achieve a targeted yield spread. This effect has now been magnified in the current rising interest rate environment, possibly causing investors to look to newer or core assets.”

CoStar’s Rybczynski also discovered that multifamily properties built within the last 15 years are increasingly accounting for a larger share of acquisitions, both in terms of dollar volume and number of units. In 2021, properties built during this period accounted for 32 percent of acquisition market share vs. 22 percent in 2018. The market share for older properties, meanwhile, saw a miniscule increase from 10.6 percent to 11.0 percent.

“When we look at the spread between share of multifamily product that’s trading, we can see that investors are angling more toward newer product,” Rybczynski says.

Are older assets riskier assets?

The Klotz Group of Companies was one of the first apartment investors to start “trading up” into newer properties. In 2015, it started moving away from thousands of lower end, older properties to acquire higher-end, newer vintage properties, according to Founder and CEO Jeff Klotz.

“We felt the value created was a lot more sustainable, consistent and impactful to the resident and community,” he says. “People are what drive profits, and trading up with your assets essentially allows you to ‘trade up’ [with] everyone you encounter, including vendors, lenders, employees, residents, etc.”

Experts say there several reasons that investors are now “trading up”: 1) the expense of maintaining an older building outweighs the return 2) the cost of insurance for older buildings relative to newer buildings 3) the discount-to-replacement cost and 4) renter sensitivity to inflation and economic downturns.

Ultimately, multifamily investors who are choosing to invest in newer properties point to the increased risk inherent in older buildings. Bonaventure, an Alexandria, Va.-based apartment investor and developer that has been known to hold properties for upwards of 50 years, is investing most of its resources in developing new communities and buying newer assets.

Earlier this year, Bonaventure acquired Vida East at Church Hill in the Church Hill neighborhood of Richmond, Va., through an UPREIT transaction. Built in 2018, the 178-unit property offers renter-wish-list amenities, including controlled access, hardwood floors, designer cabinetry and granite countertops.

“We generally view older buildings as riskier assets, although they may have greater upside, and we’re willing to give up a little upside to protect against the downside,” says Dwight Dunton, founder and CEO of Bonaventure. “If we are trading up, it is primarily because the expense of maintaining an older building is now outweighing the return, and we view the risk of holding the older asset as greater than trading up into newer assets.”

Value-add expands beyond older properties

Smart investors have realized that acquiring older assets and renovating them is not the only way to execute a value-add strategy.

“Ten years ago, value-add was a relatively simple prospect and more clearly defined as buying an older asset and undergoing a physical renovation,” says Matthew Levy, head of investments for Stoneweg US LLC, a Florida-based real estate investment firm. “Given the increased competitiveness of the market, the term value-add has broadened quite a bit, and owners and investors have broadened their horizons on ways to create and unlock value within multifamily assets.”

Levy says value-add now includes managerial value add, financial value-add and physical value-add, not to mention ESG-related value-add, which can have an impact for some investors that goes well beyond the bottom line.

Like many other multifamily investors, Stoneweg US has shifted its acquisition focus from pre-1990s properties to much newer assets. Most recently, its acquired Amaze @ NoDa Apartments, a 298-unit community in Charlotte, N.C. built in 2020.

Consisting of two four-story, elevator-serviced buildings, the class-A multifamily property offers units with chef-style kitchens, walk-in showers with subway-tile accents, stainless-steel appliances and premium vinyl flooring throughout. It also features resort-style amenities including: a sky lounge with an outdoor bar area, a gaming section, fitness center, swimming pool furnished with cabanas and a firepit and a bark park and pet spa area.

“While these heavier lift older assets do have large potential growth prospects, they also come with a high degree of risk in terms of deferred maintenance, capital expenditures, riskier business plans, higher insurance premiums and functional obsolescence for some of the older properties,” Levy says. “We feel that the risk adjusted returns for 90s/00s and new construction projects that still have some sort of value-add component to them is a far better prospect for our investors.”

Source: “Compressed Cap Rates and Higher Risk Pushes Multifamily Investors to Forgo Older Assets“

There is a widening divergence in absorption and rent growth.

Office sector leasing was flat in the second quarter, but the so-called flight to quality continued to gain speed, leading to what JLL has called a “widening divergence in absorption and rent growth based on building age and amenitization.”

“Continued reassessments of space needs as a result of delayed return-to-office plans pushed sublease availability upward modestly, even as the rate of take-backs and backfilling of sublease blocks was consistent with earlier quarters,” the firm notes in a new research report. “On the other hand, innovation-heavy submarkets and micromarkets remained bright spots in a heavily patchy real estate environment, witnessing buoyant inbound migration from both traditional and emerging industry tenants complemented by groundbreakings of midsized, boutique office space as part of mixed-use developments.”

JLL also notes that as we move into the second half of this year, a record number of leases will expire – and that in turn will drive additional leasing activity while shifting growth expectations as companies continue to noodle over space needs.

Gross leasing activity totaled 47.2 million square feet, just 0.1% increase over the quarter, which JLL attributes to tenants “both large and small” in a number of high-growth sectors such as tech, media and creative industries putting expansion plans on hold thanks to a cooling venture capital and funding environment. Secondary growth markets are registering activity at 87.3% the rate of average 2019 quarters, while gateway cities are registering a 65.4% recovery rate in gateway markets. Four markets—San Diego, Miami, Silicon Valley and Raleigh— posted transaction volumes above their pre- pandemic norms, driven largely by life sciences and financial firms.

Short-term expansions stayed below 20% of activity, “indicating stable rather than decreased confidence among tenants,” JLL notes, and net absorption was again negative in Q2, with 7.8 million square feet of net occupancy loss, most of it from Class B and C space.

But “unlike leasing, flight to quality accelerated in the second quarter,” JLL notes. “Since the onset of the pandemic, new supply has registered net occupancy growth of 86.8 million square feet, compared to the 246.5 million square feet of outflows in the rest of the market. This trend will continue for the foreseeable future, but the scale of the remaining pipeline will keep vacancy elevated despite intense demand for top-tier space….As with other core metrics, vacancy is trending in different directions based on building quality, holding firm at 16.5% for buildings delivered since 2015 and increasing to 19.0% for second- generation product.”

Source: “Flight To Quality Continues for Office Sector“