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.

How much does it cost to rent space for a small business?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.

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.

hours New office closed clipart jpg - ClipartixThis 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%.

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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.

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FRG Wins 5-Year Contract with HUD

Feasibility Research Group (FRG) selected to perform rent comparability and post-rehabilitation studies (RCS) for the Midwest Region.

University Heights, OH (August 12, 2019) — FEASIBILITY RESEARCH GROUP (FRG), a real estate services firm based in Northeast Ohio, has been selected to provide rent comparability studies (RCS) for multifamily housing properties in the Midwest Region.  The Midwest Region includes the following states: Illinois, Indiana, Michigan, Minnesota, Ohio and Wisconsin.

The US Department of Housing and Urban Development requires the completion of rent comparability studies in compliance with the latest version of Chapter 9 of the Section 8 Renewal Policy Guide.

“We are excited to work with the US Department of Housing and Urban Development” said Gregory Williams, MAI and FRG‘s Owner and Managing Director. “We are looking forward to helping to provide safe and affordable housing to communities throughout the Midwest.”

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My 1st Leadership Development and Advisory Council Session

For more than 85 years, the Appraisal Institute (AI) has been a global professional association of real estate appraisers.  AI works to develop real estate industry leaders and establish an appraiser presence in the United Stated Congress through its Leadership Development and Advisory Council (LDAC).  The Council is a group of dedicated appraisers who together once a year in Washington DC to generate solutions to challenges facing the appraisal profession.

Last month, I had the pleasure of attending my first LDAC session in Washington DC.  I entered with no expectations other than using it as an opportunity to learn more about the Appraisal Institute and offer up a thought or two on promoting our industry.  By the end of the week, I walked away from LDAC exceeding those expectations.

The LDAC discussion sessions afforded the opportunity to engage and brainstorm with appraisal professionals from all around the country.  The sessions served as opportunity for us to come together to generate actionable ideas to solve some of the appraisal industry’s toughest problems.  Serving as a member of the Ohio Chapter’s education committee I was very passionate about the education discussions. Based on my experience, I know that AI’s educational offering is superior to other competitive offerings.  Our group discussed ideas on how to not only get non-AI members to take AI courses but to also use our education offering to entice non-members to become members.

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Eminent Domain: What Options Do Property Owners Have?

As a MAI designated appraiser who completes right-of-way, acquisition and disposition appraisals, I have encountered a variety of situations where property owners are unaware of the complex process involved in a full or partial taking of private property. During this process, the appraiser can in fact assist the property owner in making sure they achieve the best possible outcome when selling their property to a government agency.

For example, once a state agency has determined that property is needed for public use, the property owner does not have an option to simply refuse the sale of their property. However, the government is required to ensure they compensate the owner fairly and cannot place any undue burdens or hardships on the property owners during this process. Thus, when the state claims private property through eminent domain, the property owner can have an impact on getting the best deal possible.

Here are some ways that property owners can make sure they are justly compensated, in the case of a state claim to their property:

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