October, 2019 - Sachse Construction

Fed Interest Rate Cuts Won’t Drive New Construction, But Still Good News

The Federal Reserve’s two interest rate cuts this year generally bode well for the real estate market, although it doesn’t necessarily feed more construction.

The Fed lowered the benchmark interest rate in July for the first time since the Great Recession a decade ago and then again in September. Each decrease was 25 basis point, or a quarter percentage point to lower the Fed fund rate at 1.75%-2%.

A third cut is expected as early as this week with the rate-setting Federal Open Market Committee meeting Tuesday and Wednesday.

The Fed fund rate is the bank-borrowing rate and, if banks borrow at lower rates, they can lend at lower rates.

Developers and home buyers generally can take out cheaper loans and borrow more when they’re paying less in interest, developer Noah Breakstone noted.

“Typically, when interest rates are lower, there’s an incentive to make that investment even for developers, real estate, manufacturing, anything in the business world,” said Breakstone, CEO and managing partner at investment and development firm BTI Partners LLC in Fort Lauderdale. ”The cost of borrowing is less.”

BTI Partners has been in the market to finance a new multifamily project in South Florida and a new condominium community in Central Florida, Breakstone said. He declined to identify the projects with negotiations under way.

“We are seeing a direct relationship in the lowering of the Fed rate to the lowering of the cost of borrowing. We would look to borrow at close to 6.5% maybe six or eight months ago,” Breakstone said. “We are seeing the same opportunities that we can borrow for development and construction at probably 5.75%. Maybe we are seeing half a point to three-quarters reduction. Usually there’s a direct relationship with that.”

The lower borrowing cost likely won’t prompt more commercial construction in the busy South Florida market.

Instead, expect more refinancings of existing real estate, said Peter Mekras, president of Aztec Group Inc., a Miami real estate capital markets intermediary and merchant bank.

New construction is driven more by fundamentals such as demand and rents, but current owners of existing property generally want to secure lower interest rates by refinancing projects, he said.

Aztec is working to refinance a new apartment tower in Miami’s Central Business District and a Lakeland shopping center, Mekras said, without identifying the developments.

If owners “previously could only borrow say $80 or $90 (million), they may be able to borrow $100. I am just using that as relative term. Meaning they can get more in loan proceeds because at the lower cost of interest, the amount of income coverage they have over the cost of the loan allows them to get a greater loan amount,” he said. “This move is surely a positive for the borrowing and buying community at large.”

Breakstone noted the new development costs won’t be lower in spite of the lower interest rates because of recent increases in construction and labor costs.

“The cost of materials has increased, so it almost offsets the reduction of the added value of lower interest rates and having more affordable products,” he said. “There’s a number of elements that helps create affordability.”

One group that would see more affordability is individual home buyers, who essentially can take out bigger loans because of lower rates.

“I want to buy $300,000 home and put 10% down and am left with a $270,000 mortgage. At 5% interest, the mortgage would be about $1,100 a month,” Breakstone said in a hypothetical scenario. “If interest rates were instead 3.5%, you can afford $340,000 and get the same $1,100 payment.”

This year’s rate cuts were factored in the trade war with China, weakness in U.S. manufacturing and a global economic slowdown. The thinking is that lower rates would encourage consumer borrowing and spending to boost economic growth.

Investors are more likely to take money out of the bank, where they are earning low interest, and put the money into real estate or other opportunities, Breakstone said.

“You may contemplate investing in the stock market or in a real estate opportunity, looking to make more money than the money just sitting there,” he said. “When rates are lowered, investment is encouraged. Whether you buy housing or you invest in equipment or new real estate opportunities, the cost of borrowing is less because interest rates are less.”

Offshore Wind to Develop Into a $1 Trillion Business

Currently, offshore wind technology supplies just 0.3 percent of global power generation. However, its potential is massive. Offshore Wind Outlook 2019, one of the International Energy Agency’s latest reports, anticipates that the global offshore wind power capacity will increase 15-fold over the next two decades, turning it into a $1 trillion business.

The report analyses the rapidly maturing technology of offshore wind energy. To issue the document, the agency collaborated with a multitude of high-level government representatives and international experts, including the Imperial College London, and used the latest satellite data, mapping out in detail the speed and quality of wind along hundreds of thousands of miles of coastline around the world.

Sailing the offshore winds

The global offshore wind market grew nearly 30 percent per year between 2010 and 2018, boosted by technology improvements such as larger turbines and floating foundations, as well as falling costs and supportive government policies. Currently, offshore wind technology holds a capacity of 23 gigawatts, of which 80 percent is sourced from Europe—the European Union’s capacity stands at almost 20 gigawatts, which under current policies, is set to increase by at least fourfold by 2030 and to rise to nearly 130 gigawatts by 2040. Yet, taking into account the European Union’s carbon neutrality aim, offshore wind capacity could jump to around 180 gigawatts by that time and become the continent’s largest single source of electricity.

The U.K., Germany and Denmark lead the technology’s development—the U.K. and Germany have the largest offshore wind capacity in operation, while Denmark produced 15 percent of its electricity from offshore wind in 2018. However, China added more capacity than any other country last year. China, in fact, is expected to play a big role in the technology’s long-term growth, forced by the need to reduce air pollution. In addition, offshore wind is highly attractive in the region as this kind of farms can be built near major population centers spread around the east and south of the country.

China aims to develop a project pipeline of 10GW by 2020 and it is likely that by 2025, it will have the largest offshore wind fleet of any country, overtaking the U.K. Specifically, the country is set to rise from 4GW today to 110GW by 2040. Furthermore, the authors note, policies designed to meet global sustainable energy goals could push that even higher: to more than 170GW.

The U.S. has good opportunities to diversify the country’s power mix, boasting offshore wind resources in the Northeast and along the East Coast, while floating foundations would make it possible to harness wind resources off the West Coast.

Newer offshore wind projects have capacity factors of 40 to 50 percent. At these levels, they match the capacity factors of gas- and coal-fired power plants in some regions, even if offshore wind is not always available. Moreover, this technology’s capacity factors exceed those of onshore wind and are about double those of solar photovoltaic. The downside is that offshore wind output varies according to the strength of the wind, but its hourly variability is lower than that of solar photovoltaic—it typically fluctuates up to 20 percent on an hourly basis, while that of solar photovoltaic varies up to 40 percent.

All these features place offshore wind in a category of its own: a variable baseload technology that can generate electricity throughout the day and produce more electricity in winter months in Europe, the U.S. and China, as well as during the monsoon season in India. This high availability and predictable seasonal patterns contribute to electricity security, more so than other variable renewables. In addition, it also has the advantage of avoiding many land use and social acceptance issues that other variable renewables are facing.

How much does it cost?

The average upfront cost to build a 1GW offshore wind project—including transmission, which these days accounts for about one-quarter of total offshore wind cost, increasing as projects move further from shore—was more than $4 billion last year. Financing costs account for 35 to 50 percent of overall generation cost and the levelized cost of electricity produced by offshore wind is projected to decline by nearly 60 percent by 2040.

Due to the relatively high upfront capital costs—a 250-megawatt project costs around $1 billion—investment in offshore wind parks is mainly made by large utilities and investment funds. In contrast, solar photovoltaic and onshore wind have much lower upfront costs, as well as fewer hurdles to entry for smaller players.

Investment in the wind industry rose to nearly $20 billion in 2018, up from less than $8 billion in 2010. Offshore wind investment last year accounted for nearly one-quarter of global investment in the wind sector and 6 percent of all investment in renewable energy. Last year, about half of total investment in wind power and one-quarter of total investment in renewable energy took place in the European Union.

Technology manufactures and performance

Builders of offshore wind turbines are mostly based in Europe. Spanish-headquartered Siemens Gamesa and MHI Vestas—a joint venture between Vestas and Mitsubishi Heavy Industries—dominated the offshore wind industry, accounting for more than two-thirds of the offshore wind capacity installed last year. Combined, these two manufacturers account for more than 80 percent of all offshore capacity commissioned from 1995 through the end of 2018. Specifically, Siemens Gamesa sold offshore wind capacity totaling nearly 14 gigawatts, while MHI Vestas followed with nearly 4GW of capacity sold during the same period.

Just like any other technology, offshore wind has advanced greatly in the last decade, both in physical size and in rated power output. Turbines available in 2010 had the top height at around 328 feet and a generating capacity of 3MW, while in 2016, an 8MW turbine had doubled in height, with the swept area registering an increase of 230 percent. A larger swept area means more wind can be captured per turbine. Currently, a 12MW turbine that has a 352-foot blade and measures 853 feet in height is under development, triple the height of the Flatiron Building. Moreover, the industry is targeting even larger 15 to 20MW turbines for 2030. Although the increase in turbine size and rating requires more capital as these pose construction challenges and require larger foundations, it will translate to reduced operation and maintenance costs.

Technology headwinds

There are, of course, challenges that could hinder the evolution of this technology. One such challenge is the onshore grid infrastructure, vital to offshore wind technology. This issue doesn’t involve just the developers of these transmission lines but also includes lawmakers, responsible for passing regulations to encourage efficient planning and design practices that support the long-term vision for offshore wind. Failing to do so, without fitting grid reinforcements and expansion, there is the risk of large amounts of power going unused.

The authors of the analysis also note that there is a pressing need to develop efficient supply chains in order to enable the delivery of low-cost projects. This means a hefty cost implying multibillion-dollar investments, which can be difficult in the face of uncertainty. Governments need to step in and facilitate investment of this kind by creating a long-term vision for offshore wind and defining precisely the measures to be taken to help turn that vision into reality. Clear measures would also increase electricity security as it would system planning to ensure reliability during periods of low wind availability.

Colossal potential

The report’s authors estimated that the technical potential for offshore wind worldwide is more than 120,000 gigawatts, with the capacity to generate more than 420,000 terawatt-hours of electricity per year. This would be enough to meet 11-times the global energy demand in 2040, in theory. Accounting for the availability of transmission and distribution infrastructure, things are not so idealistic: Due to their long coastlines, Russia (80,000 terawatt-hours per year or 20 percent of the total), Canada (50,000 terawatt-hours per year or 12 percent of the total) and the U.S. (more than 45,000 terawatt-hours per year or 11 percent of total) together account for more than 40 percent of the global technical potential. Even so, excess resources could be harnessed for export.

The study looked at the main regions separately: Europe (excluding Greenland and overseas territories) has a technical potential of offshore wind of 50,000 terawatt-hours per year, which is more than 10-times demand. In the U.S., counting just the contiguous states, shallow waters have the potential to provide more than 3,300 terawatt-hours per year and deep waters more than 8,700 terawatt-hours annually. Some of this potential is located off the Atlantic coast, near major cities like Washington, D.C., Boston and New York. The Great Lakes region also posts a technical potential of more than 900 terawatt-hours per year.

Construction Employment Rises by 7K in September Amidst Tight Labor Market

Construction employment increased by 7,000 jobs in September and by 156,000, or 2.1%, over the past 12 months, while the number of unemployed jobseekers with construction experience reached a record low for September, according to an analysis of new government data by the Associated General Contractors of America. Association officials said the modest increase in employment likely reflects tight labor conditions and urged federal officials to increase funding for career and technical education and pass immigration reform.

“Contractors foresee plenty of projects to bid on, and nearly three-fourths of firms expect to add workers during the next twelve months, but most are finding it hard to find qualified workers to hire,” said Ken Simonson, the association’s chief economist, referring to the results of a survey the association released in late August. “That’s not surprising, given that the total unemployment rate hit a 50-year low in September—a sign that workers are hard to come by throughout the economy.”

Simonson observed that the 2.1% growth in construction employment between September 2018 and September 2019 was the slowest in more than six years but that the rate remained well above the 1.4% increase in total nonfarm payroll employment. There were 319,000 unemployed jobseekers who last worked in construction—an unemployment rate of 3.2% for such workers. Simonson noted those were the lowest September levels since the series began in 2000.

Average hourly earnings in construction—a measure of all wages and salaries—increased 2.2% over the year to $30.81. That figure was 9.7% higher than the private-sector average of $28.09, the association official noted. He added that two-thirds of firms responding to the association’s survey had raised base pay rates for hourly craftworkers in the past year because of difficulty in filling positions, while 58% of firms had done so for salaried workers. Many respondents also reported providing incentives, bonuses and larger contributions to benefit plans.

Association officials said the industry was taking a broad range of steps to cope with labor shortages, including boosting pay, expanding training programs and becoming more efficient. But they cautioned that labor shortages are still impacting construction schedules and costs. They urged Congress to pass measures to boost career and technical education and provide a way for more immigrants with construction skills to legally enter the country.

“Contractors are going to great lengths to recruit, prepare and hire new workers, but too few young adults know about the rewarding opportunities available to them in construction,” said Stephen E. Sandherr, the association’s CEO. “Getting federal and state officials to boost funding for career and technical education will create significantly more programs that allow a greater number of students to consider careers in the construction industry.”

Q3 2019 US Lodging Market Update

While the U.S. continues to be in the midst of its longest uninterrupted economic expansion in modern history, slowing growth metrics along with abundant geopolitical uncertainties are heightening perceived risk of impending recession. Concerns include:

  • U.S. GDP growth is decelerating and during the near‐term increases are anticipated to remain modest;
  • The Conference Board’s consumer confidence index fell to 125.1 in September, down from a revised August 2019 reading of 134.2;
  • Trade with Canada and Mexico falls into the same uncertainty now gripping U.S. relations with China and Europe. A failure of Congress to ratify a new NAFTA deal which will govern trade relations with these two neighboring countries is a warning sign that illustrates how political volatility could drag down the U.S. economy even if its fundamentals remain strong;
  • The Federal Reserve Bank of New York’s recession probability indicator, which gauges the likelihood of a recession within the coming 12 months, rose steeply from around 10 percent at the beginning of 2019 to 37.9 percent in August;
  • An inverted interest rate yield curve has endured for several months, a phenomenon that has signaled each U.S. economic recession since 1950;
  • Ultra‐low interest rates continue to trend downwards. While this is a positive for borrowers, it is also raising speculation that America is destined for negative yields like where Japan and much of Europe have been stuck for some time;
  • Washington DC is currently in an impeachment frenzy;
  • Unknown effects of Brexit which depend on whether the UK leaves with a withdrawal agreement, or before an agreement is ratified (“no‐deal” Brexit);
  • In response to a proposed extradition bill, which included an agreement with mainland China, since June, Hong Kong has been subject to mass demonstrations with continuous violent clashes and rioting;
  • The Middle East is currently more combustible than ever. Conflict(s) resulting in global ramifications could break out in various cities/countries for a multitude of reasons;

Despite daily warnings of possible economic fragility, jobs creation statistics remain relatively steady and personal incomes continue to grow, both of which could sustain the financial system during whatever rough patches may be encountered. Not everyone believes a recession is imminent, and contrarians can point to other metrics that paint a much sunnier picture. Either way, the prevailing view seems to be that when the next recession hits, it will be less severe than the last one.

Through this past August the U.S. hotel industry’s expansion cycle reached 114 months, as hotel revenue per available room (RevPAR) declined year over year only two months during this period, namely during August 2018 and in June 2019. Generally, national hotel supply and demand growth are in equilibrium resulting in relatively flat occupancy levels and lackluster RevPAR growth stemming from average daily rate increases barely equal to inflation (and decelerating).

America’s hotel sector has been operating at peak levels for the past three years as an expanding economy has readily absorbed accelerated supply growth in most markets. Notwithstanding rising salary and wage rates and slowing revenue growth, operators have controlled costs sufficiently to achieve GOP margins at their highest levels since the 1960s. With everything said, the near‐term lodging outlook appears choppy as prognosticators have downgraded projected 2020 national RevPAR growth.

The LW Hospitality Advisors (LWHA) Q3 2019 Major US Hotel Sales Survey includes 41 single asset sale transactions over $10 million, none of which are part of a portfolio. These transactions totaled $3.725 billion and included approximately 13,100 hotel rooms with an average sale price per room of $283,000. By comparison, the LWHA Q3 2018 Major U.S. Hotel Sales Survey identified 57 transactions totaling roughly $6.4 billion including 15,300 hotel rooms with an average sale price per room of nearly $419,000. With more than 28 percent fewer trades and a 42 percent decline in total sales dollar volume during Q3 2019, the U.S. hotel transaction market has clearly slowed down when compared to Q3 2018 along with a growing disconnect between seller prices and buyers’ bids.

Notable observations from the LWHA Q3 2019 Major U.S. Hotel Sales Survey include:

  • Twelve or roughly 30 percent of the total number of Q3 2019 sale transactions occurred in two states. With seven Q3 2019 hotel sales, Florida continues to be the most active transaction market followed by five trades in California;
  • NYC continues to experience a challenging environment for hotel investment as only one sale occurred during Q3 2019 subsequent to zero during Q2 2019;
  • Ten of the 42, or almost a quarter of Q3 trades, were for greater than $100 million each. Six of the Q3 trades were between $100 and $200 million and two of the Q3 trades were between $200 and $400 million;
  • Premier Group WLL based in Bahrain acquired the 215 room Four Seasons Hotel One Dalton Street, Boston for $268 million, or $1.250 million per unit from Carpenter & Company, Inc. who recently developed the property with a 61‐story mirrored glass tower that separately includes a 160 Four Seasons Private Residences;
  • Blackstone purchased the 1,260 room Hyatt Regency Atlanta for $355 million or $282,000 per unit from Hyatt Hotels Corporation who will continue to operate the facility. Opened in 1967, the Hyatt Regency Atlanta was designed by internationally acclaimed architect John C. Portman, Jr. and was the first contemporary atrium‐style hotel ever constructed;
  • Two Q3 trades occurred above $500 million each. Caesars Entertainment Corporation (Caesars) sold the 2,548‐unit Rio All‐Suites Hotel & Casino in Las Vegas to Imperial Companies for $516.3 million, or $203,000 per unit. Caesars will continue to operate the property pursuant to a lease for a minimum of two years at $45 million in annual rent. The transaction also provides the buyer an option to pay Caesars an additional $7 million for the extension of the lease under similar terms for a third year. Caesars reportedly will retain its rewards customers and the hosting rights to the annual the World Series of Poker. Also, a  joint venture between Trinity Real Estate Investments LLC and Elliott Management Corporation acquired the 950 room JW Marriott Phoenix Desert Ridge Resort & Spa for $602 million, or $634,000 per unit;
  • Suffolk University’s acquisition of the Ames Boston Hotel highlights several trends: One, universities are challenged to obtain adequate land and student housing, particularly in urban locations. Two, development sites in urban gateway markets in the U.S. are trading at a premium. Three, Investors and real estate users have become more creative, and are willing to pay up in order to meet their objectives, and four, supply of hotel rooms does not always grow. Fluctuating markets often result in changing highest and best property uses culminating in lodging facilities being converted or demolished to make way for alternative income producing opportunities.
  • GIC Private Limited, formerly known as Government of Singapore Investment Corporation entering into a joint venture with Summit Hotel Properties to acquire the 88‐guestroom Hampton Inn & Suites in Silverthorne, CO is intriguing. An overseas sovereign wealth fund investing 49 percent of a $25.5 million capitalization in a Rocky Mountain town is illustrative of global capital chasing yield by seeking opportunities in a relatively small sized deal situated in a rural resort area;
  • Sophisticated hotel centric investors continue to execute capital recycling strategies within the lodging sector. Entities that are active purchasers and sellers of hotels include:
  1. Ashford Hospitality Trust
  2. Blackstone
  3. Brookfield Property Partners L.P.
  4. Clearview Hotel Capital
  5. Columbia Sussex Corporation
  6. Elliott Management Corporation
  7. GAW Capital Partners
  8. Highgate
  9. Host Hotels & Resorts Inc.
  10. Hyatt Hotels Corporation
  11. Noble Investment Group
  12. Park Hotels & Resorts
  13. Peachtree Hotel Group
  14. Pebblebrook Hotel Trust
  15. RLH Corporation
  16. Starwood Capital Group
  17. Summit Hotel Properties
  18. Trinity Real Estate Investments
  19. Wheelock Street Capital
  20. White Lodging

Additional commentary on the U.S. hotel market based upon my observations:

  • With enormous amounts of equity from all over the globe chasing yield at this stage in the cycle, the hotel sale transaction market remains relatively robust. Savvy investors continue to see compelling rationales to capitalize on opportunities to obtain irreplaceable locations and buildings, evidenced in part by the reported frenzied bidding amongst more than a dozen investor groups for Anbang Insurance Group’s 15 property $5.8 billion luxury hotel portfolio;
  • M&A activity in the sector also remains robust as demonstrated by the recently announced merger of two significant independent hotel operators, namely Aimbridge Hospitality and Interstate Hotels & Resorts, which will result in a combined management portfolio of more than 1,400 hotel properties in 49 states and 20 countries. Another example is Park Hotels & Resorts Inc.’s closing its $2.5 billion acquisition of Chesapeake Lodging Trust.
  • Secondary and/or tertiary cities such as Charlotte, Houston, Salt Lake City, and Tampa continue to evolve into attractive markets for investors challenged to identify quality hospitality investment opportunities in high priced first‐tier cities such as Boston, Los Angeles Miami, New York, and San Francisco;
  • The sector continues to be flush with CMBS and other debt products which support lower all in borrowing costs and often provide a compelling thesis to refinance owned assets and return equity, versus placing them on the market for sale;
  • A continued strong U.S. dollar and political factors are contributing to weakened inbound international travel trends which places negative pressure on hotel performance in several gateway markets including New York, San Francisco and Washington DC;
  • Operating expense models have changed across the industry, particularly in union markets. A higher proportion of costs are now fixed rather than variable with occupancy, particularly labor, as government and/or union work rules have created challenges to flexing schedules;
  • Several markets have passed legislation imposing stricter restrictions on alternative accommodations such as AirBNB and VRBO which should drive incremental compression hotel room nights;
  • The Hotel Advertising Transparency Act of 2019, a bipartisan bill was recently introduced in the U.S. House of Representatives that if ratified would prohibit resort/amenity/facility and other fees from being introduced to travelers late in the booking process. Fees have become increasingly popular at full service and resort properties, and as ADR growth has slowed these high margin revenues enhance net operating income while remaining competitive in terms of the advertised room rate. Added disclosure and full pricing transparency should create a more level playing field, but certain hotels’ relative value proposition could be negatively impacted in the eyes of price‐ sensitive consumers.

Although perceived risks to a positive outlook are evolving, the U.S. economy remains resilient, though risks to a positive outlook are mounting. Economic and geopolitical uncertainty is negatively impacting cross‐border transaction volumes and in the near‐term broader growth uncertainties will remain a headwind for global investor sentiment. History has proven that a late cycle mind set positions markets to be more intensified towards signs of difficulties, and that such sentiments can “talk the market down” and turn into a self‐fulfilling prophecy and induce a recession.

Everything in life is relative. Consider that during the Great Recession of a decade ago, on average the U.S. lodging industry produced profits, albeit lower than prior years. During the economic recession of the early 1990’s, coupled with the negative effects of the Persian Gulf War, the U.S. hotel industry was largely unprofitable. Although growth of current record high lodging fundamentals may be slowing, nonetheless future growth is anticipated to endure. Due in part to the lack of long‐term credit worthy tenancies and that with continuous resetting of room rates, hotels are fundamentally long‐term investments. At any point in a cycle, shrewd lodging investors that pay market prices predicated upon underwriting (not necessarily holding) a minimum ten‐year projection period tend to realize healthy returns.

Multifamily Demographics Positioned for More Growth

With expanding populations, a growing preference for renting and the majority of new jobs in the economy low-paying thus making homeownership challenging, the multifamily industry forecasts upwards of one million new renter households a year.

As a result, most multifamily experts believe the sector will flourish and prosper well into the 2020s. For example, according to the National Multifamily Housing Council and the National Apartment Association, in order to meet structural demand, apartment developers would need to complete approximately 325,000 new units annually between 2017 and 2030.

“Overall, the demand for multifamily housing remains strong and is really stable,” says Chris Nebenzahl, institutional research manager of Yardi Matrix. “There is an increase in rental rates, occupancy levels are stable and there are substantive conversations about affordable housing.”

Increase in Rental Rates

Rental rates have been steadily increasing and continuing delivery of units are at a solid pace with a rental growth of approximately 3.5%.

“Las Vegas and Phoenix have the highest demand for rental units and we expect those completions will continue. The absorption rate for Houston, Denver and Nashville are also quite high,” says Nebenzahl.

Occupancy Levels and Demographics

At 95.1%, occupancy levels have been high and stable for the last 2-3 years and that trend is expected to continue as demand for multifamily housing remains strong.

The younger millennials and older baby boomers are the majority of renters and they are seeking housing in core urban areas as well as in outlying areas which offers urbanized suburban living and town centers. Generation Xers and older millennials are still looking a suburban lifestyle and bigger houses, Nebenzahl tells GlobeSt.com.

Class A properties, located in fast-growth areas such as Texas, Florida, Arizona and California, are attractive to highly educated professionals and drive the development and investment portfolios for multifamily investors and developers. Class B and Class C rental properties remain steady but do not have the “shiny” appeal of the Class A assets.

Affordable Housing

Affordable housing is still a hot topic with experts and advocates, offering a variety of solutions including rent control.

“Rent control will only dampen development in the markets that choose to adapt it,” explains Nebenzahl. “There are some alternatives to rent control such as co-living, with different apartment models to ease the rent, and exploring the Air BnB concept where apartment owners allow short-term rental units in their complex.”

Chicago’s Retail Market a Mixed Bag in 2019

The retail market in the Chicago region has held steady so far this year, with leasing activity strong in some markets, while spotty in others.

In its Fall 2019 Chicago Retail Overview report, Newmark Knight Frank states that among some of the key prevailing trends in the market include strong activity by food tenants that are expanding or debuting new dining concepts in the area. Other market forces impacting the markets are big-box retailers continuing to right-size their operations or relocating to locations with stronger demand.

The author of the report, Amy Binstein, NKF research manager, also points to developers who are continuing to “future proof” their shopping center properties.

“This entails seeking tenants that are not as vulnerable to the threat of ecommerce. Stores that provide unique experiences or services are prime candidates to combat ecommerce,” Binstein says. “This includes personal fitness and entertainment. Experiential retail concepts continue to emerge as well as ‘pop up’ experiences that offer retailers a chance to refresh their concept.”

Among some of the positive developments in Chicago’s retail market include Pinstripes, an entertainment chain headquartered in Northbrook, which recently announced plans to potentially go public and open another 24 locations throughout the US in the next five years. Pinstripes currently has 10 locations, three in Chicago, and three additional locations set to open by year-end in Texas, California and Connecticut.

Binstein notes there are a number of exciting experiential concepts coming to Chicago, such as Offshore, a 36,000-square-foot, rooftop venue, which opened this summer at Navy Pier. This is the largest rooftop bar in the US that offers 8,500 square feet of indoor space as well.

In the suburbs, she notes that mixed-use or ‘lifestyle’ centers are having more success. Kensington Development Partners and IM Properties unveiled plans earlier this year to revamp an outdated strip center in Morton Grove. The rebranded center, called Sawmill Station, will include 240,000 square feet of new shopping, dining and entertainment options adjacent to a 240-unit multifamily project. Several tenants have been secured: Flix Brewhouse theater and Brewery, Cooper’s Hawk Winery and Restaurant, Kohl’s Department Store, LA Fitness Signature Club and an unnamed grocery tenant. The group aims to have the development ready by 2020.

The market is also seeing a variety of creative reuses for large block of space. For example, at Northbrook Court a Macy’s store will be replaced with a grocery store, gym, food hall and 300 apartments. On the South Side Blue Cross and Blue Shield of Illinois announced plans to lease a 130,000-square-foot former Target space, bringing 550 jobs to the property.

Looking ahead, Binstein says, “Many in Chicago have confidence that the regional economy and retail market will continue to perform well into the start of 2020 despite political and economic uncertainty. Big-box stores and traditional retailers will underperform in some locations. Experiential, clicks to bricks and fitness tenants will remain more dynamic. The footprint of retail tenants will also be smaller, as many will only carry limited inventory in stores and fill orders through online shopping.”

How the Next Generation is Changing the Apartment Market

The generation that’s been plugged into iphones and internet their entire life is turning the apartment market on its head with their socially conscious and community-oriented lifestyle.

Live-work-play, the buzz words of the latest cycle, are being overtaken by something as old-fashioned as bricks and mortar – community.

“Community is really important,” said Lesley Lisser, senior director, asset management at Invesco, which manages a multi-billion dollar portfolio of multifamily properties across the US.

Speaking at the 4th annual Women in CRE Symposium hosted by New York University Schack Institute, Lisser said, “We’re finding it’s old fashioned things that work. Our teams are focused on developing relationships with local vendors and making sure tenants get old fashioned things like discounts and coupons and making the community a part of where they live. We create events where they can make friends. This is stuff that’s been going on in multifamily for as long as I’ve been in the space and these old-fashioned things do work and you find that all of the residents appreciate it.”

The fusion of home, work and leisure space has been picking up steam as more and more developers attempt to read a market that has been undergoing dramatic changes as the biggest segment of the population moves into the home market – millennials.

Today, those born between the years 1981 and 2000 make up America’s largest generation, bigger even than the Baby Boomers. Where and how they choose to live is driving what experts believe will have a lasting impact on which cities rise and which recede.

As they work to attract and retain these residents, developers have deployed a range of amenity-driven strategies with a manifest that has been visited by everything from private jet service (111 Murray) to indoor skateparks (Waterline Square), bowling alleys (555TEN) to doggy daycare (MiMa) all while the size of apartments has shrunk to the smallest ever.

In the past 10 years, the average size of a new American apartment has shrunk by five percent to 914 s/f. According to internet listing service, RentCafe, the smallest apartments are in Chicago and Manhattan where they measure on average 733 s/f. This while rising construction costs and dwindling land supply has pushed rents up 28 percent.

But rather than driving everyone to the suburbs, research shows that millennials in particular are driving urban development to new heights, swelling city populations and pushing affordability to crisis point in many major cities.

In a first-of-its-kind study released earlier this year, researchers from Georgia Institute of Technology and the University of Illinois analyzed the net migration of young adults across the US and found that their hankering for city living doesn’t appear to be a passing phase as they place a premium on “consumption amenities,” like entertainment and culture, as well as transit access.

Over three quarters of all millennials would also rather spend money on an experience or event than hard goods, according to a 2018 study by Harris Poll. Most (69 percent) believe attending live experiences helps them “connect better with their friends, their community and people around the world.” In the coming year, 72 percent said they would like to increase their expenditures on experiences.

At 235 Grand in Jersey City, developers KRE Group and Ironstate Development introduced the most community-focused of their three-building partnership on June. With more than two thirds of its 549 apartments already leased and with half the property now occupied, the community building is well underway.

“We’ve already had a few very well attended events and we are planning a Halloween costume party and ‘friendsgiving’ dinner where residents bring their favorite dish to share with their neighbors,” said leasing manager Brandon Ochs.

Tenants have dubbed the building’s co-working space “The Google Room.” Explained Ochs, “A lot of our residents work for tech companies like Google and Facebook. They started calling the co-working space the Google room straight away because they said it looks just like their offices.”

Indeed, the cushioned booths and mid-century modern aesthetic come straight from a tech-office design playbook, with shelves holding vintage train sets and steampunk knick-knacks giving the space a homey look.

With each new building, KRE and Ironstate have been tweaking amenities to appeal to an apparently fickle consumer whose tastes seem to change with the wind.

But according to Ochs, leasing manager with The Marketing Directors, “Today’s residents require less living space and want more community space. They have less stuff and spend more time doing things. We used to create big lounges and libraries and people would use them to work in. Now we are creating purpose built co-working spaces instead because a lot of our residents work from home and this type of community space is what they want.”

Hoboken-based Ironstate pushed its way into the tri-state building spotlight in 2016 with its ground-breaking Urby concept. The Staten Island building raised eyebrows with its a farmer-in-residence, chef-in-residence and beehive colony.

As the industry watched to see whether it was an over-the-top publicity stunt that would fade with its headlines, David Barry, CEO of the company, insisted that creating units as small as 371 s/f and then packing his building with amenities that fostered community spirit and neighborly interaction was what would appeal to the growing millennial population.

“Urby aims to reshape the apartment industry by combining fresh modern design with intimate collective spaces that are faithfully programmed for relaxed interaction, rejuvenation and fun,” Barry said when Staten Island Urby opened in 2016.
Three years on, Ironstate is set to open its fourth Urby, this one a partnership with Brookfield Property Group in Stamford, Connecticut, where its signature community design continues to evolve, with food and beverage services being embedded within the building’s lobby and open to the public.

Award-winning local chef Mike Pietrafeso will run Roost and its menu of coffee, light fare and cocktails, seven days a week. Residents will also have access to a communal kitchen where neighbors can meet and interact through “thoughtful programming and social happenings.”

It’s a pattern that is repeating across the multifamily landscape as property owners work to attract and retain tenants.

“Experiential programming is the next evolution of amenities,” said Matthew Villetto, executive vice president of Douglas Elliman Development Marketing, who is leading leasing efforts at 475 Clermont, a new development from RXR Realty.

Over the summer, the Fort Greene building partnered with supper club startup Resident to create communal dining events for residents with a live-in chef program. As part of an amenities package that includes an outdoor movie screen and a bocce court, each resident is entitled to two tickets to a monthly dinner with wine pairings.

Resident chef Bronwen Kinzler-Britton lives in a one-bedroom on the complex and she and colleague Meryl Feinstein, host the meals in her apartment that’s been decked out in art by local artists Iman Raad, Vincent Stracquadanio, and Katharine Marais.

“Creating a unique culinary experience in an intimate setting that fosters community is a true differentiator in the marketplace,” said Villetto.

RXR CEO Scott Rechler – who has been at the forefront of the transit oriented development movement – said the chef program was about “enhancing the sense of community” at the building.

Last month, Extell announced a partnership with vendors at Dekalb Market Hall that will organize tasting events for residents of Brooklyn Point where a 40,000 s/f food hall has been created. Some of the events planned for the building’s foodies include Street Food Saturdays, Chinese street food demos by Jianbing Company in the building’s demonstration kitchen, and Sunday Bun-Day, Korean fried chicken served on the terrace. For kids, there will be ice cream socials in the game room by Ample Hills Creamery.

“With occupancy slated for early 2020 we are planning to create a more collaborate living experience for our residents,” said Ari Alowan Goldstein, senior vice president at Extell.

Speaking at the NYU symposium, Kinsey Sale, executive director Real Estate Americas, J.P. Morgan Asset Management, said screening rooms have been scrapped in many of her company’s developments to make way for larger public spaces. “More people have flexible work arrangements, so we program a lot of co-working space, conference rooms and technology.”

And it’s not just the millennials. “We have older boomers wanting to come back to the city and get rid of their big houses in the suburbs and we are seeing a lot of the young millennials progressing in their careers and making enough money to be able to afford some of these luxury products,” added Sale. “the trick is trying to achieve that sense of community for both demographics.”

Added Lisser, “I find the older and younger demographics want the same thing, even in New York City. We have empty nesters and residents just out of college and they go to the same events. It goes back to people wanting a sense of community and I don’t think we have done different programming, juts more programming.”

While the bulk of its multifamily portfolio is suburban garden-style complexes, investment giant Blackstone also owns the 11,200-unit Stuyvesant Town complex in Manhattan.

“In Stuy Town, the sense of community is extremely important to people,” said Melissa Pianko, Backstone’s real estate managing director. “We do all sorts of things to promote community, from a flea market to a farmers market every week. We have chess tournaments. We do a lot of stuff to foster a sense of community and we have a diverse community there. We see it as our job to create a sense of community for everyone who wants to participate.”

Giant asset managers like Blackstone, Invesco and JP Morgan also have a close eye on technology and how it is shaping the modern living experience.

“We own $1,450-a-month garden apartments and our renters aren’t demanding smart homes quite yet,” said Pianko. “But in some cases they are going to start demanding more technology and that’s something we are going to try to invest in, but it will be 100 percent based on ROI (Return On Investment). It’s not like wifi, which people need otherwise they are not going to live there. Smart living is nice, but not yet a need-to-have type of amenity for most renters.”

Where smart technology is being applied is in energy consumption, another issue close to the millennial’s heart.

According to Lisser, smart tech that adjusts heating and cooling systems, lighting and water loads is a double-barreled asset playing to both the owners’ ROI by reducing costs and the residents’ desire to reduce their own carbon footprint.

“Residents like something they can participate in,” said Pianko. “In Stuy Town, we have solar roofs and composting. It’s extremely visible and they know it is happening. The more actionable and tangible you can make it for a resident, the more they are going to care.”

Sachse Construction Academy Proves Importance of Skilled Trades

The Sachse Construction Academy returned to Eastern Market last week, for its fourth annual exhibition aimed at promoting skilled trade opportunities for Detroit high school students. The afternoon which had over 500 juniors and seniors attend, was aimed at opening up more students to the value that comes from pursuing a skilled trade.

The man behind the magic, is Todd Sachse, CEO, and Founder of Sachse Construction. Originally starting off as a one-time event to celebrate the 25th anniversary of the founding of his business, the academy grew to something much larger.

“The Sachse Construction Academy started as an idea to celebrate our 25th anniversary, it was supposed to be just a one day, a one time thing, and we said we’d invite a bunch of high school juniors and seniors in the city, bring a bunch of our trade partners, and we’ll show them what it’s like to be a skilled tradesman” said Sachse. “We got incredible feedback from the students and the teachers, they left asking when it’s happening again next year. We went “Oh, I guess we have to do it again next year”, and now, it’s been four years.”

The afternoon presented students with the opportunity to learn about a wide range of skilled trades, from operating heavy machinery, to painting, to the basics of working as an electrician, students were offered hands-on opportunities that allowed them to try out many of the tasks they could one day make a career out of.

“It’s a great experience, it gets better every year, and I’d say we get better at putting it on every year,” said Sachse. “The purpose of it is really quite obvious, we want to introduce these young men and women to an opportunity. If two people walk out of here today, out of the five hundred that attended, and say they’d love to be an ironworker or a carpenter, then it’s a success, that’s all that counts.”

Sachse stressed the importance of learning a skilled trade, citing that it presents one with a lifetime of opportunities, and the ability to take up work just about anywhere in the U.S..

“It is a lifelong skill, something that, in my opinion, is transferable,” he stated. “Whether you’re in Detroit, Kentucky, Miami, or New York, it’s a skill you can take anywhere. It’s a forever skill, and people don’t realize how much money they make. The average carpenter, electrician, or plumber, can make more money than the average architect.”

What sets this year’s Academy apart, is the partnership that Sachse Construction has with Detroit at Work, an organization within the city committed to helping Detroiters find work. After the afternoon was over for students, the partners of the Academy remained in Eastern Market for a job fair that offered Detroiters, aged 18-25, the chance for on-site employment working a skilled trade.

Explaining why skilled trade jobs are so important to the Metro Detroit Region, Sachse stated, “The reality is, things are not happening in the Detroit Metropolitan Area as fast as they should, and it’s costing more money, which is actually stymying our productivity and growth, it’s basically not allowing it to happen as quickly or productively as should be expected. We need these skilled young men and women, and I gotta say we’re doing this for both selfish and selfless reasons.”

Continuing, he stated, “Selfishly, in order for us to succeed in our business, we need people to join the skilled trades. Selflessly, we want to show people an opportunity, a different path and the opportunity for a great career.”

As students passed between the workstations learning more about the skills, a look of excitement was on their faces almost the entire outing. As they climbed into a fork load or tried their hand at drilling holes and working a saw, Detroit’s students had fun while learning skills that they could one day use to establish a stable career.

It is this idea of creating an engaging workspace and having fun with what you do that Sachse stressed when asked what his career has taught him about being a boss.

“You need to engage with the team members, it’s not just business, it’s personal, you need to create an environment where people can thrive, you need to have fun,” he said. “If you think about it, people spend the vast majority of their waking hours as adults at work, so I kind of feel its on all of us, not just myself, but on all of our team members, to create an environment that’s fun and interesting, and offer careers that people love to do.”

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