January 2021 – DWG Consultants

January 13, 2021by adminUncategorized

Back to The Future City: How 15-Minutes Will Change the World

As you look back in time, urban sprawl in the United States had its origins in the flight to the suburbs that began in the 1950’s, and has accelerated as each decade was placed in the history books. As suburban areas developed, cities expanded in geographic size, faster than they grew in population. This trend has produced large metropolitan areas with low population densities, interconnected by roads, mass transit and other transportation arterials. But what does Urban Sprawl mean for the traditional Inner-city of America? Is the traditional city officially dead? And equally important is the contemporary question of … have the effects of the COVID-19 pandemic … with the elimination of community gathering places such as restaurants, bars, places of worship, parks and even offices … altered the shape, design and characteristics of the traditional city?

These questions, as well as the conversation that has occurred over the past couple months, has caused urban planners to reevaluate the future of some of the most vibrant, energetic and powerful cities across America. In fact, a dichotomy exists as many professionals have announced the death of modern cities, while others have not been so drastic and see change as a good thing for the citizenry of these major cities. After all, “the secret of change is to focus all of your energy not on fighting the old, but on building the new.”

While this conversation has accelerated due to the coronavirus pandemic, there is more than one reason for things to change. Whether it be health, environmental or societal change, the “15-Minute City” is the way of the future.

In this article we will look at several important reasons for the evolution of the 15-Minute City.

What is the 15-Minute City?

The “15-Minute City” idea is based on research into how city dwellers’ use of time could be reorganized to improve both living conditions and the environment. Developed by Professor Carlos Moreno at the Sorbonne in Paris, the concept of “la ville du quart d’heure” is one in which daily urban necessities are within a 15-minute reach on foot or by bike. Hence the name … “15-Minute City.” In short, work, home, shops, entertainment, education, and healthcare would all be available within the same time that a commuter might once have waited on a railway platform.

Within the 15-Minute City, the accent shifts from urban sprawl and territorial mobility to close and easy access. The strategy no longer focuses on pouring more and more concrete and opening roads more efficiently, but quite the opposite, by reducing displacements. Ideally, in a 15-Minute City, long-distance mobility is significantly reduced, and residents no longer depend on their private vehicles or public transportation such as trains or subways for daily commuting.

In the 15-Minute City, the streetscape actually becomes the spine of the community. It is the community’s core, the gathering place, the center of outdoor activities, a park and green space of sorts. Rescued from intense vehicle traffic, the streets come to life and become livable. These publicly owned and maintained pieces of concrete and asphalt welcome and invite children’s playgrounds, terraces, street art displays and shows, thereby increasing synergy and integration of the community. Put another way … this “urban space of excellence starts to reclaim its humanity.”

While the 15 Minute City has a new shiny name, it is just a step into the past. A time before people commuted up to an hour into a business center to work.

Where does it fit into the “new normal?”

While this “urban evolution” was not initially intended to help with coronavirus protocols and “stay at home” mandates, it has fallen into its new role perfectly. With a pandemic and the resulting federal, state and local requirements that necessitate people staying in or close to home, a city plan that allows for all necessities to be reached within a short distance walk is ideal. The COVID-19 pandemic has made us call into question ways in which we can improve on the idea of cities and city spaces. Cities have been hit hard by the pandemic. People have talked about a “new normal” that has been thrust upon us all. This new normal involves less travel, smaller circles and more space. These are all things that the 15-Minute City promotes.

Travel has come to a halt because of the coronavirus, and transportation may be changed forever. While the 15-Minute City cannot deal with air travel and other long-commute problems, it can greatly reduce everyday travel and short-run commutes. One of the ideas of the 15-Minute City is to make it possible to work, live, play, recreate, worship, etc. all in the same area where they live. Contrast that with a 30-minute to 1-hour drive to a city’s central business district. This, and the effects of hindsight being 20–20 when it comes to the pandemic, would help slow the spread of the pandemic by lowering the amount on new interactions with people along with less exposure to large numbers of people.

Working conditions made an abrupt shift during 2020. While most jobs were previously performed in an office environment, an entire work force was forced to work from home as a safety measure to counteract COVID-19. This seems like an easy and understandable solution, but it had some consequences. For one, there are many people who do not have the space or resources to work from home. Some people simply do not have the luxury of a spare room to set up an “in-home” office. Some do not have family nearby to help with childcare, as schools were also shut down. Some do not have reliable internet connection. Unfortunately, there are just certain factors to working from home that disenfranchise everyone’s lifestyle … especially lower income people. While people transition away from big offices in the city, small offices in the 15-Minute City is a good solution.

Everyone has heard of the “New Normal” and what that might entail. Many people will never see this new form of living as an upgrade or an improvement to their lives as it seems like a world of less freedom, less interaction and less gatherings. Yet, indoctrinating the 15-Minute City as the new normal can be easy, and actually very beneficial to those that are accepting of the new urban design characteristics. In fact, people will save money, be healthier, be more productive and rekindle a sense of community within their towns. While a post COVID-19 world certainly scares people, a world with a 15-Minute City can also be a panacea.

Environment

While it has not been the “lead story” in every newspaper during the past 4-year administration, environmental concerns are ubiquitous and are not going away. Unfortunately, in the past few decades the myriad of approaches on how to manage the environment has become very politicized. However, everybody should want cleaner water, soil and air. In short, everyone wants a cleaner world. Most of the arguments that moderate people have made evolve around the fiscal impact and the logistics related to its implementation. The 15-Minute City was designed with the very purpose of healing the environment, and in addition to alternative fuels, would be a great way to help clean the earth. As workplaces, stores and homes are brought into closer proximity, street space previously dedicated to auto congestion is freed up, thereby eliminating pollution, and making way for gardens, hike and bike lanes, sports and leisure facilities.

In current city planning, it is almost certain that most US citizens have to get in a car to get groceries, go to a restaurant, bar, movie, doctor’s appointment, grocery store, place of worship, etc. With the 15-Minute City, towns are being forced to be more sustainable, as less car travel will be necessary.

85% of Americans commute to work and many of those travel between 30-minutes and one hour to their place of employment. This is a major problem for many environmental, societal, economic and efficiency reasons, Yet this is where an opportunity opens up for the 15-Minute City to work its magic. With the COVID effect causing most people in America to work from home, many companies have learned that they do not really need the expensive downtown offices anymore. Some, like British Petroleum, have decided to completely switch to remote working throughout London, while others have the plan to reopen but with mini offices located in these 15-Minute City environments. Both strategies are helpful to the environment as a whole and could remove so much unnecessary added carbon to the atmosphere.

Overall, the 15-Minute City will help the climate as it was designed by urban planners with that goal in mind. When it comes to environmental protection, many get hung up on the fiscal costs, subsidies and required investments. But the 15-Minute City is a “supply-side” economic benefit as it saves the ultimate taxpayer money in the process. With the 15-Minute City, streets can see a major decline in automobiles and fuel consumption, thereby reducing CO2 emissions. With the alternative land use and increase of garden and green space, the resulting photosynthesis increases oxygen production. The net result of all these factors is that we have both a cleaner environment, as well as an economic stimulus package due to the supply side economic benefits and a more efficient work force. Who could ask for more?

How does this effect the community?

Ever since the exponential rise in population and the effects of urban sprawl on big cities, we have slowly lost our sense of a community. We are no longer in Maybury RFD where people used to be able to bond with a common interest over a community goal, mission or project within their town. Sometimes chaos and crisis bring a community together. Yet as we have seen this year, chaos has not brought us closer together, but further apart. Due to the pandemic induced isolation, people have only been able to communicate remotely, and have had a lot of time on their hands to let social media accelerate a divisive wedge during a highly contested election cycle.

The 15-Minute City calls for a return to a more local community, with a somewhat slower way of life, where commuting time is instead invested in richer relationships with those nearby. The urban planners are hopeful that the smaller geographic footprint, and the closeness that accompanies the 15-Minute City, might also bring back a since of civility that is so desperately needed. The COVID crisis show us the possibility for rediscovering proximity. Now, more than ever, we as people, need proximity. Not because of the potential vaccine, the environment, or any other issue, but for the act of human interaction and the overall humanizing of one another.

In today’s master-planned, spacious society, you would be lucky to know more that a couple of your neighbors. People are so fixated on their day-to-day lives, and do not really know who they live around anymore. The world is too fast paced for things like a neighborhood cocktail or block party. What the 15-Minute City brings to the world is a return to simplicity. We have lost sight of what it means to be a neighbor and part of a community. It will allow us to slow down, no longer rushing to work or the doctor’s office, but maybe a nice walk or bike ride to simply get groceries.

Innovation Through Regression

The idea for the 15-Minute City is nothing new. In fact, in America it began with the first Settlers on Plymouth Rock and has been replicated repeatedly, from community to community. But now, it has been repackaged, branded under a new name and is being marketed as the 15-Minute City. Same strategy and goal, yet with a new fancy name.

If you went “Back to the Future” in almost any era of US history, you would see that most communities had a “live, work, play, shop, learn, worship, recreate, etc.” environment in a close-knit community. Yes, transportation may have been by foot, horse, train, Model T or mass transit, but the effects of urban sprawl truly changed these communities … as well as society … and the effects of this change has been very far reaching.

With the 15-Minute City, we bring back some of the old ideas to revitalize our communities, improve the environment, enhance our productivity and heal our society. After all, “the secret of change is to focus all of your energy not on fighting the old, but on building the new.” While we always look for the next big thing for the future, it is sometimes best to look in the past at an idea that we left behind a long time ago.

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January 11, 2021by adminUncategorized

A 7-Part Series on What Experts Predict for Real Estate in 2021 – Part 7

Part 7— Predicted Threats and Opportunities

To understand what the real estate industry experts’ crystal ball for 2021 may predict, a strategy discussion was held with some of the most experienced and knowledgeable real estate experts. The cerebral panel covered topics such as capital markets, the economy, construction costs, development trends, effects of COVID, regulatory matters, and much more.

This article is the last in a series of 7, broken into bite-size topics, related to the all-important question of … “given the current landscape and forecasted trends related to the economic, political, banking, healthcare, and real estate sectors, many real estate investor are asking the question should they be leaning into these headwinds, or should they be retreating to the sidelines?”

Part 1 of the Series suggests that now is the time to be bullish on real estate investing. But what are the fundamentals driving that conclusion? Keep reading the entire series to uncover these fundamentals.

Here is what the experts had to say regarding …

Predicted threats and opportunities — Dr. Masaki Oishi, practicing Neurosurgeon and Co-founder and Chairman — MarketSpace Capital

A summary of the current environment’s impact on various asset classes, has already been outlined above. However, with respect to Office and retail, and the impending vacancies, rental rate compression, tenant defaults, etc., all these factors contribute to a short-term reduction in NOI … and ultimate value. Values in these asset classes will be negatively impacted and it will take some time to get past these societal, health and safety and emotional concerns. So, now may not be the time to rush out and acquire these assets yet having cash to take advantage over the next 2 to 3-years for an attractive investment basis for investors.

Relative to Industrial, Storage and Fulfillment Centers, the current environment will likely be an attractive investment as an alternative investment class. So, the demand for this asset class will likely surpass the supply in the near term which could generate some good returns.

But, with respect to investing in multifamily, massive demographic shifts are underway, which are creating an avalanche of new renters over the next decade as follows:

The effects of this last year’s unemployment, salary freezes, reduction in hours, consumer confidence, elimination of employer benefits such as healthcare, 401 K match, etc. has eroded purchasing power, creating less buyers at each price point
Millennials (who have now surpassed Baby Boomers) are still not moving into home ownership due to student debt and lifestyle flexibility
New renter households increased by roughly 10 million households over the past 10 years
Demographic data says that an estimated 500,000 new rental household units will be created annually through 2025, but only 300,000 new units were built annually in the past 3 years
Single population … which generally is a renter … grew by 15 million more “units” above married couples (which generally look to buy a home) over the past 10-years
Baby boomers (representing the 2nd largest demographic group ever) are looking to downsize to urban apartments
Immigrants have lower home ownership rate … and US immigration continues to rise
Tight construction labor market is constraining multifamily construction

Should we lean in … or retreat? — The consensus of the Panel

No matter how divided a society may be, a balance of power in government generally indicates that future policy will remain generally in line with current policies, despite overtures of change. Furthermore, population counts continue to grow. and last time we checked, no one has made more land! So well-placed real estate, like gold, is in finite supply and always a great long-term investment.

We are at a point that a savvy investor could capitalize on all markets, especially when focusing on foreclosures with solid property fundamentals (hotel, office, retail — all opportunities with quality product). Yet, to summarize — real estate is always a good play despite the stock market, president, or parliament. We will feel pain in the short term due to the pandemic, that will translate through to Commercial Real Estate, but long-term fundamentals for core locations is sound. As an investor, this is the time to pounce. As a property owner, this is the time to hold. As a property owner on the edge — this is the time to refinance and benefit from some of the historical low cost of capital.

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January 9, 2021by adminUncategorized

A 7-Part Series on What Experts Predict for Real Estate in 2021 – Part 6

Part 6 – Capital Markets and the Supply of Capital

To understand what the real estate industry experts’ crystal ball for 2021 may predict, a strategy discussion was held with some of the most experienced and knowledgeable real estate experts. The cerebral panel covered topics such as capital markets, the economy, construction costs, development trends, effects of COVID, regulatory matters, and much more.

This article is the 6th in a series of 7, broken into bite-size topics, related to the all-important question of … “given the current landscape and forecasted trends related to the economic, political, banking, healthcare, and real estate sectors, many real estate investor are asking the question should they be leaning into these headwinds, or should they be retreating to the sidelines?”

Part 1 of the Series suggests that now is the time to be bullish on real estate investing. But what are the fundamentals driving that conclusion? Keep reading the entire series to uncover these fundamentals.

Here is what the experts had to say regarding …

Capital markets and the supply of capital — Jan Sparks, Executive Managing Director Structured Finance, Transwestern Real Estate Services

Capital Markets in Real Estate are tricky due to the uncertainty in the economy, how real estate will be used and investor preference. Transactional volumes are currently significantly off for the same reasons. Capital markets remain uncertain as there is a lack of price discovery for sales and lease rates.

The news of Pfizer, Moderna, AstraZeneca, etc. and their positive coronavirus vaccine results will boost service businesses and the economy, when the vaccine helps get the pandemic under control. But better economic prospects will also cause interest rates to rise. As a result, the 10-year Treasury note’s rate will likely rise above 1% before the end of the year. If vaccines are effective, the 10-year rate will likely rise at least another half percentage point in 2021. However, if Congress fails to pass another stimulus package, then rates will likely tick down temporarily.

Mortgage interest rates have likely hit their low point and will edge slightly upward from now on. During the first week in December, the 30-year fixed rate hit its lowest point since the Freddie Mac rates survey began in 1971–2.78%. The rise in the 10-year Treasury rate means that the gap between it and mortgage rates is close to the historical norm.

The Federal Reserve at its most recent Federal Open Market Committee meeting recommitted itself to keeping short-term interest rates near zero, which likely means through 2024. The Fed is also continuing to purchase $80 billion of Treasury securities and $40 billion of mortgage-backed securities every month, adding to its balance sheet. The Fed is “all in” to do whatever it takes to support the economy. Its statement said that it will be willing to tolerate inflation levels above 2% for a time. That means that the Fed will not raise short-term rates even if inflation begins to pick up.

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January 7, 2021by adminUncategorized

A 7-Part Series on What Experts Predict for Real Estate in 2021 – Part 5

Part 5— Construction Innovation and Implications on Cost and Regulations

To understand what the real estate industry experts’ crystal ball for 2021 may predict, a strategy discussion was held with some of the most experienced and knowledgeable real estate experts. The cerebral panel covered topics such as capital markets, the economy, construction costs, development trends, effects of COVID, regulatory matters, and much more.

This article is the 5th in a series of 7, broken into bite-size topics, related to the all-important question of … “given the current landscape and forecasted trends related to the economic, political, banking, healthcare, and real estate sectors, many real estate investor are asking the question should they be leaning into these headwinds, or should they be retreating to the sidelines?”

Part 1 of the Series suggests that now is the time to be bullish on real estate investing. But what are the fundamentals driving that conclusion? Keep reading the entire series to uncover these fundamentals.

Here is what the experts had to say regarding …

Construction innovation and cost implications — Honorable Marty McVey, McVey & Associates and Financial Advisor to Hwami Builders

Construction costs for real estate development are generally comprised of labor, materials and general contractor profit. However, COVID-19 and other economic, immigration and trade implications have affected construction costs in many ways. Labor has been constrained because of immigration restrictions, lockdowns and other mandates affecting the free flow of labor. Tariffs, duties, impositions, and restrictions all have an impact on cost, surety and timing of materials that are sourced “off-shore.” And other economic factors relative to commodity pricing or supply and demand impacts of materials such as lumber, steel, concrete, etc. all contribute to either an increase or decrease in material costs. In short, all these factors are outside the control of the general contractor.

As a result of these factors, Houston-based Hwami Builders, a long-standing client of McVey & Associates, chose to look to process innovation, efficiencies and other controllable items in an effort to reduce costs for their customers. For example, one of the large construction cost line items is that of wood stud framing. Historically, most framers would take the architectural designs, and have labor on site to assemble and custom fit each component. Unfortunately, this results in significant waste in both labor and materials. So, Hwami created a subsidiary which takes the architectural designs into its computer system, and by using sheet roll, 70-gauge steel, they can punch out the individual metal frames, which have been pre-punched for plumbing, electrical and other assembly requirements, the wall frames are assembled off site, and then shipped on a “just in time” basis to the site.

Based on their experience, Hwami Builders is able to use this innovation to reduce the labor by over 20% and the construction materials by roughly 35%. These costs savings can be passed along to the client, but equally, the development timeline can be reduced by two months because of the innovative construction and delivery methods. And in the construction industry, time savings results in real costs savings to all concerned. Due to the ability to get the project completed sooner, the developer sees a reduction in interest and other general condition expenses, as well as generating revenue sooner as the product can be placed into service quicker.

Regulatory Implications on New Development

It is a given that law makers will always make more … not less … regulations. After all, you never hear of a politician running for office to do nothing! Some run to reduce regulations, and others run to enhance and increase regulations. In short, change and regulations are inevitable. The goal is to understand the regulations and seek out those opportunities.

For example, the regulations for development permitting in the city of Houston, is a relatively painless process. Of course, anything can be improved, but when you compare the regulatory process in Houston to New York City, Los Angeles, Seattle, etc., the regulatory process can be cut by a factor of 3. So, instead of taking 18-months in New York City, you can start construction in Houston by month 6.

In the development community there is a misconception that the development services department of a city is there to get in the way of development. However, when you look at the big picture, the city is in need of property tax revenues to fund its general fund obligations. Therefore, the faster a city can get a development started, completed and into service, the faster they can increase revenues.

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January 5, 2021by adminUncategorized

A 7-Part Series on What Experts Predict for Real Estate in 2021 – Part 4

Part 4— Federal Tax Consequences

To understand what the real estate industry experts’ crystal ball for 2021 may predict, a strategy discussion was held with some of the most experienced and knowledgeable real estate experts. The cerebral panel covered topics such as capital markets, the economy, construction costs, development trends, effects of COVID, regulatory matters, and much more.

This article is the 4th in a series of 7, broken into bite-size topics, related to the all-important question of … “given the current landscape and forecasted trends related to the economic, political, banking, healthcare, and real estate sectors, many real estate investor are asking the question should they be leaning into these headwinds, or should they be retreating to the sidelines?”

Part 1 of the Series suggests that now is the time to be bullish on real estate investing. But what are the fundamentals driving that conclusion? Keep reading the entire series to uncover these fundamentals.

Here is what the experts had to say regarding …

Federal tax consequences — Jan Sparks, Executive Managing Director Structured Finance, Transwestern Real Estate Services

Tax consequences of the election results remain unclear. The runoff election on January 5th in Georgia will determine who controls the Senate. If the Republicans maintain control, a balance of power will remain in place, and many of Biden’s proposals would be more difficult to pass as currently drafted. However, if it flips to Democrats, there will be a negative impact on capital gains, Opportunity Zones, 1031 Exchanges, etc. That said, Republicans will probably retain the Senate and uphold current policies, which favor Commercial Real Estate.

Historically it takes at least twelve to twenty-four months for a new administration to have major legislation passed, therefore regardless of whether Republicans or Democrats control the Senate, it is believed that there will not be much change for the real estate investor in 2021 due to changes in tax regulations.

Many of the proposals in Biden’s plan target taxpayers earning more than $400k in annual income. Such areas which have been targeted include the elimination of like-kind exchanges, exemption from passive loss rules, and accelerated depreciation. Nevertheless, the following are some of the more notable areas of the tax code which will be most affected by the Biden-articulated policy positions:

1031 Exchange Implications

The 1031 Exchange program allows investors to delay paying tax on Capital Gains on CRE by Reinvesting the Profits into another Real Estate Asset. Biden’s plan would limit the tax advantages in 1031 exchanges to those making $400,000 or less. This will not only impact taxpayers that make over $400,000, as the ripple effect is that there will be less 1031 Exchange activity which could cause a decrease in demand. This reduced transactional impact in the 1031 Exchange marketplace could affect overall pricing, and this impacts all parties, regardless of their income levels.

Opportunity Zones

Opportunity zones are in 8,700 locations across the U.S. The program allows investors to channel capital gains generated from the sale of assets into qualified funds that make long-term investments in these underserved communities. Taxes on some or all the capital gains that would have otherwise been paid if the funds weren’t invested in an Opportunity Zone, is deferred, with the amount of such deferral being dependent on how long the investment is held.

Some of the Biden-proposed reforms are aimed at ensuring the Opportunity Zone areas are truly in need, and that the deferred capital gains dollars are being used to create jobs and affordable housing. Biden’s “Build Back Better” platform calls for reform of opportunity zone funds to ensure they “serve black and brown communities, small businesses, and homeowners.”

Opportunity zones will likely require greater measurability of impact and additional criteria on the zones. It appears that although there will be some reporting and regulatory restrictions added during the Biden administration, opportunity zones and most of their benefits appear to remain in place. The likely result is that like-kind exchanges are at risk and capital gains tax increases will be under pressure. Opportunity zones could see more interest to delay and reduce payment of capital gains taxes.

Income Tax Rates

The current highest Marginal Tax Rates under the tax code remains at 37%. Biden has indicated that his administration will reverse the Trump and Jobs Act tax cuts for the wealthy, by restoring the 39.6% top marginal tax rate, up from the 37%.

Capital Gains Tax Rates

Biden’s plan would first raise taxes on capital gains by treating them as ordinary income for those earning more than $1 million. This would dramatically change the long-term capital gains tax rate for these individuals from 20% to a maximum of 43.4%. In practice, this means that proposals to significantly raise capital gains tax rates, with no other changes, will lose federal revenues. Using research data from the Congressional Budget Office on capital gains realizations and these elasticities, it is estimated that raising the top rate to 43.4 percent (39.6 percent statutory rate plus the 3.8 percent Net Investment Income Tax) could lose about $2 billion each year in federal revenues.

However, Biden is not simply proposing to raise the top rate on capital gains. He also proposes eliminating the current regulations related to the step-up basis in capital gains. According to the Joint Committee of Taxation, not taxing gains at death results in a loss of about $40 billion each year in federal revenues. This change could temporarily increase investment sales activity for 2021 in preparation for the change in 2022.

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January 3, 2021by adminUncategorized

A 7-Part Series on What Experts Predict for Real Estate in 2021 – Part 3

Part 3— Unintended Consequences and Societal Impacts Due to COVID

To understand what the real estate industry experts’ crystal ball for 2021 may predict, a strategy discussion was held with some of the most experienced and knowledgeable real estate experts. The cerebral panel covered topics such as capital markets, the economy, construction costs, development trends, effects of COVID, regulatory matters, and much more.

This article is the 3rd in a series of 7, broken into bite-size topics, related to the all-important question of … “given the current landscape and forecasted trends related to the economic, political, banking, healthcare, and real estate sectors, many real estate investor are asking the question should they be leaning into these headwinds, or should they be retreating to the sidelines?”

Part 1 of the Series suggests that now is the time to be bullish on real estate investing. But what are the fundamentals driving that conclusion? Keep reading the entire series to uncover these fundamentals.

Here is what the experts had to say regarding …

Unintended consequences and societal impacts due to COVID — Dr. Masaki Oishi, Practicing Neurosurgeon and Co-founder and Chairman — MarketSpace Capital

As we have all learned this year, life can be very unpredictable. In fact, normal life has been flipped on its head and has tested everyone. So, from a macro-economic level, the following are the observations for various sectors in the real estate industry:

Office Space

One of the effects of the Coronavirus has been the movement out of office space, ostensibly for social distancing purposes. It is uncertain as to if this will be a short-term or more permanent impact on office buildings. As we all know, technology has advanced to enable everyone to be connected, whether they are sitting at their desk in an office or sitting at their kitchen table. As such, many folks are seeing the benefits and efficiency of zero commute time, a more efficient workforce, lower facility cost, etc.

Many major companies have already started to permanently get rid of their office space and move to remote working arrangements. British Petroleum, for example, is in the process of permanently shifting almost 50,000 employees towards remote working and flexible workplace layouts over the next 24-months. So, it seems like office space is getting ready for a shock as existing tenant leases come up for renewal over the next 12 to 24-months.

Retail

The International Council of Shopping Centers (ICSC) has historically cautioned retailers that digital technology will have an effect on the brick-and-mortar sales, but, what the ICSC did not see coming, was the large amount of tenant defaults, bankruptcies and downsizings that were as a result of the government-mandated closure of many retailers. What this means is that many 2nd or 3rd tier retailers (higher credit risks) that once never thought a certain shopping center or prime location was in their price range, now can negotiate from a position of strength with these desperate landlords that are looking to fill vacated space.

Hospitality & Entertainment

Travel and Entertainment budgets have been curtailed due to cost cutting directives from top executives, fear and ability to eliminate travel due to zoom and other technology tools which have now become the “new normal.” Additionally, many directives, recommendations and even mandates from federal, state and local authorities are dictating (or strongly recommending) no travel and entertainment

Just like the airline and cruise industries, the Hospitality and Entertainment industries have been dramatically hit as evidenced by occupancy levels at historically low levels, Average Daily Rates were slashed, 2020 Rev Pars are 48% of what they were in 2019 and even though the operators are doing their best to cut variable costs, their fixed costs of debt service, insurance and property taxes remain unchanged. In short, while their revenues have been cut by over 50%, their largest fixed costs remain the same.

Industrial, Storage & Fulfillment Space

Due to increased demand for online purchasing and growing constraints on supply chain, office flex and industrial space demand is growing. As a result of the “at-home shopping, ordering and direct delivery,” there will be increased demand for assets such as fulfillment centers, cold storage, and dry storage for online ordering. Furthermore, there seems to be upward demand for additional factories as popularity of onshoring sweeps the nation.

Multifamily

Current economic forces have had an impact on the incomes, livelihood, and savings of many citizens. Many people remain out of work and what may have been a dream to purchase their own home a short 12-months ago, many have chosen to remain in a rental category. Many multifamily assets focus on a “middle class America” tenant profile, and that sector continues to see strong lease-up, stable rental rates and an ever-increasing occupancy level for this asset class.

Months on end being stuck in the house or apartment has led people to question their current living conditions. And to go along with the shift away from offices, private designated workspaces in homes or apartments will be more important. People will be spending more time at home and as a result, spending more time inside the home. For these reasons, people are now looking for larger residential units with private office space and as much yard or common area green space as they can get. Tied to this, and another underlying impact of Covid-19, is that people have also learned to appreciate public outdoor spaces a lot more. Parks, green space, community gathering spaces … even if they social distance … and other outdoor areas have become a very important commodity.

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