New Look of Offices Sparks CRE Changes
The “Uberization” of how we work is leading to new challenges for the commercial real estate industry.
More people working from home means collaborating using video chat. While at the office, employees sit in front of laptops at common desks, many renting office space on an as-needed basis from companies like WeWork.
It’s all part of a growing movement toward scaled-down, collaborative offices that pose both a risk and a possible reward to the CRE industry.
“Commercial real estate needs to look at these kinds of changes in the workplace, and make changes of its own or be left behind,” says Situs Executive Managing Director Warren Friend.
The rising number of offices that are anything but traditional, along with new leasing agreements are evident at offices ranging from those of the latest tech firms to old-line financial institutions.
Some of the new trends in office space we see include:
“We’ve reached a tipping point,” says Situs’ Friend, “Those commercial real estate companies that adapt quickly to the changing workplace will profit.”
New York Owners Race to Upgrade Office Amenities
The amenity race is on in New York, with commercial property owners looking at ways to make their building stand out. “Employees have evolved with their needs and the paradigm has shifted. One may not care for an office or a large desk, as long as he can occasionally sit on a sofa, use the bike rack, and go to the gym in his or her building,” said Eli Elefant, CEO of PBC USA. “The amenity-rich environment is important and we are likely to see more creative uses of space. I also think you will see aggressive errors in creating over-amenitized space where some features do not get used.”
Amenities have become just as important as location, with more tenants opting for what the so-called Millennial generation prefers. “Millennial preferences are really just stuff that everyone likes, such as bright open spaces and useful common amenities,” said Will Silverman, a managing director at Hodges Ward Elliott. “But as the Millennial crowd reaches the age when they need to discuss colonoscopies or fertility treatments, they will value their privacy more. It’s not a generational thing to want a room of one’s one. Virginia Woolf was definitely not hot desking.”
“Corporations want their companies to be in the gateway cities in order to have the best human capital and successes. We’re trying to stay in front of those companies,” he said.
Bob Stella, a principal at New York-based tenant representation firm Cresa, pointed out that different tenants require different levels of amenities. Buildings like L&L Holding’s 425 Park Avenue are expected to attract private companies who employ extremely affluent tenants. “If you segmented the market into industries that have high incomes, those people have certain tastes and expectations,” he said. “Still, that doesn’t mean that this group isn’t cost-conscious. The people who work for these companies have certain expectations of what their office spaces will look like and the amenities provides are where companies are able to attract and retain employees.”
An increasingly popular amenity is an in-building café that offers high-quality foods, coffee, and snacks. “If you have a café in your building, it might save an employee from leaving the building and walking two or three blocks away. That’s 20 minutes when they’re not connected. If it’s right there in the space, it saves time going back and forth and provides the opportunity to connect with the people that you work with. What applies to the tech industry also works with other industries as well,” Stella said.
read more: RealEstateFinanceInvestment
The Hot New Millennial Housing Trend Is a Repeat of the Middle Ages
Home ownership is still viewed as a central component of living out the American dream, but the ways that many present-day Americans are pushing back on modern living arrangements closely resemble what came centuries, even millennia, before in other parts of the world.
Family members, relatives, neighbors, and strangers are coming together to live in groups that work for them—a bit like medieval Europe. “Today, all across the nation, Americans are living the new happily ever after,” writes the social psychologist Bella DePaulo in her 2015 book How We Live Now: Redefining Home and Family in the 21st Century. “The ‘new’ part is that people with whom they are sharing homes and lives are not just spouses or romantic partners.”
Instead of limiting their households to children, parents, and grandparents, plenty of people are going a step further, making homes with friends and even strangers. Cohousing, in which a large community lives together and shares household duties, is gaining popularity. In cohousing, individuals or families generally have their own houses, bedrooms, or apartments but share things like kitchens and community spaces. They’ll commonly trade off on responsibilities like cooking and chores. Milagro Housing, for instance, is a cohousing community located in Arizona’s Sonoran Desert. There, families, couples, and single people live in 28 homes in a tight-knit community that shares a kitchen, laundry room, library, meeting room, playroom, and storage rooms.
read more: The Atlantic
Scrutiny of Commercial Real Estate Loans Chills Small Lenders
Financing commercial property has been local banks’ bread-and-butter business for years, but a post-crisis push for loan growth prompted regulatory warnings about lax lending standards, and small banks are now shying away from the market.
A shakeout in commercial real estate is under way as some banks unwind or sell off the loans that are under regulators’ microscopes, and bankers say they are wary of making new loans.
Brokers say they are finding fewer lenders for some commercial property deals. Aaron Appel at Jones Lang LaSalle in New York said there was less competition for $5 million to $10 million commercial property deals, particularly loans that involve construction or redevelopment projects, which are considered riskier because they are not properties that are generating income.
Commercial property brokers have been working more with institutional investors like private equity and pension funds partly as a result of some banks taking a step back, Mr. Appel and others said. And foreign banks have stepped in on some of the deals.
The lending chill comes as regulators have been warning banks about being overly aggressive in commercial real estate lending. A joint bulletin in December notified the industry that “during 2016, supervisors from the banking agencies will continue to pay special attention to potential risks associated with CRE lending.”
As a result, bankers say they are sticking to business closer to home and finding growth by acquiring other small banks.
Joseph J. Lebel III, chief lending officer of OceanFirst Bank in Toms River, N.J., has reviewed some of the commercial loans that other banks have put up for sale recently but decided not to buy any because they have weak loan terms and other features that point to aggressive underwriting.
OceanFirst, with $4.2 billion in assets, is being more selective about its lending and focusing on smaller deals, Mr. Lebel said. The bank has the capacity to make $10 million to $20 million commercial loans, but it does not want to aggressively compete for those loans, he said. Instead, the bank recently acquired another Jersey Shore bank, Ocean City Home Bank, for about $146 million.
“My market is a market that I can drive to my customer and my customer can drive to me,” Mr. Lebel said. “It’s relationship-based lending where they know us, we know them, we’ve been in their offices, they’ve been in our branches and you build a little bit more than a transactional-based relationship.”
read more: NY Times
Construction Spending Weakens
Outlays for U.S. construction projects weakened in August and July led by steep declines in spending on public projects, the Commerce Department reports.
Spending on construction tumbled 0.7% in August.
That was well below forecasts. Economists surveyed by MarketWatch had expected a 0.1% increase in August.
Outlays in July were reduced to a 0.3% fall from an initial flat reading.
August spending of $1.14 trillion was 0.3% lower than a year ago. Despite the losses, outlays for the first eight months of the year are 4.9% higher compared with the same period in 2016.
For overall public construction projects, spending fell 2.0% in August after a 3.5% decline in July. Spending on public projects is at the lowest level since March 2014, the government said. Over the past year, public construction spending is down 8.8%.
read more: MarketWatch
The pound fell to a three-decade low against the dollar on Tuesday, trading below the levels it hit after Britain voted to leave the European Union in June.
The currency fell 0.82% to $1.274 reaching almost 15% below where it traded on June 23, the day the U.K. went to the polls. The pound was trading down against the euro at €1.141, down 0.4%.
Since the vote, sterling has barely risen above $1.34, as investors fret about the effects of so-called Brexit on the British economy and the likelihood of further Bank of England action to support growth. The latest stage in the pound’s decline came after U.K. Prime Minister Theresa May set a March date to begin exiting the EU and said full access to the country’s largest trading partner was a lower priority than controlling immigration.
But in a volatile day for British markets, the country’s leading share index, the FTSE 100, headed toward a record high, as investors saw the benefits of a weaker currency for the benchmark’s companies, which make over 70% of their profits abroad.
New weakness in North America, coming on top of concerns about China and Europe, is adding to a sense of “disquiet” about the global economic outlook, the International Monetary Fund said.
In its latest report on the global economic outlook, the IMF’s trimmed its forecast for U.S. growth this year by 0.6% and next year by 0.3%, and noted that the Federal Reserve has so far judged a second interest rate increase as too risky.
This weakness is spilling over to the U.S.’s neighbors.
Growth in Canada was trimmed by 0.2% for both this year and next as weakness in the U.S. compounded the setbacks stemming from the wildfires in Alberta that impacted oil output in the second quarter.
And growth in Mexico was cut by 0.4% in 2016, due to weak export performance, and by 0.3% next year.
For the global economy, the IMF made no changes to its forecast of 3.1% growth this year, down from 3.2% in 2015. Growth in 2017 is expected to rise to 3.4%.
U.S. Tech Giants Are Investing Billions to Keep Data in Europe
n the battle to dominate Europe’s cloud computing market, American tech giants are spending big to build up their local credibility.
Amazon Web Services, the largest player, announced last week that it would soon open multiple data centers in France and Britain. Google, which already has sites in countries like Finland and Belgium, is expected to finish a new multi million-dollar data complex in the Netherlands by the end of the year.
And Microsoft, by some measures the second-largest cloud computing provider in Europe, said on Monday that it had spent $1 billion in the last 12 months to expand its offerings, taking its total investment in European-based cloud services to $3 billion since 2005.
“We’re building our global cloud infrastructure in Europe so it can be trusted by the multiple constituents,” Satya Nadella, Microsoft’s chief executive, said in an interview. “We can meet the data residency needs of our European customers.”
With many in Europe questioning why America’s largest tech companies control how many of the region’s 500 million citizens use everyday digital services, it is not surprising that the likes of Microsoft and Amazon are eager to play up their local roots.
read more: NY Times
More People Using their Home Equity as a Piggy Bank
As Black Knight Data & Analytics Executive Vice President Ben Graboske explained, borrowers are continuing the trend of drawing upon growing equity in their homes, though at nowhere near the levels at which they had pre-crisis.
“The roughly 350,000 cash-out refinances in Q2 2016 accounted for 42 percent of all refinances in the quarter, and marked the ninth consecutive quarterly increase in cash-out lending, not only by count, but also by the amount of equity tapped,” said Graboske. “At $22.6 billion, that works out to approximately $65,000 in equity tapped per borrower. While that per-borrower number is slightly down from Q1 2016 – but $6,000 higher than one year ago – the $22.6 billion total is the largest equity sum tapped since Q2 2009. Just to put that into perspective, though, it’s still a nearly 80 percent lower equity draw than at the peak in Q3 2005. And, given that we saw over $550 billion in tappable equity growth last year alone, this equates to borrowers only tapping into 15 percent of the growth in equity over the past 12 months, without even touching the $4.5 trillion balance in tappable equity available. All in all, it’s clear that cash-outs are helping to prop up the refinance market – their 42 percent share is up from only 30 percent in early 2015 when interest rates had also dropped. What’s more, refi volumes are down from 2015 – at least through the second quarter – but while overall they’re down nine percent from Q1 2015, rate/term refinances are actually down 25 percent over that same period.
“Today’s cash-out refinance borrowers continue to present a relatively low risk profile, historically speaking,” Graboske continued. “The average credit score of 748 among Q2 2016 cash-out refinance borrowers is 67 points higher than that of the low point recorded in Q3 2006, and is in fact nearly 60 points higher than the overall average credit score from 2005 through 2007. In addition, post-cash-out loan-to-value ratios remain low. At 66 percent, it’s slightly higher than in Q1 2016, but it’s the second lowest quarterly average recorded in over 11 years. This is nearly six percent below the 2005-2007 average and 10 percent below the highs recorded in late 2008. In addition, while not specific to cash-out refinancing, we continue to see prudent behavior on the part of borrowers. Some 40 percent of Q2 2016 rate/term refinances involved the borrower reducing their loan term, the highest share of term reductions since late 2013/early 2014.”