Urbanexus Update - Issue #121
H. Pike Oliver assembles and distributes selected economic, real estate and community development news and perspectives every few weeks. Some items are behind a paywall.
The economy and real estate
Note that in the economic forecast excerpts copied below:
GDP = gross domestic product
2Q= second quarter
3Q - third quarter
4Q - fourth quarter
QoQ = quarter over quarter
AR = annual rate
SAAR = seasonally adjusted annual rate
From Merrill Lynch:
We expect 2Q GDP to be unrevised at -31.7% QoQ SAAR in the third and final release. We continue to track 27% qoq saar for 3Q GDP. [Sept 25 estimate]
From Goldman Sachs:
The details of the durable goods report were broadly consistent with our expectations. We left our Q3 GDP tracking estimate unchanged at +35% (QoQ AR). [Sept 25 estimate]
From the NY Fed Nowcasting Report
The New York Fed Staff Nowcast stands at 14.1% for 2020:Q3 and 5.0% for 2020:Q4. [Sept 25 estimate]
And from the Altanta Fed: GDPNow
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2020 is 32.0 percent on September 25, unchanged from September 17 after rounding. [Sept 25 estimate]
It is important to note that GDP is reported at a seasonally adjusted annual rate (SAAR). A 30% annualized increase in Q3 GDP, is about 6.8% QoQ, and would leave real GDP down about 4.2% from Q4 2019.
The graph below shows the percent decline in real GDP from the previous peak (currently the previous peak was in Q4 2019). This graph is through Q2 2020, and real GDP is currently off 10.2% from the previous peak. For comparison, at the depth of the Great Recession, real GDP was down 4.0% from the previous peak. The black arrow shows what a 30% annualized increase in real GDP would look like in Q3.
Even with a 30% annualized increase (about 6.8% QoQ), real GDP will be down about 4.2% from Q4 2019; a larger decline in real GDP than at the depth of the Great Recession.
Construction volume is unlikely to return to Feb 2020 level at any time in the next three years. Dodge updated their forecast to show 2020 construction starts for nonresidential buildings fall on average 20%, less in some markets, but -30% to -40% in a few. Only warehouses is up. Non-building starts fall on average 15%. Only the highway and bridge sector is up. Residential starts may fall only 5%-10%.
How those lowered starts affect spending is spread out over cash flow curves for the next few years. This has a major impact on jobs later in 2020 and all of 2021 into 2022. For nonresidential buildings, the greatest impact to spending and jobs affected by a reduction of new starts in 2020 occurs from 2021 into 2022 when many of those lost starts would have been reaching peak spending.
Real estate finance
Another new low in interest rates
Mortgage interest rates saw another new. The 30-year fixed mortgage rate hit 2.86% as of mid-September 2020, and the momentum suggests we will see at least one more new lowest rate as we approach the fall season.
With the decrease in rates, applications continued to increase, even through the Labor Day weekend. For the week ending Sept. 4, both purchase and refinance applications increased 3%, but refinances continued to show dominance by making up 63.1% of the total number of applications.
Blackstone assembles biggest real estate debt fund ever One of the largest commercial property owners just raised $8 billion in debt funds, making it the largest real estate credit fund ever raised
Residential
LF Capital Acquisition Corp. has entered into a definitive merger agreement with Newport Beach, Calif.–based builder Landsea Homes in a transaction valued at $510 million. With unanimous approval by both companies’ board of directors, the proposed transaction is expected to close in the fourth quarter of 2020.
Post-closing, Landsea Homes plans to expand its business both within its core markets of California and Arizona and grow organically to potential new, high-growth markets. Once the transaction is complete, the combined company will be named Landsea Homes Corp
Pandemic impact on global construction and housing
The impact of COVID-19 on the home building industry is a key concern for most, if not all, countries. There are common vulnerabilities in the global home building industry that are being exacerbated by the pandemic. Moreover, the extent to which these industries are interconnected has never been so deep. The supply chains of labor and materials in one country are dependent on the availability and manufacture of these materials in another. Countries that have had similar public health responses have also seen similar setbacks for construction.
Furthermore, COVID-19 has had a notable impact on planning and time-sensitive functions. These adverse effects may be attributed to the transition away from in-person business and towards a more online and remote form. It can also be inferred that the introduction of workplace safety measures and public health guidelines require resources and attentiveness that has slowed the various aspects of construction. In the U.S., for example, these changes have accelerated housing demand, while pushing lumber prices to new highs.
US home purchasing highest in over a decade
For the week ending September 18, 2020, the Mortgage Bankers Association's latest Weekly Application Survey showed a jump in application activity, both in purchasing and refinancing, as its Market Composite Index increased 6.8% from the previous week on a seasonally adjusted basis.
Most notably, the Purchasing Activity reached its highest level since January 2009, when it was only 5.3% higher. The refinancing activity level increased by 8.8% from the previous week, despite an increase in the MBA’s tracked contract rate of the 30-year fixed-rate mortgage by 3 basis points to 3.1%, still a few basis points above the record low rate reached at the beginning of August. The solid level of home buyers reflects a robust housing market that has proven to be resilient in the face of the current economic downturn, driven by some changes in the geography of demand.
Examining rental housing — eyeonhousing.org
The Rental Housing Finance Survey (RHFS) released by the U.S. Census Bureau contains useful information on rental housing in the USA.
The housing market for two Americas One America is living in a housing boom. The other needs support from the government or family for an affordable place to live.
Pandemic, protests, and wildfires affect rents The pandemic, protests, and now wildfires are dimming the attraction of once-attractive neighborhoods—and that might be a good thing.
The CDC and rental housing evictions
The New and extraordinary CDC ban, announced September 1st, on evictions comes as a shock for two reasons. First, we have never before seen the CDC, a respected science agency, take a mission creep leap like this. Second, many states, like California have been crafting their own rules to protect renters directly affected by landlords, but with some provisions to allow reasonable evictions by landlords and place more burden of proof on tenants. All those state rules, hammered out in negotiations that generally included apartment owners, are now for naught as the Federal guidelines have supremacy.
New privately-owned housing units started as a percentage of total households
Private housing unit production as a percentage of households in the USA has declined since the 1970s--peak percentage was 3.54% in 1972 and the lowest was 0.47% in 2009. It was 1.00% in 2019.
Thinking big and building small — www.planetizen.com Dan Parolek, inventor of the term Missing Middle Housing, has written a new book on the subject, available now from Island Press. The following excerpts offer insight into overcoming planning and regulatory barriers to deliver the desired housing.
Anticipating a Los Angeles multifamily recovery
Reducing the Los Angeles economy to the entertainment industry would be a serious mistake. In fact, the L.A. labor market is highly diversified with world-class healthcare, professional services, biotech and technology clusters providing co-sector leadership — no one-trick pony is this. Nonetheless, the entertainment industry is the single element that separates this metro economy from all others, and its tentacles are long. In its absence, the metro’s financial and professional services, tourism and digital media sectors might seem almost ordinary.
Hollywood content production has been curtailed dramatically by social distancing demands. Active filming in the second quarter plummeted 98 percent from the year before, according to nonprofit industry group FilmLA. This has a devastating effect on thousands of employees on industry payrolls and many times more freelancers, sole proprietors and contract employees that make up the bulk of the film and TV industry’s creative workers.
How quickly can Los Angeles recover from this deep hole? If history is any guide, the answer is several years. In each of the past two recessions L.A. employment returned to pre-crisis peaks only after 48 months or longer. Could a swift return of TV and film production accelerate the process? Absolutely--the coming L.A. recovery may require only half the time of the 2000 and 2009 events.
Overhaul of Jordan Downs housing in Los Angeles
Jordan Downs, an expansive housing complex in the Watts area of Los Angeles, is in the midst of a $1 billion redevelopment. Originally built for factory workers during World War II, Jordan Downs was converted into low-income housing in the 1950s. Under the redevelopment’s 10-year master plan, the complex will double in size.
Multifamily construction gains for lower-density markets in the USA — eyeonhousing.org
The Q2 2020 NAHB Home Building Geography Index (HBGI) reveals a notable multifamily construction shift to the suburbs/exurbs.
Office
How long until Manhattan offices are reoccupied?
Demand for office space has slumped. Lease signings in the first eight months of 2020 were about half of what they were a year earlier. That is putting the office market on track for a 20-year low for the full year. When companies do sign, many are opting for short-term contracts that most landlords would have rejected in February.
At stake is New York’s financial health and its status as the world’s corporate headquarters. There is more square feet of work space in the city than in London and San Francisco combined, according to Cushman & Wakefield, a real estate brokerage firm. Office work makes up the cornerstone of New York’s economy and property taxes from office buildings account for nearly 10 percent of the city’s total annual tax revenue.delaying signing new leases until rents drop and the pandemic passes.
A new tall office tower in Midtown Manhattan
SL Green Realty Corp. (NYSE: SLG), a locally based developer and Manhattan’s largest office owner, has opened One Vanderbilt. The $3.3 billion office tower is located across the street from Grand Central Station in Midtown Manhattan. Designed by Kohn Pederson Fox Associates, One Vanderbilt spans 1.7 million square feet. Rising 77 stories and 1,401 feet, it is the tallest commercial building in the Midtown area. It is 67% leased.
Hospitality
Hotel occupancy in the USA declined 32% year-over-year — www.calculatedriskblog.com
The graph shows the seasonal pattern for the hotel occupancy rate using the four week average. The red line is for 2020, dash light blue is 2019, blue is the median, and black is for 2009 (the worst year since the Great Depression for hotels - before 2020). Ironically, there was some boost by Hurricane Laura and the western fires, but it seems unlikely business travel will pickup significantly in the Fall.
What the restaurants might Look Like — www.bloomberg.com
As Covid-19 wreaks continued havoc across the globe, restaurants are still among the hardest hit industries.
Retail
New report on the future of retail
New technologies in the retail sector are likely to mean more monitoring and coercion of workers, and a stronger advantage for large companies like Walmart and Amazon, according to a new report co-authored by Chris Tilly, professor and chair of UCLA Luskin Urban Planning.
E-commerce has accelerated during the COVID-19 pandemic, but stores have still remained an important way of selling goods, according to Tilly and co-author Françoise Carré, research director of the Center for Social Policy at the University of Massachusetts, Boston. “We have been hearing about e-commerce wiping out retail stores and jobs, but our two years of research tell a very different story,” Carré said.
Brookfield and Simon to acquire JCPenney for $1.75B
Brookfield Property Group and Simon Property Group have agreed to acquire the retail and operating assets of J.C. Penney Co. for $1.75 billion at a bankruptcy auction.
As part of the sale agreement, the three companies will form a property holding company (PropCos), which will include 161 of the J.C. Penney real estate assets and all of its owned distribution centers. The Plano-based retailer’s Ad Hoc Group of First Lien Lenders will own PropCos.
Regional and metropolitan dynamics
Truckee, Calif., is a mountain town just northwest of Lake Tahoe. It is sort of an outdoorsy paradise. It has great skiing, mountain biking and hiking opportunities, as well as a river and lakes. It also has some great restaurants and a budding art scene. And if you're a Bay Area resident in the market for a house, it has another thing going for it: It has a median home price that's roughly half that of San Francisco, about three hours away.
Like a lot of other vacation destinations — the Hamptons, Cape Cod, Aspen and so on — the Truckee housing market is booming during the coronavirus pandemic. It's up over 23% since last year, according to data from Redfin, a real estate brokerage. Truckee is part of a trend that realtors and journalists are calling "Zoom towns," places that are booming as remote work takes off.
This Is the great reshuffling — www.strongtowns.org The fallout from the pandemic is spurring a housing re-shuffling in San Francisco. And not just from people fleeing the city—but people moving to the city and within the city.
On September 2, 2020, The New Republic ran a story with headline “The Suburbs Are Still Hell” that summarizes new work about the problems of American suburbia but relies on old tropes about the lack of “organic social interaction” including “existential despair” and alienation. This piece is unnecessarily polarizing and simply does not square with views of many Americans. Statistics about suburbia are quite clear: Americans like the suburbs and want to be in them.
The problem is that while some writers may feel social lives do not exist outside of cities, that simply is not true. Data from the American Enterprise Institute's Survey on Community and Society—conducted before the COVID-19 pandemic—shows that socialization patterns were as high in the suburbs as city centers and that Americans rated suburbs as very desirable places to live.
In terms of overall quality of life, suburbanites express the highest overall satisfaction, with 87 percent rating their area as a good or excellent place to live. For city dwellers, it was 74 percent. Small town and rural residents were in between those two.
Two decades of interstate migration America is still a mobile nation. Back in the 2000-2010 decade, 12.9 million people moved interstate, nearly five percent of the total population. In the 2010s the population has been a bit less mobile, with net domestic migration of 11.7 million residents, slightly under four percent. Nonetheless, 11.7 million is a large number. This is nearly equal to the population of Ohio, with only five states being larger (California, Texas, Florida, New York, Pennsylvania and Illinois). This article describes net domestic migration trends by state from 2000 to 2019 (Note).
Millions may be displaced in the coming decades by fires, hurricanes, extreme heat and rising seas. Where will they go?
Community development
A reckoning with single-family zoning and racial equity
Zoning laws in cities nationwide continue to preserve the legacy of redlining, excluding many people of color from homeownership.
Could golf courses become sites for housing in L.A.?
The Rancho Park Golf Course is an 18-hole, par 71 municipal course in the affluent West L.A. neighborhood of Cheviot Hills, near Century City. The greens used to be the domain of a private club, but became part of a Los Angeles city park after World War II. “It’s a really pretty park,” says Dermot Connell, an L.A. golfer who is very involved in the city’s municipal circuit and serves as a Rancho Park board member. “From almost every point at Rancho, you can get a perspective of the city. It’s unique in the sense that you’re in the middle of a major metropolitan area — yet there you are, walking along a tree line in a little oasis of solitude.”
However, the course looks a little different to Daniel Dunham, a designer at the Santa Monica-based Koning Eizenberg Architecture firm. To him, Rancho Park would be an ideal spot to build affordable housing. Dunham estimates that one could fit 15,000 units — homes for about 50,000 people — on the 200-acre site, which is also within walking distance of both an upcoming Purple Line extension and a station on the Expo subway line. And Rancho is just one of the 19 courses available to L.A. duffers — the city operates the largest public golf system in the United States.
An auction of public land in Arizona
More than four square miles of state land in Apache Junction on the eastern edge of the greater Phoenix area is being auctioned off this coming month for what might seem like bargain-basement prices. But top officials at the Arizona Land Department say the minimum bid price in the range of $25,000 an acre is not giving the 2,783 acre parcel just inside Pinal County and adjacent to existing development away. The Arizona Land Department will be taking bids only from those with unrestricted cash or equivalents of at least $40 million, have a net worth of not less than $400 million, and have “relevant experience” in developing a planned community of at least 1,000 acres and at least 2,000 residential units.
Cities don't need parking minimums The evidence shows that the market will take care of demand for parking and housing alike.
Did SUVs ruin the environment?
SUVs “ruined the environment,” says to a rather shrill article in the Guardian that was also reprinted in Mother Jones and other publications. It reached this conclusion based on a study showing they were the “second largest contributor to the increase in global carbon emissions from 2010 to 2018.”
But the reality is that today, thanks to improvements in engine technology and streamlining, most SUVs get pretty good fuel economy. In 2017, the latest year for which data are available, the average light truck (which includes SUVs, pickups, and full-sized vans) used the same amount of energy per vehicle mile as the average car did in 1990 and used only 11 percent more energy than the average car in 2007.
Walking has been having a moment for a while now. Books and research have been proliferating about the joys and benefits of walking, which include cultural exchange, spiritual enlightenment, and cognitive and creative benefits. Research regularly concludes that even small walks stimulate one’s imagination and enhance focus, and findings note that those who walk regularly are healthier and live longer than those who do not. This is a reminder that planning and providing for safe and attractive routes for walking has broader benefits.
Environment
McKinsey on climate change — www.mckinsey.com
During Climate Week, McKinsey & Company presented a special downloadable collection bringing together their research and perspectives on the climate risks the world must confront and actions to reduce emissions.
As concerns over climate change rise, more developers turn to wood — www.nytimes.com With environmental benefits and lower labor costs, mass timber has grown into a market that could rival steel and concrete in the construction industry.
Real estate enterprise
A family-owned real estate company
For Mid-Wilshire Los Angeles-based developer Decron Properties Corp., family is key. The family-owned, multigenerational company works as a tight-knit team and is pursuing expansion plans. Leverage accounts for about 52% of Decron’s current portfolio, and now the company is looking at more multifamily and industrial properties in and outside of California. David Nagel said the company “always planned for trouble,” which will allow it to do well during a recession. “. . . As a fundamental structure within our company, and part of our ultimate strategy, is leverage. We are always very careful in watching our leverage. We want to be able to ride out a recession.”
