ARES Urbanexus Update #156
Publication of this monthly selection of real estate and community development news and information began in 2018. It is now distributed by the American Real Estate Society (ARES), and its founder, H. Pike Oliver, continues as curator.
The US budget deficit
Like most developed nations, the US government spends more than it takes in taxes — essentially, it lives beyond its means. This was less of a concern during the low-interest rate environment from the end of the Great Recession in mid-2009 until 2022. Current higher borrowing costs have changed the game.
The Congressional Budget Office forecasts that most future government deficits will not result from net new spending but rather from paying the interest on what's already owed (some $33 trillion.) Deficits are expected to rise significantly as a share of GDP during the coming decades. Learn more here.
Real estate billionaires
Forbes Magazine reports that higher interest rates and work-from-home policies may have taken a toll on commercial real estate. Still, America’s richest property barons are wealthier than last year. 25 billionaires on the 2023 Forbes 400 list primarily owe their fortunes to real estate. These individuals are worth $139 billion—about $5 billion more than the 24 in real estate on the 2022 ranking. The top three are Donald Bren at $18 billion, Stephen Ross at $10.1 billion, and Leonard Stern at $8.1 billion. Learn more here.
Industrial
Bellwether District in South Philadelphia
More than three years after buying the 1,300-acre former Philadelphia Energy Solutions refinery in South Philadelphia, Hilco Redevelopment Partners is breaking ground on the Bellwether District’s first phase, featuring two industrial buildings.
Hilco CEO Roberto Perez said the $4 billion project, planned to take 10 to 15 years to complete, is a year ahead of schedule. At full buildout, the Bellwether District is projected to have 10 million square feet of industrial space, while a life sciences component would fill the northern 250 acres of the campus.
The first building is set to have 326,340 square feet of space. Construction on the 727,000-square-foot second building will begin in two to three months. Learn more here.
Office
Vacancies in the Sun Belt and elsewhere
Data reports are preliminary, but early glimpses into how the third-quarter office market fared suggest improvement in a few markets. In contrast, others continue to add sublease space and direct vacancy. An analysis of preliminary Moody's Analytics Inc. data from Q3 illustrates which U.S. office markets have seen their vacancy rates rise over the past year and which have seen their share of vacant space shrink during the same period.
Among major metros, several Sun Belt cities' vacancy rates rose faster than in cities in other parts of the country — including gateway markets, which have borne much of the brunt of post-pandemic distress and population outmigration. Some major cities outside of the Sun Belt — including San Francisco, Denver, and Boston — also outpaced other markets for their rate of vacancy increase.
Learn more here.
Declining office property values
About two-thirds of 919 respondents to a survey by Bloomberg believe the US office market will only rebound after a severe collapse. An even greater majority say that US commercial real estate prices won’t hit bottom until the second half of 2024.
That’s bad news for the $1.5 trillion commercial real estate debt that, according to Morgan Stanley, is due before the end of 2025. Refinancing it won’t be easy, particularly the roughly 25% of commercial property that is office buildings. A Green Street index of commercial property prices has already fallen 16% from its peak in March 2022. Learn more here.
Cities best poised for office conversions
Despite similar trends and themes emerging in office markets across the country, individual cities will likely have unique trajectories in figuring out what to do with their excessive office space. The biggest solution identified for the glut of office space hitting primary, secondary, and tertiary markets calls for conversions, typically into multifamily or residential use.
A recent analysis by CBRE Group Inc. examined where office-conversion activity is happening across the U.S., finding about 100 office-conversion projects are expected to be completed in major cities this year. That's a notable uptick from the average of 41 conversion projects annually between 2016 and 2022. Unfortunately, the growth rate is tapering off as developers struggle to obtain financing in the current environment.
Learn more here.
Residential
A renter’s market
For Americans looking to get their foot on the property ladder, buying has perhaps never made less financial sense: CBRE analysis, cited by the Wall Street Journal, suggests that average new monthly mortgage payments are now 52% more expensive than typical rent on an apartment in the US. This disparity is now the most pronounced that it's been across the 27 years of CBRE’s research.
Several factors have coalesced to make buying a house a pipe dream for many people. The new analysis shows that housing is at or near “peak unaffordability,” as steep prices, low inventory, and still-rising mortgage rates keep bidders at bay.
Rents and house prices should move roughly in line, but the real world is rarely so tidy. Indeed, CBRE’s analysis suggests that buying was the “value option” for much of the 2010s — a period that must feel far away for the 51% of non-home-owning Americans who fear they’ll never afford that first purchase. Learn more here.
Mid-density multifamily is missing
NAHB Analysis of the Census Bureau’s Characteristics of Units in New Multifamily Buildings Completed finds that in 2022, 58% of completed multifamily units built-for-rent were in buildings that had 50 units or more. This has been a trend since 2017, where over 50% of completed multifamily units built for rent each year have been in buildings with 50 or more units. The largest decrease in the percentage of completed built-for-rent units between 1999-2022 was in buildings with 10 to 19 units, which saw its percentage drop 21 percentage points from 27% in 1999 to 6% in 2022.
Buildings with under 10 completed units represented 25% of built-for-rent units in 1999; by 2022, this was only 5%. There is a clear trend that multifamily built-for-rent has been increasingly focused on high-density over the past 20 years while the medium to light density has been reduced greatly. The missing middle of the multifamily market continues to be an issue as medium to light-density buildings are not being built at the same rate as in previous decades. Learn more here.
The most expensive non-coastal markets
While housing has become more expensive across the country, the extent remains relative. For example, coastal cities such as Los Angeles and San Francisco have median prices of $940,000 and $1.2 million, respectively. Conversely, places such as Austin, Texas, and Phoenix have experienced over 30% price appreciation since 2020 but still offer median existing homes priced less than $500,000.
Housing affordability generally improves as one moves away from the coast, but even inland markets are reaching affordability extremes. Here are the top five most expensive noncoastal markets across the country today and over time. The rankings are based on median existing home prices and price-to-income ratios. The areas included are metros with a population of 250,000 or greater. Learn more here.
Retail
Macy’s emphasizes small-format off-mall stores
Macy’s, Inc. (NYSE: M) is accelerating the expansion of its small-format store strategy, potentially tripling the total number of its small-format stores through fall 2025. Beginning in 2024, up to 30 new Macy’s small-format locations will open nationwide. This expansion is in addition to the nearly 15 small-format Macy’s and Bloomie’s locations. Paired with a premier digital experience, these small-format stores enhance the company’s store portfolio with a mix of the best on- and off-mall locations to deliver a seamless shopping experience across channels. Learn more here.
Retail Media Networks
Retail media networks (RMNs) – advertising opportunities provided by retailers either online or in their physical stores are catching on. And companies across industries are stepping into the fray. Two segments in particular – superstores and grocery chains – continue to spearhead the RMN revolution, especially when utilizing physical stores.
With massive reach and diverse customer bases, retailers in these categories are particularly well-placed to help brand partners connect with new audiences. And while much of their retail media activity still occurs online, superstore and grocery retailers are increasingly leveraging their large store fleets to lean into in-store and omnichannel RMN initiatives. Indeed, grocery chains and superstores, perhaps even more than other retailers, still attract more visitors to their physical stores than websites.
This means that advertisements in grocery chains and superstores’ offline channels will potentially be seen by many more people than online ads published through the retailers’ digital channels. By embracing holistic strategies that account for physical and virtual visits, major chains in these categories can unleash the full power of their retail media offerings. Learn more here.
Mixed-use
Retail mall reuse planning in the S.F. Bay Area
The 78-acre Hilltop Mall, sitting empty in Richmond since 2021, could become the site of a new multiuse development with new homes, retail, and an employment center. Preliminary renderings shared with the Chronicle earmark most of the property — up to 50 acres — for residential use.
The owners of San Francisco’s Stonestown Galleria have proposed remaking that mall into a mixed-use development with housing and open-air retail. Farther south, prolific life sciences developer Alexandria Real Estate Equities last year unveiled plans to transform San Bruno’s Shops at Tanforan Mall into a 2 million-square-foot life sciences mega campus accompanied by more than 1,000 new homes. And, in San Rafael, the Northgate Mall’s redevelopment plan calls for a mix of housing, shops, and restaurants.
And the future of another San Francisco mall — the Westfield San Francisco Centre downtown — remains uncertain after its owner this summer confirmed that it would return the property to its lenders amid waning foot traffic and other challenges. San Francisco Mayor London Breed has suggested turning the property into a soccer stadium; a feasibility study is underway.
Redevelopment of the Domino Sugar site in NYC
The current developer, Two Trees Management, took control of an 11-acre abandoned sugar-processing complex on Brooklyn’s East River shoreline in 2012. The firm asked that the enormous refinery building (a historic landmark) be turned into office space— an unusually large office development for Williamsburg. The overall development program approved by the City of New York also called for 2,800 residential units (700 affordable). Two Trees also agreed to build and maintain a shoreline park esplanade, as other developments had done.
Making office-building magic out of a massive, difficult-to-adapt structure is complicated enough. And tenants have yet to sign leases. But the former sugar refinery is the centerpiece of a much larger puzzle: the multi-building, $2.5 billion mixed-use redevelopment with spectacular views of Manhattan.
Learn more here.
Metropolitan and regional trends
AI jobs continue to cluster in big tech hubs
Work at the Brookings Institution and elsewhere suggests that the artificial intelligence work is clustering in regions already dominant in high technology in the USA. The reasons for this include the innovation benefits of local clusters, the need for deep pools of specialized talent, and the benefits of “winner-take-most” network effects playing across huge platforms. Learn more here.
Most and least educated metro areas in the USA
To identify the most and least educated cities in America, WalletHub compared the 150 most populated U.S. metropolitan statistical areas (MSAs) across two key dimensions, including “Educational Attainment” and “Quality of Education & Attainment Gap.” The study evaluated 11 key metrics ranging from the share of adults aged 25 and older with a bachelor’s degree or higher to the quality of the public school system to the gender education gap. Unsurprisingly, the ten most educated MSAs tend to have a significant concentration of artificial intelligence employment. Learn more here.
Climate change
A possible benefit for the Midwest of the USA
For decades, the Midwest has been a region left behind as manufacturing and other jobs dried up. Milwaukee County’s population has shrunk 12.3% in the last 50 years. Illinois has lost about 200,000 people since 2009—declining from a population of 12.8 million to 12.6 million. And while sunbelt states like Florida and Texas grew between 2020 and 2022, Illinois, Michigan, and Ohio all lost population, according to the Council of State Governments.
Almost every list of the “best cities for climate change” includes Midwestern cities. Architectural Digest has Milwaukee and Columbus on its top ten list, and Policygenius, an insurance platform, has Milwaukee, Columbus, and Minneapolis on its list. The top 10 list assembled by Jesse Keenan, a climate adaptation expert at Tulane University, almost exclusively consists of Midwest and Rust Belt cities, including Detroit, Duluth, Milwaukee, Minneapolis, Buffalo, and Rochester. Learn more here.
Insurance costs cause slowdown in South Florida
A dramatic increase in property insurance rates this year has helped spur a slowdown in real estate sales and development in South Florida – and it's a situation that's not expected to improve anytime soon. According to industry experts, commercial property insurance rates have spiked from 25% to 100% over the past year, depending on the property type and location. Deductibles are also higher in most cases. Combined with rising interest rates, that has greatly increased the carrying cost of buying commercial real estate. For developers, the triple whammy of expensive builder’s risk insurance, higher interest rates, and elevated construction prices can make some projects too costly to pursue. Learn more here.
Construction
Robots building single-family houses
Close to two years ago, Lennar, ICON, and Bjarke Ingels Group (BIG) announced they would design and build the largest U.S. community of 3D-printed homes. Today, the Genesis Collection at Wolf Ranch has made significant strides to accomplish its goal. The community's first fully furnished model home is now open for scheduled tours, and Lennar has sold several homes already, with the first homeowners targeted to move in this fall. Learn more here.
Around the world
China over-emphasized real estate
How the real estate market became central to China’s economy was long in the making. For years, everyone bet on housing. Local governments lined their coffers with the proceeds from selling land. Families invested in apartments. Jobs for builders, painters, landscapers, and real estate agents were abundant.
Real estate became the single-biggest contribution to China’s breakneck growth. In 2020, the central government turned its focus to the debt that had piled up and restricted the ability of real estate companies to borrow from banks. The policy, known as the “three red lines,” limited how much debt developers could have and left real estate companies scrambling for cash and turning to more risky ways to avoid a cash crunch.
On October 10, 2023, the embattled property developer Country Garden said it could not repay a loan and expected to miss upcoming overseas debt payments due to plunging sales from China’s spiraling property crisis. The announcement highlights that Country Garden, once China’s largest homebuilder, will likely default with roughly $187 billion in liabilities. Country Garden is one of the biggest causalities of China’s imploding real estate market, which also bankrupted Evergrande, another giant property developer. Learn more here and here.
Singapore’s shophouses are hot properties
Buildings constructed during the colonial era- from the 1840s to the 1960s- to house merchants and their families with stores at the street level and living quarters on the upper floors have gone from being considered urban relics to high-priced symbols of sophisticated city life. Their colorful facades, ornate plasterwork, and covered walkways are sought after by hipster restaurants, bars, and boutique hotels, which are doing brisk post-pandemic business as tourism returns to the city-state. Learn more here.
