Wednesday, August 5, 2020

Will Downtown Office Towers Continue to Command Top Rents?

By Paul Leonard CoStar Advisory Services
For those living in one of America’s largest cities and working downtown, the daily commute not too long ago probably involved crowding onto trains that were over capacity during peak hours and often operated with outdated ventilation systems. Commuters then flowed into enclosed transit stations before exiting and facing the last gauntlet of the commute, riding a crowded elevator up to the final floor.

This typical journey to work for millions of Americans was mildly unpleasant before the pandemic, but is now shaping up to be borderline unbearable when commuting to the office eventually resumes. The logistical nightmare of getting workers safely from their homes to the office is keeping a lot of mayors, governors, CEOs and office landlords and managers up at night. Fear of crowding in subways, office lobbies and other public gathering spots threatens to upend the three-decade trend towards the reurbanization of America’s cities.

When we eventually resume life as we knew it, larger cities with longer commutes and a dependency on public transit will face unique challenges that smaller, more car-dependent cities will largely avoid. Compounding this threat is the fact that the metropolitan areas that are most reliant on transit and that have the longest commutes also have the highest office rents in the U.S. This raises an important question of whether these larger cities will continue to see such disparity in rent premiums after the pandemic.
Top-tier markets such as New York, D.C., Boston, Chicago, Los Angeles, San Francisco and Seattle are the most challenged by this trend. Companies located in these markets are likely to face the most pressure from employees to continue to work from home or have more flexible schedules in the future.

But while top-tier markets collectively face enormous challenges, New York City stands out as being far and away the most acutely impacted by transit concerns associated with virus transmission risks. According to the U.S. Census Bureau, 31% of New York's metropolitan workers commute via mass transit to work, and this number is far higher for commuters whose destination is Manhattan. San Francisco is in a distant second place at 17%, and only four other markets are above 10% — all of them top-tier markets.

This past April, when New York City was the epicenter of the COVID-19 pandemic, ridership on New York’s subways dropped an unprecedented 92% compared to April 2019. But in the months since, ridership has only recovered to a 77% deficit compared to last year.
In addition to having long, transit-dependent commutes, these top-tier markets also have the greatest share of office space located in mid- and high-rise buildings necessitating an elevator ride. Nearly half of all office inventory in tier-one markets is above the fourth floor. That compares to a little more than one-third of the office space located in tier-two markets and only about a quarter of the office inventory in tier-three markets. In addition to mass-transit concerns, these high-rise cities face another hurdle in the logistics of getting workers from the ground to their floor without crowding in the lobby and the elevators.
If we focus within these markets, we find that 75% of the four- and five-star office space in central business districts nationally is located above the fourth floor versus just 31% of office inventory outside of the central business districts. New York is not alone in facing challenges presented by elevator queues and crowding. There are 28 cities in the U.S. with central business districts where 70% or more of the four- and five-star office space is located above the fourth floor.

In addition to longer, transit-dependent commutes and the prevalence of high-rise towers, nearly all central business districts command a rent premium compared with their surrounding markets. Once again, this premium is highly correlated to the market tier. Among the tier-one markets, there is a 72% rent premium, led by New York’s 125% rent premium for downtown office space compared to its suburbs.

The average rent premium falls to just 30% in tier-two markets and to just 15% in tier-three markets. The question remains, will office buildings in central business districts be able to maintain the same rent premiums after the pandemic?
Commuting activity may return toward previous levels once a vaccine for the new virus is developed and immunity levels eventually increase. This has historically been the case after other health scares or shocks, such as 9/11, that also prompted employers to reconsider downtown locations. In the past, initial concerns subsided over time once the general public perceived the threat had passed or had been addressed.

But that, of course, will take time. For investors concerned by the short-term implications posed by interrupted commuting patterns, there are a few office markets that have less dependency on mass transit. In addition to suburban markets generally, Sun Belt areas such as Phoenix, Arizona; Austin, Texas; Orlando and Tampa, Florida; and San Diego, California, are the least impacted by this trend, as they are far more dependent on cars with a relatively low share of high-rise office inventory.

Tuesday, August 4, 2020

More Renters Are 'Ghosting' Landlords, Apartment REIT Complains

By Marissa Luck CoStar News
Apartment renters in California are proving to be something of a frustration when it comes to paying rent, according to a national apartment landlord.

Its tenants in California, where the unemployment rate is 14.9%, are more likely to struggle to pay rent, with many "ghosting" their landlords by cutting off all contact, executives at real estate investment trust Camden Property Trust told investors. California has regulations in place to prevent tenant evictions, a move that the apartment industry says has the unintended effect of providing a disincentive for some to pay who otherwise would.

“If you’re a resident in California and you listen to the mayor of L.A. or the governor, their messaging is, ‘don’t worry, you don’t have to pay,’ and the limitation of late fees, the limitation of [not] being able to evict somebody creates what we call ghosting, which is they just don’t show up,” Camden's CEO Ric Campo said in discussing the company's second-quarter earnings.

He added that some renters “know they don’t have any negative recourse; you’re not charging them interest or late fees and they know they can’t be evicted and so you just have this ghosting scenario that happens out there.”

The deferred rents, higher expenses and lack of payment reduced profits for Camden in the second quarter, which saw its net earnings fall almost 60 percent to $17 million from $43 million in the same quarter last year. Camden's challenges provide one look at the national apartment market as federal aid programs begin to run out and unemployment remains high.

The Houston-based developer and owner has a portfolio of 56,112 apartment units across 164 properties, offering a glimpse into multifamily markets in a variety of cities. The difficult quarter came after Camden launched a $10.4 million cash-grant renter relief program for struggling tenants and after Camden saw its lowest renter turnover rate in its history in the first quarter, with tenants not moving out.

Delinquency rates among Camden's renters in California are hovering at about 3.6%, said Alex Jessett, Camden’s chief financial officer, during the call. The national apartment REIT said it has about 4,200 apartment units across 12 properties in the Golden State.

Across its portfolio, Camden saw its delinquency rates hit about 1.2% in the second quarter, on par with the 1.4% seen during the same time last year. However, about 1.1% of tenants deferred rent or made some rental payment plan, while virtually no tenants deferred rent the same time last year.

Orange County in California had the lowest collection rates for rents, with Camden able to collect about 92% of its rental income in the second quarter, said CEO Ric Campo on the earnings call. Other cities nationally had rent collection rates between 95% to 98%..

There's a debate between the apartment industry, which says the tenant protections in California don't provide enough monthly revenue protections for landlords to collect enough money to be able to pay their own costs such as mortgages, and lawmakers, who say there's a societal need to prevent large numbers of evictions as they point to rent collection rates above 90% to argue that landlords are still collecting the majority of rent revenue.

Sun Belt Payments

Residents in Sun Belt states where unemployment is comparatively lower seemed to be better at paying rent on time, he said. Before the pandemic, California had been a bright spot for Camden’s growth, and company officials said they still think it’s a good long-term investment.

“I think California will always be a market that people want to be in. It’s one of the biggest economies in the world,” said Jessett. “To me, I know that there’s a lot of people piling on to California, New York and Seattle and some of these other markets. They’re not going away, there will be good, long-term markets and hopefully the pandemic moves through fast and we’ll get back to good growth.”

Even in the Sun Belt, some areas showed weakness in the apartment market, particularly in economically harder-hit areas such as Houston and southern Florida, Camden officials said.

Houston’s apartment market is facing challenges on multiple fronts. Beyond the double-whammy of the coronavirus pandemic and the oil industry downturn, Houston also is seeing a big wave of newly built apartment units hitting the market.

“Houston continues to be one of our weaker markets,” Campo said, adding that the downtown and midtown areas have some of the biggest challenges with too much supply.

Renters in southeast Florida also are struggling more than other markets, Camden officials said. After Orange County, the market that saw the lowest rental collection rates was Southern Florida, where rent collections were about 94%, said Keith Oden, executive chairman at Camden, in the earnings call. Florida’s unemployment rate has hit 13.7% as the hospitality industry took a major hit from the pandemic. Renters in this market seem slower to jump onto Camden’s virtual leasing and tours platform, Oden said.

Across its portfolio, Camden saw its renewal rates stay essentially flat in the second quarter compared to growing 5.7% in the same quarter last year. Its new lease rates dropped by 2.8% compared to growing 4% in the second quarter last year.

Overall, Camden saw expenses from the coronavirus pandemic sink its profits by 59% to $17 million last quarter, compared to $43 million during the same time last year. Its profits were dragged down by about $14.4 million in one-time coronavirus-related expenses, including the company’s contribution to its renter relief fund and employee assistance fund and one-time employee bonuses.

It also saw its property-related expenses rise by roughly 9% year-over-year. And property revenues dropped roughly 2% to $250.6 million in the second quarter, compared to about $255 million the same time last year.

On the development side, Camden has about $1.9 billion of new apartments representing 1,939 units in the construction pipeline. In Houston, it has started leasing up Camden Downtown I, a 271-unit, $132 million apartment project that is now about 24% leased, according to its earnings report.

It also recently started leasing up Camden Cypress Creek II, a 234-unit, $32 million apartment project it developed in a joint venture in the north Houston suburb. In the second quarter, Camden also recently completed construction a 441-unit, $98 million apartment project in Phoenix called Camden North End I, which is now about 89% leased.

Campo said he was optimistic about the prospects for America’s multifamily market, as demand for apartments is still strong despite the 11.1% national unemployment rate. Camden still has a relatively strong occupancy rate of 95% and its turnover rate is down somewhat from last year.

“Camden’s geographic and product diversification has continued to lower the volatility of our rents and occupancy. Camden’s Sun Belt market have fewer job losses than close to markets in the U.S. overall,” Campo told investors. “Our product mix that offers varying price points in urban and suburban locations continues to work for us."

How The Coronavirus has PERMANENTLY Impacted Commercial Real Estate 2020 (Video)

Monday, August 3, 2020

Trends in commercial and residential real estate markets (Video)

Apartment Construction Starts Slowed Nationwide, but Some Southern Cities Bucked the Trend

By David Kahn and Sam Tenenbaum
CoStar Analytics

The onset of the coronavirus pandemic caused multifamily owners, lenders and developers to take a pause in the second quarter of 2020 as uncertainty led to firms taking stock of their own portfolios rather than looking to add to them with either new construction or acquisitions.

It’s been well documented that sales volume, both in multifamily and the other commercial property types, fell off a cliff in the second quarter of this year. But investment through sales only tells part of the story. Analyzing the trends in construction starts throughout the country can help paint a fuller picture because development often poses greater risk than acquiring an existing asset.

Perhaps most important, construction starts indicate sentiment about the future – investors won’t break ground on a new project if they don’t feel that demand will be sufficient in the six to eight quarters following the groundbreaking, when the project is completed and begins to lease up. Therefore, looking at which cities saw the largest and smallest drop-offs in apartment groundbreakings in the second quarter may serve as an early signal for how confident multifamily owners, lenders and developers are in a given city, relative to the nation as a whole.

CoStar Market Analytics looked at which cities saw the largest and smallest drop-offs in groundbreakings compared to its prior five-year trailing quarterly average. Using a five-year quarterly average is advantageous for one key reason: Quarter-over-quarter or even year-over-year groundbreaking figures are exceptionally volatile, even on a metro level. Additionally, the analysis included only markets that broke ground on at least 2,000 units in 2019. This data set shows that apartment construction was down almost 50% from its five-year average nationally.

Plenty of cities saw no properties break ground in the second quarter, including Las Vegas, Nevada; Palm Beach, Florida; and Charleston, South Carolina. Those cities all rely heavily on tourism, a factor that may have temporarily spooked investors and dissuaded developers during the height of the pandemic last quarter.

In terms of markets that did see units break ground, the biggest drop off from the five-year trailing average was Fort Lauderdale, Florida. This makes sense, considering the city’s tourism-dependent economy and typically robust multifamily construction pipeline. Furthermore, Fort Lauderdale delivered nearly 3,000 units in the second quarter alone, representing more than 2% of its existing inventory opening in a single quarter.

Other large drop-offs were seen in New York and Los Angeles, the two largest metropolitan areas in the country and two locales typically viewed as safer from an institutional capital perspective. Other slower-growth, legacy cities including Philadelphia, Chicago and Boston saw drastic drop-offs in construction starts last quarter.

Austin, Texas, with its typically robust construction pipeline, saw groundbreaking activity slow in the second quarter as well. That’s largely the result of a high historical average, rather than a drop in the market, as roughly 750 units still broke ground, compared to a more than 2,500-unit historical average for the market.
Only a handful of metropolitan areas saw an uptick in groundbreakings in the second quarter compared to their five-year trailing quarterly average. Three of the fastest-growing Sun Belt markets saw an increase in new construction starts in the second quarter of 2020. Raleigh, North Carolina; San Antonio, Texas; and Nashville, Tennessee, all saw more groundbreakings than respective five-year quarterly averages, with Raleigh nearly doubling its typical quarterly figure.

All three of those cities have seen explosive demographic growth over the past decade, and many developers and owners feel confident that those long-term trends will outweigh any near-term coronavirus concerns.

Other Sun Belt cities saw slowdowns in groundbreakings last quarter, but not quite to the extent as the rest of the country. Construction starts in Atlanta, Houston, Phoenix, Dallas-Fort Worth and Charlotte all held up relatively well compared to recent history. In fact, Dallas-Fort Worth led the country in terms of the nominal number of units breaking ground in the second quarter, with about 4,500. And even tourism-dependent Orlando, a city with an already robust pipeline and falling rents, saw a shallower drop-off in groundbreakings compared to the national benchmark.

Aside from tourism-dependent Orlando, these Sun Belt locales have all performed better than the nation in terms of job losses since the onset of the pandemic. And long-term demographic growth throughout the region continues to boost developer confidence in many traditionally fast-growing southern cities. However, with cases rising throughout the country, and especially in the south, future construction activity will likely be tied to the relative economic recoveries of these cities over the next few months.

Many of the projects that began construction in the second quarter will deliver in the second half of 2021 or the first half of 2022. If the economy does not return to pre-COVID employment levels by then, those projects could face a more difficult leasing environment.

$103M Construction Loan Secured for NJ Industrial Park

By Ingrid Tunberg
$103.5 million in construction financing was secured for two industrial buildings in Logan Township, NJ, as the exclusive adviser to Advance Realty Investors and Greek Development.

The loans, provided by Wells Fargo and Provident Bank, are designated for buildings H and E within the planned 3.2-million-square-foot, class A industrial site, Logan North Industrial Park.
Building H will serve as Logan North Industrial Park’s first asset to be developed out of ten total planned sites. The property is 100% pre-leased to Target, which will utilize the building as a flow center to fulfill online orders and restock retail centers. The facility, 60% of which will service retail stores and 40% will service for e-commerce needs, is estimated to create 1,300 jobs. Wells Fargo provided a $69 million construction loan for the development of building H.

Building E’s construction will commence immediately after building H’s development. The built-to-suit cold storage facility is pre-leased to the cold storage operator, Lineage Logistics, and will be operated by Lineage Logistics’ subsidiary, Preferred Freezer Services. The 189,889-rentable-square-foot site will offer 103 parking spaces, 44 trailer spaces and 20 dock doors. The property received $34.5 million construction loan from Provident Bank.

“With these two assets pre-leased, encompassing the first 1.3 million square feet of Logan North, our partnership is currently constructing Phase II of the development to meet continued demand in Southern New Jersey,” states David Greek, Greek Development’s director of acquisitions.

Cushman & Wakefield’s equity, debt and structured finance team, comprising John Alascio, Sri Vankayala, Chuck Kohaut, TJ Sullivan and Maya Steinberger, represented the borrower.

“It is a true testament to Wells Fargo and Provident Bank in understanding the vision and value proposition of Logan North in our uncertain economic environment,” states Alexander Cocoziello, Advance Realty Investors’ managing director of capital markets. “Our team could not be more pleased with the execution of Cushman & Wakefield and the broader sponsor team in these two deals.”