Urbanexus Update - Issue #112
H. Pike Oliver distributes a weekly selection of real estate and community development news. Some items are behind a paywall.
The economy
Slow recovery from COVID-19 Impact
As pandemic-driven restrictions steadily ease across the country, all 50 states have now entered some form of gradual economic reopening. Customers are returning to retailers and office workers returning to their cubicles, but businesses are still struggling to recover from the impacts of COVID-19.
In a webinar titled “The Future of Real Estate,” Michael Acton, head of research at AEW Capital Management, addressed key reopening data, demographic trends and his real estate outlook for the remainder of 2020 on into 2021.
US retail sales rebound in May, but future unclear
The recovery is tentative, and it remains to be seen how the pandemic will change consumer behavior and the shopping experience over the long term. Total sales, which include purchases in stores and online as well as money spent at bars and restaurants, rose 17.7 percent in May from the previous month, the Commerce Department said Tuesday. That followed a 14.7 percent drop in April, the largest monthly decline in nearly three decades of record-keeping, and an 8.3 percent decline in March.
Collateralized Loan Obligations in the commercial real estate market are pools of floating rate loans sold in the secondary market. It’s a major underpinning of the bridge loan sector. It has been virtually shut down since early March as no bond buyers were active. Activity has started up again in the past few weeks as some pools of selected pre-COVID originated loans are being successfully securitized. Spreads are wider, for example: pre-COVID pricing for AAAs was approximately LIBOR + 100. Those bonds are now selling at about L + 235 with oversubscribed buyer interest. Look for bridge loan programs offering 80% LTC loans at L + 275-300 pre-COVID to now offer 60-70% LTC at L + 450 – 550. And the now familiar stratification of product types will be in effect: multifamily and industrial in favor, with office needing a good story, retail very selective and no hotels.
Real estate trends and compensation changes
What will real estate look like in the new normal?
Per Christopher Lee, we must stop assuming that “things will get back to normal”…they won’t! Every real estate firm will need to accelerate the transformation around best practices [generated daily], collaboration, flexibility and focused priorities. The coronavirus was and is a world-changing event that has touched the lives of nearly everyone on the planet, and recent social protests have further highlighted the challenges ahead. While it is impossible to have a generic outcome and timing for all, the real estate industry is at the precipice of challenge or opportunity, distant memories or long-term relevance and inactivity vs. strategic action. The lessons of the past, experiences of the present and the visionary expectations for what can be are embedded in the going-forward priorities for every real estate firm. You don’t have to figure it out completely before taking action…just start taking the next steps. Read more for Dr. Lee's assessment of the factors that are and will continue to influence the real estate industry curing the coming years and decades and the dramatic shifts in compensation policies and practices within real estate organizations across the USA.
Retail
24 Hour Fitness to permanently close 132 stores
Fitness center retail chain 24 Hour Fitness has filed for Chapter 11 bankruptcy protection stemming from revenue losses during the COVID-19 pandemic. The San Ramon-based company expects to secure $250 million in debtor-in-possession financing, which is subject to court approval. The fitness chain has also announced its intention to permanently close 132 of its 300-plus gyms. In California alone, 24 Hour Fitness will shutter 41 locations, and in Texas another 26 will permanently close as the company will focus on reopening its other gyms across the country.
CIM Group passes on Baldwin Hills Crenshaw Plaza
CIM Group, which announced in April that it had entered into an agreement to purchase the 869,000-square-foot Baldwin Hills Crenshaw Plaza, revealed June 14 that it was stepping back from the deal. “CIM has concluded that the community, the Mall, and CIM are best served by us stepping aside,” the company wrote in an Instagram post.
Terms of the original deal had not been disclosed, but industry insiders had pegged the price at more than $100 million. Baldwin Hills Crenshaw Plaza occupies 40 acres at 3650 W. Martin Luther King BOulevard in Los Angeles. CIM’s proposed purchase of the site had met with opposition from some members of the community.
Retail to office
Former Macy’s to be Amazon cloud-computing office
Where shoppers once browsed in a Seattle suburb, software engineers will build cloud computing data bases.
Housing
COVID-19 challenges U.S. housing — seekingalpha.com
Despite apparent normalization, closer examination of the US housing market suggests a number of COVID-19 related structural challenges. This time around, it is the feedback loop from dislocation in the real economy to the US housing market that is the main problem, rather than the reverse, as it was in 2008. Therefore, the first challenge is the impact from the spike in unemployment. This caused a surge in mortgage loans in forbearance, as borrowers who are furloughed, or unemployed, accessed the support offered by the CARES act, allowing payments to be deferred or reduced for up to 12 months. Historically, mortgage delinquencies have been strongly correlated with the US unemployment rate.
Pandemic effects on home and community
As most of the nation was under stay-at-home orders through March and April, “home” was suddenly everything, and the silence about the industry was deafening. Even as crushing levels of unemployment mounted, online searches and virtual home shopping increased. The America at Home Study, conducted from April 23 to April 30, surveyed a nationally representative sample of 3,001 consumers 25 to 74 years old with household incomes of $50,000-plus; 77% are homeowners, 20% are renters, and 3% currently live with relatives or friends. When the survey was conducted, nearly half (48%) of the respondents or another household member had lost a job or income as a result of COVID-19.
One of the key findings was that Americans had already begun to make changes to both their homes and garages in response to COVID-19. Current home design and spaces that may have worked as intended before the coronavirus no longer did. Open concept floor plans suddenly proved challenging when one room simultaneously had to function as a home office, a classroom, and, in some cases, a sleeping space. Areas in the home designed with one purpose in mind were being converted and used for combined purposes by more than one-third of all survey respondents and nearly half of all millennials.
Regional and metropolitan dynamics
When workers can live anywhere The coronavirus has prompted Americans to reassess the need to reside near hot job markets.
Covid-19 heads to less dense areas of the USA
As the disease spreads, it touches different sorts of people in different sorts of places. In late March, according to Mr Frey, more than four-fifths of the population of newly-infected counties lived in inner cities, especially in the north-east. By the end of May, more than half the residents of newly infected counties lived in outer suburbs, smaller towns or rural areas. Almost half of those counties were in the South (see chart).
