How Will California’s Latest Solar Mandate Apply to CRE Investors? 

California is determined to reach the point where it draws 100 percent of its electricity from renewable sources. As part of the plan to achieve this goal, Assembly Bill 178 was passed, making solar panels compulsory on new buildings up to three stories high as of January 2020. In August 2021, further legislation was approved to mandate solar power and battery storage for all new commercial buildings and high-rise residential projects from 2023 on. Specifically, this includes commercial buildings such as hotels, office blocks, medical facilities, retail stores, restaurants, campuses, and community spaces.

So what do commercial real estate (CRE) investors need to know? Well, the California Building Standards Commission will now consider the proposal, and it’s expected to include it in an overall revision of the building code toward the end of 2021. In the meantime, the existing requirements for residential buildings may provide some insight.

Solar Requirements for Residential Developments

Beginning in 2020, all new single-family residences and multi-family residences up to three stories high are required to have rooftop solar panels. The requirement also applies to any new additional dwelling units, such as carriage houses or granny flats. The panels should have the capacity to cover the building’s annual electricity consumption, which can vary depending on the use of the space, the shape of the building, and the tenants. The amount of solar needed is based on an energy design ratio, but an average rule of thumb for residential buildings is 2 watts of solar power per square foot. State-approved software can be used to test schematic designs as well.

Reducing the Cost of Your Photovoltaic (PV) System Installation

The New York Times estimated that California’s original solar mandate would add $8,000 to $12,000 to the cost of building an average residence. However, there are several ways to reduce the cost implications of solar building mandates, including the following:

  • Add Storage Capacity. Batteries were not mandated for residential buildings previously as they are in the new rulings for high rises. But where storage is included in a building’s photovoltaic (PV) system, it can be up to 40 percent smaller due to its increased energy efficiency. This is of help where roof space is limited. It also has the added advantage of making the building independent of the power grid—a big plus in areas prone to wildfires, hurricanes, or flooding, events that can leave residents without power for days in some cases.
  • Install Other Energy Efficiencies. As the requirement is to cover the total energy consumption of the building, other onsite energy-saving precautions can help cut down the size of the PV system needed. For example, energy-friendly building materials, certified energy-efficient appliances, and other initiatives will all count toward reducing the energy requirements of a structure.
  • Take Advantage of Tax Credits. There are not currently any state reimbursements for mandatory solar expenses. However, building owners and business owners are still eligible for the federal solar investment tax credit for mandated PV requirements. Until 2022, 26 percent of the total system cost will be eligible for a tax credit, but this will drop to 22 percent in 2023. Beginning in 2024, a 10 percent credit will be available on commercial systems only.

To manage cash flow and avoid upfront costs, building owners can consider leasing their solar systems from one of the numerous companies in California that offer solar equipment leases. On the other hand, a PV system will generate a better ROI over its lifetime when it is owned rather than leased.

Exempt Properties

As with most laws, the California solar mandate lists some exceptions:

Rebuilding After Natural Disasters. In 2019, an exemption to the new state solar requirements was added for buildings being rebuilt due to wildfires, floods, and other natural disasters.

Community Solar Project Participants. Housing developments can avoid rooftop solar requirements in some cases if there is an associated community solar initiative available. If a local utility and the California Clean Energy Commission (CEC) approve a shared community “solar garden,” residents can draw their electricity from it instead of installing solar roof panels. Solar gardens are large arrays of solar panels installed off-site that residents of nearby communities can purchase power from. These purchases are credited toward the property’s power bill.

Poor Solar Access. Local boards can approve a departure from the state’s PV requirements in areas that don’t get enough direct sunlight to be conducive to solar energy.

Low Electricity Rates.An exemption from solar capacity can be sought in exceptional areas that do not incur normal, daily electricity usage. However, this usually is only applicable for temporary structures and remote job sites.

Off-Grid Buildings. If there is no intention to ever connect a building to the utility grid, it does not need to have solar panels. However, most off-grid buildings will utilize solar energy regardless.

Correctional Facilities. Correctional facilities are specifically exempt from California solar requirements.

Is Houston America’s Next Life Sciences Hub? Construction Indicates Yes

Second only to industrial real estate, life sciences real estate has thrived throughout the pandemic, and there’s no sign of it slowing down. Houston, Texas, is one city seeing strong growth in this sector. While energy, manufacturing, and aerospace are still the dominant industries there, Houston’s IT sector is an important hub for nanotechnology and biotechnology.

What Makes Houston Right for Life Sciences?

The life sciences industry requires an ecosystem that Houston is well positioned to provide. It’s a sector that needs well-educated workers, even more so than technology generally. Houston ranks seventh in the country for the number of adults with STEM (science, technology, engineering, and math) degrees—over 400,000, according to a recent JLL report. The same report also ranks Houston in eighth place for wage positioning of the sector, which implies that highly qualified workers will continue moving to the city. This seems even more likely, given that Texas is one of the few states without personal, state, or corporate income taxes.

This worker profile also looks for proximity to and association with prestigious academic research institutions. Houston fits the bill here, too—the Greater Houston Partnership (GHP) records over 25 research and innovation centers in the area. Not least of these is the Texas Medical Center (TMC), the largest medical center globally, with 61 member institutions and some of the brightest minds in the field.

According to the GHP, funding to Houston from the National Institutes of Health (NIH) totaled $670 million in 2018. That year, venture capital and private equity investment in the city’s life sciences startups totaled $161 million. Today, close to 2,000 life sciences companies, hospitals, health care facilities, and research institutions employ over 300,000 workers—even more than the energy sector, which has traditionally dominated the Houston economy. Corporate life sciences employers include Merck, Novartis, Bayer, and Fisher Scientific.

Other life sciences clusters ranking above Houston in a CBRE report last year include the San Francisco Bay Area, Boston, and San Diego. However, Houston stands apart from these metro areas with a much less expensive cost of living—which can be a major factor for companies wishing to relocate.

Current Life Sciences Real Estate Availability

Life sciences real estate includes office space and even medical suites. However, the laboratory, manufacturing, and warehousing space associated with the industry differ from most other commercial real estate. Life sciences real estate can be complex and expensive. For example, a 2018 JLL report says lab construction costs at that time ranged from $350 to $1,350 per square foot.

Most Houston lab spaces, with a few build-to-suit exceptions, are light industrial properties that were converted to cater to the industry. Right now, there’s not even enough of that to meet the needs of the city’s early-stage life sciences ventures exiting incubator environments.

There are, however, millions of square feet of dedicated life sciences real estate in the pipeline:

  • This August, Medistar Corp. and Healthcare Trust of America broke ground on Horizon Tower, a 30-story tower due for completion in 2023. It includes 17 stories of dedicated life sciences and medical space, 13 stories of parking, and ground-floor retail space (15,000 SF). It’s part of a five-acre campus called Texas A&M Innovation Plaza, which includes residential space for medical students and centers around an acre of open-air greenspace.
  • Hines and 2ML Real Estate Interests are developing Levit Green. Adjacent to TMC, it will constitute 52 acres of mixed-use prime real estate, including research facilities, offices, residential, shopping, entertainment, and greenspace.
  • Rice University’s new ION Hub is a 266,000-square-foot construction designed to promote collaboration among the city’s entrepreneurs, businesses, and academic communities.
  • TMC’s TMC3 is set to open in 2022. The 37-acre campus is mixed-use but life sciences-focused, and phase I includes 950,000 square feet of research space. When complete, the campus is predicted to create 30,000 jobs and create an economic impact of $5.2 billion.

Life Sciences Will Continue to Grow

The pandemic indeed focused the world’s attention on the life sciences industry, but several other drivers were pushing growth in the sector long before COVID-19 became part of our everyday vocabulary.

An aging baby boomer population has converged with advances in medical and information technology. AI-powered research, wearable devices, and a greater understanding of genetics are all revolutionizing healthcare. Treatment has the potential to become far more personalized, and the relationship between patients and their medical professionals is also changing. It all adds up to a huge market for life sciences products and services.

Accordingly, tech giants like Apple, Google, Microsoft, and Samsung are entering the field. Their reach, drive, and budgets are putting smaller medtech companies under pressure to compete. At the same time, venture capital, academic, federal, and philanthropic funding for the life sciences has also reached unprecedented rates.

There’s no doubt that exciting times lie ahead for the life sciences, and Houston is geared to being part of that.

What Will a Retrospective Capital Gains Tax Mean for Investors?

The Biden administration has released its “Green Book” for 2022. Included for consideration by Congress are several proposed tax changes that will have severe consequences for real estate investors if passed. Specifically, the proposals of concern are:

  • A retroactive capital gains increase
  • Changes to or eradication of the estate step-up in basis
  • Changes to or eradication of the 1031 exchange

But the administration isn’t targeting real estate investors exclusively. The budget package includes proposals to increase the top tax rate to 39.6 percent, levying a 10 percent surtax on the ultra-wealthy, and possibly a 2.5 percent one-time wealth tax and ongoing 2 percent to 3 percent annual wealth tax. Even corporations aren’t exempt—Congress will be looking at increasing corporate tax rates from 21 percent to 28 percent.

A Retroactive Capital Gains Tax Increase

Currently, the top capital gain tax rate is 23.8 percent for gains realized on assets held longer than a year. Biden plans to increase this to 43.4 percent for households earning more than $1 million. But additionally, he wants this implemented retrospectively to April 2021. And this is in addition to a “stepped-up basis” to tax capital gains over a $1 million exemption at death.  

Together with state capital gains taxes, the proposals would make American capital gains tax the highest in the industrialized world, surpassing even socialist countries like Denmark and France. And if taken as currently proposed, they could potentially tax ordinary individuals who have structured their retirement income on real estate investments as though they are millionaires. That’s according to a Wall Street Journal article that shared how a Kentucky man earning only $75,000 annually will have his savings halved when he’s taxed on the proceeds of the five apartment buildings he bought and renovated to support his retirement.

Effects of Eliminating the 1031 Exchange

Currently, a 1031 exchange allows real estate investors to defer gains on the sale of an investment property if they buy another similar property. It allows investors to realize gains on money that would otherwise have been paid over in tax and significantly improves long-term ROI. And at the time of death, the asset is “stepped up” to the fair-market value for heirs, meaning they won’t pay any capital gains tax if they sell the property.

Biden proposes that individuals defer taxes on gains of up to $500,000 and married couples up to $1 million. Additionally, deferred taxes on capital gains won’t be “forgiven” on death. So, beneficiaries will pay any deferred taxes in addition to taxes on additional gains when selling an inherited property.

However, any 1031 changes, if they pass, won’t be applied retroactively. So, if you have a property that you expect will realize gains over the proposed allowances, now might be a good time to sell. But remember, both sides of the transaction will need to be completed before December 31—the sale of your current property and the purchase of the replacement.

Reason for Investors to Hope

While it’s a good idea to plan, keep in mind that these changes are merely proposals at this stage—they must still get through Congress. (Although they are being dealt with via the reconciliation process, which means they can be passed with 50 votes and won’t be subject to filibusters.) However, it’s by no means a sure thing they’ll pass.

For starters, analysts at Penn-Wharton predict Biden’s capital gains changes will lower federal revenue by $33 billion instead of raising it. If the Congressional Budget Office comes to the same conclusion, it’s unlikely the changes will be made. Congress may also be sensitive to the small businesses and individuals who are already struggling amid the pandemic and won’t be able to handle retroactive taxes.

The whole reason for a retrospective tax is that, historically, capital gains tax increases prompt a rush of sales that result in a one-off spike in tax revenue at the old tax rates and lower collections for years afterward. But it’s not at all clear that retroactive taxes are, in fact, constitutional. The constitution bans retroactive criminal laws on the basis that citizens can’t reasonably be expected to comply with the law before it’s made and must be given a due warning to adjust their behavior. Thus, interested parties may challenge the constitutionality of Biden’s bill were it to pass.

Then, retroactive taxes deny taxpayers the ability to plan their affairs, thereby undermining the fundamental requirements for taxation to be transparent and stable. They also undermine the perceived fairness of the legal system and, therefore, the respect of the public.

Concerning the possible reduction or repeal of Section 1031 benefits, separate Ernst & Young and Ling-Petrova studies found the move would bring about several “unintended consequences” that could outweigh any short-term gains and act at cross purposes to tax goals. To summarize the findings, eliminating Section 1031 will:

  • Discourage investment
  • Shrink the economy
  • Lower federal revenue

While it’s unlikely the Democrats’ proposed Budget 2022 will pass without substantial amendments, the proposals do serve the purpose of reminding investors not to be complacent. Understanding the key drivers of your ROI is critical to avoid falling foul of changing circumstances that may upend your plans.

Can Asian Frontier Markets Offer Adventurous U.S. CRE Investors Upside?

American investors have invested more than $20 billion in Asian commercial real estate (CRE) since 2015. Their investments cover the full spectrum of CRE, from multifamily apartment complexes to office space, retail, and industrial properties.

Asia’s economic growth has been phenomenal in recent years, and there are no signs of it stopping anytime soon. Additionally, countries in the region actively seek to collaborate with Westerners and break down barriers to cross-border investment. Now might be an excellent time to consider geographically diversifying your CRE portfolio.

Asia Pacific’s Post-Pandemic Recovery Is Strong

Real Capital Analytics reports that second-quarter CRE sales in Asia-Pacific reached US $40.3 billion. It’s the third consecutive quarter of growth and represents an 11% increase on the same period last year. Comparing the full first half of 2021, sales volumes are up 8%. If that doesn’t sound particularly impressive, remember that transaction volumes didn’t plummet here in 2020 the way they did elsewhere.

For the first time since Q2 2019, Asian investors spent more in the region than their European and American counterparts, which indicates those on the ground may be witnessing the recovery firsthand. Office space is still taking a back seat, but sales in the industrial sector hit a quarterly record, and retail is recovering.

The noticeable exception to this recovery is Japan, where national sales dropped to US$5.5 billion, a 47% year-on-year decline. However, Tokyo remains the most-invested city in the region, despite its 32% decline year-over-year.

Asia Provides Access to Frontier Markets

Within the Asia Pacific region, the different countries are at very different stages of economic development, and each offers different CRE opportunities. However, broadly speaking, the region is undergoing a massive shift toward urbanization, which bodes well for CRE. In China, for example, more than 600 million people have migrated to cities from the countryside in the last two to three decades. However, it’s the frontier markets that present some of the most significant opportunities, albeit also the riskiest.

Frontier markets are different than emerging markets in that they are less stable and less accessible. They may be characterized by political unrest and currency fluctuations, will definitely be less liquid, and typically won’t have developed stock exchanges. This makes it challenging for investors to identify and manage assets, but the upside can be enormous.

  1. Siem Reap, Cambodia

Being close to Angkor Watt and several other UNESCO World Heritage Sites, Cambodia’s second-largest city, Siem Reap, is a significant tourist hub. The larger province is home to more than a million people and saw a 10% growth in its GDP in 2019, largely contributed to by the hospitality and tourism industry. As a result, experts predict the city to experience a boom within the next few years. However, Chinese investors already heavily dominate the market, so Americans wishing to participate should act swiftly.

  • Manila, Philippines

The Philippine capital Manila is one of the most urbanized and densely populated cities in the world. Its economy is predicted to show strong growth, and last year, Knight Frank put expected growth in office space at 19%. Colliers sees this as very dependent on the rollout of vaccines, but that is progressing well so far. Colliers also points out that money from OFWs (overseas Filipino workers) in the U.S., Singapore, and Saudi Arabia accounted for 50% of remittances in January and February of this year. This money will keep demand for residential units high.

  • Ho Chi Minh City, Vietnam

Ho Chi Minh City, or Saigon, has a population of more than 10 million, making it Vietnam’s largest city. Property here has only been open to foreign investment since 2015, but now it’s possible to purchase property on a tourist visa as long as the building is at least 70% Vietnamese-owned.

The Ho Chi Minh City Stock Exchange has the largest total market capitalization of any Vietnamese exchange, and the city is home to many corporate headquarters, both national and international. It accounts for 20% of the country’s GDP and almost 30% of its industrial output. Economic activities are diverse, ranging from seafood processing to finance. The city is developing into a tech hub not just for Vietnam, but the whole Southeast Asia region.

  • Jakarta, Indonesia

Located on the island of Java, Indonesia’s capital, Jakarta, is a true megacity. The population of the metro region exceeds 35 million, making it the second-most populous urban area in the world after Tokyo. In 2017, Jakarta property investment jumped a massive 85%, and it continues to show strong demand. The region attracts both tourists and investors with an economy based on manufacturing and financial services. Indonesia’s economy has a relatively stable growth of around 5% annually, which is predicted to be 6% for 2021. Tourism revenue is predominantly from India, Japan, and Australia, and it contributes to that growth, so the COVID travel situation may impact numbers in the short term. Regardless, experts predict an Indonesian real estate boom in the coming years.

The upshot here is that Asian economies are booming, and the region has become a hotspot for real estate. These are long-term investments that could reward adventurous but patient investors looking to diversify their CRE portfolios.

How Is Single-Family Rental Innovating to Meet Demand?

A new Urban Land Institute (ULI) report has identified an upward trend in demand for purpose-built single-family rentals (SFRs). It’s a trend that has been accelerated by the COVID-19 pandemic, which has prioritized tenants’ requirements for space and increased demand in suburban neighborhoods. Prospective tenants will be working from home more and thus need suitable workspaces separate from the distractions of family life. And more people are choosing to share their homes with pets that require both indoor and outdoor space.

The Requirements for SFR Housing Are Changing

Another contributing factor to the increased demand for SFRs is that millennials are finally starting families. They are looking at rental homes either due to affordability or because they choose not to buy for other reasons. For example, many wish to retain the amenities they have grown accustomed to in their urban apartments, such as gyms, swimming pools, entertainment areas, and even concierge services. Empty nesters looking to downsize are also asking for more than SFRs have historically offered. These requirements are changing the product mix of SFRs.

The current shortage of SFRs and lack of innovation in the SFR market is partly an investor response to the oversupply of single-family homes that arose during the subprime lending crisis. And the subsequent lack of capital provided by the financial markets for conventional single-family homes. But with the median price of houses in America rising faster than salaries, affordability is still a key driver of SFR housing. And job losses from the pandemic have added to it. ULI believes the SFR housing market will benefit from a segmentation strategy to address separately tenants who chose to rent and those who have no other option.

Purpose-Built SFR Housing Is a Relatively New Concept

More than 97 percent of existing SFR housing is owned by small-scale, “mom and pop” investors, many of whom start their portfolios by renting out their own first home when they upgrade. Most own fewer than three properties and don’t ever acquire the economies of scale to realize market efficiencies. They typically market their properties directly to prospective tenants via online platforms, and property management is of a novice level.

The initial institutionalization of SFRs kicked off when organizations took advantage of the fallout of the 2008 financial crisis to buy up single-family homes across the country. Subsequently, aggregators have partnered with builders to buy up bulk homes in newly constructed blocks. Their portfolios consist of uniformly branded and professionally managed properties.

But with the increase in demand for SFR, new players are entering the field, including real estate investment trusts and crowdfunding platforms in addition to traditional investors and developers. They are focused on built-for-rent (BFR) communities that frequently include on-site amenities, tenant support services, and property management. Whereas small-scale and institutional SFR investors mostly own detached homes and occasional attached homes (e.g., duplexes), BFR complexes display more variation in product offerings – detached and attached homes and “horizontal multifamily” homes. This new term refers to various typologies of small non-stacked dwellings generally erected on multifamily-zoned land.

What Do the Numbers Look Like?

Historically, SFR operating margins have been less efficient than multifamily apartments – with net operating income (NOI) around 50 percent. But since 2000, they have steadily improved to become comparable at NOIs of almost 70 percent, which are also equivalent to office space and self-storage real estate categories. SFRs tend to have higher expenses than multifamily complexes, specifically property taxes, insurance, and homeowners’ association levies, although those without comparable common areas can have lower maintenance costs. And their lower tenant turnover rates can help mitigate higher running costs. For BFR, capital requirements are often driven by land values, which are in turn driven by density. Detached products typically compete with single-family-for-sale developers for suburban fringe locations. As a result, capital requirements are in the region of 50 percent more than traditional multifamily requirements.

ULI Policy Recommendations to Watch For

As mentioned earlier, ULI supports the growth of the SFR industry and the burgeoning of new products. With one or two provisos, ULI sees SFR as one possible solution to the affordability crisis in American housing. Accordingly, its report makes specific policy recommendations to facilitate the growth of the industry.

Investors wishing to take advantage of the SFR trend should look out for the adoption of the following by local governments:

– Policies to support growth and diversity in established areas to reduce pressure on greenfield development.

– Policies prioritizing development locations close to existing nodes and facilities that will promote mixing of uses and reduce demand on transport infrastructure.

– Policies permitting neighborhood-serving retail to be included in residential developments.

– Supportive transportation infrastructure for developments that integrate into the existing road or transit infrastructure.

Student Housing Trends – What Does COVID-19 Mean for Gen Z Student Life?

Student housing withstood the last financial crisis. But the pandemic has brought changes to the sector, from reduced density to increased costs.

Student housing has been a clear choice for many investors seeking portfolio resilience. In the last financial crash from 2007-2009, the sector thrived. Student housing is traditionally high-density, with many purpose-built student housing communities having four to six beds per unit. Landlords as much as double rentals per square foot if they rent by the room. Students sign one-year leases so rents can be raised annually, depending on local regulations. Because leases are often backed by parents as co-signers, there are fewer defaulters.

Student housing has historically played a significant role in the real estate markets of university towns and neighborhoods. Universities typically only provide on-campus housing for a fifth of their students. That means as much as 80% of the student body needs to be accommodated off-campus. In weak markets, student housing can save single-family homes that might otherwise be abandoned. In tight markets where the housing supply is low, student housing can displace lower-income households.

However, a combination of the enduring outcomes of the pandemic and the traits of a Gen Z student body may affect returns for investors in the student housing sector. What do investors need to know?

A Shift to Single Rooms

Privacy has become a highly valued commodity since the pandemic. As a result, micro-units, studio, single- and double-bedroom apartments are becoming preferred student accommodation. They replace the conventional four- to six-person apartments that have, to date, been popular in the US student housing market.

Housing shortages may make it challenging for some institutions to abandon their current shared room facilities. As a start, many have reduced the number of people per room and have gotten rid of shared bathrooms.

Collaborative Spaces Need to be Rethought

Student housing has come a long way since the original dorm concept it started as. To woo students, modern facilities make an effort to be lively, sustainable, and engaging. They offer collaborative spaces to promote peer connections and academic success, incorporating technology-enabled lounge areas, sports and recreation facilities, kitchens, and eateries.

Unfortunately, shared amenities like these may need to be rethought post-COVID. New designs will most likely see the incorporation of additional entrances and noncontiguous corridors to reduce congestion. In addition, communal spaces will need to be reconfigured to support social distancing and cater to sanitation precautions.

While it’s still unclear exactly how all concerns will be met, we know that solutions are needed. A recent survey that looked at the challenges students faced in 2020 found that almost half of the students surveyed battled with stress, anxiety, and loneliness. At the same time, just over 20% had trouble keeping up academically. When student housing isn’t conducive to residents’ healthy living and academic endeavors, it is less desirable.

Transport Looks Different

Since the outbreak of the pandemic, many people have been wary of using public transportation for fear of infection. Previously this might have meant an increase in the number of private cars on campus. However, Gen Z’s concern for the environment, their relative lack of wealth, the emergence of rideshare services like Uber, and other alternative transportation options seem to counter this. As a result, the number of students bringing cars to campus is declining.

Walking and cycling (including e-bikes) have also increased in popularity because of their potential to improve health and boost the immune system. The air droplets that can spread COVID-19 are also dispersed more rapidly in the outdoors.

The combined outcome of these trends is that student housing landlords may not be required to provide parking for their young residents, depending on local laws. In urban locations, this can free up expensive real estate for redevelopment to meet the new post-COVID requirements.

A Greater Regulatory Burden

On campuses, student housing buildings generally have student paraprofessionals who play the role of resident assistants or RAs. RAs give parents peace of mind by serving as a responsible older figure who is available to support students. They also perform various administrative, institutional, and community-related jobs. In single-family homes run as student housing, the landlord can sometimes carry out elements of this “semi-parental” role.

Post-COVID, RAs’ (or landlords’) duties have increased to include enforcing COVID-related rules and regulations, like wearing masks and social distancing.

Investing in student housing hasn’t been without challenges in the past—students will be students, after all. They may be less careful with the property and more likely to damage it. Many landlords have to deal with unhappy neighbors kept awake by late night parties. In addition, in many municipalities across the country, there are zoning restrictions on student housing to regulate rentals and maintain the character of family neighborhoods.

Now, investors must also factor in the impact of COVID on rental returns. They may be impacted not only by reduced density, but also from potentially declining demand for the on-campus experience. With online classes more available than before, students now have more reasons to stay at home with their families and save on rent.

Take Control of Your Multifamily Properties to Increase Your ROI in 2021

Multifamily apartments require day-to-day management. If you have the time and skills to manage your property yourself instead of hiring a professional property management company, you can realize an additional return on your investment. The amount and complexity of the work involved shouldn’t be underestimated, however. At times, you will need to be an accountant, project manager, and maybe even a psychologist.   

This article addresses three key areas to pay attention to, in order to make your life as a property manager as easy as possible.

  1. Tenant Selection

Careful selection of tenants is one of the cornerstones of good property management—choose the wrong ones, and you could spend all day trying to collect rent or watching while your property degrades in value.

  • Tenants should ideally earn between two and a half to three times the rent they will be paying. Request proof in the form of pay slips or bank statements—the most recent three months of either should be sufficient.
  • Always perform background and credit checks. Of course, you will need to ask permission from the prospective tenant, but you are entitled to have a “no checks, no keys” policy.

Previous evictions and a poor credit record are generally warning signs of trouble to come, but in the end, it’s your call who you lease to. Just remember giving someone the benefit of the doubt might mean your own family suffers in the long run.

  • Property Maintenance

As a landlord, it’s your job to ensure your tenants live in habitable conditions and that you comply with prevailing laws. Structural features, roofs, and appliances need to be repaired when damaged, and any toxins and pests must be eradicated. When a rental property is adequately maintained, it preserves its value and helps to keep tenant turnover and vacancies to a minimum.

In addition to being available to your tenants when they report a problem, you should perform the following routine inspections on a proactive basis:

  • Move-in Inspection

This is a critical inspection often performed with the tenant to document the property’s condition before tenancy.

  • Move-out Inspection

When a tenant moves out, an inspection must be performed to ensure they have left the property similar to when they took occupation, excluding normal wear and tear. This inspection must be done before you return their deposit and after their possessions have been removed, so that furniture or other goods aren’t positioned to hide damage.

  • Rental Visits

During a tenant’s occupation, scheduling bi-yearly walkthroughs can help keep maintenance costs down by allowing you to note issues before they become major problems. They are also an excellent way to keep the communication channels with tenants active. In addition, knowing the landlord will visit can deter tenants from damaging their units or breaking occupancy rules. Tenants should be notified in writing well in advance before visits, however.

  • Seasonal Inspections

The change of seasons is ideal for performing routine appliance checks—for example, ensuring that the air conditioning unit, heaters, and water heaters are working. It’s also important to prepare the exterior of the property for the coming season. Make sure the roof is repaired and the gutters are clear of leaves before winter snow and rain, for example.

  • Drive-by Inspections

These are cursory but critical inspections of the exterior of the property that allow you to spot any obvious issues quickly.

It’s a good idea to make use of vacancies to perform necessary maintenance. This will prevent inconveniencing tenants and maintain rental income. If you have major repairs that require tenants to relocate temporarily, you may be responsible for accommodating them elsewhere. Speak to your insurance broker to make sure you have adequate coverage in such an instance.

Keep a separate maintenance fund and maintain a list of reliable contractors’ contact details for easy reference. Where warranties accompany appliances or repair work, make sure the details are filed to be easily accessible when needed.

  • Property Management Software

Technology has made it a lot easier for landlords to manage their properties on their own. Property management software platforms can assist with nearly everything a property manager needs to do. When shopping around for such software, look for the following features:

  • Lease management functionality will keep track of when your leases are due for renewal.
  • Property management accounting will allow you to track expenses related to your property and produce the reporting you will need for your tax returns and when applying for financing.
  • Rent collection software will assist you in billing tenants and keeping track of payments and outstanding monies.
  • Marketing and lead management will help you advertise your property and follow up with prospective tenants.
  • Tenant communication functionality will make it easy for you to communicate professionally with your tenants, either individually or in groups. Look for software that includes an online portal for tenants to register problems and queries.
  • Amenity and facility management software can help you keep manage facilities like laundry rooms and keep on top of maintenance and repairs.

Most property management software is hosted in the cloud these days, meaning they are available on a subscription basis and you can access them from your PC, smartphone, or tablet. If you have fewer than 50 rental units, one of these free multifamily property management platforms may suit your purposes.

Getting to grips with these three areas of managing multifamily apartments will set you up for success. However, many landlords who start off trying to manage their properties find it overwhelming. It can be especially difficult if you are simultaneously working a conventional job, or if you have several tenants at multiple properties. If that turns out to be the situation in your case, it’s often wiser to employ a professional property manager.

Latest Report on Medical Office Trends Sends a Message of Hope

doctor

In April, commercial real estate group CBRE released its report on U.S. Medical Office Trends for 2021. It offers news of a swifter recovery than market averages for those invested in the sector.

Health Care Employment Growth Will Resume

Health care jobs weren’t shielded during the pandemic, but losses in the sector were significantly less than in other areas—6.4 percent versus the 11.2 percent average. And it’s recovering quicker than average, too.

By Q4 2020, it was down just 1.5 percent year-over-year versus the 6 percent decline in total U.S. employment. Historically, health job growth has exceeded averages, and CBRE expects this trend to continue for the next five years.

Backlog of Medical Procedures Will Support a Sector Rebound

An estimated 41 percent of patients delayed medical care due to COVID-19 concerns. With the virus potentially coming under control in 2021, the backlog of elective procedures and routine visits will support the recovery of the sector.

Telehealth Won’t Significantly Reduce Demand for Medical Office Space

Telehealth will continue to cater to some of this need, but it’s anticipated to be negligible. Almost a third of providers never made the switch to telecare even at the height of the pandemic. And most of the rest reverted to minimal use after the virus’s initial surge—health care is just better handled in-person.

Telehealth may even lead to more in-person consultations if it facilitates greater patient interaction with rural patients, for example. And even if in-person consultations do decline, office layout will need to change to comply with social distancing requirements. It’s unlikely square footage will reduce.

Remote Work May Affect Administration Services

Administrative workers may be more suited to remote work than their colleagues who deal directly with patients. CBRE estimates that continued work-from-home arrangements could impact the health care sector’s demand for conventional office space by as much as 15 percent. But it also suggests it would be premature to take a call on this before there is a widespread return to the office.

Hospital Campuses Will Diversify

As technological advantages mean more procedures can happen off-campus and self-driving cars and ridesharing services call on-site parking into question, hospitals will use their space differently. In high-cost metros, this could entail affordable housing for staff burdened with high commuting costs due to rising home prices.

Health Care Will Decentralize

Provision of care will follow patients’ moves to the suburbs. Even before the coronavirus, remote work possibilities facilitated a migration away from urban centers. The pandemic increased this flight from the cities, and so will the millennials when they become homeowners.

Patients are going to seek health care close to their new homes. And new legislation and regulations supporting value-based care will also likely lead to a focus on preventive care in lower-cost facilities.

The Shift to the Sun Belt and Lower Cost Areas Will Accelerate

Patients won’t be the only ones moving to the suburbs. High-cost markets like New York and San Francisco have lost popularity during the pandemic. Many companies have forsaken their urban head offices for more affordable locations in Texas and Florida or given them up for a more distributed structure. Their workers will move with them and require health care where they go.

Investor Demand for Medical Office Space Remains Strong and Strengthening

In 2020, the drop in medical office property investment volume was 12.7 percent—the lowest of any major property type. This resilience follows the pattern established during the Global Financial Crisis of 2008 when sales of medical office space returned to their 2006 levels before any other sector. And it holds on price too, not merely volume of sales.

Combined with the uncertainty of conventional office space at this time, medical office space’s resilience has led to net acquisitions of medical office buildings by institutional investors reaching a record in 2020. It has been one of the most sought-after property types in 2021, and PwC and ULI listed it among their “Expected Best Bets in 2021.”

Providers Will Consolidate

Hospitals are under financial stress as a result of the pandemic. Close to the end of last year, operating margins were down by 5.1 percentage points year-over-year (excluding CARES funding). They will need to reevaluate their real estate to make cash flows work, even for those newly consolidated. Divestment will be an option, as well buybacks of currently leased space, depending on their needs.

In Summary

While the medical office sector wasn’t shielded from impact by the pandemic, it escaped the worst of it. Following the trend established in the Global Financial Crisis, the sector remained resilient and is recovering fast—in large part because of opportunities presented by the pandemic, such as procedure backlogs.

Telehealth and remote work are likely to have negligible effects on demand for medical office space. But campuses will diversify, and care will follow patients’ migration to the suburbs and Sun Belt areas.

Is the Pandemic a Once-in-a-Generation Opportunity for Family Offices?

home office

It’s estimated that there are 5,300 family offices globally, accounting for about $9 trillion in assets. According to the 2019 USB/Campden Wealth Global Family Office Report, about 17 percent of family office wealth is tied up in direct real estate investment and management, while a third of respondents planned to increase their investments in direct real estate.

The ultra-rich have always invested heavily in property. Two centuries ago, international banker Nathan Meyer Rothschild advised investing one-third of assets in real estate. In times of low returns in most asset classes, real estate continues to generate comparably attractive returns. And now, direct investment is trending (versus investing in shares in a fund or a publicly or privately held company).

What’s driving this move to direct investment? And will family offices also be heeding Rothschild’s other advice to “buy property when there’s blood on the streets”?

Family Offices Focus on Preservation for Future Generations

Family offices are typically concerned with preserving long-term wealth for future generations. Many of these offices are created with the proceeds of entrepreneurial businesses, as founders often wish to separate and protect family assets from their business activities, which may be subject to disruption. Family offices also facilitate generational changes and allow for professional, dedicated management of accumulated wealth.

But professional management doesn’t necessarily mean outsourced management. Family offices are becoming more sophisticated and bringing professional management in-house. Plus, they offer reduced fees to clients, given that most have paid the industry-standard 2 percent management and 20 percent performance fees for decades.

Reduced costs aren’t the only incentive for direct investment, however. Family offices’ investment horizons extend beyond those of investment companies, which tend to invest in funds on a five- to six-year timeframe. Research by Bain and Co. found that selling a direct investment vehicle after 24 years yields a return of almost two times that of a short-duration fund. This is due to reduced trading costs, more tax-efficient exit planning, and improved capital deployment.

The Coronavirus Pandemic Offers a Learning Opportunity

Younger generations are playing a more active role than ever in family offices, particularly in philanthropy. Here, they direct family funds to sustainable or impact investment, rather than giving money away (often their parents’ and grandparents’ approach).

Many family offices were slow to invest in real estate during the recession following the 2008 financial crisis and have lived to regret it. The coronavirus pandemic is once again offering the “blood on the streets” scenario that usually comes once a century. Many offices are building up cash to take advantage of distressed sales and diversify their real estate portfolios. Now is an ideal time to involve younger family members in real estate investment strategy decisions.

What Do Investors Need to Consider?

The financial repercussions of the pandemic are only just beginning to show, and the pandemic could potentially be a precursor to an even greater crisis. At this point, what should real estate investment strategies entail?

All things considered, real estate has performed relatively well overall during the pandemic. But individual categories have had vastly different results; for example, hospitality and office space have been hard hit while industrial has performed well. Some experts suggest following a conservative approach, paying attention to how the pandemic, disruption technology, world politics, and climate change have affected fundamentals like:

  • Job opportunities
  • Remote work opportunities
  • Migration patterns
  • Cost of living
  • Quality of life

Investors should introduce and consider a range of “what if” scenarios, looking at reduced rentals and higher vacancies to ensure they’re not overcommitting in the short term.

International Real Estate Investments

Direct real estate investment requires specialized, experienced human resources and access to a deal pipeline. Some family offices enter into real estate “club deals” to combine resources, often creating partnerships or joint ventures for individual projects. This can be a sensible way to lower risk, provided family values and risk profiles match. But even club deals can still mean investments are geographically concentrated in traditional, known locations with limited upside.

Family offices seeking to diversify their real estate portfolios by location should consider local partners. Overseas real estate investments may present above-average returns, but a local expert will provide a context for the investment. They can also advise on location-specific tax and legal requirements. It makes sense for family offices to invest in real estate. Although indirect investment remains an option for passive investors, direct investment offers greater control and flexibility. Involving younger family members early on, collaborating with other family offices, and partnering with local experts can help ensure family fortunes are preserved for generations to come.

Safe Shopping – What Does It Mean for Retail Landlords?

As summer beckons and COVID vaccines roll out, hopes of returning to our pre-pandemic lifestyles are budding. And after being cooped up for a year, the idea of physically shopping for a new summer wardrobe may seem like a well-deserved indulgence. While many will still need to watch their pennies, in-person retail recovery is in the cards.

But the change is not going to happen overnight, and shopping is unlikely to look the same as it did in 2019. The pandemic accelerated the switch to online shopping, and 79 percent of Americans say they will continue to shop online. Meanwhile, those willing to return to the malls will have a heightened awareness of personal space and health and safety measures.

So how will returning shoppers react to their favorite malls being filled with empty store-fronts? Can cash-strapped landlords and tenants rise to the occasion one last time to welcome shoppers back?

Flexibility Is Core to Future Retail Design

Retail, design, and construction experts agree that flexibility must be built into any retail space changes. Shoppers will be looking for new experiences, and nobody knows what those are yet. And the coronavirus (or something similar) could rear its head again; we can’t be sure the current vaccines will serve as protection against future variants. If nothing else, shoppers will need to feel psychologically safe for a while to come.

Places of Purpose

The National Retail Federation (NRF) predicts that retailers may need to adapt themselves to become “places of purpose.” Contrary to pre-pandemic efforts that encourage shoppers to come and browse, shoppers may demand a quick in and quick out.

The year 2020 initiated a phenomenon being tagged Online Merging with Offline (OMO), which sees shoppers blending online activity with in-person acquisition. They may look at options online, check for stock of their size, go in-store to fit items, and take them home that day. As opposed to the multiple online transactions spread over days required to get the “right fit.”

A More Personal Experience

The other thing people miss from the online shopping experience is engaging with helpful and knowledgeable store assistants. The NRF suggests retailers encourage shopping appointments. Shoppers could time with an assistant who attends to their wishes and presents options to them in the safety of a private, reserved space.

Even without appointment scheduling, it makes sense to free up floor space (for social distancing) by putting just a single item on display. Shoppers could then request their choice of color and size. Clothing can be appropriately wrapped and sanitized after each fitting. 

Store layout designers will need to rethink the ratios of storage to display area and allow for private viewing and fitting areas.

Smaller Shops May Receive Preference

Some shoppers may prefer to exchange variety for safety (or perceived safety). Small stores that allow shoppers to quickly assess the controls in place and speedily make their choices from a limited selection have received preference. It could be the final nail in the coffin for department stores that were already on the decline pre-pandemic.

The trend could suit landlords, too, as they can spread their risk across multiple niche tenants rather than a few large anchor tenants. It also opens opportunities for start-up local businesses that might not usually bid on premier class mall space. And gives small online businesses a chance to put their goods in front of passersby.

One-Way Aisles, Transition Spaces, and Outdoor Space

Many stores are introducing one-way aisles as a way to control social distancing. At the same time, store entrances are becoming transition spaces that provide shoppers the psychological safety of conspicuous health and safety measures. As such, they offer opportunities for branding and the creation of unique experiences—for example, consumers may watch a video while their cart is being sanitized.

In climates that allow for it, shopping is extending into outdoor spaces previously reserved for eateries. Making such areas pet and child-friendly could see families safely viewing malls as destinations once again.

Curbside Pickups Remain

With most consumers expressing contentment with online shopping, the hastily erected curbside pick-up areas constructed last year can be upgraded and extended. Again, look to underutilized parking that provides cover and branding opportunities.

Turnover Rent Can Increase Collaboration between Landlords and Tenants

Finally, turnover rents, usually calculated as an agreed percentage of the tenant’s turnover and other receivables, are gaining popularity in the retail space. The concept isn’t new, but now more than ever, landlords need to be flexible. Insisting on fixed rents in uncertain times may put off prospective tenants. Or could force existing ones to shut up shop if retail recovery doesn’t go according to plan.

Turnover rent arrangements create a symbiotic relationship between landlords and tenants. When times are good, everyone does well, and when times are bad, there’s an incentive to work together on improvements.