Zoning Reform Alone Won’t Make Housing Affordable
Tracee Jones • February 13, 2019
A new paper finds that zoning reform in big cities makes land more expensive without necessarily creating more housing units.
(Bloomberg Opinion)—During the past few years, it has become clear that housing affordability is a major challenge facing the U.S. Rent is consuming an increasing percentage of consumers’ paychecks:
The problem has become especially acute in big cities and technology hubs like San Francisco:
One of the most popular solutions being proposed is zoning reform. Rules that limit density — especially single-family zoning — restrict the amount of housing available near a city center, and make it difficult for people of modest means to live near transportation hubs and employers. When Minneapolis recently voted to end single-family zoning, it was hailed as a victory for racial and economic justice. Meanwhile, presidential candidate, Senator Elizabeth Warren, has made zoning reform a centerpiece of her housing affordability bill. Even Housing and Urban Development Secretary Ben Carson has vowed to attack restrictive zoning.
But a new paper has zoning-reform advocates worried. The study, by urban planningdoctoral student Yonah Freemark, is entitled “Upzoning Chicago: Impacts of a Zoning Reform on Property Values and Housing Construction.” Freemark looks at recent changes in Chicago in 2013 and 2015 that permitted increased density and eliminated mandatory parking in certain areas of the city. He found that in those areas, land prices rose quickly, but new construction has yet to materialize.
The study will certainly give ammunition to skeptics of the idea that building more housing will improve affordability. But the finding is limited in several ways. Most importantly, it doesn’t look at rents. It’s perfectly possible for upzoning to increase the value of land because it allows bigger buildings, with more rental units or condos, to be built on that land, while not increasing the rent that current tenants are paying. Second, it doesn’t measure the citywide effect of the reforms.
But most importantly, the finding that construction didn’t increase raises the question of why prices went up. Why would a parcel of land become more valuable as the result of upzoning, if the buildings on that land remained the same? The obvious answer is speculation — because more dwelling space can now be built on that land, its value is higher, even if the buildings haven’t been built yet. It’s possible that the speculation is irrational — a local bubble — and that the construction will never materialize. But it’s also possible that construction simply takes more time to get started.
Despite these limitations, the paper implies that increasing housing availability should involve more than just allowing more housing to be built on a parcel of land — it should involve strong incentives to build more units quickly.
Newly elected California Governor Gavin Newsom has some ideas for how to do that. His plan involves a combination of tax credits and loans for housing developers and grants to local governments to help them meet density targets. In addition, the governor wants to withhold transportation funds from cities that don’t meet state-mandated housing requirements.
It’s possible that administrative measures like these will succeed in prompting cities not just to upzone, but to spur housing construction. But if measures like these fall short, there are some more radical options that governments could pursue.
The first is a land-value tax. This is basically an increased property tax with exemptions for construction and other improvements. The idea is to force urban landowners to use it or lose it — if they don’t develop their property, they would simply be taxed for holding unproductive land. The idea, first conceived by 19th century economist Henry George, would be difficult to implement in California, where the state’s infamous Proposition 13 creates an effective cap on property taxes. But other areas could experiment with this approach, as the cities of Washington and Pittsburgh have done with decent results.
The second idea is public housing. In the middle of the last century, the U.S. built many housing projects for low-income Americans, but these became potent symbols of urban decay, riddled with crime and other social problems. But cities like New York City and San Antonio are now trying new approaches to make public housing safer, including better designs and more community programs. So far the results are encouraging.
Finally, the government can assist people in creating housing co-ops — buildings owned and managed collectively by the residents. Without a landlord to take a cut of the cost of housing, co-ops can offer tenants greater affordability, stability and sense of ownership. City governments, through agencies like New York City’s Urban Homesteading Assistance Board, can encourage co-ops with loans or other financial assistance that allows tenants to buy out their buildings from their landlords. If cities really want to be assertive, they might be able to use eminent domain powers to force landlords to sell at a reasonable price, then resell cheaply to co-ops after using public money to spruce up the properties.
So there are plenty of options to create more affordable housing in American cities. Upzoning by itself may not be a cure-all for the rent crisis, but it’s an important way to open the door for greater density to follow.
To contact the author of this story: Noah Smith at nsmith150@bloomberg.net
For more columns from Bloomberg View, visit Bloomberg view
COPYRIGHT© 2019 Bloomberg L.P
About TCD Commercial
Charlene Grambling is the Managing Director of TCD Commercial Investments. She is an apartment and 1031 exchange specialist who also offers experience in net leased, office, warehouse, special use – including houses of worship—in the West Hills, Ventura, Oxnard and surrounding Los Angeles County area. She can be reached at 818.288.2564
This article was first published in the The National Real Estate Investor
Amazon’s pullout of its HQ2 plan from New York City came down to opposition from local politicians over corporate incentives and residents who didn’t want the e-commerce giant in their Long Island City neighborhood. But it shouldn’t have a long-lasting impact on the city’s commercial real estate market. That is the assessment of real estate experts, several of whom were caught by surprise by Amazon’s quick abandonment of New York after a very public one-and-a-half-year national search that pitted large metro areas around the country against each other to provide the most appealing package of incentives, talent and real estate to lure the corporate giant and 25,000 jobs. “When I saw that Amazon was floating this idea of leaving, I thought there was too much traction to go back, yet here we are,” says Victor Rodriguez, senior market analyst with research firm the CoStar Group. Part of the problem was that New York’s $3 billion incentive package for Amazon was agreed upon essentially behind closed doors between the New York City Mayor Bill de Blasio and New York Governor Andrew Cuomo and touched off a firestorm of protests and opposition at the local city council and neighborhood level. “I don’t believe there will be any long-term negative impacts (on commercial real estate),” Rodriguez says. Still, had Amazon gone through with the HQ2 plan, there would have been gains that now won’t be realized. One area that won’t see the gains is the retail market in Long Island City, Rodriguez notes. High-paying tech employees would have attracted more retail to the neighborhood. The multifamily sector also won’t see the growth that it would have in that area if Amazon had followed through with its plans, he says. Still, New York City remains known as a tech, financial and media hub and will continue to draw companies to relocate and to expand there in the future, Rodriguez notes. “New York was healthy before Amazon came along and I think it will continue to be healthy; it would have been great addition to have another tech giant in the city of New York.” But the Amazon project may have also been too big for the neighborhood it chose, according to Barbara Denham, a senior economist in the research and economics department at research firm Reis Inc. “Selecting Queens was like putting a square peg in a round hole. They were just too big for that neighborhood,” she says. For its part, Amazon said in a blog post “that while polls show 70 percent of New Yorkers support our plans and investment, a number of state and local politicians have made it clear that they oppose our presence and will not work with us to build the type of relationships that are required to go forward with the project we and many others envisioned in Long Island City.” Amazon already has 5,000 employees in Brooklyn, Manhattan and Staten Island, and will continue growing those teams, the company said. It also said it wouldn’t re-open the HQ2 search and will proceed with the other half of its HQ2 project in Northern Virginia, its plans for an office in Nashville, Tenn. and growth across other, already existing offices. On Feb. 12, two days before Amazon pulled out of New York, local leaders in Dallas held an Amazon post-mortem event sponsored by the Urban Land Institute and hosted by HKS Architects to talk about the behind-the-scenes details of the search there. The city received two visits from Amazon and believed it was shortlisted for selection, but ultimately got knocked out because it lacked the tech talent that New York and Northern Virginia could provide, according to Mike Rosa, senior vice president, economic development, for the Dallas Regional Chamber, which led DFW’s bid. “We’ve never hung up the phone with Amazon,” Rosa said during the event before it was known Amazon would pull out of New York City, but after the Washington Post story about that possibility had published . “If they were to readjust their decision … they certainly know who to call,” he said. New York city leaders should have encouraged Amazon to go to Hudson Yards, a new development on the west side of Manhattan that was more in scale with the e-commerce giant’s plans, according to Denham. At full build-out, Hudson Yards will have 18 million sq. ft. of commercial and residential space, more than 100 shops and restaurants, and about 4,000 residences. About 2 million sq. ft. of office space there is scheduled to be delivered this year. New York City has long opposed corporate incentives and hasn’t passed a sizable incentive deal on that scale since the 1990s, Denham adds. Even the deals passed back then were unpopular. The perception was that “a highly profitable company asking for $3 billion in tax incentives smacked of considerable greed, which is why there was so much pushback against the plan,” she notes. “The governor and the mayor should have recognized that there would be this reaction, given the magnitude of both the size of the company and the size of the incentives.” Amazon’s quick abandonment of the deal sends a signal that a corporate expansion of that scale could have a difficult go of things in New York, according to Greg Willett, chief economist with RealPage, a provider of property management software and services. “But again, it’s really unusual to have a deal this big, so does it do any big picture long-term damage to the New York real estate market? Probably not.” About TCD Commercial Charlene Grambling is the Managing Director of TCD Commercial Investments. She is an apartment and 1031 exchange specialist who also offers experience in net leased, office, warehouse, special use – including houses of worship—in the West Hills, Ventura, Oxnard and surrounding Los Angeles County area. She can be reached at 818.288.2564 This article was first published in the The National Real Estate Investor
(Bloomberg)—If you’re looking for a career change, you might want to consider a move to Salt Lake City, Utah for the best range of job options. That’s one takeaway from LinkUp’s 4Q report which ranked Salt Lake City the highest in terms of job market diversification in 2018 among metropolitan statistical areas with a population over 1.1 million. Salt Lake City is home to a number of large businesses such as Zions Bancorp, the largest lender in the state of Utah, Extra Space Storage Inc., a self-managed real estate investment trust, health care concern Myriad Genetics Inc., discount e-commerce retailer Overstock.com Inc. and Instructure Inc., an online education provider, just to name a few of the city’s diverse employers. The Utah capital and most populous city attracts employers because of its strong labor-force growth, according to the report published Friday. Cities with more diverse job markets are less likely to be affected by a single company’s actions, according to Molly Moseley, CMO of job search engine LinkUp. "You can have a strong economy but if you focus on just one or two sectors, it’s not diversified." Moseley said. "If something were to happen, like one employer went under, that market could plummet." The value of diversification was "glaringly obvious" during the most recent government shutdown in Washington DC as the area suffered due to more than half of its jobs linked to the federal government, according to the report. Other large markets with high diverse rankings included Buffalo, N.Y., Sacramento, Calif., Oklahoma City and Austin, Texas. In addition to Washington, New York City ranked near the bottom of the list because there are 10 sectors that make up for more than 50 percent of job openings, according to Moseley. However, Amazon’s plans to open a new headquarters in Crystal City, Va., just across the Potomac River from the nation’s capitol, are likely to improve Washington’s ratings, the report said. Among the mid-markets, with a population from 542,000 to 1,100,000, the five most diversified are Spokane, Bridgeport, Scranton, Provo, and Oxnard. LinkUp calculated a region’s job market diversification report (JMDR) score using three metrics: distribution of sectors with job openings, distribution of companies with job openings and distribution of occupations with job openings. LinkUp’s report further broke down the regions into large, mid and small markets based on the top 150 markets (i.e. Metropolitan Statistical Areas as defined by the U.S. Office of Management and Budget) based on U.S. population. To contact the reporter on this story: Shelly Hagan in New York at shagan9@bloomberg.net To contact the editors responsible for this story: Alex Tanzi at atanzi@bloomberg.net Wei Lu COPYRIGHT © 2019 Bloomberg L.P About TCD Commercial Charlene Grambling is the Managing Director of TCD Commercial Investments. She is an apartment and 1031 exchange specialist who also offers experience in net leased, office, warehouse, special use – including houses of worship—in the West Hills, Ventura, Oxnard and surrounding Los Angeles County area. She can be reached at 818.288.2564 This article was first published in the The National Real Estate Investor
The continued proliferation of e-commerce remains a boon for the industrial sector. In all, North American industrial absorption is forecast to register 495 million sq. ft. in 2019 and 2020, with 550 million sq. ft. of new product delivered by year-end 2020. IN addition, vacancies will remain at around 5 percent and average asking rents will rise from $6.24 per sq. ft. all the way to $6.68 per sq. ft. by the end of 2010. Those were some of the conclusions in Cushman & Wakefield's recently released 2019 North American Industrial Outlook , which line up with the sentiment expressed in NREI 's recent industrial research study . According to the firm, "Market conditions will encourage development in port-proximate markets, intermodal hubs, and inland population centers but supply will not overwhelm demand." In addition, "The greatest uptick in North American leasing activity in 2019-2020 will be in the 10,000-to-100,000 and the 300,000-to-500,000 sq. ft. segments. Leasing activity in the 10,000-100,000 sq. ft. range peaked in 2013 with many tenants signing leases that will rollover in 2019 and 2020. Although leasing in this size range has remained well above pre-recession levels, lease expirations will boost activity in the next two years." Using data from the report, here are a look at the industrial markets currently boasting the lowest vacancy rates as of C&W's preliminary numbers for the fourth quarter of 2018. Data in the slides also includes information on net absorption, leasing activity, vacancy rates, asking rents, total inventory, deliveries in 2018 and the total amount of space under construction as of the fourth quarter. Slides About TCD Commercial Charlene Grambling is the Managing Director of TCD Commercial Investments. She is an apartment and 1031 exchange specialist who also offers experience in net leased, office, warehouse, special use – including houses of worship—in the West Hills, Ventura, Oxnard and surrounding Los Angeles County area. She can be reached at 818.288.2564 This article was first published in the The National Real Estate Investor
Once upon a time, buying single-family homes and renting them out was the default way individuals diversified their investment portfolios beyond stocks and bonds. Becoming a landlord generated steady income (albeit a small one in terms of yield), and (successful) individual investors could buy rental properties and simply sit back and watch their wealth grow. That model has been disrupted in recent years, as individual landlords have been increasingly marginalized by big institutional investors . The competitive pressure has led many individual real estate investors to exit the market. But legislative changes may offer a way back in. The rise of the institutional investor In 2001, almost 83 percent of single-family rental residences were owned by individual investors. In properties with between five and 24 units, that number was about 65 percent. Fast forward to 2015, when individual investor ownership of single-family residences had dropped to about 75 percent. For residences with between five and 24 units, the drop was even more precipitous: 38 percent. It can be difficult for individual investors to scale: as portfolios expand, what starts as a small, passive form of income expands into running a full-time business. Adding more rental homes means more work. But there’s something bigger at play. Since the Great Recession, homeownership rates have dropped dramatically, from 67.8 percent in 2008 to 63.6 percent in 2017. When banks started to foreclose on mortgages, institutional investors swooped in, leaving individual landlords with new, outsized competition. The behemoth on the corner Today’s individual investors are increasingly competing with public companies such as Invitation Homes. When Invitation Homes Inc. and Starwood Waypoint Homes merged last year, their combined worth was approximately $11 billion. The product of that merger, Invitation Homes, owns over 80,000 homes across the U.S.—that’s 0.5 percent of the country’s rentals—making it America’s largest landlord; and not a benevolent one. There are accounts of tenants getting eviction notices from Invitation Homes within days of being late on their rent or having their rent increase substantially with no advance notice as a condition to renew their lease. On the other hand, when a pipe breaks or the furnace goes out, big companies can leverage vertical integration to offer faster turnarounds on maintenance and repair issues. In an online world, renters’ property management expectations are rising . The local landlord may be nice to talk to, but he or she can’t compete with the efficiencies and level of service offered by a large company. From landlord to shareholder Competing with huge institutional investors might be intimidating, but there’s a flip side: While the residential real estate market is growing increasingly competitive, the commercial market is becoming more and more accessible. For years, institutional investors had the high-value commercial market cornered. Even smaller commercial deals went to what the industry refers to as “country club money”—wealthy individual investors who joined with friends or acquaintances to form investment partnerships. For everyone else not in the “club,” it was challenging to simply learn about commercial real estate deals, much less invest in them. In 2013, when Title II of the JOBS Act went into effect, commercial real estate sponsors were finally able to advertise their investments to a wider public. Information that was previously confined to backroom deals could be found on online investment crowdfunding platforms. In 2015, the last year for which there is reliable information, individual investors poured $484 million into real estate crowdfunding in the US, much of it into commercial real estate. These platforms are easy to navigate and allow individual investors a much more passive way of diversifying their portfolios . Rather than scouring residential listings, visiting homes, going through the purchase process and then finding a renter, the platforms allow investors to manage the entire process from their computers with minimum investment amounts as low as $10,000. In the same way that online stock trading has replaced the need for expensive private brokers, online real estate investing platforms are lowering barriers of entry to individual investors. So, instead of owning your rental home, that individual landlord may, in the future, own a fraction of your office building—or perhaps your local country club. Ian Formigle serves as vice president of investments at CrowdStreet, an online real estate investment crowdfunding platform. About TCD Commercial Charlene Grambling is the Managing Director of TCD Commercial Investments. She is an apartment and 1031 exchange specialist who also offers experience in net leased, office, warehouse, special use – including houses of worship—in the West Hills, Ventura, Oxnard and surrounding Los Angeles County area. She can be reached at 818.288.2564 This article was first published in the The National Real Estate Investor
(Bloomberg)—Boston Properties Inc. is increasing its investment in California’s Silicon Valley with a new office development that could attract some of the biggest names in technology. The company is teaming up with San Francisco-based TMG Partners to develop Platform 16, a 1.1 million-square-foot (102,000-square-meter) urban campus in downtown San Jose that will have 16 outdoor terraces, a gym and a conference center. The three-building project is near the Diridon Station transportation hub and where Google is planning an 8 million-square-foot project with offices, retail and housing. The venture marks a significant expansion for Boston Properties in California, where it also developed Salesforce Tower, San Francisco’s tallest skyscraper and one of the most visible symbols of the city’s skyline. The real estate investment trust is initially leasing the land from TMG and Valley Oak Partners, but next year will have the option to buy it for $134.8 million. “Large-scale, transit-oriented sites in the Silicon Valley are in high demand and rare,” Chief Executive Officer Owen Thomas said Wednesday during the REIT’s quarterly earnings call. Boston Properties said it plans to take ownership of Platform 16 but is in serious discussions with a partner who may take a significant stake in the property. Work on the site is expected to start in the spring, and the project may be finished as early as 2021. Shares of the Boston-based company climbed 2.8 percent to $129.87 at 2:14 p.m. in New York Wednesday. The stock has gained 8.8 percent in the past year, compared with a 0.8 percent drop in an S&P index that tracks 14 office REITs. On Tuesday, Boston Properties raised its forecast for 2019 funds from operations to $6.88 to $7.00 a share, up from its prior expectation of $6.75 to $6.92. To contact the reporter on this story: Lily Katz in New York at lkatz31@bloomberg.net To contact the editors responsible for this story: Debarati Roy at droy5@bloomberg.net Christine Maurus COPYRIGHT© 2019 Bloomberg L.P About TCD Commercial Charlene Grambling is the Managing Director of TCD Commercial Investments. She is an apartment and 1031 exchange specialist who also offers experience in net leased, office, warehouse, special use – including houses of worship—in the West Hills, Ventura, Oxnard and surrounding Los Angeles County area. She can be reached at 818.288.2564 This article was first published in the The National Real Estate Investor
Pushed by Home-Sharing Hotels Try Some New Tricks “From televisions in every room to smartphone room keys, the hotel industry has evolved to stay at least on pace with travelers, if not a step or two ahead. Now, challenged by the home-sharing economy — Airbnb alone reported over $1 billion in revenue in the third quarter of 2018, its highest to date — new hotels are toying with everything from pricing to privacy.” ( The New York Times ) Charlotte Russe Files for Bankruptcy, as it Looks to Close 94 Stores “Charlotte Russe Holdings Corp. filed Monday for bankruptcy, as the women's apparel retailer looks to wind down about 94 stores, while it continues to pursue a sale of its business. The company has received up to $50 million in debtor-in-possession financing, which would help support operations during the bankruptcy process. The company said its Charlotte Russe and Peek Kids stores and websites will remain open, and will provide more details about store closures in the near term.” (MarketWatch) Meet Adrian and Sonia Cheng, Power Siblings Behind Some of the World’s Most Luxurious Hotels “ Hong Kong locals often argue about which view of the city’s vertigo-inducing skyscrapers, verdant mountain slopes and ship-filled harbor is the most scenic. But if Sonia Cheng has her way, all will agree it’s the perfectly framed, picture-postcard vista from the main entrance of her recently completed Rosewood hotel, opening this month. Occupying 43 floors of a 65-story skyscraper, the Rosewood Hong Kong is just one of the newest projects from Cheng, 38, a Harvard grad and investment banker–turned-hotelier.” ( Wall Street Journal , subscription required) Foxconn Reiterates Commitment to Wisconsin, but the Devil is in the Details, of Which There are Few “On Friday, the idea of expanding the plant’s mandate to include more R&D did not appear to have changed. ‘This campus will serve both as an advanced manufacturing facility as well as a hub of high technology innovation for the region,’ said the Foxconn statement. It did not make any mention of job numbers or what exactly would be manufactured. ‘We look forward to continuing to expand our investment in American talent in Wisconsin and the US,’ said the statement.” ( MarketWatch ) Salesforce Tower Mystery: What Is SF’s Tallest Building Worth? “Even a small ownership stake in Salesforce Tower, San Francisco’s tallest building, is worth nine figures. Owner Boston Properties said in a recent corporate filing that it paid $187 million last year to buy out minority partner Hines, which owned 5 percent of the building. A $187 million payment for a 5 percent ownership stake suggests Salesforce Tower is now worth more than $3 billion. But there are a few details to consider.” ( San Francisco Chronicle ) The Future of Real Estate: Fintech 50 2019 “Lagging prices of an uncertain housing market will put real estate fintech companies to the test. Many of startups who made this year's list of proptech stars have partnered with big banks and heavy hitters to weather a turbulent market. Former Fannie Mae CEO Tim Mayopoulos was recently named president of Blend, which counts two of the nation's largest mortgage providers, Wells Fargo and U.S. Bank, among its growing number of customers.” (Forbes) California Craving More Tax Revenue from Recreational Cannabis Sales “California’s high cash expectations from recreational marijuana are going up in smoke as most people are opting to buy their weed on the cheaper, more available and tax-free black market. ‘We projected bringing in $185 million in taxes in (fiscal) 2018,’ state Treasurer Fiona Ma said. ‘We got less than half of that.’ To give the legal market a boost, Ma is joining other lawmakers in supporting AB286 by Democratic Assemblyman Rob Bonta of Oakland to cut the current 15 percent excise tax on pot down to 11 percent. The bill would also suspend the tax of $143 per pound paid by growers for three years.” ( San Francisco Chronicle ) New Concerns Ahead for Economy, CRE “The bottom line from Integra Realty Resources’ 2019 Commercial Real Estate Trends Report is basically: don’t expect 2019 to be like 2018. Or, in the report’s own words, ‘ Things feel ebullient. The best advice: enjoy it while it lasts. The times, they are a-changing.’ Hugh Kelly, PhD, authored the IRR report, which also advises the commercial real estate market that ‘ it’s time to play defense.’ ” ( Commercial Property Executive ) These Were the Top NYC Retail Leases in January “Gyms maintained a strong presence in January’s retail leasing scene, securing two of the top spots. The rest of the list is a bit of a mixed bag, featuring wildcards such as museums and marijuana dispensaries. All together, January’s top 10 retail leasing deals totaled more than December’s in terms of square footage. The 10 biggest retail lease deals signed last month totaled 229,700 square feet, up 80,900 square feet from December’s total of 148,800 square feet.” ( The Real Deal ) American Girl Store at Mall of America Closing on March 20 “Destination retailer American Girl said Thursday it will close its store at the Mall of America along with a location in Boston on March 20 as part of a cost-cutting move. Both stores opened in November 2008. The closure will affect 15 full-time and 31 part-time employees at the Mall of America.” ( Star Tribune ) About TCD Commercial Charlene Grambling is the Managing Director of TCD Commercial Investments. She is an apartment and 1031 exchange specialist who also offers experience in net leased, office, warehouse, special use – including houses of worship—in the West Hills, Ventura, Oxnard and surrounding Los Angeles County area. She can be reached at 818.288.2564 This article was first published in the The National Real Estate Investor
At apartment building construction sites, delays have gotten way out of hand. It’s often difficult to find enough workers to finish the apartments on time, industry experts say. “We’re measuring an average delay of around five months,” says Andrew Rybczynski, senior consultant for CoStar Group Portfolio Strategy. That’s a lot of extra time, especially for projects that often take just two years to complete. Every week of construction delays results in a week of lost income, and another week during which the developer must pay the rising cost of the project’s often floating-rate construction loan. To keep construction workers on the job, developers and general contractors are maintaining strong relationships with their subcontractors, and they are often paying more for labor, especially for skilled construction workers. “We aren’t facing labor shortages, but rather cost increases that are needed to ensure there aren’t any shortages,” says Marc Padgett, president of Summit Contracting Group, a general contractor for apartment projects. The extra time it now takes to finish an apartment building has added more uncertainty to expectations of how many new apartment units will open over the next few years . It’s one of the reasons that vacancy rates in the apartment sector rose more slowly than anticipated in some markets. It’s also a big reason why the number of new apartments that opened in 2018 fell to 300,000 in 2018. “This decrease in construction completions can largely be attributed to delays,” says Rybczynski. In 2019, developers are expected to finish 340,000 new units, as thousands of apartments that developers had planned to complete in 2018 finally open. “The market is working though those construction delays, and that this will allow completions to rebound to some degree next year,” says Rybczynski. The average delay of five months is not likely to get much longer in 2019, though it is also unlikely to shrink. “Those delays seem to be at least evening out, in no small part due to a decrease in multifamily starts,” says Rybczynski. “At a national scale it would appear that things are stabilizing.” However, the number construction workers available to build apartments is not rising quickly enough to curtail delays anytime soon. “Unemployment rates are at an all-time low right now, so it does not appear that it [the challenge of finding workers] will improve for quite some time,” says Padgett. Five months of delays is a significant increase from the first half of 2015, when developers were often finishing projects faster than their initial estimates. It’s also a big increase from early 2017, when developers finished projects with an average delay of about three months, according to CoStar. (That delay is the average for apartment projects completed over the preceding three months. It measures the difference between the time developers initially told CoStar their projects would take to build and the number of months it really took.) Focus on strong relationships and higher wages The biggest shortage of workers is currently among the specialized trades needed to build complicated projects, like taller buildings. “The most acute shortage is of highly-skilled tradespeople,” says Taylor Brown, president of NRP Construction, the general contracting arm of developer NRP Group. “As a result, highly-complex construction projects are at risk of the greatest delays and the greatest number of mistakes.” Top developers and general contractors are fighting to attract and keep workers and subcontractors with higher pay and strong relationships. “We have not seen an issue with the quantity of labor, but rather the cost for having it,” says Padgett. The cost of labor is growing significantly faster than inflation, though it varies from market to market, and is also based on the relationships that the firm has built with its subcontractors. “Due to buying power we have the ability to keep subcontractors very busy, so this allows us some opportunity.” To keep these relationships strong, developers and general contractors carefully maintain their reputations in the markets where they are active. For example, they make sure that their subcontractors are consistently paid on time. “Existing, long-term relationships with subcontractors is a big part of the solution,” says NRP’s Brown. “In addition to cultivating long-standing relationships being simply good business, this also motivates subcontractors to prioritize NRP projects over others.” About TCD Commercial Charlene Grambling is the Managing Director of TCD Commercial Investments. She is an apartment and 1031 exchange specialist who also offers experience in net leased, office, warehouse, special use – including houses of worship—in the West Hills, Ventura, Oxnard and surrounding Los Angeles County area. She can be reached at 818.288.2564 This article was first published in the The National Real Estate Investor
In 2018, prices seemed poised to drop for federal low-income housing tax credits (LIHTCs) —the most important federal program that helps pay for the cost of building new affordable housing units. It didn’t happen, and LIHTC prices are also unlikely to fall in 2019. “The price has stayed pretty steady over the last year,” says Jennifer Schwartz, director of tax and housing advocacy at the National Council of State Housing Agencies (NCSHA), based in Washington, D.C. Tax credit prices had already dropped in 2017, as the corporations that buy LIHTCs bet lower corporate taxes would cut into their need for tax benefits. Then Congress passed a reform of the federal tax code that cut corporate taxes more than anyone anticipated. Experts thought LIHTCs prices would drop again, but they stayed relatively stayed relatively stable in 2018. In 2019, “the market is going to be very strong,” says Cindy Feng, a Boston-based partner and leader of tax credit investment services with accounting firm CohnReznick. Developers resist lower prices The federal LIHTC program provides developers that aim to build or rehabilitate affordable housing with a tax credit that they can sell to investors to help pay for the cost of the development. The more investors are willing to pay, the more money developers have for construction. LIHTC prices dropped sharply after the Presidential election of 2016, because Republicans who then controlled the White House and Congress promised to reform the federal tax code and cut the overall corporate tax rate. Investors guessed the top tax rate would fall from 35 percent to 25 percent. The prices they paid for LIHTCs dropped accordingly—from an average of over a dollar for a dollar of LIHTCs plus related tax benefits, all the way down to an average of 92 cents at the end of 2017, according to CohnReznick. “They started pricing that in before tax reform passed,” says Schwartz. Affordable housing developers scrambled to fill gaping holes in their budgets. A project that cost $10 million to develop could easily end up short $1 million. Many deferred development fees—if they hadn’t already planned to do so—and tapped all available sources of secondary financing. Affordable housing projects financed with tax-exempt bond loans and LIHTCs often took on hard debt equal to 60 percent or even 70 percent of the cost of the project. When tax reform cut the corporate tax rate to 21 percent, experts thought LIHTCs prices would drop again in response, probably by another four cents to about 88 cents for a dollar of LIHTCs. Instead, pricing for LIHTCs has stayed relatively stable. Investors paid an average of 91 cents for a dollar of LIHTCs in December 2018, according to CohnReznick, only a penny less than the year before on average. In many cases the yields that investors are willing to accept on their LIHTCs investments have fallen, averaging 4.75 percent at the end of 2018, according to CohnReznick. However, in multi-investor funds, different investors receive different yields. Some investors, like large banks motivated by the requirements of the federal Community Reinvestment Act (CRA), can accept yields as low as 3.75 percent. Economic investors that are more focused on yield are able to demand yields from 5.5 percent to 6.0 percent in the upper tiers, and they are unlikely to accept less. Many firms that syndicate LIHTCs to investors have also reduced the amount of money they take from transactions, or their “loads.” “Syndicators are getting squeezed as far as their loads,” says Feng. Investors are also structuring tax credit deals to provide more losses in the first year for additional tax benefits. Strong demand for LIHTCs in 2019 The expectation is that LIHTC prices will remain stable in 2019. “I doubt that the price would drop further this year,” says Feng. “There is a very active, busy market for the first quarter of this year… The investor demand is still very strong.” Cohn Reznick counts $1.8 billion in multi-investors funds scheduled to close in the first quarter, which is a strong number, according to Feng. The banks that buy LIHTCs to satisfy the requirements of CRA also continue to invest, unphased by the potential reform of the CRA by federal regulators. The demand for LIHTCs has also been supported by the return of Fannie Mae and Freddie Mac to the market, which began to buy LIHTCs in 2018 for the first time since the Great Recession. “Fannie Mae and Freddie Mac were able to put more equity into LIHTCs in 2018 than many expected,” Feng notes. About TCD Commercial Charlene Grambling is the Managing Director of TCD Commercial Investments. She is an apartment and 1031 exchange specialist who also offers experience in net leased, office, warehouse, special use – including houses of worship—in the West Hills, Ventura, Oxnard and surrounding Los Angeles County area. She can be reached at 818.288.2564 This article was first published in the The National Real Estate Investor
"Steady Eddie." "Consistently consistent." Those are a couple of the phrases that come to mind when I'm asked to describe the Midwest apartment market. Granted, they may not be the most exciting words around, but they capture the appeal of the region's secondary and tertiary markets to investors . Cities like Indianapolis and Kansas City will likely never produce the soaring rent growth we sometimes see in coastal metros like San Francisco or New York. But they do experience strong, consistent operating fundamentals that lead to reliable increases in rental rates. Combine these factors with investment sales prices that are often considerably lower than what you'll find in the gateway cities, and investors see that Midwest markets can generate attractive, dependable returns. Along those lines, 2018 was another good year for apartment markets in the Midwest. For instance, effective rents in Indianapolis rose by 4.7 percent over the 12-month period ending in September 2018, according to the most recent report from Marcus & Millichap. Similarly, the investment research firm has predicted that effective apartment rents in Kansas City will increase by 4.3 percent over the course of 2018. As for 2019, there is ample reason to believe that another solid 12 months of performance is in store. Below are some of the factors that will contribute to continued strong resident and investor demand in the Midwest—and beyond—in the new year. Rising interest rates . In December, the Federal Reserve raised its benchmark interest rate for the fourth time in 2018. Many experts anticipate more increases this year. The apartment industry has dreaded such increases because of their potentially negative impact on property valuations and investment sales activity. But it's important to keep in mind that rates are still near historic lows. To my eye, the recent increases haven't slowed down investment sales or harmed pricing. Furthermore, rising interest rates stand to benefit the industry in a way. They will make purchasing a home more expensive. In turn, that should serve to keep resident demand for apartments strong. Stock market volatility . It's no secret that the stock market experienced major ups and downs in the closing months of 2018. And while no one enjoys seeing equities struggle, the heartburn that investors suffered last year and are likely to continue to experience in the early part of 2019 should compel many of them to seek alternative investments . In times of market volatility, returns with minimal correlation, such as those produced by multifamily investments, suddenly hold an even greater appeal. Low unemployment rates . We are living in an era of historically low unemployment rates, both in the Midwest and throughout the country. According to the most recent available data, the U.S. unemployment rate was 3.9 percent in December. Overall, approximately 312,000 jobs were added during the month, and wages rose 3.2 percent on an annual basis. Job growth and rising wages are the foundation of resident demand for apartments, and with hiring poised to remain strong for at least the early part of 2019, occupancy rates should remain healthy. Possible slowdown in new construction . The apartment industry has seen a wave of new communities come on-line in recent years. By and large, these new developments have been well absorbed. According to RealPage, for instance, the national apartment occupancy rate was 95.8 percent at the end of the third quarter, up from 95.4 percent in the preceding quarter. Looking ahead to the new year, there are some factors in place that may slow the pace of new development: rising interest rates and the growing costs of construction materials and labor . While I remain confident that resident demand is strong enough to support sensible levels of new construction, a slowdown would likely boost occupancy levels and therefore rent growth. When you own and operate apartments in the Midwest, you're not in for a lot of drama. Thankfully. Operating fundamentals are typically solid and rent growth is reliable. In part because of the factors outlined above, 2019 should be another steady 12 months for apartment portfolios in the region. About TCD Commercial Charlene Grambling is the Managing Director of TCD Commercial Investments. She is an apartment and 1031 exchange specialist who also offers experience in net leased, office, warehouse, special use – including houses of worship—in the West Hills, Ventura, Oxnard and surrounding Los Angeles County area. She can be reached at 818.288.2564 This article was first published in the The National Real Estate Investor
As U.S. households continue to look more favorably on renting versus owning than at any other time in the last half century, it’s a good time to be a landlord. It’s also the key reason why the multifamily sector continues to outperform, with positive absorption rates and higher rent revenues. Investors have taken notice, too, actively buying and selling multifamily properties nationwide. The downside to investors trading properties? As apartment communities change hands, residents may be challenged by the new owner’s approach to property management. Especially if the landlord is inexperienced and unsure about what it takes to successfully market, manage and operate an apartment community so their ROI performs accordingly. At Chicago-based RMK Management, we oversee a portfolio of over 7,000 rental units throughout Illinois and three other states. When one of our apartment communities is sold, the first step we take is to understand and get to know the new owner’s investment strategy and goals and effectively communicate how our third-party management experience can chart the course and deliver those results. Ultimately, it comes down to three key areas: operations, marketing and resident retention. Operations Each market is different when it comes to landlord-tenant relations, lease regulations, advertising and disclosures. A professional third-party manager is well-versed in the differences of each market and can skillfully lead a new property owner through the process, thereby avoiding costly mistakes. It’s important for new owners to find a trustworthy resource that can provide this valuable institutional knowledge. And, vice versa, by providing that service, property managers can substantially boost their profile and value. Likewise, day-to-day site operations, staffing, and oversight of capital projects are just a few of the routine, yet critical, functions of the property manager. Communicating effectively and often with the property owner and taking a very hands-on approach with site visits and weekly calls will ensure the entire property management team is on the same page. This is especially important in the first year of ownership. Marketing Savvy property managers know and understand the nuances of local multifamily markets, and through smart marketing practices can successfully promote amenities and services, and remain competitive and in-step with current offerings and incentives. Smart marketing goes beyond placing an ad or posting photos on Twitter. Instead, it’s about using local expertise and market knowledge to identify and connect with a target audience, and there are many creative avenues to reach prospective tenants. For example, community engagement efforts can increase foot traffic, effective referral incentives can encourage more personal outreach and resident surveys can offer insight into the interests and needs of tenants, so you can tailor effective programming. But smart marketing, like anything else, is not a one-size-fits-all approach. Each property has its own personality, so owners need to keep in mind that what resonated with residents at a building down the street, may not have the same results at their new investment. It is also important to build strong relationships with the surrounding business community. Resident Retention And now we get to the holy grail of property management: resident retention. New or inexperienced owners can avoid common pitfalls by partnering with a seasoned property manager who will work to deliver residents the best possible experience and lifestyle. This is done by offering value-add concierge services that ease the stress of day-to-day life; ensuring maintenance requests are quickly and properly handled; and creating a sense of community through social activities, communications and engagement that bind residents to the property and their fellow neighbors. An often-overlooked component of resident retention is cultivating a staff that is well-trained to meet a tenant’s day-to-day needs and provide exceptional customer service. From resolving complaints to answering questions to planning social engagements, front-line staff members play a pivotal role in resident retention. Property management veterans know that retaining and growing talented employees is inextricably linked to resident satisfaction and have invested in quality training programs, encourage employee engagement and reward customer service. At RMK, we live by a motto: See it. Solve it. Report it. We empower our property managers to make decisions if they encounter a problem and build their confidence to effectively handle issues as they arise. It may mean some mistakes are made along the way, but in those rare instances we analyze what happened and learn from it. Going forward, new investors will continue to enter the market as the economic fundamentals and demographic trends that make multifamily properties a good investment are projected to continue. Tapping the expertise of an experienced property manager is key to ensuring the property remains a viable, profitable asset by providing a happy home for the renter. About TCD Commercial Charlene Grambling is the Managing Director of TCD Commercial Investments. She is an apartment and 1031 exchange specialist who also offers experience in net leased, office, warehouse, special use – including houses of worship—in the West Hills, Ventura, Oxnard and surrounding Los Angeles County area. She can be reached at 818.288.2564 This article was first published in the The National Real Estate Investor