CARNM

The commercial real estate (CRE) industry is in a period of unprecedented evolution, triggered by the availability of new technologies and changing societal norms. One of the slower industries to shift into the cyber age, CRE’s common brick-and-mortar mindset is increasingly influenced by the fluid world of data analytics, computerized and real-time automated operations, and digital communication. Due diligence practices are adjusting rapidly, too, as investors examine their target acquisition through modern lenses that affect the way asset information is collected and used, as well as new key performance indicators (KPIs) that seek to evaluate long-term asset performance.

Data is King
For anyone who’s been in the business long enough to recall receiving physical copies of due diligence reports, digitally delivered PDF reports may still seem like a modern upgrade, but even these will soon be antiquated.

Much like a paper report, digital PDF reports have limited use and are frequently reviewed once and then filed away, taking up storage space and losing value as the property changes over time. Acquisition teams who want to leverage the data contained in, for example, a static property condition assessment (PCA) report, must manually extract information from the observations, findings, recommendations, etc. in the various tables and narrative sections. This tedious process allows room for human error: omissions, redundancies, inaccuracies, etc. Conversely, raw data can be readily imported into management software or other technology platforms, saving resources and improving data hygiene. Given the amount of data that commercial real estate owners and stakeholders must manage, data hygiene is a serious concern, since the quality and “cleanliness” of data is critical for its effective use.

Dashboard Data Delivery
The goal of due diligence is to leverage and analyze property data for better decisions. The value of using raw data versus static PDFs is the ease with which raw data can be viewed, sorted, and analyzed. But what about CRE professionals or other users who lack an effective platform to do so? As much of the CRE industry plays technology catch up, many customers may require a software solution along with their data. For example, Partner Engineering and Science, Inc., a market-leading provider of third-party due diligence assessments, offers a client portal via their cloud-based SiteLynx™ platform, which facilitates online ordering, storage, and review of reports. The development of the “Partner Analytics” component of SiteLynx allows users to readily view, sort, and analyze report information via an interactive and customizable dashboard. Users can review an individual property or compare an entire portfolio, all while sorting by attributes such as geography, property use, condition, criticality /priority, building systems, and other KPIs. By leveraging this data, an investment firm purchasing a portfolio could review all assets in the portfolio and quickly sort to see which properties meet acquisition criteria and which have red flags. SiteLynx can be customized to provide distinct views and permissions depending on the role of the user, which then becomes useful for different functions within an organization, such as risk analysis, proforma modeling, capital planning, and/or facility management.

Using Due Diligence Data Beyond Acquisition
Another growing data trend in the CRE industry is gathering data that remains useful after the transaction is complete. Typically, an acquisition team will order a PCA scoped for risk management in terms of immediate repairs required and projected capital expenses. Then, once acquisition is complete and the property is onboarded to the asset management team, asset managers have two options. They can order a facility condition assessment (FCA) which is scoped to include the richer data required to effectively manage the asset, or they use the PCA data, but may struggle to make the expectations of the acquisition team meet the reality of asset performance.

There is a forward-looking solution: scope the PCA as robustly as an FCA. Discuss data needs with the asset management team and build the PCA scope to ensure that the data collected will support asset management objectives. The upsides are cost savings (paying for one report instead of two), rapid onboarding of assets, and better synergy between acquisition and asset management. The challenge with performing an FCA at acquisition is the length of time required to gather more data; often acquisition timeliness require a quick turnaround. However, sophisticated due diligence consultants can deliver reporting in phases, offering early results to meet the acquisition timeline and the full report by a later deadline.

Future-Proofing
Anticipating change over the planned hold period of an asset is one hallmark of a savvy investor. Depending on the investment strategy and length of hold, it’s important to consider rapidly evolving consumer expectations, regulations, and even the demands of changing climates to position a property for long-term success. In addition to ordering the core reports used at acquisition (typically PCA, environmental assessment, zoning report, ALTA survey, and appraisal) investors who seek to future-proof their properties will leverage the expertise of their due diligence consultant already onsite to identify opportunities to minimize risk, reduce costs, boost revenue, and capitalize on trends. As part of their due diligence package, they may order reports such as:

Energy & Water Audit
Climate Resilience Assessment
COPE Data Collection
Solar Consulting
Building Technology Assessment

The Future is Here
Change happens fast, and staying ahead of the curve can provide an edge in the competitive landscape of CRE. Ask your due diligence consultant which of these forward-thinking strategies can apply to your due diligence practices so you can be sure you’re getting the most out of your due diligence spending and getting the data you need to succeed.

Source: “4 Ways that Data is Changing the Way We Transact”

Builders are seeking fewer construction permits for multifamily properties due to elevated interest rates and an increasingly saturated market.

According to Redfin, permits to build apartments in the United States have dropped nearly 30% since the pandemic. Builders have obtained permits to construct 13 multifamily housing units for every 10,000 people in the country so far this year, according to its new report based on data from the U.S. Census Bureau.

In addition to the challenging interest rate environment, builders may be waiting out a building boom in recent years that has made it difficult for property owners to find tenants. Only 47% of newly completed apartments were rented within three months at the end of last year, the lowest share since 2020, said Redfin.

Although permits have slowed significantly to below their 10-year historical average, the number of units being completed remains at historic highs as projects started during the pandemic are now being completed. This has created a backlog of new units property owners are competing with each other to rent out, which is putting downward pressure on rents. Asking rates, which were growing by 18% during the pandemic, rose only 1% in the past year, said Redfin, though it noted asking rents are still at their highest level since 2022.

“Prospective renters should be aware that now may be a better time to sign a lease than later,” said Redfin senior economist Sheharyar Bokhari. “Property owners might start jacking up rents again once all of the new apartments hitting the market fill up with tenants and there’s no longer so much supply, which could be the case in a year or two.”

Some Sun belt markets bucked the permitting decline and are permitting more multifamily housing than anywhere else in the country. Permits to construct 27 multifamily units per 10,000 people were issued in Cape Coral, Florida, followed by 21 in Austin, Texas; 20 in Greensboro, North Carolina; and 18 in North Port, Florida.

“Florida faces high risk from storms, flooding and sea level rise, and is the epicenter of the housing insurance crisis,” the report noted. “But builders keep building because there’s still demand — partly due to the influx of out-of-towners who moved in during the pandemic. Permits may also be rising in Florida as homeowners continue to rebuild after Hurricane Ian in late 2022.”

The two metros with the fewest multifamily permits per 10,000 people are in California, with both Stockton and Bakersfield issuing no permits in the first five months of 2024. Providence, Rhode Island, also has had no new multifamily building permits issued this year, while El Paso, Texas; Baton Rouge, Louisiana; Cleveland; Fresno, California; Detroit; Dayton, Ohio; and New Orleans each have only had one new multifamily building permit issued so far this year.

Source: “Multifamily Construction Permits are Down 30%”

City leaders in Durango, Colorado, recently unveiled an initiative aimed at keeping businesses in town.

Introduced last month, the Economic Development Incentive program will be tailored to individual companies, but its focus overall is on creating jobs, bridging market gaps and retaining growing businesses in Durango.

“This program ensures Durango has pathways to provide essential services for residents to thrive and helps local businesses grow and retain well-paying jobs, preventing the need for relocation,” said Tommy Crosby, the city’s economic opportunity manager, in the announcement of the program. “We believe this program will play a crucial role in maintaining Durango’s unique, resilient, and dynamic community.”

They’re not alone with that thought. This spring, the Miami Downtown Development Authority expanded an incentive program to include small retail businesses and tech startups, pumping up a $500 per-job grant for businesses moving downtown to $2,000 per employee, along with providing $500 per 500 square feet of leased space.

“We have seen massive growth since the pandemic, and the Miami DDA is looking to the future to focus on the city’s trajectory as a global business epicenter,” said Christina Crespi, the authority’s CEO and executive director, in a statement. “We are seeing occupancy rates for downtown office space increasing even as developers continue to add new supply. These incentives will build on that success.”

Across the country, cities large and small are launching or expanding incentive programs as part of a broader bid to save downtown communities after the one-two punches of the Covid-19 pandemic and the onset of remote work. Even as some workers return to the office, hybrid work means many workers are no longer filling office spaces five days a week.

According to data from tracking firm Placer.ai, while nationwide office visits reached a post-pandemic high in June, that number remained more than 29% below what it was in June 2019. Office visits in Miami lagged pre-pandemic numbers by 9.8%, the smallest margin among markets tracked. San Francisco had the largest gap, at 49%.

That decline in activity, combined with rising interest rates, has led to to huge losses in value for office buildings — declines that in turn lead to less tax revenue, creating the potential for what could be a vicious cycle.

Experts are divided, however, on how much incentives can do to turn the tide, and what incentives in particular cities should be offering to help bring people back to office properties, especially in downtown districts.

“Communities have been competing for business enterprises seeking a lower operating cost for decades, and there is some question as to how you measure success, and if they are needed at all,” said Glenn Brill, a managing director in FTI Consulting’s Real Estate Solutions practice.

Brill said the era when large companies moved out of high-cost markets such as New York and attracted incentives to relocate back-office operations to smaller cities is over. Relocation programs in New Jersey, for example, used to draw in businesses from New York, but that type of success has slowed.

Many of today’s efforts are more about keeping a company within its existing community. Those initiatives must account for new challenges facing business owners, though.

“Targeting local businesses with incentives to grow employment and occupancy is a relatively new tactic as cities seek to retain employers and bring back employees to [central business districts],” Brill said. “However, employers are somewhat beholden to their employees, a hybrid workforce is largely here to stay, and the risk of disruption to the workforce in exchange for money is likely not worth it if their employees prefer to work elsewhere.”

Ultimately, economic development is the product of community development and making an area attractive based on factors like good public safety, education, transportation and housing, Brill said. Essentially, municipal leaders need to make their downtowns a place people want to be — not have to be.

“You need a place where qualified labor wants to visit, live, work [and] play,” he said. “Improve the commute and the perception of public safety, and downtowns will improve as people choose to seek them out.”

How to draw people downtown

The sentiments expressed by Brill are backed up by the latest research from the University of Toronto’s School of Cities, which tracks cell-phone activity across 62 downtown metropolitan areas in the United States and Canada as a means of assessing activity in communities since the onset of the pandemic. The data found economic diversity — including entertainment, restaurants, retail and tourism — is playing a huge role in the post-pandemic urban recovery.

Led by Professor Karen Chapple, School of Cities researchers found most metros are on an upward trajectory, albeit at a slower rate than they’ve been on previously. That’s happening even though office vacancy rates are ticking up, Chapple said.

“We’re seeing more shopper and visitor activity that’s compensating for the loss of worker activity that we know is happening from increased office vacancy rates,” Chapple said in an earlier interview.

Some of the incentive programs being developed in cities across the country have retail efforts in mind:

Anirban Basu, chief economist for the Associated Builders and Contractors, said older central business districts require catalysts to help revitalize them — so it makes sense for cities to provide incentives.

“Absent aggressive municipal effort, these areas are poised for relentless decline. That not only leads to diminished real property tax collections over time, but produces a host of issues that increase costs for government,” Basu said. “Rather than sustain those losses, it makes sense to invest upfront.”

Steven Strauss, a visiting professor at Princeton University’s School of Public and International Affairs, said well-crafted incentive programs can work — and while he would not comment on specific incentive plans, he laid out how cities might go about the process.

“I think wfh (particularly hybrid) is here to stay,” Strauss said in an email. “Any revitalization plan that does not engage with that reality is likely to be problematic.”

He also said he was dubious when it comes to one-size-fits-all solutions, as incentives should be tailored to a city’s specific challenges. In some cities, people still want to live downtown, such as New York, so the bigger challenge becomes the addition of housing — and office conversions can be difficult.

Ultimately, spending money to improve long-term infrastructure for downtowns is a good idea, Strauss said.

“Cities should be open to innovating, aside from converting office properties to housing,” he said. “Can they be converted to museum space, parks and common areas in the sky, restaurants, gallery space, etc.”

How incentives factor into company relocation decisions

When discussing incentives, economists often point to the research of Timothy Bartik, senior economist at the W.E. Upjohn Institute for Employment Research, who in a 2019 book wrote that for new facility locations or expansion decisions, companies often prioritize factors other than incentives. Only 25% of the time do incentives alter the outcome of a relocation or expansion decision, Bartik found.

It can be hard to tell in a specific deal whether incentives played a dominant role in any decisions made. In many cases, companies also are choosing from a range of offerings from various states that are presenting a host of incentives packages.

A Kauffman Foundation study from 2014 found companies that received incentives were no more likely to generate new jobs than similar companies that did not receive incentives.

One relatively new area of economic-development incentive programs, however, focuses not on companies but on workers.

City leaders in Tulsa, Oklahoma, in 2018 instituted the Tulsa Remote program to lure in remote workers, offering incentives of $10,000 for workers to relocate. By June 2021, Tulsa Remote had received 20,000 applications and invited about 2,700 workers to the city, with 763 ultimately moving there.

A study in April 2022 by the Center for Regional Economic Competitiveness and Smart Incentives found that the remote-worker incentive program in Tulsa — along with a similar program in Vermont — have been effective at generating net economic gains at relatively low costs.

Such initiatives gained momentum in the wake of the pandemic, when many workers learned their job responsibilities were not tied to a particular office location, or even to a particular city. That led to dozens of cities across the country implementing their own remote-work incentive relocation programs, fueling what’s become a new wave of economic-development efforts for communities nationwide.

Source: “Cities betting on incentives to fuel downtown comeback”

Advertised rents in the multifamily market increased 1.5% across the country during the first half of 2024, a moderately positive result that should be considered a win given the market environment, according to the Yardi Matrix National Multifamily Report.

Year-over-year rent growth was highest in the Northeast and Midwest, led by New York City (4.8%), Kansas City (3.4%), Columbus (3.2%) and New Jersey (3.1%). Washington, D.C., rounded out the top 5 at 3% growth. Meanwhile, negative rent growth is intensifying in several Sun Belt metros, led by Austin (-6.5%), Atlanta (-3.6%) and Raleigh (-3.3%).

The national occupancy rate was 94.5% in May, unchanged from April but down 0.5% year over year. Las Vegas was the only metro with a year-over-year increase, while occupancy rates fell in Indianapolis and Kansas City despite solid rent growth. This could signal cooling rent growth in these markets, Yardi Matrix said.

Although demand has slowed from more than 600,000 units absorbed in 2021, the market is on track to absorb more than 300,000 units this year. Demand for multimarket assets is boosted by a strong labor market, the U.S. housing shortage, foreign immigration and a low number of home sales, said the report.

However, the market continues to face headwinds, including elevated interest rates that slow transactions and make it difficult for owners to refinance maturing debt. In addition, expenses have continued to skyrocket at a time when rent growth is slowing, Yardi Matrix said.

Expenses per multifamily unit nationally rose by 8% year over year to $8,890 in 2023, after increasing by 8.2% in 2022, according to an examination of more than 20,000 properties that use Yardi operating software. Property insurance rose 29%, marketing expenses increased 12.7%, administrative costs jumped 10.8%, and repair and maintenance expenses grew 9.8%.

Affordable multifamily owners are also impacted by increasing costs, compounded by the thin margins on which they operate. Rent increases set by public agencies are not enough to cover the rapid growth in insurance and other expenses, the report noted. In addition, these owners are facing an uptick in nonpayments due to fraud and the struggles of low-income tenants with depleted finances. If expense growth does not moderate, it could exacerbate loan defaults and curtail needed development, said Yardi Matrix.

In the single-family arena, the average national advertised rent fell slightly in June for the first time since late 2023. However, rents are only $3 from their all-time high and the sector is outperforming multifamily, with rents up 1.1% year-over-year, according to the report.

Source: “Multifamily Market Logs Encouraging H1 Performance”