Archives for December 2022

Real estate professionals, academics, people who work with low-income and homeless populations, and even residents just interested in keeping elderly relatives close to family voiced support for Albuquerque Mayor Tim Keller’s proposal to dramatically change the city’s zoning code.

But the ideas also drew backlash during a public meeting Thursday. Some homeowners argued the changes deserved far more scrutiny and expressed fears they would alter neighborhood character, block views and increase the number of cars parked on the street.

The legislation – created by Keller’s administration and co-sponsored by City Councilors Isaac Benton and Trudy Jones at the mayor’s request – aims to grow the city’s housing stock with Integrated Development Ordinance amendments enabling greater density. It would impact areas zoned for single-family homes by allowing duplexes and accessory dwelling units – also known as “casitas” – on lots with sufficient available space. The bill also relaxes rules for apartment development by removing the height limit in certain areas and reducing parking requirements. It also would allow developers to replace the standard kitchen oven or stove with a microwave or hot plate when turning hotels or other commercial buildings into permanent housing, thus extending an exemption that currently applies only to city-funded projects.

“This is the biggest zoning package we’ve put forward since the IDO itself,” Mikaela Renz-Whitmore of the city’s Planning Department told the Environmental Planning Commission on Thursday.

The EPC, an appointed citizen committee, is tasked with making a recommendation to the City Council. After five hours of discussion and public testimony Thursday, the EPC voted to delay any action until its Jan. 19 meeting. The panel discussed several tweaks it would like to see – most of them somehow limiting the changes or focusing them in more specific areas – but made no final decision.

Only councilors can change the bill itself, which will eventually go through the council’s Land Use Planning and Zoning Committee and then up to the full council for a final vote.

Many people specifically addressed casitas, which are currently only allowed in certain areas, as a way to foster multigenerational living, more diversity in established neighborhoods and extra income for residents who may otherwise struggle to afford home ownership.

“It’s important for us to create more of this housing stock so more diverse populations in the city of Albuquerque have access to good schools and supportive neighborhoods and not just be pushed into high-density housing in other parts of the city,” said Johanna Stein, who said her neighbors already have “grandfathered” casitas and she would like to build one on her property, too.

But several people affiliated with neighborhood associations and coalitions raised concerns, saying they did not know about the significant proposal until reading it in the newspaper last month and that the public has had little opportunity for comment thus far. They said it could detrimentally impact existing homeowners, who needed to be considered.

“I live in an R-1 (single-family home zone). We chose this area for that reason. People choose their largest investment of their lifetime for a reason, and have an implied contract with the city,” Julie Dreike said. “This is a complex, diverse change that’s being proposed very, very quickly.”

Source: “Public gives feedback on Albuquerque mayor’s sweeping zoning code proposal“

CBRE undertook a large-scale study of cross-generational attitudes, with surveys of 20,000 people globally, to understand how baby boomers through to Gen-Z will want to live, work, and shop in the future.

One of the standout observations is the number of people who want to move, or have, after living through the worst (at least so far) of the pandemic. In general, a full third of people say they plan to move within the next two years, with the US showing “the strongest desire to relocate” among developed countries. Another 24% did move within the last two years, although that would include changing residence due to the pandemic’s effects as well as, in the US at least, already existing major demographic shifts

Of those planning to move, nearly half at 49% wanted to move closer to a city center. Another 41% sought a “more remote location,” whether in the same city or a different one. And then 10% looked to move to a different country.

Breaking the numbers down globally by age, 48% OF Gen-Z and 46% of late millennial respondents said they planned to move within the next two years. The number continued to drop off by age: early millennials, 35%; Gen-X, 28%; and baby boomers, 20%. The latter two groups have higher levels of home ownership, that could affect interest in moving. According to the CBRE figures, half of baby boomers own their homes and no longer have a mortgage.

The balance of moving toward or away from a city center also showed age-related patterns. For Gen-Z, 53% wanted to move closer and 35%, further away; late millennials, 50%/41%; early millennials, 50%/42%; Gen-X, 45%/44%; and boomers, 44%/48%.

“Regarding how we live, this is manifesting in consumers’ desire to seek higher quality properties offering better facilities and surroundings, which has replaced affordability and the desire to save money as the strongest reasons to move,” CBRE wrote. “However, the current economic climate may temper this appetite.”

CBRE ended the section on living choices with advice for investors. One is to “capture robust housing demand,” as it will continue to grow globally, although “short-term buying intentions could be affected by rising interest rates and the prospect of a recession.”

Another suggestion: building housing for younger people in urban centers. “Locations close to business districts should meet such demand from this demographic cohort, which typically seeks easy access to offices and supporting amenities.”

Third, “retain focus on placemaking,” by emphasizing a property’s surroundings more than the unit. “Alluring yet functional designs will be needed for interiors, outdoor areas and surroundings and should support working from home.”

Source: “One-Third of People Ready to Move Now, Says Study“

Before the pandemic, co-living seemed to be an up-and-coming investment property type, with appeal to millennials and venture-backed startups abounding. Some developers even claimed that co-living projects delivered better rents per sq. ft. than conventional multifamily properties.

But now, nearly three years since the onset of the Covid pandemic, the co-living sector has seen a consolidation of major players and a shift in view of these units as a specialty offering in a multifamily building, particularly for renters looking to catch a break in a pricey city.

“There were a number of co-living companies that did not survive the pandemic,” says Sarah Yaussi, vice president of business strategy at the National Multifamily Housing Council, an industry group for the apartment industry. “But if you think bigger picture, there’s so much demand for different kinds of living situations.”

Before the pandemic, there were plenty of reports talking about how co-living—essentially, roommates sharing spaces—had always existed, but was taking off in a new, purpose-built fashion, fueled by the rise of new operators hoping to make a name in the space. At the end of 2019, there were 5,000 beds in co-living communities across the U.S., compared to a handful the four years prior, and there were some 40 operators on the scene, according to one report from commercial real estate services firm CBRE.

Today, many of the sector’s best-known players—including Ollie, Quarters, Roam, to name a few—no longer exist. WeWork’s WeLive co-living experiment never expanded as planned, either.

In part, the pandemic led to a pullback in the flow of capital into the kinds of proptech firms that ran co-living operations. “It’s tough. In general, there’s a lot of uncertainty,” Yaussi says.

But companies that specialized in master leases or development of co-living projects also struggled. “What the pandemic did is it shook out questionable business models within the sector,” says Brad Hargreaves, founder of co-living company Common.

Hargreaves, who also founded the technology trade school General Assembly, founded Common in 2015 with the hopes of formalizing what was a dreaded process to find a roommate on Craigslist.

“Twenty-five million Americans live with roommates or someone they’re not related to,” Hargreaves notes. “This is a much broader part of the housing market than most developers, most investors give it credit for. … Think about it as roommates done better.”

Common, which raised some $113 million in funding, operates in 10 markets today. During the start of the pandemic, Common experienced a low renewal rate and the company had to make aggressive concession offers to bring tenants back. The company also focused on attracting travel nurses and other essential workers that may have needed apartments quickly.

Common’s business then grew as the firm took over assets from other operators that fell by the wayside, according to Hargreaves, and bounced back by the summer of 2021. When the pandemic hit, Common had around 1,500 units. Heading into 2022, that number quadrupled to around 6,000.

The firm’s model is more akin to a property management firm, partnering with developers to design and manage co-living buildings and units. Common has also diversified its portfolio by offering other types of units, like workforce housing.

“That is how we’ve evolved over the past three years,” Hargreaves says. “If we work with a client, we want to be able to work across their portfolio.”

The co-living industry has faced other challenges, in addition to the pandemic-related drop in demand. Common, like other co-living companies, faced criticism from tenants over its housing conditions, and in August, Hargreaves stepped down as the company’s CEO. New York Attorney General Letitia James’s office told Gothamist that it’s paying close attention to complaints lodged against co-living firms. Not to mention, rising interest rates and construction costs now pose hurdles on the development side.

“There’s kind of a right amount of strain that developers feel about creative options like co-living,” Hargreaves says. And if traditional units are penciling into the plans well, “it’s tough to get developers to do anything else,” he adds.

Hargreaves’s tactic? Focus on how a co-living project can increase returns for investors and developers. Co-living ups a building’s density with more paying tenants in more units, which can translate into more dollars. Also: underscore how Common isn’t another short-term rental company bemoaned by local governments and enforce the same or better credit standards as a traditional rental building.

“And then finally, say, ‘Let’s not necessarily make a building 100 percent co-living, but look at co-living as a unit type within the building,’” he says. “And that is usually what gets lenders comfortable. So co-living is a unit type—it’s not a distinct and distinguished product.”

Yaussi, of the NMHC, agrees. “There’s a real value to it because there’s an affordability challenge.”

NMHC’s annual housing preferences survey found that 8 percent of respondents would consider a co-living unit in their next rental search.

“There is a cohort that is interested in this. But is it 40 percent? No—40 percent said they were interested in detached family homes,” Yaussi says. “There’s a real interest, but it’s small.”

Source: “Co-Living Sector Transforms as it Faces Pushback from Developers and Lenders“

When the Tax Cuts and Jobs Act of 2017 put in place new tax incentives for investors tied to Opportunity Zones, no one was quite sure how well the new structure would take off. The early days were marked by a frenzy of sponsors jumping into the space—and plenty of critics who were skeptical that the tax incentive program would work. However, five years in, the sector is proving that it can both attract capital and deliver economic development to underserved communities.

Opportunity Zones (OZ) are defined as an economic development tool that allows people to invest in distressed areas in the United States. Their stated purpose is to spur economic growth and job creation in low-income communities while providing tax benefits to investors. Investors can defer tax on any prior eligible gains by buying into OZ funds with deferral benefits varying based on the length of the fund.

To its credit, the OZ industry has overcome a number of challenges, including a tedious process of defining zones and getting clarity on how the tax rules were likely to be interpreted by the IRS. And then, of course, the pandemic disrupted things even more.

According to survey data from Novogradac & Company LLP, an accounting services firm that tracks the OZ sector, Qualified Opportunity Zone Funds (QOFs) have raised $32.7 billion since their inception and are on pace to raise $10 billion in 2022, which would mark its biggest fundraising year yet. However, the firm estimates that it is capturing data on only roughly one-third of the industry. If that estimate is correct, that would put the overall size of the OZ industry at closer to $100 billion.

“There are not a lot of opportunities to defer capital gains, and Opportunity Zones are very flexible,” agrees John Sciarretti, CPA, a partner at Novogradac & Company. Capital gains, regardless of where it comes from, can be reinvested in real estate projects or an operating business within designated zones that meets certain standards. However, it remains a highly fragmented industry. Novogradac is currently tracking about 1,600 QOFs, about 1,200 of which are reporting fundraising data. “There’s a fairly low barrier to entry to set one up. So, there are a lot of funds that we’re not capturing,” says Sciarretti.

“At a macro level, I think there has been a wide adoption of the Opportunity Zone program because it is the only capital gain deferral tool available for asset classes other than real estate,” says Cody H. Laidlaw, chief business development officer and head of investor relations at Belpointe PREP LLC, a publicly-traded Opportunity Zone entity. Although real estate owners can utilize 1031 exchanges to defer capital gains when rolling proceeds into a new real estate purchase, there is no equivalent structure for the sale of other types of assets, such as stocks, a business or even artwork that has appreciated in value.

Evolution of the sector

The Opportunity Zone legislation unleashed a rush of players entering the market ranging from high-quality, experienced commercial real estate investment management firms to those that had never developed property or managed funds before. Since then, clear leaders have emerged. About 60 of the QOFs that Novogradac is tracking have all raised more than $100 million, which suggests that a minority of the funds are raising a majority of the capital. A number of the larger QOFs were not new to the scene in 2017. They were established private equity funds that set up specialized funds to capture the OZ marketplace, and they have grown, notes Sciarretti. A number of funds Novogradac tracks have captured over $500 million.

Grubb Properties is a North Carolina-based firm that was active in building essential housing in low-income areas before legislation was introduced. When OZs were established, the firm already had four projects located in designated zones. “That set us apart early because we had experience in the geographies with a product type that we were continuing,” says Clark Spencer managing director, investments at Grubb Properties. Since launching its Link Apartment Opportunity Zone REIT in 2019, the non-traded REIT has raised roughly $400 million.

COVID created challenges for less experienced sponsors that ended up thinning out some of the market participants. “What we were left with in 2021 and now 2022 is a very sophisticated OZ market,” says Spencer. “I think the top of the industry has gotten very, very strong.” In addition, the way that the program is designed with incentives being passed on to investors only, it is really important for the deals to make financial sense. “Fundamentally, that requires that the projects themselves be good investments,” he adds.

Different entry points

The most popular OZ structure is a single-asset partnership that raises capital in a Reg D private placement. However, some players are differentiating themselves with alternative structures. Grubb Properties opted to overlay a non-traded REIT structure on top of its QOF program to produce beneficial results for investors, such as tax reporting simplicity and internal flexibility in how the portfolio is managed over time. As a private offering, it is limited to accredited investors.

Meanwhile, to date, Belpointe PREP is the only publicly-traded entity. “When the initial round of Opportunity Zone regulations was released, it was unclear whether any structure other than a REIT structure would allow a QOF to own multiple assets,” says Laidlaw. Belpointe initially went out as a non-traded REIT. Once the final round of OZ regulations established that partnerships were able to develop multiple assets within a single fund, Belpointe reorganized as a publicly traded partnership and is currently listed on the NYSE American under the ticker OZ.

According to Laidlaw, the publicly-traded structure offers a number of advantages, including being able to work with non-accredited investors. “Being a public structure also provides our investors with liquidity, via trading on the NYSE American, as well as the ability to invest whenever they choose to, and, if they’re buying in the open market, with no minimum investment required,” says Laidlaw. In addition, unlike most private partnerships, the structure does not provide for capital calls and will not require investors to make future capital contributions, he adds.

Future growth remains uncertain

One of the big challenges is that the legislation did not set up OZs as an evergreen program. New capital raising could be shut off in either 2026, or with a one-time extension currently under consideration, in 2028. If the program isn’t renewed beyond that, OZs could end up being a one-time 10- or 12-year program and remain a niche tax strategy product. “However, if the program is renewed and a new set of Opportunity Zones are established for the next 10 years, then I think you could see a lot more democratization of it,” says Spencer.

Currently, there is proposed legislation with the Opportunity Zones Transparency, Extension, and Improvement Act that would extend the capital gains tax deferral period from December 31, 2026 to December 31, 2028. It would also re-establish the 10 percent step-up in basis for QOF investments that are held for at least five years prior to the end of the deferral period and reduce the holding period requirement for investors to receive an additional 5 percent step-up in basis (for a total step-up in basis of 15 percent) from the current seven years to six years. In addition, it would eliminate some of the current designated zones that no longer qualify as low-income areas.

This type of incentivized economic development from private capital is desperately needed in many areas, adds Spencer. Designated OZs are typically low-income areas that have been under-invested for a variety of historical reasons. “A lot of them are really, really good real estate that, hopefully through the program, can be transformed to valuable parts of the communities that they’re in,” he says.

Source: “Five Years In, Opportunity Zones are Hitting Their Stride“