Category: US/Texas CRE News

Back to the office? Are CRE Workers Ready to Return to Their Desks?

Posted on by Sarah

It’s clear when looking at the quieter streets in downtowns across the Midwest that many office workers have still not returned to their cubicles and conference rooms. It’s equally clear that no one knows when workers will once again fill these office buildings.

But what about those working in the commercial real estate industry? Are they returning to the office? And do they want to?

That’s what Keller Augusta, a search and advisory firm focused on commercial real estate, wanted to find out. The firm recently conducted its second Workplace Reboot Survey, charting the opinions of 600 CRE employees and employers on whether brokers, developers and other CRE pros are returning to the office, if now is the right time for this and what a return to the office will look like.

What did this survey find? First, those working in commercial real estate are largely like most employees: They’re not eager to return to the office full time. Keller Augusta found that nearly half of all surveyed employees wanted to work one to days a week in the office.

The conflict? Only 20% of the employers surveyed by Keller Augusta mirror that hybrid schedule.

Kaitlin Kincaid, senior managing director with Keller Augusta, said that these results aren’t overly surprising. The COVID-19 pandemic changed the way many people think about work, and that includes those working in commercial real estate.

“Most commercial real estate salespeople and client-facing people were not sitting at a desk all day long before COVID,” Kincaid said. “But that doesn’t mean that commercial real estate companies didn’t face challenges with work-from-home. How do you manage a building from home? How do you build a building from home? How do you interact with tenants from home? A big part of the real estate industry is at the property level. When COVID hit, it became challenging when only emergency personnel were allowed to go properties.”

Those CRE workers who were allowed to do their jobs remotely found that they liked the flexibility of working from home, Kincaid said. They no longer had to make long commutes each day. They could spend more time with their families. They had more time to exercise.

This has forced many CRE employers to search for ways to provide at least some of that flexibility now, even as the United States has, hopefully, worked through the worst days of the pandemic. This might mean offering all CRE employees the option to work on a hybrid schedule, even those working in property management.

And employers who don’t give their workers some say in how many days a week they must come into the office? They might struggle to find and retain employees.

“A company that isn’t doing this could lose strong employees to a different opportunity,” Kincaid said. “The flexibility and hybrid schedules are a major retention tool for companies today. Employees are prioritizing flexibility over compensation in many cases. Employers have had to respond to that.”

Are employers in the commercial real estate world responding to this challenge? Kincaid said that they are. She said that most CRE companies are operating on a hybrid model in which employees work part of the time from home and other days in the office.

“The companies that quickly said that we are in the real estate business and we want people back in the office five days a week are losing people at such a high rate that they are backpedaling and are now working on a hybrid model,” Kincaid said.

But how permanent is this change? That’s a tougher question to answer, Kincaid said.

Kincaid said that she isn’t sure that hybrid work models are here to stay in the commercial real estate business. Many companies might be offering this flexibility on a temporary basis to keep their most talented workers. But the key word here is “temporary.”

“Companies might soon start to say, ‘If you can go to restaurants and bars and go on vacation, you can come to the office,’” Kincaid said. “Companies accommodated people who didn’t want to go into the office before we had vaccinations. Then companies kept this flexibility because they knew if they didn’t offer it, they’d lose workers. But when we continue to move past COVID will this working arrangement be here to stay? I don’t know.”

In the past, the only employees who asked for remote work were generally people with childcare responsibilities, mostly women, Kincaid said. That is no longer the case. Today, many workers are seeking the flexibility to work from home at least part of the time, with some saying they’ll never come back to the office five days a week.

This doesn’t mean that commercial real estate offices are empty. Kincaid said that few commercial real estate companies have not brought their employees back to the office in some capacity.

This is important, Kincaid said. Employers want their workers in the office at least part of the time as a way to foster collaboration and brainstorming. When everyone is working from home, that collaboration largely disappears.

Even a hybrid work schedule limits collaboration to some extent, Kincaid said. And this is one of the big concerns that CRE companies have.

“If everyone is in the office, that works well. If everyone is at home, that can work, too. But if some employees are at home and others are at work, that results in missed opportunities to have everyone collaborate at the same time,” Kincaid said. “The employees at home miss out on that moment when they are walking by someone’s desk and that person wants to sit and talk about a project. That is the part that is missing. If that one person is not in that day, that person might miss out on that conversation.”

Employers are concerned, too, about mentorship and training. It’s more difficult to train younger workers when they aren’t in the office.

Those who entered the workforce during COVID have borne the brunt of this, Kincaid said.

“They didn’t have the same kind of training,” Kincaid said. “Their internships were canceled. Their first year on the job they worked form their parents’ basement. They are lighter across the board on overall professional experience. They lack some of that mentorship that is so important.”

What are CRE employers doing to bring their workers back to the office, at least on a hybrid basis? Kincaid said that many companies are improving the work environment. This might mean something as simple as providing regular lunches and snacks onsite. Others are paying for their employees’ parking, while still others are bringing wellness services – everything from onsite fitness classes to mental health services – to their offices.

Some CRE firms are holding more social events to encourage their workers to leave their homes and mingle with their fellow employees. This might mean company lunches and off-site activities. Others are organizing community service events to get employees interacting with each other again.

“It’s about bringing people together again,” Kincaid said. “They are trying to recreate those relationships that employees had with their colleagues. They want their workers to say, ‘I enjoyed being with these people today. I want to go back.’”

The keys to retaining the top CRE workers, though, remain the same today as they were before the pandemic, Kincaid. It’s about offering not only solid compensation but opportunity, too.

“Employees want to feel as if they have an opportunity to advance,” Kincaid said. “It’s about creating a career path that employees can aspire to. Employees that have a desire to do more, will be happier at a company that offers them more professional opportunities.”

Recession-Proof REITs: Senior Housing Demand Bounces Back After Two Catastrophic Years

Posted on by Sarah

Few places seemed riskier during the early, pre-vaccine peaks of the Covid-19 pandemic than nursing homes and senior housing facilities. That includes Arbor Court Retirement of Topeka, the oldest retirement community in Topeka, Kansas.

“There was a lot of fear,” says Linda Clements, the director of business development at Arbor Court of Topeka, an independent living community for people 55 and older. Arbor Court contained the few Covid outbreaks it experienced – the 58-apartment community saw one Covid-related death. Nevertheless, like many senior housing communities, the business struggled during the pandemic to bring in new residents to fill empty apartments when residents either passed away or moved to facilities offering more medical care.

Highly publicized Covid deaths at nursing homes early in the pandemic forced many families to rethink congregate living and long-term-care plans, but experts and senior housing groups say demand is now picking back up.

Click to read more at www.forbes.com.

Higher Pay? Lower Requirements? Nothing Drawing Employees Back

Posted on by Sarah

Where are the workers? That’s a question that employers have been asking since the early days of the COVID-19 pandemic. And so far? No one really knows.

A June report from the ADP Research Institute demonstrates just how serious the shortage of workers has been for employers. Citing numbers from the U.S. Bureau of Labor Statistics, ADP reports that in March of this year, total public and private employment is 822,000 workers short of what it was in February of 2020. Part of the reason is that so many employees have quit since the pandemic started.

ADP, again citing numbers from the Bureau of Labor Statistics, found that the number of people who quit their jobs in 2021 rose 36% when compared to the previous year. That’s a jump of nearly 12 million people leaving their jobs.

In all, 45.4 million people quit their jobs in 2021. As ADP says, the Great Resignation is a real event.

This has made it difficult for companies to fill their open jobs. In 2019, employers found new hires for about 84% of their job openings, ADP said. In 2021, that number had fallen to 71%. As ADP reports, applicants aren’t showing up to fill all those open jobs.

According to the report, there were nearly 30 million more private-sector job openings last year than in 2019. That’s a jump of 39%. And it’s not that employers aren’t trying to fill these positions. They’re even offering a greater number of remote job opportunities. ADP says that unique job postings for remote positions more than doubled in 2021 from the year before, hitting 2.8 million.

ADP found that employers are desperate enough for new workers that they are lowering their standards when it comes to whom they are willing to hire. The minimum years of experience that employers are requiring for new workers has shrunk from 5.8 years from January of 2018 to February of 2020 to 4.3 years from March of 2020 to March of 2022.

Companies are offering more money, too. ADP said that advertised wages were up 4% for commercial truck drivers, 10% for cashiers, 8% for registered nurses and 13% for stockers and order fillers when compared to the months leading up to COVID.

When will these perks have an impact? When will all those missing employees rejoin the labor force? Unfortunately, no one yet knows.

Investor Demand for Multifamily? It’s Been Insatiable

Posted on by Sarah

Insatiable. That’s the best way to describe investor demand for multifamily assets during the last five years.

Need proof? Consider a bulletin released late last month by Yardi Matrix. According to the company’s research, Yardi Matrix tracked more than $215 billion of U.S. multifamily property sales in 2021. And these properties traded for an average of $192,100 a unit.

Both of these figures are all-time highs, according to Yardi Matrix.

The company found, too, that 4,500 multifamily properties in the United States sold at least three times during the last decade. That’s about 5.3% of all U.S. apartment properties.

According to Yardi Matrix, investors have been most interested in smaller apartment properties that target working-class residents, mostly because these properties have the potential for higher rent growth. When investors purchase these properties, they tend to have lower rents even though they sit in markets with above-trend rent growth.

This gives investors the opportunity to raise rents on these properties, increasing their returns on investment.

The investment numbers that Yardi Matrix tracked are rather impressive. According to the company’s report, transaction activity in the multifamily sector bottomed out at $13.3 billion in 2009. Increasing steadily each year, this figure rose to a then high of $128.7 billion in 2019.

In 2020, a year of decline related to the COVID-19 pandemic, multifamily transaction volume fell to $95.5 million. Then came 2021, and a record-setting $215.3 billion in transaction volume. That is an increase of 67.3% when compared to the prior record-setting year of 2019.

Last year also set new highs for the number of multifamily properties sold — 6,488 — and the total number of units traded, 1.34 million.

Pricing has been on the rise, too. After bottoming out at $62,344 in 2009, the average price per unit has jumped all the way to $192,105 in 2021. That figure climbed 21.6% in 2021, the biggest one-year increase in decades.

Asymmetrical Risks? How the CRE Industry is Reacting to the Fed’s Inflation-fighting Moves

Posted on by Sarah

Last week, the Fed did something that it had not done since 1994: It raised the fed funds rate by 75 basis points.

Leading up to the announcement, the Fed reiterated that it intended to raise this rate by 50 basis points. The Fed stated that it changed its approach to address high, persistent inflation. Ultimately, that claim seems substantiated. But more directly, it appears that the Fed changed its mind because markets signaled that the Fed was not doing enough to control inflation.

Equity markets fell into bear market territory and fixed income yields pushed higher as bond prices declined. The Fed won’t admit so, but it seems that the markets forced the Fed into doing something that it otherwise wouldn’t have done, even with May’s upside inflation surprise.

The Fed also raised the terminal fed funds rate in its forecast by 100 basis points to 3.8%, well past our estimate of r-star (neutral) at about 2.5%, with the Fed taking a harder stance that more squarely pits interest rates against inflation. Both sides of that battle carry risks, which might prove asymmetrical.

Inflation leads

Let’s take inflation first. Empirical research dating back decades proves that inflation upsets consumers (overall) more than other economic phenomena, including high unemployment and job losses.

But we do not need to reach into the distant past for evidence of this. In early June, consumer sentiment reached its lowest level on record. Yet, empirical research also demonstrates that unless inflation reaches very high levels, it tends to have a negligible cost and impact on economic growth. Our own humble contribution to this research reaffirms this position.

That raises the obvious question: “Why is the Fed so concerned with inflation?” There seems little chance of inflation rising to a high-enough level to impair economic growth. But concerns about inflation, especially outsized ones like we observe now, could influence behavior in a way that negatively impacts the economy. If consumers believe that inflation will cause economic trouble in the future (i.e. a recession), they might alter their behaviors in anticipation of such an outcome, and in the process bring about a self-fulfilling prophecy.

While that risk is likely increasing, it remains far from certain that it would manifest. In the absence of such an outcome, risk of higher inflation on economic growth remains incredibly limited.

Interest rates follow

What about the other side of this battle? Higher interest rates attempt to reduce inflation by impacting the demand side of the economy. Because central banks like the Fed can exert little or no direct control over the supply side of the economy, they raise rates to increase the cost of borrowing, negatively impacting the prospects for interest-rate-sensitive industries such as housing, financial services and durable goods.

As those industries experience lower revenues and slower job growth (if not outright job losses), growth in the economy starts to slow as those businesses and their employees (or former employees) spend less.

That helps to bring demand and supply back into balance. But the risk here is much clearer. If the Fed raises rates too much, the probability of a recession increases significantly because the decline in spending spirals into further job losses in other industries and an even greater reduction in overall spending. Most post-war recessions in the U.S. occurred because the Fed overshot interest rates.

Can the Fed actually reduce inflation?

Against such a backdrop, it might seem foolish for the Fed to start pushing even harder on interest rates. Many have noted such risks since last week’s Fed meeting. But another key question remains unanswered: Can the Fed actually reduce inflation? And here the evidence also seems suspect.

During the last four tightening cycles dating back to the 1990s, the data appears to show limited efficacy. Using the Fed’s preferred inflation measure, the core (excluding food and energy) personal consumption expenditures (PCE) index, monthly inflation did not trend downward during periods of Fed tightening. The monthly data appear somewhat random, and not indicative of deceleration brought about by higher rates.

Moreover, in the current environment, inflation is increasingly driven by food and energy, partially because of war in Europe and partially because of lack of capacity in energy production and refining. The Fed exerts almost no control over these. Therefore, the Fed is targeting what it can – the labor market.

The Fed sees excess demand for labor (most clearly in the 11.4 million open jobs) and believes it is contributing to the inflation problem. Even though wage growth and core inflation have both decelerated in recent months, the Fed seems willing to weaken the labor market to attempt to reduce headline inflation. The Fed would likely accept a higher unemployment rate, slower job gains and even job losses to tamp down inflation.

Yet that path tends to be a slippery slope to recession. To be fair, on multiple occasions the Fed has successfully managed to slow the economy and bring down inflation without causing a recession. It does not receive enough credit for this. But the course that the Fed charted last week could lead to a troublesome destination if it is not careful.

Lookout! Errr … outlook

The upshot? The 75-basis points increase by itself does not mean much. Rates remain low. But the forecast for the fed funds rate creates greater concern. If the Fed follows through, it will almost certainly push past the neutral rate into contractionary territory. How long the economy could sustain such rates without a recession remains murky. And the Fed does not need to adhere to its own forecast.

For those looking for a silver lining, the Fed has a terrible track record of following through on its own forecasts. If the Fed went too far, the Treasury market would likely signal so, much as it did during the last business cycle. That could prevent the Fed from hiking too much.

For now, our base case shows moderate growth for the economy, driven by a strong labor market and robust consumer spending. But the Fed’s increasingly hawkish interest rate forecast is raising recession risk.

What it means for CRE

Commercial real estate is digesting all the changes from recent months, including last week’s Fed decision and forecast. The market has not yet lost faith, but because things are changing so quickly, market participants are taking an extra beat or two to ensure that they are not making a mistake.

Interest remains high, but the rapidly changing environment requires extra homework. Borrowers, lenders, buyers, sellers, landlords and tenants are all assessing rapidly changing conditions, trying to avoid making a costly error. Participants are weighing longer-term confidence in the asset class against short-term uncertainty.

Ryan Severino is chief economist with JLL.

CORFAC Survey: Interest Rates, Inflation the New Stressors for Brokers

Posted on by Sarah

After a tumultuous two years, commercial real estate market conditions still haven’t stabilized. The COVID-19 pandemic has entered a less urgent phase, but now the public and private sectors are contending with its repercussions, including the end of stimulus programs.

During its quarterly survey of brokers from its independently owned member firms, CORFAC found that overall business sentiment in member markets remains encouraging, even as concerns emerge about the effects of inflation and rising interest rates on potential deals.

“CORFAC members are seeing strong deal activity even as we continue to contend with political and economic unknowns,” said 2022 CORFAC president Mason L. Capitani, SIOR, principal of L. Mason Capitani/CORFAC International in Detroit, Michigan. “Our quarterly survey shows that our brokers have a unique perspective on how macro trends affect their markets and can use that to help their clients make better future-looking decisions.”

Where deal activity is coming from

Looking at where CORFAC business is growing, the largest source of new business this year is existing clients who are expanding, according to 70% of members surveyed – an increase from 63% the previous year. Clients relocating to the market was the next highest source of new business at nearly 50%. Investor interest in secondary markets where price pressure isn’t as great, including those across the Midwest, is creating opportunity for CRE brokers.

Industrial continues to be the strongest CRE subsector for CORFAC members with 65% of respondents saying it drove business activity. CORFAC brokers are also seeing new activity from specialized niches of retail and office, such as medical offices and quick-serve restaurants in retail, while big-box retail and large office buildings are being readapted as logistics spaces.

“While residential migration to outer markets has slowed, industrial interest in secondary markets is very strong,” said Hayim Mizrachi, CCIM, president of MDL Group/CORFAC International in Las Vegas, Nevada. “There is pent-up demand for this product.”

The impact of work and commerce changes

Shifting consumer behaviors in the 2020s ­– particularly the growth of work from home and digital commerce, as well as the great job migration – will shape CRE trends for the near future. Specifically, 62% of members believe office will be the CRE sector that changes the most in 2022, as companies are still adjusting to the growth of remote and hybrid workforces. However, some members point to huge multinational corporations such as Google bringing back employees to the office as a reason for optimism.

CORFAC brokers were asked what their greatest concerns are looking at current events and macroeconomic trends. More than 55% of members identified inflation and rising interest rates as the factor that will have the most negative effect on CRE transaction activity. Continued supply chain challenges and the constrained labor market are compounding those rising costs to cause uncertainty in the CRE marketplace.

As one member summed it up, “Consumer spending has been strong through the last 12 months as we thought we were rebounding from the global pandemic and all the related implications, but now with inflation rising and consumer spending reduced, the economy will slow and have rippling effects on all sectors.”

Strong sentiment in the face of concerns

Despite these worries, half of CORFAC members describe overall business sentiment in their market as “somewhat positive” and another third say it’s “very positive.” The strength of the industrial subsector and readily available capital are common reasons for this positivity. Yet, other members are hoping for some changes in government leadership, tax policy or both to help buoy businesses and CRE activity.

As business owners try to understand how economic policies will impact their real estate plans, CORFAC brokers will draw from local experience and global network insights to help them make confident decisions.

CORFAC International is a network of independently owned commercial real estate firms. CORFAC has 70 offices across the globe.