ARES Urbanexus Update #153
This selection of real estate and community development news and information began publication in 2018. It is now distributed by the American Real Estate Society (ARES). Its founder, H. Pike Oliver, continues as curator, and the update is distributed free of charge.
Office
The new abnormal
In February 2023, American office occupancy hit a pretty significant milestone on its journey to recover to pre-pandemic levels. Data gathered by Kastle Systems, which tracks security pass swipes for offices in 10 major cities across the US, warranted articles that featured experts pondering whether this was “as good as it gets”. The figure that occupancy rates had exceeded for the first time in just under 3 years? 50%.
Learn more here.
Feasibility of turning office buildings into apartments
Sheryl Schulze, a principal at architecture and planning firm Gensler, has been studying office-to-residential conversions in cities like Calgary, where in 2020, the firm led a conversion feasibility study of downtown class B and C office properties. They developed an algorithm that quickly evaluates and ‘scores’ building qualities and metrics that present challenges to conversions—large floor plate sizes that make it difficult to divide into apartments with adequate light; facade challenges due to inoperable windows; inadequate parking if it is required, and more. Since then, they’ve expanded their conversion studies to more than 700 buildings in 25 cities in the U.S and Canada, such as the recently-renovated Philadelphia’s Franklin Tower; and 36 buildings in San Francisco, a city recently named "the most empty downtown in America" by The New York Times’ The Daily podcast. Older buildings, she says, are the sweet spot.
Learn more here.
Retail
Trader Joe’s continues to impress
An upturn in grocery visits during Q2 2023, as tracked by Pacer.ai, has positively impacted several chains within the category, with players such as WinCo Foods, Aldi, and H-E-B seeing a YoY increase in visits of 5.5%, 5.4%, and 2.5%, respectively. But the real winner of the Q2 was Trader Joe’s, where quarterly visits rose by 9.7% relative to Q2 2022. The beloved California-based chain recently expanded its presence throughout the country, and visit data indicates that demand for the chain’s private-label, affordably-priced goods is strong as ever.
Residential
Housing’s share of the U.S. economy
According to the National Association of Homebuilders’ Eye on Housing blog, housing’s share of the economy remained at 15.8% at the end of the second quarter of 2023. Overall gross development product (GDP) increased at a 2.4% annual rate, following a 2.0% increase in the first quarter of 2023 and a 2.6% increase in the fourth quarter of 2022. Despite overall GDP increasing for the fourth consecutive quarter, housing’s share of GDP remained at 15.8% over the course of the quarter.
In the second quarter, the more cyclical home building and remodeling component – residential fixed investment (RFI) – decreased to 3.8% of GDP. RFI subtracted 16 basis points from the headline GDP growth rate in the second quarter of 2023. The last time RFI added to GDP growth was the first quarter of 2021, resulting in nine consecutive quarters where RFI has subtracted from overall GDP growth.
Learn more here.
The largest U.S. new home markets
“The top 10 markets in the country have two main things in common: land availability and migration,” says Ali Wolf, chief economist at Zonda. “Land availability is a critically important metric because it ultimately drives total sales. For example, nine of the 10 top markets for the most sales are also within the top 10 for total starts.” Learn more here.
Housing for seniors remains resilient
Despite rising interest rates and a tough lending environment, the seniors housing sector is expected to see rental rate increases this year, according to a new survey from CBRE.
Findings from the survey showed that over three-quarters of investors anticipate rental rate increases of 3% or more across most housing classes for seniors, except for skilled nursing, over the next 12 months. These increases are being attributed to rising development and inflation-driven operating costs.
According to the survey, the assisted-living class is expected to see the greatest increase in rental rates, with 28% of investors forecasting rent growth above 7% over the next 12 months—this is up from 15% of investors last year. No rental decreases are expected for any of the sector’s asset classes.
Facts about single-family rental investment
Single-family rentals have long been an important part of the US housing stock. But according to the Joint Center for Housing Studies of Harvard University in its latest State of the Nation’s Housing report, investor purchases of single-family homes reached new heights during the pandemic, particularly lower-cost units and homes in Sunbelt markets. While many of these units are eventually resold to new buyers, most are rented out to tenants. Moreover, there have been significant changes in who owns single-family rentals over time. Most notably, business entities and medium- and large-scale rental operators own a growing share of rental properties. Over the past two decades, examining investor activity in the single-family rental market reveals eight key facts.
Learn more here.
Master-planned communities
Top-selling communities as of mid-year 2023
Every year since 1994, RCLCO has conducted a national survey identifying the top-selling master-planned communities (MPCs) through a rigorous search of high-performing communities in each state. They report the annual sales among the Top-50 communities at the end of the year and publish this mid-year update in July. For this mid-year 2023 report, they surveyed MPCs nationwide to establish the current rankings as an update to their Top-Selling Master-Planned Communities of 2022, published in January 2023.
Learn more here.
Lower-density urbanism in planned communities
According to Steve Mouzon, lower-density urbanism benefits from a blend of four principles:
Building compact hamlets and villages and preserving most of the land in perpetuity is primarily a financial move, increasing developed land value and substantially reducing infrastructure.
Listening to the land is a financial move with potential seven-figure savings, but it strongly supports building places people love.
A wide range of housing values contributes strongly to more affordability and makes the place more interesting.
A robust mix of uses is essential to true urbanism and can capture a substantial amount of commerce and traffic within the place.
Following all four of these principles has a strong paradoxical benefit: On the one hand, places created this way can deliver developed land values an order of magnitude higher per acre than nearby sprawl while at the same time delivering a quantity of truly affordable units usually entirely missing in most sprawl.
Learn more here.
Hospitality
The decline in hotel transactions
Although U.S. hotel sector operating fundamentals remain strong, lodging-centric institutional investors, including Ashford Hospitality Trust (NYSE: AHT) and Park Hotels & Resorts Inc. (NYSE: PK) have announced plans to “hand back the keys” on assets whose loans have matured. Time will tell if these maneuvers are a positioning tactic to negotiate workouts with lenders who may very well not be interested in foreclosure of any of the assets.
Learn more here.
Metropolitan and regional trends
The world’s most livable cities
Living conditions in cities worldwide have fully recovered from the deterioration caused by the covid-19 pandemic, the Economist’s latest liveability index shows. It rates living conditions in 173 cities across five categories: stability, health care, culture and environment, education, and infrastructure. Cities in the Asia-Pacific region have rebounded the most. The index also suggests that life in cities is a bit better than at any time in the past 15 years. Our charts below show which cities topped the ranking.
Learn more and see interactive graphics here.
Activity centers and vehicle miles traveled
Using real-world data to estimate travel patterns for residents of the 110 largest U.S. metropolitan areas, we can more directly measure the relationship between residential proximity to urban and suburban activity centers and overall vehicular trip distances. It turns out that the relationship affirms the theory that proximity will reduce miles traveled.
Learn more here.
Taking risks in search of cheaper housing
An analysis by Redfin finds that migration to places at high risk from heat, floods, and fires rose over the last two years. It’s not that people don’t care about climate dangers, says Redfin Deputy Chief Economist Daryl Fairweather. It’s that concerns about affordability are primary and dominate everything else. And during the Covid-19 pandemic, the combination of remote work, low mortgage rates, and high home prices in several major metropolitan areas prompted many Americans to relocate to the Sun Belt.
Learn more here.
Construction
Zennihomes offers stackable prefabrication
Founded in 2019 and based in Page, Arizona, ZenniHome produces factory-built models that can be easily transported to sites. The two model homes are similar to LEGO blocks and can be configured together in various applications, including stacked as many as five units high for multifamily projects. A ZenniHome comes fully furnished with beds, sofas, tables, chairs, appliances, and smart home feature upgrades and sits on either six or nine concrete pier footings, depending on the model’s size.
Learn more here.
Transportation
Congestion pricing
Micheal Lewyn explains why the urbanist argument against congestion pricing is wrong. Learn more here.
Sustainability and climate change
Oceanic statistical anomalies
Perspective from Brad Weed on the oceanic temperature and ice cap anomalies of 2023 and the question of how certain we can be about climatic statistical variation. Learn more here
Leadership
Richard Ravitch (1934 - 2023)
Nicole Gelinas offers a retrospective on the exemplary public leadership contributions of real estate developer Richard Ravitch who died in June 2023. New York City would not have recovered and rebuilt from its 1970s malaise without his steady presence.
As a developer, he built thousands of affordable apartments in the ’70s, from Manhattan Plaza, west of Times Square, to the Bronx’s River Park Towers. The middle class was leaving the city — New York City lost nearly a million residents that decade — and Mr. Ravitch's housing helped New York retain an engaged, committed citizenry and workforce.
Less than a decade later, as chairman of the state-run Metropolitan Transportation Authority, Mr. Ravitch rescued the subways from decades of decay. Rebuilt subways underpinned New York’s subsequent economic revitalization. Annual ridership almost doubled in the nearly four decades before 2019. New York City could not have gained more than 1.5 million new residents and more than 1.3 million jobs over that time without the subways’ capacity to move more people around more efficiently. Learn more here.