Category: US/Texas CRE News

A Return to OZ

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The opportunity zone program continues to thrive despite skepticism and the pandemic.

By Sarah Hoban | Fall 2020

It’s only been three years since opportunity zones were created to encourage investment in low-income communities across the country. The program has been welcomed and used by many, though some look on with skepticism. Now, opportunity zones face new challenges related to the COVID-19 pandemic. The Qualified Opportunity Zones program had bipartisan backing as a part of the 2017 Tax Cuts and Jobs Act. State governors nominate low-income census tracts to be opportunity zones, which are then certified by the Treasury Department. Investment comes through opportunity funds, a vehicle developed for the program. Funds need to invest at least 90 percent of their capital in OZ assets, which are classified broadly and include not only commercial and affordable residential real estate, but also investment in startups and local entrepreneurship, historic renovation, industrial developments, and job creation initiatives. The program’s tax incentives are meant to encourage long-term investment. Investors get numerous benefits: a temporary tax deferral for capital gains invested in an opportunity fund; a step-up in basis (the basis of the original investment is increased by 10 percent if the investment in the fund is held by the taxpayer for at least five years and by 15 percent if held for at least seven years); and a permanent exclusion of any future capital gain income realized upon the sale or exchange of an investment in a fund if the investment is held for at least 10 years. Still, the program has generated controversy, with critics noting examples of questionable designation of tracts and billionaires using the tax break for projects such as luxury condos or other high-end uses that provide little benefit to struggling neighborhoods. Click to read more at www.ccim.com.

Cash Builds for Property Debt Funds as Crisis is Delayed

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Real estate debt investors are stockpiling cash, searching for opportunities to lend to commercial-property owners hurt by the pandemic. Property debt funds, including at Blackstone Group Inc., raised $14.1 billion from April through September, compared with $15.7 billion a year earlier, according to research firm Preqin Ltd. Yet the expected flood of deals has so far been just a trickle. Now there are signs of a thaw. On one side, competition is building to put that cash to work, motivating some lenders to take on higher risks. On the other, borrowers are growing desperate as loan extensions start to expire on malls, hotels and even some offices that are still struggling as COVID-19 continues to ravage the U.S. economy. “If you’re willing to do it, you’ll get a lot of deals, but you have to be willing to play in those sectors and take some risks,” said Mark Fogel, chief executive officer of Acres Capital, a New York-based commercial property lender. He said he’s getting almost twice as many calls from borrowers looking to refinance their debt or get bridge loans to stay afloat than just a few months ago. Debt fund investors are eager to see returns seven months after the coronavirus threw commercial property markets into disarray. When bank lending starts to dry up, investors looking for better yields tend to turn to private credit, which steps into the vacuum. Click to read more at www.houstonchronicle.com.

What’s Driving Distribution? CBRE Experts Weigh in on the Industrial Market

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In the pre-pandemic world, e-commerce was already a giant. Industry observers predicted it would account for more than a third of all retail sales by the year 2030. Now, roughly a year since we first heard about COVID-19, the virus helped accelerate the growth of e-commerce in a way few could have predicted in 2019. “Even older Americans are now accustomed to buying things online, so it’s pervasive,” said Jack Fraker, vice chairman and managing director at CBRE. Now that threshold of 39 percent of retail sales is viewed as something e-commerce could reach by mid-2027. To meet that consumer demand, Fraker said, there is and will be a need for much more industrial real estate. Texas markets, such as Dallas-Fort Worth, Houston, Austin, San Antonio and El Paso, are benefitting from that push because of their ever-growing populations. On the one hand, explained Fraker, manufacturers want to get distribution hubs closer to their customers to satisfy the existing demands. More than ever, customers expect to receive goods within days of ordering, if not the very next day. “All those retail products have to reside inside warehouses for a while,” Fraker said. Along with satisfying retail needs, warehouses and logistics hubs are essential for growing communities. Before the tub, shower head, curtains, washer, dryer, carpet paint, floor tiles and ceiling fans can be installed in a new home or apartment, they must take up space in a warehouse located nearby. The pandemic also revealed systemic flaws in the international supply chain, prompting manufacturers to relocate to the U.S. or Mexico. “A lot of real blue chip U.S. corporations like the low cost of labor in Juarez, for example. They can assemble products on the Mexico side of the border, ship them across to El Paso and to distribute into the United States from there,” said Jonathan Bryan, executive vice president at CBRE, adding that those goods might end up in a warehouse in San Antonio as well. On top of all that, Texas is an affordable place to set up shop compared to popular hubs on the east and west coasts. “We have freeways that crisscross the state, as well as a number of great railroads. It’s a friendly right-to-work state with a low cost of living and tremendous population and job growth. Not to mention it’s really flat. That makes it easy to build,” Fraker said. “There’s a whole list of Chamber of Commerce reasons companies want to be here and that’s why the Texas markets are exploding.” As much of a bargain as Texas industrial prices are, they’ve certainly increased in the past few years. Fraker points out that some of the new prototypes or big e-commerce companies are paying $200 per square foot or more. That isn’t a deal breaker these days, however. “The number one question the investor would ask us when we sell a property used to be ‘What’s the price per square foot?’” said Fraker. “It’s still asked, but it’s not the overriding question.” That, he emphasizes, is usually related to other fundamentals. Investors want to know how much space is already available in the market, what the tenant profile looks like and the range of lease rates. They’re also keenly aware of the value of location over just about any other factor. “A lot of users have realized they can’t only have three distribution centers that serve the entire United States. Just-in-time demand has created a need for more dots on the map, more locations,” Bryan said. “So we’re seeing a lot more demand in what we would categorize as secondary strategic markets.” As examples, he cites Indianapolis, Columbus, San Antonio, Savannah and Reno, which provide more touch points closer to the population base is key for companies to be competitive. Many of those companies have developed algorithms based on where the customers are and where they need to be to get the product to the customer quickly. “We like to say, ‘location trumps functionality’ or ‘location trumps age,’” Fraker said, explaining that many companies looking for an industrial footprint will take an older infill site over a shiny new building. “They sacrifice the clear height of the building. They don’t care as much about the length and depth of the truck court. What matters most to them is how long it takes to drive to the best customers.” While the huge industrial deals are the ones that usually make the headlines, CBRE’s experts say smaller tenants are the core of the market right now. “We all talk about the million-square-footers, which are happening left and right. But at the same time, 20 or 30,000-square-foot leases are signed,” said Fraker. “If you visualize the national inventory of industrial real estate as a pyramid, the million-square-footers are at the top. The base of the pyramid is all the smaller tenants, who represent the vast majority of the universe of industrial real estate.” The challenge now, besides fighting off the competition, is finding space for those small tenants. Most require infill interior sites, which are few and far between these days. Even when a site is located, it can be cost-prohibitive because you lose the economies of scale on a smaller building, resulting in higher rent. Fraker predicts that will prompt the industry to consider new prototypes, such as the multilevel industrial examples in Tokyo, Singapore and Hong Kong. “In those cities, it’s not uncommon to see a 10-story, 1-million-square-foot building,” he said. “However, the floor plan is only 100,000 square feet. The buildings go vertical.” That, Fraker added, isn’t something that’s necessary in a market like Dallas, where the topography is flat and there’s plenty of land. It’s more likely an option in urban markets such as Seattle, San Francisco or New York. While they expect the sector to evolve and change over time, Fraker and Bryan agree that the white-hot demand for industrial will continue for at least a decade, possibly more. “Some of these major e-commerce companies are trying to make sure they can have delivery to everybody within one or two days. That requires a very ambitious and long-term expansion plan,” Fraker said. If you have to choose between throwing money in a savings account or even the stock market, it’s hard to argue against industrial real estate, especially in the current market. “You get some very attractive returns,” Fraker said. “That’s what’s driving our asset class.”

How Liberal Politics, COVID-19 and a High Cost of Living are Fueling a New California Exodus

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Cori Sarno Villacres talks on Oct. 21, 2020, about how she and her family didn’t feel comfortable or safe in California — even feeling bullied for their political preferences. They left their life in Sacramento last April to start anew in Idaho. BY DARIN OSWALD

Rich Threadgill was born and raised in California and loved his home state. Until he didn’t. The Navy veteran is a gun fan, but he felt he couldn’t talk about his hobby or express other conservative opinions without running the risk of making someone angry. This summer, when his employer allowed employees to telework from out of state for lower pay, the 39-year-old human resources officer surprised himself. He sold his Rancho Cordova home and moved the family to Idaho, where he’ll build a house for less than he sold his California home. He says he feels more relaxed in a rural environment where people are more conservative and, to his mind, more congenial. “We love it,” he said. “In California, if you express your beliefs, you can be outright attacked,” he said. Threadgill is among a wave of hundreds of thousands of Californians leaving the state in the last few years. Last year alone, nearly 200,000 more people left the state than moved in. Most likely did it for economic reasons. The cost of living, particularly housing, is now far higher in California than almost anywhere else in the United States. But a turbulent 2020 has added new motivations for migration. Amid coronavirus shutdowns, wildfires, street protests, and a tense election-year political environment, some say California’s “charm” has finally worn too thin. Click to read more at www.sacbee.com.

Getting Kenect’ed: How This Multifamily Concept Ushered in Evolution

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Americans are spending more time at home than they ever have before as it becomes the hub for work, school, and most social activities during the COVID-19 pandemic. “If households need to think about working from home and caring for kids, how would shared space be repurposed?” wondered Dr. Victor Calanog, Moody’s Analytics head of CRE economics. “Should individual storage units now be offered as a perk in apartment communities?” Those questions for the multifamily sector, posed in March, are part of a discussion of the pandemic’s long-term effects and how the industry will evolve. Some parts of it were already starting that process, however. For the minds behind Kenect, that live/work experience was an obvious next step. “We saw businesses shifting toward a more flexible /remote work schedule and designed our properties to include a coworking space for our residents as well as our Kenect members,” said Rajen Shastri, founder, and CEO of Akara Partners, the development firm behind the Kenect concept. “The flexibility of working from home is great, but people still like having a place to go outside the home where they can connect with like-minded people.” Click to read more at www.rednews.com.

Marcus & Millichap Acquires Mission Capital

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Marcus & Millichap, Inc. (MMI) has entered into a definitive agreement to acquire Mission Capital in a transaction expected to close in the fourth quarter. 40 capital markets professionals—including Mission Capital’s founding partners, David Tobin, Joseph Runk, Jordan Ray and Trenton Staley—will join MMI offices in Texas, as well as in New York, Florida and California. “Broadening our capital markets capabilities is a key component of MMI’s long-term growth plan and we are excited to add Mission Capital’s complimentary services and track record to our financing division, Marcus & Millichap Capital Corporation (MMCC),” said Hessam Nadji, president and CEO of Marcus & Millichap. “Mission’s loan sales and consulting services will expand our lender relationships and client service offerings. Internally, their ability to collaborate with our existing financing and sales professionals will be synergistic to our overall business development. The debt and equity team’s track record of securing financing for larger and more complex transactions and equity advisory is highly complementary to MMCC’s core mortgage brokerage business.” Founded in 2002, Mission Capital is a capital markets advisor with teams specializing in the sale of loans and consultative/due diligence services as well as debt and equity placement across all property types. The firm’s loan sale and consulting clients include commercial and investment banks, hedge funds, special servicers, government agencies and private equity firms. The debt and equity team specializes in structured finance and equity advisory for institutions, developers and private real estate investors. “As we explored joining forces with Marcus & Millichap, we considered the firm’s stellar reputation and dedication to outstanding customer service, Tobin said. “We are attracted to the breadth of the company’s platform, commitment to growth and feel like minded with the firm’s collaborative culture. We look forward to adding value to the Marcus & Millichap team and helping the company scale and diversify its services.” “The debt and equity team is eager to join Marcus & Millichap because of the synergies of our respective organizations,” Ray said. “We see the value in Marcus & Millichap’s investment brokerage dominance and brand and respect MMCC’s leading market position on the financing side. We look forward to contributing to the company’s growth by bringing over a strong team with deep structured finance expertise.”