#CRE - FRG Consultants

What’s Red, Blue and Gray All Over?

The population of the United States is rapidly growing older. According to the US Census Bureau, the number of older Americans is projected to more than double from 2010 to 2050. And by 2030, Americans 65 and older are estimated to represent over 20% of the total population. Technological advances and modern medicines are contributing to a greater number of seniors each year.

Question: Is the country prepared to meet the housing needs of this growing demographic?

According to the US Census Bureau, as of July 2022, there were approximately 144 million housing units in the US and of those housing units almost two thirds are owner occupied. Seniors living in lower income households cannot find the means to adequately update their homes to meet their needs as they age. Aging in place is becoming more of a challenge for this demographic group due to high home maintenance cost, interest rates, and a reduced income as seniors rely on social security and/or part-time work.

Several state governments are paying attention and trying to make it easier to age in place. The Institute for Taxation and Economic Policy (ITEP) provides a list of states that offer lowered property tax options, renter’s aid and reverse mortgages through HUD’s Home Equity Conversion Mortgage (HECM) program. For example, Iowa’s legislature recently passed bill SF 619 for the Elderly and Disabled Homeowners. The bill allows income qualified seniors to exempt $3,250 of taxable value of their primary residence for the 2023 tax year and $6,500 for the 2024 tax year. Similarly, Connecticut’s state law offers an income-based property tax credit up to $1,000 for single homeowners.

Without more awareness and action to proactively push funding through legislation for affordable senior housing, the “I’ll think about that someday when I get a little older” will be tomorrow and our nation may not be ready.

Remote Work and the Changing City Center

As the story goes – once upon a time workers drove into the heart of the city to sit in an office building for 8 hours a day, 5 days a week. Every other Friday someone hand delivered these workers a paper paycheck. And as diligently as they drove into the city, they exited the city to return home.

Well, this fairytale is over. By early 2023 approximately 30% of full-time workdays are worked from home. As a result, cities are seeing increased office space vacancies. According to CoStar, in New York city the average office space vacancy rate is at a 26-year high.

Office vacancies are costly. The National Bureau of Economic Research estimated that declines in office values equates to $453 billion in value. This decline in real estate value has serious repercussions for local governments which rely on property taxes. Larger cities, like New York depend on 400 million square feet of office space to provide 10 percent of the city’s $60 billion in tax revenue.

The lack of daytime workers in urban centers is also hurting businesses, many of which are small businesses. The fewer workers, the fewer lunches, the fewer dinners and retail shoppers, causing many businesses to shutter in city centers.

Cities across the nation are pursuing ways to adapt their empty office buildings. Many large cities are turning them into apartment complexes, small boutiques and government assisted, low-income housing.

According to Harvard University’s Joint Center for Housing Studies Millennials are moving downtown and thriving. The social atmosphere and events bringing the community together appeals to a new generation. Because the traffic is down with less commuters going to the office it becomes a more amenable location to stroll and observe the uniqueness of downtown cities. The air quality is better, many times there are street markets, music festivals, and vendors to enjoy social interaction.

Given the changes and challenges the workforce has overcome in the last 10 years, it appears we may adapt to the hybrid model of work while the city centers evolve to adjust to the new working world.

The Price of Contamination

An Ohio village of less than 5,000 people became the epicenter of an EPA disaster. On February 3^rd (2023) a Norfolk Southern train with 150 cars derailed on the outskirts of East Palestine, Ohio. East Palestine is approximately 90 miles from metro Cleveland and 50 miles from metro Pittsburgh. Eleven cars containing hazardous materials were a part of the derailment. The EPA along with multiple local, state and national offices immediately began working to remove the contaminated soil and water.

The US is averaging a hazardous material spill on land and waterways every day and a half impacting residents, natural resources, and property values. This statistic does not consider intended and naturally occurring contaminations from mineral extraction, flooding, illegal dumping, and agricultural chemical use.

Contaminated property can pose significant health, financial, and legal risks. Working with experienced professionals, including environmental consultants, attorneys, and appraisers, can help to develop a comprehensive plan for remediation and minimize the impact of the contamination. Although the EPA and federal government are tracking contaminants to humans, the impact of depreciation to property values before and after remediation are not specifically quantified and can affect the use and development of the property.

Valuing contaminated property can be a complex process that requires a specialized understanding of environmental regulations, remediation costs, and market conditions.

The cost approach considers the cost of cleaning up the contamination and restoring the property to a usable condition.
The sales comparison approach compares the contaminated property to similar properties that have sold in the same market. The appraiser adjusts the sale prices of comparable properties based on the extent and type of contamination and other factors, such as location and property condition, to estimate the value of the contaminated property.
The income approach is used for income-producing properties, whereby the appraiser estimates the potential income that the property could generate if it were not contaminated, and then subtracts the costs of remediation and other expenses to arrive at an estimated value.

In addition to these three approaches, appraisers may also consider other factors, such as the property’s zoning, development potential, and legal liabilities, when valuing contaminated property. Valuing contaminated property can be challenging due to the complexity and uncertainty involved in estimating remediation costs and other factors. Thus, it’s important to work with an appraiser who has experience and expertise in valuing contaminated properties.

FRG’s appraisers have extensive experience valuing contaminated properties, as well as completing due diligence. For almost ten years, FRG has assisted the state of Ohio in identifying the owners of abandoned underground storage tanks (e.g. fuel tanks) who are responsible for removal of the tanks and as needed remediation efforts.

So, remember, if you buy contaminated property, you might be responsible for the remediation of the property. The extent and type of remediation required will depend on the nature and extent of the contamination, as well as any regulatory requirements. Be informed and seek professional help before you buy.

What Are Your Office Hours?

Over the last 24 months, the office real estate market has drastically changed, and this change was likely always going to occur; however, the COVID-19 pandemic accelerated it. Stay at Home orders resulted in an employee exodus from physical corporate office space to an explosion in employees working remotely from home. 2020 was a boom for technology companies as there was a widespread adoption in the use of video conferencing and cloud-based collaboration tools.

This boom also resulted in a decrease in demand for traditional office space. Many employers still see the value of having a physical office space for collaboration and face-to-face interaction. Companies like Citigroup, Disney, and Goldman Sachs have slowly required a return to the physical office, however, in most cases that mandate comes with flexibility, e.g., return to the office two to three days a week. Experts anticipate that there will likely be a rebound in demand for office space, though not to pre-pandemic levels.

So, what is a property owner of office real estate to do during this downturn?

Reposition the property: By making improvements to the property, such as updating the common areas or adding new amenities, an owner can make the property more attractive to potential tenants.

Offer flexible lease terms: In a declining market, it may be necessary to offer more flexible lease terms, such as shorter lease lengths or more generous options to terminate a lease, to attract tenants.

Diversify the tenant base: Instead of relying on a few large tenants, an owner can diversify the tenant base by attracting smaller tenants or by offering flexible office space to businesses that are looking for a more flexible lease structure.

Be creative: Instead of trying to lease the space only as office space, landlords can consider other uses for the space such as retail, residential, or warehousing.

Finally, be patient: it’s important to remember that the market will recover over time. By being patient and holding on to the property, an owner can take advantage of the market’s recovery.

So, the days of the open-door policy are not dead. Instead, they have morphed into a combination of an actual open door and a virtual open door.

#Cleveland-#OfficeMarket-#Remote

Where’s the Rent?

According to Moody’s 10 million Americans are behind on their rent. And as of December 2020, according to the National Low Income Housing Coalition renters owe ~$30-70 billion in back rent to landlords.

The Center for Disease Control and Prevention (CDC) extended the federal moratorium on rental evictions due to a tenant’s failure to pay rent through June 30, 2021. This decision is both good and bad.

The eviction moratorium is a vital protective public health measure. The obvious positive impact of the moratorium is that millions of people who are unable to pay their rent can stay in their homes and out of crowded congregate settings, or worse. Research has shown that it is easier to keep someone from becoming homeless than attempting to get them out of homelessness.

However, with each extension of the moratorium there is an increase in the number of landlords struggling to find cash to pay mortgages, taxes, utilities, and maintenance cost. ~10 million individuals own one or two rental units and these individuals account for 22.1 million, or over 50% of the rental housing stock in the U.S. The hardship of no rental payments disproportionately impacts the small landlord. Many of these small landlords are providing housing to the lower income market and the risk of these landlords filing bankruptcy or facing foreclosure could have a significant impact on the availability of affordable rental housing.

The passed COVID Relief (December 2020) and American Rescue Plan (March 2021) set aside a combined $50 billion in funds for state and local agencies to distribute to renters in arrears to pay their rent. And as of now less than half of landlords and a third of tenants are aware of the rental assistance.

The federal government’s goal is to get the funds to renters before the eviction process starts in July. To meet this goal local agencies will need to make both landlords and tenants aware of and encourage the use of the resources. As with most things, success is found in the execution.

Multifamily Housing: What to Expect in 2021

The COVID-19 pandemic is impacting every aspect of our economy. First it was the hospitality and travel industry; then retail; and now it is the real estate sector, more specifically multifamily housing.

According the to the United States Postal Service since the start of the pandemic ~16M people have moved. Some people are moving back in with their parents and others are moving to rural co-living spaces. CoStar data shows that many are moving to the suburbs where rents are holding, while rents are falling in urban and downtown areas.

All of this pandemic moving is having adverse effects on the multifamily housing (MFH) market. Overall multifamily transactions have sharply declined due in part to the difficulty of securing site visits and inspections to complete transactions; lenders pulling back from debt and equity; and a growing uncertainty in the underwriting of future cashflows for income producing properties. In addition, landlords are increasing their payment leniency requests of banks as the federal eviction moratorium significantly reduces their income available to cover loan payments. As a result, financial lenders are starting to place MFH properties into their highest-risk categories.

In addition, we are experiencing an investment shift. MFH investors are moving from the urban core to inner ring suburbs. According to commercial real estate research firm Yardi Matrix since the start of the pandemic apartments sales in midwestern urban areas declined 41% while the decline is not as steep in the suburbs at 26%.

Exploring and Inspecting Properties

To effectively complete a commercial appraisal or multifamily housing rent comparability study we are required to conduct a thorough exterior and interior inspection of subject properties. COVID-19 has presented challenges but has not stopped the FRG team from completing comprehensive site inspections.

In the late Spring, as the country began to slowly re-open our client requests increased. FRG team members often take multi-day trips many times via air travel to complete site inspections. In early June, FRG had a client commitment requiring an inspection of a property on the border of the states of Wisconsin and Michigan. Having previously completed projects in the same area, I knew the fastest route to the site was via a one-hour direct flight from Cleveland to Milwaukee and 2.5-hour car drive north of Mitchell Airport to the site.

As I explored this travel option, I found direct flights were no longer available. As well, my preferred airline only had two flights leaving each day with Milwaukee as the destination. And the available flights had a total travel time of almost six hours. Further, both flights would require an overnight stay in Milwaukee.

I needed to find another travel option.

I considered driving and discovered a one-way trip to the site from Cleveland would be a ten-hour drive. Further, this option would require an overnight hotel stay. At that time, many hotels, especially those in rural areas were struggling with remaining open and offered few amenities. Thus, I did not see a hotel stay as a viable option.

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COVID-19

Feasibility Research Group (FRG) is a privately-owned real estate services company specializing in commercial real estate appraisal, inspection, and research. Like many small businesses, FRG has been impacted by COVID-19.

However, the services that we provide are deemed essential by most states and thus we remain willing and able to assist you with your appraisal services and market research needs.

FRG practices social distancing. Currently, all employees are working from remote locations. Further, if an FRG appraiser is conducting an on-site inspection he/she will practice social distancing during the subject property inspection.

The FRG appraiser conducting the inspection will:

Maintain six feet distance from all property contacts
Request that only one person accompany the appraiser on the inspection
Not touch any fixtures, door handles, light switches, etc in the facility
Require unobstructed access and views of the interior of the building
Wear protective covering including but not limited to gloves and face masks

Further, as much as possible FRG appraisers will seek to conduct virtual interior inspections leveraging technology such as Skype and/or FaceTime*.

FRG will continue to monitor the coronavirus and its impact very carefully and provide updates as needed.

*NOTE: USPAP does not require a physical inspection. Appraisal Foundation Statement

The Appraisal Foundation, Fannie Mae, Freddie Mac and the Appraisal Institute have deemed virtual inspections to be acceptable.

The Struggle to Find Home Sweet Home

As our MAI appraisers complete multifamily housing commercial appraisals and rent comparability studies (RCS) for HUD and private clients, FRG has extensive multifamily housing knowledge. And as a result FRG has a great deal of interest in remedies to the affordable housing shortage.

I can still remember signing my first apartment lease. I was 19 years old and excited to move into my very own 500 sq-ft, one bedroom, one-bathroom home. Well it wasn’t all mine, because I could not afford the apartment, thus I had a roommate. Even with a roommate, this was the first time I felt like a responsible adult.

Unfortunately, many today are struggling to find a place to call home. Nationally, the number of renters has reached historic highs, and as a result it is becoming increasing difficult for many to find safe, quality affordable housing. In fact, according to a Harvard University Housing Study the availability of affordable rental housing is being affected by:

High rental demand and low vacancy rates, which allow landlords to continually increase rental rates
Demand from higher income renters is driving the construction of luxury vs affordable multifamily rental housing

A recent Ohio Housing Finance Agency report that assessed the state’s housing needs noted that lower income Ohioans are struggling to pay for housing as they spend more than 30% of their income on housing. The agency discovered that there are only 43 available and affordable rental units for every 100 extremely low-income renter. And these extremely low-income renter households are typically made up disproportionately with seniors and/or small children.