7 Trends Investors Should Look out for in Multifamily Housing for 2021

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Multifamily investors are caught trying to find a middle ground between historical data and the chaos of the coronavirus pandemic. It is hard to know which trends will continue in a post-COVID world and which will be permanent.

The multifamily sector has historically performed well and held its own in times of recession—but are there features of the COVID-led recession that could change this?  The following seven factors may help predict the trajectory of multifamily housing for the immediate future.

Stimulus Packages Offering Protection

Last year, multifamily landlords were hit by defaulting tenants and anti-eviction legislation as the pandemic caused significant job losses. While it’s still unclear exactly how much of the new administration’s proposed stimulus packages will be passed, they look set to offer a degree of job protection and likely extend unemployment benefits. Additional measures such as funding for local governments to rebuild their economies without imposing additional taxes will hopefully prevent further rent defaulting.

Vaccine Rollouts Stimulating the Economy

The rollout of vaccines will speed up economic recovery. New York recently launched the Excelsior Pass, a digital health certificate verifying negative coronavirus test results and proof of vaccinations. New Yorkers are using the voluntary system to attend events at public venues such as Yankee Stadium and Madison Square Garden. Other states may not follow the certification path, but businesses will receive increased support as public confidence grows with their protection against infection.

Millennials Continuing to Rent

A resistance to homeownership has long characterized millennials. While some experts predict an end to this trend, saying ownership has merely been delayed, there are no signs of it changing. If millennials were considering buying their own homes, the uncertainty introduced by the pandemic could well have deterred them for the immediate future.

The Trends of Working from Home and the Gig Economy Continuing

Working from home was already a trend pre-COVID, but the pandemic has boosted the demand for amenity-rich living spaces. Most renters say amenities significantly impact their decision when looking for an apartment. Sought-after amenities include convenience factors such as high-speed Internet, in-complex stores and restaurants, and concierge services. Renters also look for health and entertainment features such as gyms, contactless foyers, and entertainment areas.

Meanwhile, 56 percent of current renters are looking for new units, primarily larger ones, as homes become combined work, live, and play areas for the whole family.

Suburban Locations Remaining Popular

Before the pandemic, the multifamily housing market was trending toward the suburbs. Sunbelt cities like Dallas, Atlanta, and Miami took preference over high-density megacities like New York City. Millennials, in particular, favor these modern, sprawling cities that have large “inner-ring” suburbs conveniently close to downtown activities but with lower rent. Remote work increased demand for the suburbs, and the trend is expected to continue, putting pressure on inner-city rents.

Increasing Diversity

The pandemic has highlighted the instability that comes with non-diverse living conditions that don’t consider how the American population has changed over the last decade. Statistics show significant growth in middle-aged and senior renters, people living alone, shared households, and high-income earners. There is also increasing pressure on housing communities to make themselves accessible across race divides and the LGBTQ+ community. For landlords, this means staffing should reflect the broader community and that there should be an acknowledgment of different cultural habits and celebrations.

Tenant-Friendly Legislation Balancing Supply Shortage

According to data from Freddie Mac, it is estimated that the US is facing a shortage of 4 million homes. With developments halted due to the pandemic, this situation will not likely change in the short term. Already in low supply in some areas, the shortage of single-family starter homes pushes demand for multifamily rentals even higher. In other circumstances, this would mean landlords could ask for higher rents.

However, as long as pandemic uncertainty is a feature of the economy, landlords can expect tenant-friendly legislation such as rent moratoriums and anti-eviction legislation to remain features of the multifamily housing landscape.

Closing Thoughts

Usually, investors look to multifamily housing for predictable cash flows. If that’s an immediate requirement, continued uncertainty means this might not be the best time to invest in multifamily units. For investors with longer horizons, higher-risk profiles, and deeper pockets, now could well be the right time to pick up some multifamily units. The demand is not going away. For developers, distressed office space and hospitality sales could offer the potential for conversion to multifamily housing, with careful consideration for amenities and location.

Will Self-Driving Cars and COVID Revive Street-Level Lots?

self driving car

Technology and globalization are impacting urban design in unanticipated ways. How we will travel in the future has changed—not just at a macro, international level, but locally, between home and office. For instance, self-driving ride-sharing vehicles could make parking lots defunct, while electric cars could do the same for gas stations.

At the same time, the COVID-19 pandemic has opened our eyes to the need for safe community spaces. It has also changed the way we work, thanks to empowering technology. The workplaces of the future will need to rise to new challenges.

For commercial real estate (CRE) investors, these are changes to consider sooner rather than later.

What Do Self-Driving Vehicles Mean for City Real Estate?

When Google started its self-driving project in 2009, it was expected to significantly change how we move from point A to point B. Robotic vehicles were meant to be a safer journey where all occupants are free to get on with other things: napping, working, or simply watching the scenery pass by.

But what also quickly became apparent was that technology-driven changes in transport, such as self-driving vehicles, share-riding, and drone deliveries, were set to impact urban landscapes. Consider the following:

  • Curbside parking

With more rides taken in shared vehicles that don’t need to park, much of the space reserved for curbside parking is potentially freed up. Even where people retain a personal vehicle, it can be sent to park itself remotely and called when needed.

  • Street-level lots

For decades, office and retail developers have built their plans around supplying adequate parking for their clients. Now vast parking lots at street level could become superfluous.

  • Pick-up and drop-off zones

What we will need more of are spacious pick-up and drop-off zones. For many buildings in cities like Los Angeles, this will mean designating larger zones in front of lobbies for pick-ups and drop-offs rather than building on top of underground parking garages.

  • Gas stations

Not all self-driving cars are electric, but self-driving taxis will likely “refuel” at depots outside of premium business hubs either way. And with an increasing shift to electric cars in privately owned vehicles, prime urban spots currently occupied by gas stations may be up for redevelopment.

The Pandemic Has Us Thinking Differently about Buildings

We have not yet seen the full effects of self-driving vehicles, but the COVID-19 pandemic is making us rethink urban developments. While some initially predicted the end of traditional office space, studies show that workplaces are crucial for companies. Offices provide things that remote work doesn’t and never will. They facilitate the exchange of ideas between colleagues and help develop the culture many organizations rely on for staff retention.

A more likely outcome of the coronavirus pandemic is increasingly flexible schedules mixing in-person and online remote work. The work that employees come into the office for in the future will have different workspace requirements. Spaces will need to provide what workers miss at home: access to restaurants, retailers, gyms, and services like laundries. At the same time, they want these amenities in areas that aren’t overcrowded and have access to fresh air. These are best provided by spaces on the ground floor, open to streets and squares—the very same spaces that changes in transport make available.

What’s the Value of Street Level Activity?

For most metropolises, the myriad commercial activities that fill the streets are what give them character. Think of Paris without the Champs-Élysées or Beverley Hills without Rodeo Drive. Unfortunately, high-street retail chains and local eateries were the first to suffer in the pandemic. So now, large strips of prime urban real estate still lie deserted.

The World Economic Forum (WEF) has identified street-level lots as having the potential to invigorate post-COVID cities. It sees local authorities as having a vital role to play in relaxing and updating the regulatory frameworks that govern the use of such assets. Further, the WEF suggests using post-pandemic recovery plans to grant public-private partnerships extra agility in revitalizing the streets.

What Should CRE Investors Be Doing?

Given all of the above, investors looking at extending their urban portfolios would do well to consider the following:

  • Plan new construction around flexibility, such as spaces that can be used for multiple purposes or quickly converted. This includes parking garages that many developers are now making standard heights, intending to convert them to office space if they become defunct.
  • Be on the lookout for stimulus packages aimed at revitalizing urban streets.
  • Think innovatively about how space may be used differently in the future, especially when assessing distressed assets.

Featured Image courtesy zombieite | Flickr

How Achievable Is “Livable, Sustainable, Resilient, and Affordable”?

The World Economic Forum (WEF) recently released its Framework for the Future of Real Estate. In the wake of the coronavirus, the report emphasizes the need for cities and buildings to reinvent themselves, to become more “livable, sustainable, resilient and affordable.”

The year 2020 brought the world what the WEF has called a “convergence of multiple crises” –environmental, political, social, and economic. Amid these crises, real estate failed in its primary tasks: to provide adequate refuge and shelter; to facilitate commerce; and to cater to inclusion. The WEF believes the world has changed, and so must real estate.

The Four Pillars of the WEF Framework

Here is a look at the four pillars the WEF identified as key to its vision for cities and buildings that are fit for purpose in the future:

1. Livability

People in cities typically spend as much as 90 percent of their day inside buildings. Under stay-at-home orders, that number rose to 100 percent, widening livability cracks into gaping chasms. Office spaces, condensed over time to save costs, became unsafe, as did gyms, theaters, and schools.

Some people experienced total isolation. Living on their own, in buildings designed for absolute privacy, they could go days without even seeing another human being. At the other end of the spectrum, multigenerational families sharing homes struggled to keep at-risk members safe. Adults trying to work experienced constant distraction by children who had neither the space nor the attention they needed.

The real estate of the future should be livable, providing high-quality, human-centered spaces that enhance well-being as well as productivity.

2. Sustainability

Buildings have been instrumental in the creation of the current climate crisis. They consume half the world’s energy and 40 percent of raw materials and emit 40 percent of all greenhouse gas. Turning this situation around will require the optimization of buildings for carbon output at every stage of the life cycle, with renovation and repurposing replacing demolition.

Sustainability entails decarbonized, efficient spaces that take a life-cycle approach to deliver environmental, economic, and social benefits.

3. Resilience

Whole neighborhoods can be destroyed by freak weather conditions, as we saw with Hurricane Katrina. Malls lie deserted, abandoned due to financial crises or health emergencies like the coronavirus, unable to adapt.

The reality is our real estate is not resilient in the face of unforeseen natural or manmade disasters. And the uniformity of construction based on economics is making it difficult to distinguish one city from another.

Resilience translates to preparedness, such that cities and buildings are designed to mitigate risks while preserving cultural identity.

4. Affordability

America has a dire shortage of affordable housing. In many places, wages have stayed static while rents have increased. The arts are being priced out of city centers, and nonprofits are spending donor funds on escalating rentals. Where housing is accessible, infrastructure such as transport and essential services is often lacking. And crime makes residents fear for their safety.

Affordability encompasses inclusive, accessible spaces that minimize the effects of inequality.

The Five Enablers of the WEF Framework

How achievable are these four pillars? The WEF report identifies five enablers that government, business, and citizens need to focus on:

1. Digitalization and Innovation

Design and construction innovations such as digital twin technology can improve construction time, quality, adaptability, and affordability. Smart buildings learn and adapt to the needs of occupants and the environment.

2. Robust Regulatory Frameworks

Governments can drive change by endorsing sensible, flexible zoning and development regulations. Mandatory standards around carbon emissions, unified building codes, and progressive subsidies can be aligned with, and incentivize, corporate responsibility targets.

3. Talent and Knowledge

Ensuring fit-for-purpose real estate will require a competent and knowledgeable talent pool. Workers will need to be upskilled, and the key pillars should have representation at the C-suite level with the creation of positions such as chief technology officer, chief data officer, chief sustainability officer, or chief resilience officer. Real estate businesses should also build resilience by diversifying their workforces for age, gender, race, etc.

4. Proof of Value

Innovation must be applied at the business planning and design level to ensure all stakeholders benefit from the industry’s change. Metrics should be consistently applied and transparent, with access to high-quality data available to all stakeholders.

5. Stakeholder Engagement

Genuine and lasting transformation will require the real estate community to cooperate–this includes policy makers, lenders, investors, tenants, contractors, and so on. Academia and civil society must also be consulted for insight into technological innovation and citizen needs, respectively.

How Are CRE Investors Affected?

For commercial real estate investors (CREs), the WEF’s framework indicates more significant regulatory pressure in the future. Furthermore, tenants will experience increasing investor pressure, which will be passed on to their landlords. If the CRE industry wants to resume pre-COVID growth trajectories, investors will need to evolve.

Real Estate Investment Trusts – Are They Safe for the Beginner Investor?

real estate

Commercial real estate (CRE) can be a challenging field to break into as a new investor. Commercial properties often require more substantial financing and a greater degree of involvement from landlords than residential property. One alternative is to invest in CRE real estate investment trusts (REITs). 

REITs have an excellent track record of delivering solid returns. By their nature, they should also reduce risk through diversification. Before diving in, however, beginner investors should understand the different types of REITs, and they should be sure the underlying investments and structure of the trust will suit their needs.

What Are REITs?

All REITs invest in commercial properties, either directly or in the mortgages on the properties. Where they invest directly, they might also provide management services to their investment properties. Many REITs restrict themselves to a particular sector of the CRE market, such as residential (multi-family apartments), office space, retail, or data centers.

How Have REITs Performed Historically?

REITs are legally obligated to pay out 90 percent of their taxable income to shareholders. This makes them a high dividend-yielding option that will suit investors looking for immediate and regular cash flow. Over the long term, shareholders should also realize capital gains due to commercial real estate’s steady historical performance.

The FTSE NAREIT Equity REIT Index, which is what most investors use to follow the real estate market, has beaten the S&P 500 in 15 of the past 25 years. However, individual REIT performance can differ significantly depending on their sector.

This has been particularly evident recently, as sectors such as retail and office space have taken significant hits due to the COVID-19 pandemic. While the S&P 500 has delivered total returns of 13 percent since the beginning of the year, the S&P 1500 Retail REITs Index remains down more than 30 percent.

Tax Considerations of REIT Investments

REITs yield higher-than-average dividends compared to other stocks. However, most REIT dividends don’t meet the IRS definition of “qualified dividends.” Investors can end up paying more tax than on other dividends. Fortunately, REITs can qualify for the 20 percent pass-through deduction.

What Should Investors Look for in REITs?

REITs are sometimes presented as a “simple” option for beginner investors. This might hold when investing in REITs via exchange-traded (ETFs) or mutual funds. But if anything, investing directly in REIT companies is a more complex undertaking than directly investing in property. This is because investors must take a call both on the underlying CRE and the REIT company itself. Before investing, investors should be sure to consider the following:

  • Industry – This is the most prominent consideration of investing in REITs. By buying into a retail REIT, you’re investing in retail real estate, just as buying into office space REITs means investing in office space. Even if you’re considering a REIT with a mixed portfolio, understanding the spread of funds between sectors is essential to predicting potential returns.
  • Locations – Like all real estate, CRE can be very location-sensitive. This is especially true for residential CRE. Markets for this sector are generally better in urban areas where high costs of single homes drive up demand for rental accommodations. This, however, is provided the city is thriving. If jobs are declining and people are moving away, the residential CRE will suffer.
  • Government incentives and initiatives – Sectors that stand to benefit from federal, state, and local incentives like tax abatements may perform comparatively well. Many centers encourage “knowledge industries” that aren’t reliant on natural resources. President Biden’s new infrastructure policy offers revitalization in specific sectors, as well.
  • Underlying property and tenants – Regardless of the sector or location, look for REITs with quality properties and solid anchor tenants.
  • Interest rates – REITs that invest in CRE mortgages are sensitive to increases in interest rates, decreasing book values, and driving down stock prices. But if interest rates increase, future financing will be more expensive, reducing the value of a portfolio of loans.
  • Historical performance – Has the REIT performed well historically compared to other REITs with similar portfolios?
  • Balance sheet position – What is the REIT’s cash and debt position? Does it have the cash to take advantage of distressed sales post-COVID? Can it cover its short-term debt?
  • Management – Is the leadership team stable? Do the individuals have good reputations for solid decision-making and high integrity?

In conclusion, REITs can be an excellent way to diversify a portfolio of stocks and bonds. They present a low entry point to CRE investing, and investing in REITs via ETFs can simplify decision-making. For investors looking for passive income, REITs can provide high dividend yields, but some of this benefit can be eroded if the dividends are taxed as income.

Data Center-Ready Real Estate – The Gem You Didn’t Know You Owned?

computer server room

It should come as no surprise that data center real estate fared well throughout the pandemic. COVID-19 drove a sharp increase in cloud computing and sent global data usage skyrocketing.

But as with anything real estate-related, the numbers tell the true story. JLL reports that US data center sector deals reached US $31 billion in 2020, compared to US $16 billion in 2019. In addition, publicly traded data center REITs rose 19.2% compared to global REIT performance of -16.7%.

With no reason to think the demand for data will drop anytime soon, data center real estate can make a profitable addition to any CRE portfolio. In fact, you might already have data center-ready property without even realizing it.  

Types of Data Centers

If the idea of technology real estate scares you, know that landlords have several options in terms of how they present their holdings for data center use. Rental yields are often dependent on the investment made by the landlord, but preparing data center space is a highly specialized field. Many data center operators prefer to handle everything themselves.

Base building

Data center operators will often look to lease industrial or office buildings that meet the base requirements listed below and undertake the necessary capital improvements themselves. Rents for a base building data center are typically lower because the tenant directly bears the largest portion of costs.

These leases usually protect the tenant with long terms or guaranteed renewal options. They will either provide for the improvements to revert to the landlord on termination or be removed at the tenant’s cost.

Powered base building

A powered base building is one where the landlord has installed the necessary primary power upgrades as part of its investment. The building’s power capacity is described in terms of kW (kilowatts) or MW (megawatts); typical data centers range from 2 MW to 15 MW in capacity, though Google, Amazon, and other tech giants operate 100 MW+ data centers. Note that the square footage of the average data center ranges from around 50,000 to 100,000 square feet—not incredibly large.

Turnkey

Turnkey leases are where the landlord bears the cost of all improvements, which can be extensive. According to the Counselors of Real Estate, 2018 construction costs of powered base buildings often range from $200 to $450 per square foot. In contrast, turnkey data centers cost anything from $800 to $1,200 per square foot. Turnkey data centers also present a higher level of risk to investors, due to the risk of technical obsolescence.

Internet gateways

“Internet gateways” or “carrier hotels” are single buildings served by multiple fiber providers. They are generally used for retail colocation providers.

Data Center Real Estate Requirements

Location is critical for data centers, as the wrong location can drive up operating costs substantially. For investors new to technology real estate, the requirements for data centers need to be understood. Many don’t realize the potential value of real estate that meets these criteria:

Proximity to fiber points of presence (POPs)

For obvious reasons, data centers need to be situated within easy reach of fiber optic connectivity. Fiber is generally run along preexisting rights-of-way; for example, along railroad tracks. Landlords with properties adjacent to these paths may not even realize their potential for data center development.

Floor loading and stable weather conditions

Data centers must safely house heavy, sensitive electronic equipment. Existing industrial buildings may be fit-for-purpose; for example, printing warehouses were built to handle heavy presses and weighty stocks of paper and often have higher load-bearing floors. However, locations that are subject to disruptive, extreme weather conditions like earthquakes, hurricanes, and floods are not suitable.

Proximity to essential services

Locations near essential service providers like hospitals often receive priority attention in emergencies. Proximity to these essential services could mean minimal power disruptions for a data center.

Availability of robust, affordable power supply

Power is one of the highest ongoing costs for data centers. In 2017, US data centers consumed more than 90 billion kilowatt-hours of electricity. Corporate social responsibility initiatives are causing developers to seek renewable energy sources such as solar, wind, and biomass.

Government incentives

Look out for local, state, and federal government incentives for data center construction. These can include expedited access to rights-of-way, power, and support for fiber access, in addition to tax reductions.

Accessibility to clients and employees

Client accessibility is necessary for colocation spaces but may be less important for data centers occupied by one operator. However, data centers require highly skilled workers who are typically able to dictate their working conditions. Sites need to be conveniently located for easy commutes and include adequate parking.

Yard space

Yard or roof space is usually sought for placement of Uninterruptable Power Supply (UPS), fuel tanks, generators, and chillers.

What Else Should Investors Know?

JLL confirms that data center real estate has transitioned from a niche market to one openly recognized as a resilient investment opportunity. As such, it is increasingly attracting the attention of institutional investors such as pension funds. Globally, prices are rising in the more established markets, so investors are looking at areas where there is less competition and evidence of growth potential.

In the U.S., Cushman & Wakefield’s latest Data Center Update Report says Illinois’ data center incentives make Chicago attractive for US investors. At the same time, absorption in North Virginia exceeded global figures for the first half of 2020.

Self-Storage – There’s Still Upside if You Know What to Look For

self storage

Self-storage is commonly regarded as recession-proof. It also delivers stable cash flow at reasonable margins. In the choppy waters of a pandemic real estate market, those are attributes that look very attractive.

For investors looking to diversify their commercial real estate (CRE) portfolios, self-storage can add ballast—and if there are opportunities to pick up distressed assets, all the better. However, as an asset class within CRE, self-storage has some unique quirks.

It’s also an industry that’s evolved substantially since arriving on the scene in the 1960s, and it’s still changing. So how has self-storage weathered the pandemic? And what do prospective investors need to know before diving in?

What Is Self-Storage?

Along with hotels and assisted living/independent living facilities for seniors, self-storage is one of a few asset classes that involve operating businesses attached to real estate. As such, it presents opportunities for upside in operational improvements.

Big brand chains like Public Storage, CubeSmart, and StorQuest were wise to this when they entered the market, which had predominantly consisted of mom-and-pop operations. These companies streamlined operations, sharpened business practices, and quickly realized the benefits.

Publicly traded self-storage REITs have been among the top-performing sectors of the past decade. Features that contribute to their performance include:

  • No improvement costs associated with turnover; little needs to be done between one tenant leaving and the next moving in.
  • This means there are no works delays between tenants. Units are immediately available for the next tenant.
  • Negligible customer acquisition costs. Rentals are typically on a month-to-month basis, and there are no brokerage fees involved.
  • Staffing requirements are low. Tenants don’t “visit” their stores on a daily or even regular basis.
  • Construction and conversion costs are lower than comparative CRE assets like office space.
  • As a result, maintenance costs are also comparatively low.

The combined effect of the factors above is that the required occupancy levels for self-storage are lower than comparative classes. On average, retail, office, and multifamily units require a 65% occupancy level to service standard debt requirements. The breakeven occupancy level for self-storage is about 45%.

How Is Self-Storage Evolving?

However, the industry continues to evolve rapidly, and investors must exercise caution in applying outdated models. Attractive returns have resulted in sporadic spots of oversupply. As the market has matured, tenants are demanding increased convenience and improved facilities.

Location

Storage follows population. Whereas previously, self-storage would be situated on the outskirts of a city or in industrial areas, it’s now finding its way downtown. At an Apple Self Storage facility in urban Toronto, for example, 70% of the tenants are businesses. Plus, millennials and baby boomers are flocking to city apartments and need conveniently located storage for their surplus gear.

Features and Facilities

These more prestigious locations come with the costly city building and zoning requirements associated with retail spaces. An increasingly competitive market means that customers want storage space that looks attractive inside and out.

Tenants are also increasingly demanding climate and humidity-controlled space for their clothing, documentation, and electronics. There is even a market for specialist storage for art, wine, and boats and cars, which must include sophisticated security.

How Did Self-Storage Fare During the Pandemic?

According to PWC’s Emerging Trends in Real Estate 2021, self-storage entered the pandemic on a solid footing and sustained revenues and collections. The industry was aided by being declared an essential service and thus avoiding closures during lockdowns. Tertiary education institutions closed, and elsewhere, capacity was reduced for social distancing purposes. Many self-storage facilities saw an increase in demand as students returned home and restaurants cleared their spaces.

What Do Investors Need to Know for 2021?

There’s no crystal ball for predicting how a post-pandemic CRE market will play out. But when it comes to self-storage, investors should look out for the following possible trends and opportunities:

Flat or Reduced Revenues: Government stimulus packages were probably partly responsible for sustained revenues in 2020. As the long-term effects of continued unemployment roll out, tenants may not be able to pay their rent.

Increased Demand: Associated with the above, there could be an increased demand for storage as people move, downsize, or relocate due to pandemic-related pressures.

Distressed Sales: Around 80% of self-storage facilities in America are owner-run by individuals or mom-and-pop owners. This profile of owners tends to sell in tough times. There could be a flood of properties on the market.

New Supply Slowed: While storage facilities were allowed to remain open, self-storage construction activities ceased. There may not be sufficient confidence or funding to pick up with the projects again in the coming year.

Opportunities for Conversion: Creative investors could potentially look to distressed sales in other classes like offices and retail for conversion opportunities.

Ultimately, self-storage seems to have clung to its reputation as recession-proof. Investors who know what to look for could do worse than diversify into the market.

Blended Retail Real Estate – Is It a Visionary Investment or a Knee-Jerk Reaction?

real estate

The COVID-19 pandemic pushed even the most die-hard technophobes to do their shopping online, while seasoned online shoppers extended their purchases to include goods they had traditionally bought in-store, such as groceries. If even just some of these shoppers elect to stick to their new shopping patterns, the impact on commercial real estate (CRE) will be significant.

Last year, the Wall Street Journal reported that US warehouse demand might increase by 400 million square feet over the coming two to three years. E-commerce typically requires as much as three times the distribution space of the distribution operations that serve traditional retail outlets. You can add to that the fact that many businesses look set to increase inventories by 5 percent to 10 percent in the long term to avoid repeats of the shortages experienced at the onset of the pandemic.

The Suez Canal’s accidental blocking in late March 2021 further heightened the vulnerability of global supply chains. According to Lloyd’s List shipping news, the Ever Given mega-container ship held up an estimated $400 million in trade every hour she remained stranded.

Industrial Real Estate Bucked COVID Trends

Overall, CRE deals were down 36 percent year on year, according to the Deloitte 2021 CRE Outlook Report. However, some sectors were positively affected—industrial real estate being one of them.

The report attributes this to:

  • Higher volumes of e-commerce and the need for “last-mile distribution” centers
  • Increased orders for takeout food, which led to the advent of “ghost kitchens”
  • More data centers to support the data usage required by work-from-home initiatives

Retail to Industrial Conversions

Retail real estate was one of the CRE sectors most negatively affected by the pandemic. Stay-at-home orders and subsequent social distancing regulations meant many tenants were forced to default on rent. With no clear end in sight, transactions in the sector have been slow.

But retail-to-industrial property conversions accelerated, according to a CBRE Research survey that looked at projects completed, proposed, or underway from 2017. At the start of 2019, there were 24, and by mid-2020, the number had grown to 59. Approximately 13.8 million square feet of retail space is expected to be converted to 15.5 million square feet of industrial space.

The cost of real estate is negligible compared to transport costs to get goods to customers. Retail sites located within population centers are ideally situated and equipped for last-mile warehousing concerning utility connections, parking, and accessibility. Big-box stores even have existing dock doors and clear heights compatible with industrial use.

The top five market cities for conversions are Milwaukee, Cleveland, Chicago, Omaha, and Dallas/Ft. Worth, all of which account for more than a third of the projects surveyed. If e-commerce trends continue, and thus the need for industrial space grows, this development strategy could extend to higher growth markets in the Southeast and West regions.

Blended Retail Real Estate

To think of brick-and-mortar retail and e-commerce as competitors, however, is erroneous. Increasing numbers of brands have moved to “blended” or “omnichannel” retail models, which are a combination of physical stores and online sales. In the pandemic, e-commerce kept many of these afloat while their non-blended competitors crumbled.

This convergence of retail and industrial presents a challenge to investors accustomed to single-use real estate. Multi-use environments complicate both valuations and management. Existing tenants may object to non-retail elements being introduced into traditional retail environments. Plus, there are zoning restrictions to consider.

Investors at the forefront of this new movement will need to develop collaborative relationships with municipal decision-makers and give careful thought to the right tenant mix. In some cases, developers are addressing concerns by creating facilities with retail façades backed by distribution infrastructure.

Converted multi-use spaces will likely have a longer return on investment due to the time it may take to reshape the tenant mix, but the investment could pay off if it accurately predicts the future needs of retail tenants.

Don’t Forget Hospitality and Office Space

Consumers aren’t buying less—they’re buying differently. Blended retail tenants are also willing to pay market rates for the right spaces to give them what they want. Traditional retail spaces are not the only ones with the desired attributes.

Hospitality, office, and even residential real estate can present opportunities for reconfiguration. Remember, it’s about being able to get goods to the customers, not necessarily about getting the customers to you. Distressed asset sales may be ripe for the picking in 2021 and 2022.

Concluding Thoughts

Far from being a knee-jerk reaction, the convergence of traditional retail and e-commerce was an established trend before COVID. Investors wishing to ride the wave should be sure to partner with developers who have experience in multi-use spaces and the potential to form the necessary relationships with municipal decision-makers.

Life Sciences Sector Offers Opportunities for CRE Investors

The pandemic has shaken up the commercial real estate landscape. With some of the old rules no longer holding, investors are trying to decide where to put their money. For the risk-averse, the growth of the life sciences sector may be as close to a sure thing as there can be. Already a trend before the pandemic, the race for COVID vaccines and treatments has only reinforced it.

What is the industry looking for in the real estate market? And what do investors need to know before they join the rush for state-of-the-art lab space?

What Is Life Science Real Estate?

The term “life sciences” covers a broad range of medical-related areas, encompassing pharmaceuticals, biomedical devices, nutraceuticals, and biomedical technologies. Life science real estate includes the laboratories, manufacturing, and warehouse space associated with these activities. In addition, it encompasses the associated office space and medical suites.

What Is Driving the Growth of the Life Sciences Sector?

A large and aging baby boomer generation combined with the convergence of information technology and medical technology are the primary drivers of today’s life sciences industry.

In its 2020 Global Life Sciences Outlook, Deloitte talked about how patient-centered models now direct business, operations, and research.

AI-powered drug discovery and development is transforming the research arena. Consumer wearables and telemedicine are changing how patients and medical professionals interact. And gene therapies are revolutionizing treatment.

The funding of the industry is occurring at an unprecedented rate. Traditional medtech companies now face competition from consumer technology companies such as Apple, Microsoft, Samsung, and Google. All of these corporations are working hard to expand their presence in the life sciences sector. Academic, federal, and philanthropic funding is also playing a large part.

The pandemic has raised greater awareness about the number of new startups in the field. Deloitte notes that a number of them are “unicorns,” privately held startups valued at over $1 billion.

The Life Sciences Ecosystem

The concept of ecosystems underpins real estate investment in the life sciences sector. Perhaps the most famous “life science ecosystem” is the Cambridge-Oxford-London “golden triangle” in the UK, which combines the universities of Oxford and Cambridge with the metropole of London.

The life sciences sector is characterized by exceptionally well-qualified workers, even more so than technology companies. It has the highest concentration of PhDs, who want to be close to the prestigious academic institutions with which they’re associated. Scientists also want the convenience of city locations. After all, they cannot work remotely the way that other professionals are doing.

And with the venture capital activity and anticipated merger and acquisitions as the startups mature, access to legal and financial professionals makes sense from a business perspective. In North America, the Boston and Cambridge areas form a life science hub, with San Francisco and San Diego not far behind. In Canada, Toronto is the epicenter of the “Ontario Life Sciences Corridor,” and Vancouver is home to some of the country’s largest life science companies.

Life Sciences Industry Provides Investors with a Range of Opportunities

Buying into or developing new life science ecosystems requires a substantial investment. However, Gregory Theyel, Ph.D., the director for the East Bay Biomedical Manufacturing Network, points out that there are significant variations across the industry, presenting investors with a range of opportunities outside of the pharma and biotech sector.

Theyel points out that while assembling medical devices requires clean rooms, it does not necessitate many more of the areas that are typically associated with life science real estate, such as laboratories. On the other hand, digital healthcare companies need desk space and computing power. Geoff Sears of Wareham Development in San Rafael, California, highlighted the growth of personalized medications and self-therapies, which are handled on a much smaller scale than “big pharma.”

Steven Lang of Savills says that when it comes to converting space, retail locations have suitable ceiling heights and floor loadings. Moreover, they would be well-placed in terms of accessibility and amenities. And the shortage of supply on the San Francisco Peninsula has led to the conversion of many industrial areas. Where industrial zones border life science ecosystems, properties have recently increased in value between 20% and 30%.

Considerations When Investing in the Life Sciences Sector

Investors who want to enter the life sciences sector should be aware that life science buildings are not like your typical office space. They can be complex. A 2018 JLL report says that lab construction costs at that time ranged from between $350 to $1,350 per square foot. Labs require precise plumbing, airflow, and fire prevention systems to be in place.

Moreover, investors may want to consider investing in properties that can be leased to biotech and life sciences companies. As the life sciences sector continues to grow, there will continue to be many investment opportunities.

Multi-Family Investors Could Find a Market in Baby Boomers

retirement

By 2030, the number of people over 65 years old in the United States will total 72 million. Born between 1946 and 1964, they’ve come to be known as “baby boomers.” As more baby boomers begin to retire, their impact on the housing market is becoming increasingly apparent.

Since 2011, 2 million boomers have retired each year. But last year, that number rose to 3.2 million. The pandemic may have influenced their jobs or sped up their decision to retire. Or it could have been the double-digit surge in home prices seen by 88% of the housing market in the final quarter of 2020.

Baby boomers are increasingly renting urban multi-family units

Baby Boomers ages 65 to 73 sold their homes faster than any other age group in 2020. But where are they going? While baby boomers are primarily homeowners, an increasing number of them are choosing to rent. As a result, multi-family investors may want to consider targeting baby boomers, who could drive demand for apartments.

One trend that has been evolving since 2014 is that the increase in the number of baby boomers in the rental market is approaching that of millennials. For multi-family investors, the growth in baby boomers seeking apartments presents an exciting opportunity.

Baby boomers are increasingly moving downtown into large, amenity-rich apartment buildings at only a slightly lower rate than millennials, who comprise the largest share of micro-unit apartment dwellers.

But older couples, singles, and pied-à-terre users are a substantial secondary segment, according to a study by the Urban Land Institute.

Community and convenience

“Two things are important to them,” says Ron Shuffield, president of EWM Realtors. “I call them the two C’s – community and convenience.”

Amy Schectman, chief executive officer at 2Life Communities in the Boston area, agrees. Isolation is a more serious health danger than obesity and smoking and can double the rate of dementia, she said.

Baby boomers are in better physical condition and will live longer than their parents. They want to pursue more active lives and need to make their money last longer.

A 2019 survey by the architecture firm Perkins Eastman found that 26% of its clients in the senior housing business believe that boomers will be most concerned with living in proximity to an urban location or town center.

Technology and the sharing-economy drive down costs and extend independence

Economist Linda Nazareth predicted in 2015 that baby boomers would drive the growth of the sharing economy. She mentioned cash-strapped retirement as the main reason, but also points to boomers as a generation accustomed to sharing.

Dan Hutson, a senior-housing strategist, agreed. “Transportation-on-demand, dining-on-demand and online learning…all play well in the senior market.” And he pointed out that voice-first technology like Amazon’s Alexa is ideal for older users.

Services offered by apps like Instacart, Uber, and TaskRabbit can help retirees with shopping, lifting, and chores when they cannot manage on their own. And when they need help with day-to-day tasks like dressing and bathing, services like Honor can provide care in hourly increments. Professional care companies usually work on three-hour stints to ensure that travel costs are covered. “It’s about efficient routing, and the right people in the right place at the right time,” says Seth Sternberg, Honor’s co-founder and chief executive.

A study by the MIT Age Lab investigated the cost of living for a healthy, single 85-year-old. Living at home without a mortgage and using sharing-economy services cost $2,967 a month. In contrast, an assisted-living option in the Boston metropolitan area came in at $6,433 a month. That’s a significant savings.

But the sharing economy isn’t just driving costs down. Boomers are active providers in the gig economy. In 2020, women over 60 years of age hosted 43% of the private rooms rented in the U.S.

An opportunity for investors

Multi-family investors who have been targeting millennials may have an untapped market in baby boomers. At one end of the market, micro-units serve as an affordable option to cash-strapped boomers. This is particularly true when units are positioned in convenient urban locations, close to parks, entertainment, medical services, shops, and restaurants. According to the ULI study, micro-units cost more to develop and operate, but have higher occupancy rates and rental-rate premiums. At the other end of the market, retirees can make excellent tenants for upmarket, full-service apartments.

Space-As-a Service Is Here – What Do Investors Need to Know?

conference-room

The technology to enable WFH (work from home) has “grown-up” overnight thanks to the coronavirus. But over time, technology has also done away with the need for physical space to produce and store information. And many administrative positions have been made redundant in the process.

Combined with the threat of contagion, these factors are making companies rethink the concept of large, centralized head offices. But, as effective as WFH can be, there are still reasons people need, and want, to assemble physically for work purposes. Now, multiple smaller, dispersed workspaces may better fit the bill.

More than ever, facilities and services will be what get people back to the office. But, with dispersion, it no longer makes sense for the businesses themselves to invest in and manage these. The space-as-a-service model is ideally positioned to fill this void. For investors interested in this growing market, there are significant differences to traditional office space investment.

Location is increasingly suburban.

With diversified locations, workers can meet in smaller teams. And workspaces can be more conveniently located to their homes. For investors, this means identifying suburban locations and looking at the new “zoom towns.”

The retail voids left by the pandemic offer opportunities for re-development as space-as-a-service. For smaller investors, a single storefront in a “walkable” neighborhood allows them to offer tenants access to a community. Think coffee shops, launderettes, gyms, etc. It’s a chance to revitalize commercial zones that might otherwise languish.

For investors with deeper pockets, indoor malls are candidates for conversion to multi-tenant offices. They come with ample parking, wide, COVID-friendly passageways, and existing facilities. The conversion of Los Angeles’ West Pavilion Macy’s is an excellent example that pre-dates the pandemic.

Leases are getting shorter.

Space-as-a-service has a far more flexible leasing model. It can offer space from anything from hourly to annual terms. However, dedicated space still requires a longer commitment.

Long leases have historically characterized commercial real estate. But a trend toward shorter lease terms for smaller deals has been occurring for years. Average terms for 10K SF and smaller dropped from 6.75 years in 2015 to 6.25 years in 2019.

These small leases make up three-quarters of all leases. And now, the pandemic has impacted deals of all sizes. According to JLL, average leases across the board dropped 15 percent in the first five months of 2020.

Flexibility is the name of the game.

One implication of shorter lease terms is the need for spaces to be flexible. Landlords can’t afford to renovate the space between each tenant. Changeable office layouts such as modular offices that be reconfigured as tenants require are the way to go.

Rates are higher, but so are costs.

In the space-as-a-service business model, landlords provide a suite of services that allow tenants to maximize the space. Everything is focused on how best to allow them to accomplish their jobs.

High-speed connectivity is the most basic requirement because technology is a key driver of the model. The proliferation of smartphones, cloud computing, AI (artificial intelligence), and the IoT (Internet of Things) frees workers to move seamlessly between spaces.

Space-as-a-service landlords will provide anything from furniture and fixtures to staffing of shared services. Their success will become dependent on the “user experiences” they can create around their physical spaces. And that’s going to cost money. So while turnover will increase significantly, margins may not.

Property management requires new skills.

Managing office spaces under the services-as-a-service model changes the role of property management significantly. Tenants become customers. And data analytics should play a key role when it comes to understanding the customer journey. How do people engage with the physical asset?

Landlords must switch from rent collectors to service providers. The model is closer to hotel management in that respect. Investors considering the switch must consider what this entails.

Valuation models are changing.

Longer lease terms currently attract higher valuations. Traditional investors and lenders are still looking for the security of fixed long-term cash flow. However, as space-as-a-service proves itself, lenders are coming around to the concept. Where space-as-a-service landlords can consistently fill their space, lenders should come to value them in the same way they approach an apartment block that lets on 12-month leases.

The advantage to short-term leases in a depressed market is that opportunities to raise rent occur more frequently. Traditional landlords are being locked into 10-year leases at rates that could be below market within a couple of years. In contrast, space-as-a-service landlords are free to reset prices at each lease roll-over.

The trend will continue to accelerate.

Already a trend pre-COVID, the pandemic will accelerate the move towards space-as-a-service. It’s a move that makes commercial real estate less about the real estate and more about monetizing space. For investors, it opens up opportunities for innovative uses of existing space and possibilities for new locations.