Urbanexus Update - Issue #128
This selection of economic, real estate, and community development news and information comes from H. Pike Oliver. Some items are behind a paywall.
The economy
Consumer demand and lasting effects of COVID-19
Consumer demand will change for years to come due to the pandemic, as longstanding habits and behaviors were upended during its height. While there is reason to be optimistic for a robust recovery in consumer spending once the COVID-19 virus is controlled due to pent-up demand and a significant accumulation of savings, the pandemic, like other crises, will leave lasting marks.
Unlike previous recessions, this one involves no consumer debt overhang, bursting asset price bubbles, or long-term business cycle fluctuations. The sudden and deep drop in consumer spending across China, the United States, and Western Europe, ranging from 11 to 26 percent in the initial months of the pandemic, resulted mainly from cutbacks to in-person services, especially travel, entertainment, and dining
The McKinsey team found that e-grocery shopping, virtual healthcare visits, and home nesting were likely to stick while remote learning, declining leisure air travel, and decreasing live entertainment would likely revert closer to pre-pandemic patterns. In contrast, wider adoption of work from home has reduced demand for business air travel, with some estimates indicating a 20 percent or more drop could be permanent, and that will have an impact on the routes and flights available for leisure travelers. In entertainment, where box office revenue globally in 2020 was only 20 to 35 percent that of 2019, they expect a lasting drop in demand for movie theaters, due to the high likelihood of permanent theater closures and the shift to digital channels by movie studios.
A boom in the USA has begun, but can it last?
High-frequency economic data suggest it’s full steam ahead. The monthly employment report, published on April 2nd, painted an impressive picture: over the previous month America created more than 900,000 jobs. That figure, the strongest since August, reflects the state of the economy in the first half of March, when the surveys took place. But a look at “high-frequency” economic data for more recent weeks, on everything from daily restaurant diners to Google-search behaviour, suggests that, since then, the recovery has if anything accelerated further. America’s post-lockdown boom has begun.
Yet two factors could spoil the party. One relates to economic “scarring”. Some economists worry that the pandemic has damaged America’s productive capacity. If lots of businesses have gone bankrupt, then even with buoyant demand many Americans will not have jobs to go back to.
The second factor relates to fears that infections could take off again, despite the momentum behind vaccination. There are particular concerns about coronavirus variants, such as one first found in Britain, which spread more easily (though the prevalence of the “British variant” has not stopped cases tumbling in Britain itself, where, as in America, vaccination has been proceeding apace). Cases of covid-19 in America are now rising again. Some places, such as Chicago and New Jersey, have paused reopening.
That is slowing the recovery, but not yet stopping it. Widespread vaccination has weakened the link between infection and hospitalisation. In Michigan and Florida, two states with high levels of the British variant, the Google-Economisteconomic-activity index has lost steam in recent days, though it is still stronger than it was in the first quarter of the year. There will be setbacks along the way, but expect the good economic news to start piling up.
Job matching key to economic recovery
When reflecting on the future of the economy and its recovery, sometimes it’s good to look back. For instance, one of the lessons learned from the pandemic of 1918 was that people will make up for lost time, says Scott Brown, chief economist for Raymond James. “That’s one of the reasons we had the Roaring ’20s.”
Americans have made substantial gains in consumer spending on durable goods, according to Brown. Examples include the sales of motor vehicles, which have trended upward. Year-over-year increases in the consumer price index are likely to reach 3 percent this spring, but that is viewed as a rebound from low figures a year earlier. Inflation has risen to 2 percent and is on track to moderately exceed that figure. Keep in mind that government debt does not drive inflation, pointed out Brown.
According to the economist, stimulus checks have not fueled a great deal of spending as Americans have utilized 70 to 80 percent of the checks for paying off debt or adding to savings. But the extension of unemployment benefits could be a bigger factor. The $300 benefit that the federal government added back in January will last until Labor Day.
As of February, the U.S. unemployment rate sat at 6.2 percent, which translates to 9.5 million jobs less than February 2020. Since the U.S. typically adds about 2 million jobs per year in a healthy economy, the figure is really 11.5 million jobs below where it should be, according to Brown.
“A key issue of the recovery is going to be matching people with jobs and getting people back to work,” said Brown.
CRE outlook
Most of Brown’s discussion on the various commercial real estate property types centered on the office sector. Work-from-home will likely be an ongoing phenomenon and will have a bigger impact in large cities, Brown predicted.
“Why would you want to commute an hour anymore if you can work from home? A lot of that demand is just not going to come back,” said Brown.
Smaller markets with less traffic and less density are likely to see demand for office space come back at a healthier rate. Additionally, Brown doesn’t expect it will take too long before we begin to see what the real future of office will look like. A lot of office users are beginning to make those decisions on their spaces now.
Real estate finance
CMBS (Commericial Mortgage Backed Security) or "conduit" loans, as they are sometimes called, are a popular investment vehicle for commercial properties. Generally speaking, agency loans from Fannie Mae, Freddie Mac, and even U.S. Department of Housing and Urban Development (HUD) provide the lowest-cost financing available on the market today, however, they aren't always ideal for everyone. The high net worth and liquidity requirements may prove to be a barrier for entry for many investors. Additionally, HUD and agency loans are typically only available for strictly multifamily properties (occasionally with a small commercial component allowed), while mixed-use properties with heavy commercial components usually do not qualify. For investors in either scenario, CMBS loans, also referred to as conduit loans, may be the ideal solution.
Unlike other key types of apartment financing, CMBS loans are securitized (pooled into a large group of CMBS loans) and then sold to investors on the secondary market. This means that lenders are able to wipe their hands clean of most of the risks associated with holding the loan. However, this can make things complicated for borrowers. Because conduit loans are packaged together and sold to investors, they're not serviced by the lender that initially issued them. Instead, they're serviced by a third-party firm, also referred to as a Master Servicer.
2021 capital markets environment
NorthMarq executives connected with nearly 50 correspondent lenders and more than 150 debt experts in an effort to better understand the capital markets environment in 2021 and to share information about opportunities within the market.
Residential
S&P Case-Shiller home price index for 2020
Home prices continued to increase across the U.S. The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 10.4% annual gain in December, up from 9.5% in the previous month. The 10-City Composite annual increase came in at 9.8%, up from 8.9% in the previous month. The 20-City Composite posted a 10.1% year-over-year gain, up from 9.2% in the previous month.
Phoenix, Seattle, and San Diego continued to report the highest year-over-year gains among the 19 cities (excluding Detroit, due to lack of data) in December. Phoenix led the way with a 14.4% year-over-year price increase, followed by Seattle with a 13.6% increase and San Diego with a 13.0% increase. Eighteen of the 19 cities reported higher price increases in the year ending December 2020 versus the year ending November 2020.
Wall Street's increase presence in the housing market A debate about the effect of the increasing footprint of large, institutional investors in the housing market is further fragmenting the politics of development in the United States.
Office
Dropbox-anchored office campus in San Francisco sells for $1,440/sq.ft. — rebusinessonline.com
Kilroy Realty Corp. (NYSE: KRC) is selling The Exchange on Sixteenth, a 750,000-square-foot office campus located at 1800 Owens St. in San Francisco’s Mission Bay neighborhood. KKR, a private equity firm based in New York, is the buyer. The purchase price is a little more than $1 billion, equating to approximately $1,440 per square foot. Kilroy Realty says this is the highest per-square-foot sales price for a “major property” in the history of San Francisco’s commercial real estate market.
Lots of parking in Microsoft HQ renovation
Microsoft began construction on its multibillion-dollar East Campus refurbishing project in Redmond (Seattle area) more than two years ago. Despite the pandemic and speculation that more flexible post-Covid remote-work policies will mean less need for office space, Microsoft has soldiered on with the project.
The company has torn down several of the Redmond headquarters’ original buildings — many 34 years old — to make way for 18 new buildings, totaling 2.5 million square feet, with room for up to 8,000 new employees. New details about the project, include one of the largest underground parking structures in the world, with 3 million square feet divided among four levels.
When you go back to the office, will you recognize it?
Employers, architects and commercial real estate experts are now contemplating what post-pandemic office work will look like, with ramifications that extend far beyond the average cubicle dweller. Millions of square feet of office space today sit empty, once home to thousands of employees who commuted, spent money at nearby cafes, and sustained employers’ demand for pricey downtown office space.
After pandemic, shrinking need for office space could crush landlords Some big employers are giving up square footage as they juggle remote work. That could devastate building owners and cities.
Residential
Japan does housing better than the USA
Japan’s national government controls land use and buildings to a larger degree than do national authorities in other affluent democracies. It’s likely no coincidence that Japan’s overall system of regulating housing has always been simple, uniform, and markedly more welcoming to homes of many sizes and types than are other nations’ policies. This national control has only grown in recent decades, even as other nations have gone into residential lockdown. (In the advanced industrial democracies overall, the number of dwellings built per year, adjusted for population, has fallen by more than 60 percent since the early 1970s, according to The Economist. Japanese homebuilding, meanwhile, has remained robust throughout.) In Japan, a broad public interest in abundant housing has usually trumped parochial housing obstructionism.
California legislative reforms helped affordable housing
A clever developer from Los Angeles has figured out how to combine California's Senate Bill 35 with low-income housing tax credits and density bonuses – to make a ministerial review of an affordable housing project work in a community in an affluent county – but already has lots of affordable housing. And the key to making the project work was not just Senate Bill 35, but also Assembly Bill 1763, a 2019 bill that gave affordable housing developers more leverage over resistant local governments.
The community is Marin City, in the southern part of Marin County in the San Francisco Bay Area. Marin City has had a large African-American population ever since it was built as defense housing during World War II. After redevelopment in the ‘70s, Marin City came to have a variety of housing types, including single-family homes, public housing, and co-ops – all pretty affordable by Marin County standards.
U.S. homeowners gained record $1.5 Tn of equity in 2020 According to CoreLogic's latest Home Equity Report for the fourth quarter of 2020, U.S. homeowners with mortgages (which account for roughly 62% of all properties) have seen their equity increase by 16.2% year over year.
Regional and metropolitan dynamics
Perhaps the most obvious impact of COVID-19 on the labor force is the dramatic increase in employees working remotely. To determine how extensively remote work might persist after the pandemic, a McKinsey & Company team analyzed its potential across more than 2,000 tasks used in some 800 occupations in eight focus countries that represent about half of worldwide population and 62% of economic activity.
Considering only remote work that can be done without a loss of productivity, they found that about 20 to 25 percent of the workforces in advanced economies could work from home between three and five days a week. This represents four to five times more remote work than before the pandemic and could prompt a large change in the geography of work, as individuals and companies shift out of large cities into suburbs and small cities. They also found that some work that technically can be done remotely is best done in person. Negotiations, critical business decisions, brainstorming sessions, providing sensitive feedback, and onboarding new employees are examples of activities that may lose some effectiveness when done remotely.
Understanding major metropolitan migration in the USA It has been clear for years that net domestic migration to and from major metropolitan areas (over 1 million population) has been characterized by moving out of costly areas, like Los Angeles, the San Francisco Bay Area and New York to much less expensive areas, like Dallas-Fort Worth, Houston, Atlanta and Nashville. However, within these metropolitan areas, there are substantial variations.
Most Seattleites who moved out in 2020 didn’t go far
The number of Seattle households filing change-of-address requests to leave the city was up 36% in 2020, compared to 2019. But Seattle's grass still looks greener to some.
Seattle’s mistakes benefit Bellevue — www.seattletimes.com
Seattle, struggling with crime and homelessness, is poorly positioned to reclaim its superstar status as the nation tames the coronavirus pandemic, writes Seattle Times economy columnist Jon Talton.
The world’s least affordable cities to buy a home Which housing markets in the world are the most expensive? Here's a look at the least affordable cities based on their price-to-income ratio.
Environment and sustainability
The Carbon Leadership Forum at the University of Washington has completed a research project with a major US tech company to understand the potential of using low-carbon and carbon-storing materials in new construction. The project focused on carbon-intensive hotspot materials (e.g., concrete foundations and slab floors, insulated roof and wall panels, and structural framing) in light industrial buildings. The study found that a sizable reduction (~60%) in embodied carbon is possible in two to three years by bringing readily-available low-carbon materials into wider use. The report may be downloaded here.
Updating the U.S. government’s social cost of carbon
The social cost of carbon (SCC), the total cost to society from the release of a ton of CO2 emissions, is vital in evaluating the benefits and costs of climate policies. To bring the SCC to the frontier of knowledge, Tamma Carleton and Michael Greenstone of the Climate Impact Lab recommend that the Biden administration immediately update it by using a discount rate of no higher than 2 percent and including global damages. These changes would produce a social cost of carbon of $125 per metric ton. As a second step, they recommend that the Biden administration form an interagency working group with the goal of returning the SCC to the frontier of understanding about the science and economics of climate change.
Urban planning and design
Dangerous by design The deadliest metro areas and states for people walking have been identified in Dangerous by Design 2021. The number of people struck and killed while walking has gone up 45 percent in a decade, and people of color, older adults, and people walking in low-income neighborhoods were killed at significantly higher rates.
Biophilic research and design is gaining increasing attention. Think Wood’s new Biophilic Design LookBook explores Terrapin Bright Green’s "14 Patterns of Biophilic Design” in over 50 pages of project examples and the latest research.
Dealing with homes at risk from rising seas Sea level rise is threatening billions in coastal property. A California lawmaker is proposing a novel way to retreat from the threat: buying and renting out properties as long as they're habitable.
Real estate leadership
Lennar's chief medical officer
Last year, Lennar, the second-largest home building firms in the USA (based on closings), became one of the first companies outside of the health care industry to hire a chief medical officer. Dr. Pascal Goldschmidt, the former dean of the University of Miami’s medical school, came on as a consultant in March 2020. Goldschmidt talks about how he has been helping one of the home building industry’s largest companies and its nearly 9,500 employees during the pandemic.
Evolution of the built environment
The forgotten history of our first skyscrapers
Karrie Jacobs interviews Donald Friedman about his latest book, which offers new insight into the earliest supertalls.
