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A Decline in International Students Will Hurt a Lot More than Colleges and Universities

Posted on March 22, 2019 by Mike Kushner in Blog, Community, Trends No Comments

According to a report by MarketWatch, the number of overseas students coming to the U.S. for grad school declined for the second year in a row. There is much speculation as to what could be causing this trend; however, one reappearing theme ties back to the current political climate here in the United States.

As you likely remember, President Donald Trump initiated a ban on people entering the U.S. from multiple Muslim-majority countries, all of which have a track record of sending students to America for higher education. It’s not difficult to see a near-immediate impact. For example, U.S. graduate school applications from Iran, one of the countries targeted by the travel ban, fell 27% between fall 2017 and fall 2018. The travel ban isn’t the only blamed culprit. President Trump has floated changes to student visas that would reduce the amount of time international students can stay in the U.S.

Naturally, colleges and universities in the U.S. who rely on international students to make up a significant portion of their admissions are concerned. If the U.S. continues to present hurdles that make it unappealing, if not impossible for certain international students to study in the U.S., our colleges and universities are not the only pillars of our community who should be concerned. A decline in international students will have a ripple effect on our economy which will flow into many different industries, including real estate.

How significant is this impact and what industries should be most concerned? Let’s take a closer look at the economic impact of fewer international students coming to the U.S.

International Students Drive Economic Growth

Simply put, international students are pivotal to our economy. First, they often pay the highest tuition rates which is why colleges and universities carefully account for enrolling so many international students to keep their budgets in line. Next, while international students are studying in the U.S., they are spending money on food, clothing, living essentials, as well as renting space to live. Many smaller colleges have built on-campus apartments primarily for the use of their international students. Compared to students that reside with their parents and commute to school, international students have a markedly different economic impact on the school and the surrounding community.

To put a value on this point, the Institute of International Education, an organization that promotes research and international study, estimates that international students contributed $39 billion to the U.S. economy in 2017. In fact, some colleges and universities rely so heavily upon their international students that they have gone as far as taking out an insurance policy to protect themselves against the drop in international enrollment!

A Local Look

The facts and stats reporting the decline in international students coming to the U.S. takes a national look, but what about locally here in Central Pennsylvania? Are we seeing the same trends? One of the area’s leading universities for international enrollment is Penn State Harrisburg. College Factual ranks Penn State Harrisburg as 114th out of a total 1,300 colleges and universities for popularity with international students. And the pool of international students is diverse. At least 50 countries are represented on the Penn State Harrisburg campus with the most being from China, India, and, South Korea.

Interestingly from 2011 to 2016, enrollment of international students has been steadily increasing with 716 international students being enrolled at Penn State Harrisburg in 2016. What this doesn’t account for is the most recent travel ban and change to student visas implemented in 2017-2018 that would not be reflected in this data; however, it is likely to be released soon. With international students making up about 14.2% of the student body at Penn State Harrisburg, should the University also experience the decrease in international enrollment that has been sweeping the nation, it will join the ranks of so many other educational institutions hurting due to this downward trend.

As It Relates to Real Estate

It’s clear how international students impact the colleges and universities in which they are enrolled, but what impact do they really have on real estate and is this decline enough to cause any significant changes to our residential and commercial real estate markets?

International students arriving in the U.S. to study are in immediate need of semi long-term housing, typically at least two years and up to 6+ years depending upon the type of degree they are pursuing. International students can technically choose to purchase real estate on their student visa, but mortgages and lending have a whole host of challenges, making cash to most desirable and feasible option for purchasing home a home. Most commonly, international students decide to rent real estate either from the college or university that they are attending or from a landlord in the community.

Depending upon the demand for off-campus student housing, some real estate investors have created a significant business around owning and renting out real estate to students, including international students. Should there be a severe enough decline in international students, this could cause a decrease in demand for real estate. Property owners will need to make a strategic decision to either ride this wave, with a decreased income for an unknown period of time, or sell off some of their properties if they feel this trend could last a while.

Additionally, should a decline in international students persist, colleges and universities whose campus housing is mostly occupied by international students are not likely to invest in renovating or adding to this real estate until the decline stabilizes and/or reverses.

Key Things to Keep in Mind

All-in-all, this trend in decreasing enrollment from international students is one we must keep an eye on for a variety of reasons. When our colleges and universities are economically impacted, it is highly likely that other businesses and the community as a whole will also feel an impact. Should this provide to be a short-lived trend that passes as the political climate changes, there is the probable outcome that things will return to normal and possibly better than before.

However, we would be shortsighted to not think beyond forces within the U.S. To compound the issue, other counties are also competing for international students and are surely making every effort to market themselves as the most attractive option. It will be a constant battle for the U.S. to retain and grow its international students. Given our country’s reputation for high-quality education, this is not an impossible feat, but we must remain strategic to stay ahead of the curve!

What do you feel are the most critical areas to be impacted by a decline in international students? Beyond colleges and universities what other industries will be most significantly impacted?

Share your ideas by leaving a comment below!

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Jobs – Not Economy – Drive Commercial Real Estate Activity

Posted on August 22, 2018 by Mike Kushner in Blog, CPBJ Articles, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

Earlier this month, it was reported that the number of Americans filing for unemployment benefits rose less than expected. To put this into perspective, claims dropped to 208,000 during the week of July 14, which was the lowest it has been since December 1969! After peaking at nearly 300,000 claims in October of 2017, we have seen a mostly steady (with some variation) decline in unemployment claims moving forward.

Dropping unemployment numbers indicate a strong labor market. The United States has an estimated 149 million jobs – 19 million more than it did just nine years ago. When you think about that type of job growth, it’s easy to see how it will have an impact on commercial real estate. To accommodate 19 million more workers, businesses have had to add space. Even for jobs that are run outside of traditional office space, there are still many more that do utilize office, retail or industrial real estate to some capacity.

Source: Bureau of Labor Statistics

Many people may assume that it’s the economy that drives commercial real estate activity, but really it’s jobs. The two are closely correlated, but for several compelling reasons jobs have the greater impact and drive businesses to either expand or contract their commercial space.

It all comes down to people and space.

Economic growth is measured by GDP and can be fueled by any number of factors, most of which won’t have a direct impact on commercial real estate. Businesses can earn more money without necessarily needing to hire more people or move into a different commercial location. Though it’s common that when the economy is growing, the commercial real estate industry becomes more active, the true driving force is jobs.

When businesses need more people, they also need more space to accommodate these people. A business using traditional office space is not likely able to hire more than three or so people before working quarters begin to feel a bit crammed. As a result, they move. It is increasing jobs, not just economy, that spurs new commercial real estate activity.

Change doesn’t happen overnight.

There is somewhat of a long tail on job growth driving commercial real estate activity. It takes time to catch up! When businesses are adding employees, they will usually make their current space “work” for as long as possible and then strategically move into a bigger space when they absolutely must. Conversely, when businesses are forced to lay off employees, they often stay in their current space, even if it means some space goes unused. The reason is it’s easier (and less expensive) to lay off employees as the first means of cutting costs than it is to downsize commercial space.

So, the job growth that we’ve seen over the course of many years is now driving the commercial real estate activity we are seeing today.

Slowing, but not stopping.

Job growth peaked in early 2015, then fell steadily through the end of 2017. Since then we have seen a modest, yet mostly steady increase in recent months. The reality is job growth, at any rate, cannot go on forever. The reason is, at some point, the United States will reach its “full employment” where everyone who wants a job, has a job. The unemployment rate, now at 4%, is about as low as it has been since the late 1960s, almost 50 years ago.

For commercial real estate, the link between job growth and space demand is clear and direct, though there may be lags. There will always be businesses who are looking to change their commercial space. Some will want more space, some will want less. Others will want to move to a newer space or will desire a different location. Businesses will close while others open. And so the cycle continues.

Short-Term Impact

Even with economic growth heating up, commercial real estate investors and property owners should not set their expectations for greater space absorption too high, at least in the short-term. Yes, there will be some pick-up in leasing associated with the spike in GDP growth. However, CRE professionals would be wise to focus more on job growth as the gauge for leasing prospects – and this outlook looks much more moderate because the ranks of unemployed workers available is largely exhausted. Looking at the short-term, we should not anticipate significant growth in property leasing this year. The surging industrial sector is the exception, which is the result of the shift from in-store to online shopping, not jobs.

Do you agree that it’s jobs, not the economy, that has the greater impact on commercial real estate activity? Why or why not? Join in the conversation by leaving a comment below.

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How Will Trump’s Tariffs on China Impact Commercial Real Estate?

Posted on August 8, 2018 by Mike Kushner in Blog, Commercial Real Estate 2 Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

Earlier this summer, President Donald Trump approved tariffs on about $50 billion dollars in Chinese imports. Some fear this is certain to escalate a trade war between the world’s two largest economies. While others argue the short-term setbacks are outweighed by the long-term political and economic benefits. Which side will prove to be right? Only time will tell.

What we can expect, with a great deal of certainty, is that these tariffs will have a ripple effect on the United States’ commercial real estate industry. CRE professionals should be on high alert for several, short-term impacts that stand to reshape the investment decisions we make for the next five to ten years. Keep in mind, the tariffs must still undergo a review process, with hearings this month; however, should they be approved, here are the near-future impacts CRE professionals must be prepared to manage.

Higher Permanent Debt Costs and Construction Costs

CRE professionals should prepare for a 10-Year Treasury of about 3 ½ to 4%. Additionally, it’s reasonable to expect an increase in both permanent debt costs and construction costs. Higher prices for commodities, like steel, will hurt construction and infrastructure projects. The U.S. is already seeing more than 5% materials inflation in construction, and given these recent actions, it’s reasonable to predict this number could rise as high as 10%.

CRE Renovations Over New Construction

If the prices of construction materials increase as expected, this will change the landscape for how CRE professionals are investing in commercial real estate. An increase in raw material prices (aluminum and steel) would accelerate the trend for inflated construction cost that has already been going for years. Foremost, higher construction costs will make buying an enhancing existing commercial real estate the smarter investment over new construction.

Temporary Decrease in GDP

Even though the third quarter is normally the strongest quarter of the year, the addition of these tariffs could cause the GDP to fall below 3% this fall. However, this decrease in GDP will only be temporary if Trump prevails. It will take a patient economy to “ride the wave” until 2019 when it’s expected that GDP will reach 4% with exports rising.

Increased Inflation

In the short-term, these tariffs and counter-tariffs are predicted to add to the currently elevated 2.8% annual inflation. Let’s not forget that this inflation has already caused the Fed to raise rates in June and provides guidance for two more hikes in the second half of 2018.

What This Boils Down to for Commercial Real Estate

Commercial real estate (as well as residential real estate), is intricately linked to virtually every aspect of our nation’s economy; we often look to our construction and housing markets as a barometer to gauge current economic temperature, endurance, and vulnerability. The recent tariffs not only increase the costs of materials, but they may also ignite a global trade war, both of which can have a significant, negative impact on both local and national commercial real estate.

However there is one positive angle to consider. While much of the industry may feel the squeeze of elevated costs, the recent aluminum and steel tariffs don’t mean doom and gloom for the entire commercial real estate vertical. There is one sector that actually stands to benefit from the recent market flux: current property owners. Landlords of existing buildings won’t have to worry about increasing rents to cover new and unforeseen materials costs. These building owners can offer extremely competitive rent prices to potential tenants, ultimately undercutting the competition and stealing market share.

What other impacts do you anticipate Trump’s trade tariffs to have on the United States’ economy, within CRE or beyond? Do you feel short-term impacts outweigh long-term benefits or not?

Join in the conversation by leaving a comment below!

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Top Commercial Real Estate Projects to Impact Central PA

Posted on February 26, 2018 by Mike Kushner in Blog, Commercial Real Estate, Construction, Local Market No Comments

There is a lot of different commercial construction activity taking place in Central Pennsylvania. Looking at the top commercial real estate projects to be delivered in 2018, there are two retail projects and 4 Class A industrial projects that will enter the market, bringing with them new businesses, jobs and consumers. Let’s take a closer look at these top projects to better understand the likely impact they will have on Central Pennsylvania’s economy both now and into the future.

RETAIL

Lancaster County has two retail real estate projects under construction that are projected to have a significant impact on jobs and the economy. The anchor stores for each of the two projects are supermarket brands we have come to know and love – and ones that will surely attract consumers far and wide.

The smaller of the two projects is the Crossings at Conestoga Creek, located on U.S. Route 30 in Lancaster. The 90,000 square feet of retail space being developed will be anchored by Wegmans which will become the county’s second largest supermarket, trailing only Shady Maple Farm Market in East Earl, which is 150,000 square feet. With annual sales of $7.4 billion, Wegmans is the nation’s 32nd largest supermarket chain.

The Crossings, which sits on a 90-acre site between Toys R Us and the Lancaster Post Office, is being developed by High Real Estate Group. This new retail space will create a substantial number of jobs and attract shoppers from surrounding counties. The Wegmans store anticipates the creation of 500 to 550 new jobs, and they have already begun hiring for their grand opening in 2018.

Project at 206 Rohrerstown Road.

Lancaster’s Manheim Township has exciting news of its own as it prepares to welcome the grand opening of a Whole Foods market in 2018. The proposed $130 million Belmont housing and retail project includes the market, other retail stores and homes on farmland just south of Route 30.

Rendering of Belmont retail and housing project.

Anchoring the retail portion of the 110,508 square-foot project will be the 40,000-square-foot Whole Foods market. Additional tenants will be Two Farms, Inc. Panera Bread, Metro Diner, Fuddruckers, Citadel Federal Credit Union and Mod Pizza. The retail portion of Belmont will create nearly 1,000 jobs, while Belmont overall will generate millions of dollars in tax revenue for Lancaster.

INDUSTRIAL

Four new industrial real estate projects are also under construction in Central Pennsylvania. Though much larger in size, these spaces will have a slightly different impact on our local jobs and economy than Lancaster’s retails spaces.

The largest is the Class A industrial space located at 100 Goodman Drive in Carlisle. This is part of the Goodman Logistics Center Building 1. It was announced in August 2017 that the tenant for this 1,007,868 square-foot space will be syncreon, a global third-party logistics company headquartered in Michigan. From this prime industrial location, syncreon will have access to more than 40 percent of the population of the United States.

Project at 100 Goodman Drive.

Another Carlisle Class A industrial space soon to enter the market is the warehouse at 100 Carolina Way. This 805,600 square-foot space, currently not pre-leased, is located next to Keen Transport, U-Pack and ABF Freight. The third industrial construction project is the 738,720 square-foot space located at 112 Bordnersville Road in Jonestown (First Logistics Center – Building A). Situated in the heart of the I-78 and I-81 industrial distribution corridor, the industrial park is designed to accommodate two Class A distribution centers. The second space will be delivered in Q3 2018.

Project at 100 Carolina Way.

Project at 112 Bordnersville Road.

The final Class A industrial space which is under construction in Central PA is the Ace Hardware expansion located at 139 Fredericksburg Road, Fredericksburg. With 225,875 square-feet of space, this expansion will turn the building’s existing space into a combined 1.1 million square-feet of distribution space located at Lebanon Valley Distribution Center.

Rendering of the ACE Hardware expansion.

As Central Pennsylvania’s warehousing and distribution industry grows through the delivery of these new buildings, to what extent do you feel this will impact our local jobs and economy?

Also, which of Lancaster’s two new retail spaces do you feel will gain more traffic – short term but also long term?

Join in the conversation by leaving a comment below!

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Central Pennsylvania Office Real Estate Made Few Gains in 2017

Posted on February 19, 2018 by Mike Kushner in Blog, Local Market, Office Leasing No Comments

Vacancy rates in the local office market remained mostly stagnant moving into the New Year.

If the saying “no news is good news” can be applied to Central Pennsylvania’s office real estate market, then 2017 was a good year indeed! We closed out 2017 with few noticeable gains and mostly stagnant vacancy and rental rates. On a positive note this means there were no lasting drops to cause volatility to the market; however, if “stagnant” remains an ongoing theme for our local office real estate market in 2018, we may have some cause for concern.

Let’s take a look at some key data for our three local submarket clusters: Harrisburg/Carlisle, Lancaster and York/Hanover. You will see that each experienced its own ebb and flow with some submarket clusters faring better than others at the close of fourth quarter 2017. The most important question to consider when looking at this data is: “What submarket is poised to perform the best in 2018 and what does that mean for commercial real estate and our local economy?”

Harrisburg/Carlisle Submarket Cluster

Vacancy – The office vacancy rate for the Harrisburg/Carlisle Submarket Cluster increased to 6.3% at the end of the fourth quarter 2017. The vacancy rate was 5.8% at the end of the third quarter 2017, 5.9% at the end of the second quarter 2017, and 6.5% at the end of the first quarter 2017, placing it just shy of where we began the year.

Absorption – Net absorption for the Harrisburg/Carlisle Submarket Cluster was a negative (135,877) square feet in the fourth quarter 2017. That compares to positive 25,603 square feet in the third quarter 2017, negative (6,036) square feet in the second quarter 2017, and positive 22,829 square feet in the first quarter 2017.

Largest Lease Signing – The largest lease signing occurring in 2017 was the 57,764 square foot lease signed by Pennsylvania Health and Wellness, Inc. at 300 Corporate Center Drive located in Camp Hill.

Rental Rates – The average quoted asking rental rate for available office space, all classes, was $18.12 per square foot per year at the end of the fourth quarter 2017 in the Harrisburg/Carlisle Submarket Cluster. This represented a .89% increase in quoted rates from the end of the third quarter 2017, when rents were reported at $17.96 per square foot.

Inventory – Throughout 2017, a total of two new office buildings were delivered to the market with a combined total of 73,000 square feet. At the close of the fourth quarter, two additional buildings remained under construction with a combined total of 70,000 square feet of inventory yet to be delivered.

Lancaster Submarket Cluster

Vacancy – The vacancy rates for the Lancaster Submarket Cluster in 2017 held steady for the first three quarters at 6.0%. Only in fourth quarter 2017 did we see the slightest movement in vacancy to 6.1%. Since its dip to 5.3% in third quarter 2016, the vacancy rate has returned to its recent historical average where it continues to remain stable.

Absorption – In the fourth quarter of 2017, net absorption dropped into the negatives for the first time all year, ending 2017 at negative (13,391) square feet. Net absorption was 2,462 square feet in third quarter 2017, 101,013 square feet in second quarter 2017 and 16,187 square feet in first quarter 2017.

Rental Rates – Even with a drop in net absorption and only a slight increase in vacancy rates, the quoted asking rental rate for available office space, all classes, in the Lancaster Submarket Cluster continued to increase throughout 2017. In the first quarter the quoted rental rate was $16.63, $17.13 in the second quarter, $17.20 in the third quarter and $17.46 in the fourth quarter. This is the highest quoted rental the Lancaster Submarket Cluster has experienced since prior to 2014.

Inventory – Two new office buildings were delivered to the Lancaster Submarket Cluster in 2017. Both delivered in the second quarter and combined they added a total of 113,000 square feet of new office space.

York/Hanover Submarket Cluster

Vacancy – The fourth quarter office vacancy rate for the York/Hanover Submarket Cluster held steady at 5.9%, the same as it was in the third quarter. This is slightly higher than the 5.6% vacancy rate in the second quarter and the 5.8% vacancy rate in the first quarter.

Absorption – The fourth quarter ended with a net absorption of 1,400 square feet. This is an increase from the third quarter’s negative (29,853) square feet that was a significant drop from the second quarter’s 15,646 square feet the first quarter 2017’s 31,636 square feet. This is the only increase in net absorption the market experienced in 2017.

Rental Rates – 2017 started off with a fairly steady quoted asking rental rate for available office space, all classes, of $17.40 per square foot. It increased by $0.01 in the second quarter to $17.41 and spiked in the third quarter at $18.05. Though still higher than the first two quarters, 2017 finished with a slight dip in quoted rental rates as it fell to $17.74.

Inventory – No new office buildings were delivered in the York/Hanover Submarket Cluster in 2017. There is one building under construction with a total RBA of 840 square feet.

Looking at the comparison of the three Central Pennsylvania submarket clusters, which do you feel is in the best position to start making some moves in 2018? Share your ideas by leaving a comment below.

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Real Estate Trends to Impact the United States in 2018

Posted on December 27, 2017 by Mike Kushner in Blog, CPBJ Articles, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

Rapid technological advancements and significant demographic shifts significantly influence the real estate industry. These various factors like growing urbanization, longevity of Baby Boomers and differentiated lifestyle patterns of Millennials are changing the way people value real estate. Add into the mix macroeconomic and regulatory developments, and you have the perfect storm for some significant changes to come to the real estate market in 2018.

With the many changes that have already taken place in 2017, many real estate companies find themselves searching for ways in which they can gain a competitive advantage and drive top- and bottom-line growth in the New Year.

To achieve this, we must identify and monitor emerging trends that are likely to impact the economy moving into 2018. Take a look at the top trends that are shaping the U.S. real estate industry right now!

ECONOMIC OUTLOOK: Increasing interest rates could temper growth

Federal Reserve is likely to raise interest rates in the short-to-medium term. Volatile global markets have led to continued low interest rates, but that’s expected to come to an end in 2018. Higher interest rates are likely to increase mortgage costs and could deter real estate investments to some extent.
Gross domestic product growth will likely increase 2.5 percent in 2018. It’s the same as in 2017, but better than the 2.1% growth in 2016. The modest economic improvement could temper the pace of commercial real estate (CRE) transaction activity.
Improving labor markets and household wealth will boost consumer confidence. The U-5 unemployment rate which includes discouraged workers and all other marginally attached is expected to drop under 5 percent. The employment-to-population ratio is projected to peak in 2018, as retiring Baby Boomers may reduce the share of employed.

REGULATORY OUTLOOK: Greater compliance means greater cost

Increased compliance and administration costs will result from the new accounting standards on lease accounting and revenue recognition that will primarily impact real estate investment trusts (REITs) and engineering and construction (E&C) companies.
Risk retention rules will lower issuance of commercial mortgage-backed securities (CMBS). We are also likely to see a reduction in capital availability in secondary and tertiary markets.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 will ease REIT tax provisions and R&D tax credits for E&C companies, while increasing the flexibility to invest in startups for R&D experimentation. However, corporate tax reforms will reduce flexibility for corporations to spin off real estate assets into REIT structures.

DISRUPTIVE TRENDS: These factors are reshaping the face of CRE

Collaboration and Sharing.These sound like two positive trends, right? They certainly are for startups who utilize new platforms and business models like Airbnb or WeWork to reduce their real estate overhead. However, this type of collaboration and sharing of space is disrupting the way organizations lease and use commercial real estate space for their businesses. Traditional CRE companies will need to rethink their approach toward space design, lease administration, and lease duration in order to compete.
CRE data is becoming more ubiquitous and transparent thanks to technological advancements. The traditional brokerage model is being threatened by the increasing ease and efficiency of online leasing. Traditional brokers will need to diversify their services to include consulting and collaboration.
A growing demand for mixed-use developments as consumers prefer to “live, work and play” in proximity. This demand is the result of a shortage of workers with strong STEM skills, rising urbanization and Millennials’ preference for an open and flexible work culture. Companies trying to compete for this type of talent should choose office locations in areas that cater to the living and working environments preferred by their ideal candidates.
Rising demand for fast and convenient online retailing is disrupting the retail and industrial markets. Innovations in speed and mode of delivery (such as same-day delivery and e-lockers) will decrease the demand for large retail and industrial spaces. This trend will also cause a blurring of the lines between these two properties. For example, some retail space could double as fulfillment centers. To stay afloat, retailers will need to try different store formats to appeal to the consumer, while industrial properties should focus on smaller, more flexible spaces located near cities.
A change in how we get around will also change how we use real estate. With each passing year, more and more people rely upon “pay-per-use” vehicles and rideshare platforms like Zipcar, Uber and Lyft. We also get closer to self-driving vehicles. This major disruption to the entire mobility ecosystem will result in fewer people owning and driving their own vehicles, especially in urban areas. This will free up large parking spaces in prime locations that can be put to different uses. Real estate companies should begin to explore ways to reduce and repurpose parking space as a means to generate more income.

Over the course of the next 12 months, the U.S. commercial and residential real estate industry can expect to be hit with various changes and challenges. Some of these changes may have a favorable impact, while others could impose some serious setbacks. For real estate businesses to gain a competitive advantage and drive top- and bottom-line growth in 2018, they should take note of these emerging trends and work on developing a strategy now to react to the changing market, when the time comes.

What real estate trend do you think will have the most significant impact on the United States in 2018? Share your insights by leaving a comment below!

[Online Resources] Real Estate, 2017, 2018, buyers agent, central pennsylvania, commercial, demand, Economy, growth, industry, Mike Kushner, Omni Realty, prediction, regulation, residential, tenant representative, trends, united states

Current State of the U.S. Economy and Its Impact on Commercial Real Estate – Part II

Posted on December 12, 2017 by Mike Kushner in Blog, Commercial Real Estate, CPBJ Articles, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

Continuing with part II from our series on the health and future of the U.S. economy, we again welcome the knowledge and insight of Robert Calhoun. Robert is the Northeast Regional Economist for CoStar Group where he manages a team of economists and analysts tasked with producing research at a local, regional and national level on commercial real estate, the economy and capital markets.

Let’s now dive into what real estate market participants should be keeping a watchful eye on in 2018 – Be sure to also take a look back at part I from this series which focuses on the U.S. economy as a whole!

Omni: Debt drives real estate markets and there’s a flood of capital in the market right now. Is this a shoe waiting to drop?

I say that all the time: debt drives real estate markets. What you worry about from a capital markets standpoint is that a flood of capital leads to declining underwriting standards, and so far we aren’t seeing anything overly alarming on that front.

There has been some gradual loosening of underwriting standards in the CMBS space, but this has generally been met with demands of higher credit support by the rating agencies. Investors are still doing a good job of differentiating collateral and demanding higher yields for riskier deals. We are seeing a resurgence of CRE CLOs during this cycle, but the structure of these deals are much better than the previous cycle (simpler and easier to understand, more capital in the deals, etc.).

Omni: What is contributing to the widening gap between bid and ask prices in the commercial real estate market right now?

We’ve been watching the staring contest between buyers with dry powder and owners with big gains for some time. While many owners would probably like to take advantage of current valuations and harvest gains at low cap rates, they run the risk of having to redeploy that capital back out into the same market.

Many buyers, despite being flush with cash, are balking at current prices. And the deeper we get into this cycle, the harder it is to make deals pencil by assuming higher rents and higher occupancy into an uncertain future. I would say the widening of bid/ask spreads right now is a healthy thing, further evidence that market participants are staying somewhat disciplined.

A CRE investor has a couple of different dials he can toggle when making investment decisions: risk profile, return requirement, pace of investment. They are choosing to slow their investment pace instead of loosen their risk profile or lower their return requirements.

Omni: From a commercial real estate perspective, what are the most dramatic potential effects that we should brace ourselves for? In terms of the commercial real estate market, what will you be keeping a close eye on in 2018? What will be driving the volatility in 2018?

I’ll echo my comments from before: CRE fundamentals appear solid with no glaring red flags at the national level. The biggest risk to the commercial real estate market would be a sharp rise in interest rates, likely driven by an unforeseen pickup in inflation that causes the Fed to worry that it’s behind the curve. So far, inflation has been very well behaved.

I’ll be keeping a close eye on the unemployment rate and corresponding wage growth. At this stage in the cycle, with labor markets relatively tight, we’ve typically seen wage pressures materialize. As of the Fed’s most recent statement of economic projections, the Committee expects the unemployment rate to be 4.1% at the end of 2018. We are already at 4.1% as of October 2017. If the unemployment rate were to dip below 4.0% and inflation were to begin moving more quickly back toward the Fed’s 2.0% target, that could elicit a faster pace of rate hikes than is currently expected.

Omni: Do you think market participants are factoring the threat from technology into their investment decisions?

Technology is an interesting topic when it comes to commercial real estate. I think many market participants see CRE as an area of the economy that won’t be as easily “disrupted” by technology, but we’re already experiencing disruption! So much ink has been spilled over the Amazon effect on retail that I don’t need to say much here. WeWork and its $20B valuation, whatever you may think of it, is shaking up the office market. Even if a company doesn’t actually use WeWork space when they want to expand, couldn’t they take a page from their playbook and demand a shorter/more flexible lease in a traditional office building? How would that impact office valuations?

Technology like driverless cars won’t change people’s need to live SOMEWHERE, but it might change the shape of cities and neighborhoods, creating winners and losers. Technology is also changing the way investors think about real estate as an asset class. Priceline is currently valued at $84B while Marriott has a market cap of $46B. In that light, which his more valuable: owning the real estate or owning the customer relationship?

I’m hearing more chatter about how artificial intelligence and machine learning can begin to disrupt the CRE lending market, with algorithms taking the place of human underwriters. It’s easy to envision a company like Zillow disintermediating traditional real estate brokers by facilitating peer-to-peer home sales, and that same model could be extended into the commercial real estate market.

To answer your question (finally), I think it’s important for market participants to consider technological threats…but at the same time, nobody does a very good job of predicting an uncertain future! Picking winners and losers will be as challenging as always.

What appears to be most promising for 2018’s commercial real estate market? What is most concerning? Start a conversation by leaving a comment below!

In case you missed it, be sure to check out part I from our interview series with Robert Calhoun. In our first article, Robert shares insights into the health and future of the United States’ economy as a whole.

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Learn more about Robert Calhoun: Robert Calhoun is the Regional Economist covering the northeast for CoStar Group and is based in New York. Mr. Calhoun manages a team of economists and analysts tasked with producing research at a local, regional and national level on commercial real estate, the economy and capital markets.

Before joining CoStar, Mr. Calhoun was a director of research at Annaly Capital Management, the largest publicly traded mortgage real estate investment trust. There he was accountable for the creation of proprietary research on the US economy, monetary policy and the regulatory environment to drive investment decisions across a portfolio of real estate-related assets that at times was larger than $100 billion. Mr. Calhoun graduated from Clemson University with a Masters in economics and a BA in business management. He also holds the Chartered Financial Analyst designation.

[Online Resources] Real Estate, 2017, 2018, commercial realestate, costar, Economy, insight, local market, national market, prediction, recession, regional market, robert calhoun, technology

Current State of the U.S. Economy and Its Impact on Commercial Real Estate – Part I

Posted on December 7, 2017 by Mike Kushner in Blog, CPBJ Articles, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

With the GOP’s proposed tax bill on its way to conference committee to reconcile the House and Senate versions, Omni Realty Group chatted with CoStar’s Regional Economist for the northeast, Robert Calhoun, about the state of the U.S. economy.

For more than a decade, Robert has been an influential source of economic analysis as it relates to monetary policy and real estate markets. He manages a team of economists and analysts tasked with producing research at a local, regional and national level on commercial real estate, the economy and capital markets.

Through this two part series, Robert shares a wealth of knowledge and insight in his answers to our questions. Let’s take a look at what we can learn about the current state of our economy and the largest threats and opportunities we might encounter in 2018 – Be sure to stay tuned for part II from this series as we diver deeper into commercial real estate and the economy!

Omni: From your perspective, how has 2017 fared? Is the U.S. economy where you thought it would be?

2017 has been another solid year in this recovery. Through three quarters of 2017, real GDP growth has averaged about 2.2% year-over-year, roughly in line with the average since 2010. We are on pace to add another ~2mm jobs this year, and while the rate of job growth has slowed, it’s impressive that we’re still adding this number of jobs in the 8^th year of a recovery.

The unemployment rate is down to 4.1% as of October 2017, not only a new low for this cycle but the lowest level since 2000. I expected roughly average growth in 2017, as well as a gradual slowdown in job creation, but I didn’t expect the unemployment rate to fall as much as it has. This took the Fed by surprise as well.

At the end of 2016, the Committee projected the unemployment rate to reach 4.5% by the end of 2017, and I think I was also in that camp. The Fed expected to hike the Fed Funds rate 3 times in 2017, and they are on pace to do exactly that. This is notable: 2017 is the first year in this recovery where the Fed was able to hit their goals for the path of the Fed Funds rate.

Omni: What are your thoughts on Jerome Powell [President Donald Trump’s pick to be the 16th chairman of the Federal Reserve]?

In my opinion, what you get with Powell is monetary policy continuity, which is going to be important for a few reasons. 2018 has the potential to be a challenging year, so there is no reason to amplify that by bringing in a new Chair with radically different ideas about how policy should be implemented.

The Fed intends to begin slowly winding down its mortgage and treasury holdings starting in late 2017, and the taper is set to intensify throughout 2018. Markets are unsure how smoothly this will go, so sticking to the status quo should help smooth out potential volatility. Also, the voting composition of the FOMC swings decidedly more hawkish next year. Picking Powell, a centrist who is already well known to market participants, reduces uncertainty about how the Fed will act in 2018.

Omni: What’s the single biggest threat to the U.S. economy right now? Do you see an economic recession coming anytime soon?

While it would be easy to forecast a looming recession just because the expansion is 8 years old, I’ll paraphrase the Chair of the Board of Governors of the Federal Reserve, Janet Yellen: expansions don’t die of old age. I’m not seeing any alarming imbalances as we have in certain past cycles, and monetary policy is still remarkably loose given how deep we are into this recovery. The biggest threat is probably an unexpected revival of inflationary pressures, which would cause the Fed to raise rates faster, and would cause a spike in interest rates that would be damaging to the economy.

Omni: Generally speaking, has increased regulation been a good thing?

Any increase or decrease in regulation has the effect of moving us along the spectrum between ease of doing business and increased stability. I think I can state, without causing much of an uproar, that going too far in either direction is a bad thing.

Prior to the financial crisis, we had probably gone too far in deregulating certain parts of the financial system, so the increase in regulation that followed is no surprise. That being said, we’re already seeing several bipartisan efforts to reduce the strain from increases in regulation. The House recently passed a bill that would “clarify and amend the High Volatility Commercial Real Estate bank capital rule.” Also, Senate Banking Committee Chairman Mike Crapo (R-IA) is working with a handful of Democrats on a bill that would soften some parts of Dodd-Frank that are considered particularly hard on smaller regional and community banks. The government’s take on regulation is always a pendulum.

What particular insights did you find most compelling? Do you agree or disagree with Robert’s viewpoints? Start a conversation by leaving a comment below!

Now that we’ve taken a broad look at the health and future of the U.S. economy, stay tuned for part II of our interview series with Robert Calhoun to learn more specifically about how the economic climate and emerging technology stand to reshape the commercial real estate market in 2018 and beyond!

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[Online Resources] Real Estate, 2017, 2018, Commercial Real Estate, costar, Economy, federal reserve, forecast, prediction, recession, recovery, regulation, robert calhoun, united states

Mega Warehouse Space Exploding in Central PA

Posted on December 4, 2017 by Mike Kushner in Blog, Local Market, Trends No Comments

Central Pennsylvania has gained 8 warehouses, each over 1 million square-feet, since 2010.

With today’s booming e-commerce market continuing to expand, the need for sufficient storage space to meet online consumer demands is at an all-time high. To keep pace with online consumer needs, retailers look towards extra-large storage warehouses exceeding 1 million square feet, also known as “Mega Warehouses.” These warehouses are a way to keep an edge over the competition. Between 2010 and 2017, 21 of these mega warehouses were constructed in the Philadelphia Submarket which includes Central PA.

As people continue to prefer ordering goods online with a click of a button or a tap via smartphone applications, over the traditional brick and mortar storefronts, the need for these mega warehouses continues to grow. Mega warehouses around the U.S. are strategically placed outside large metro areas allowing them to benefit from the abundance of space. By maintaining access to road, sea and rail transportation channels, mega warehouses do not sacrifice their ability to directly deliver goods to consumers in a timely manner.

Top 5 Largest Warehouses in Central PA Since 2010

# 1: At the top of the list is the warehouse occupied by Georgia Pacific. Located at 234 Walnut Bottom Road, Shippensburg, the property is 1,495,700 square-feet. CBRE Global Investors purchased this property from Prologis in 2015 for $83,000,000.

# 2: Unilever PLC, the company behind brands Dove, Lipton, Ben and Jerrys and many more, occupies 1,370,052 square-feet at 954 Centerville Road, Building 3, Newville. In 2013, this building was awarded LEED certification by the U.S. Green Building Council.

# 3: Developed by Hillwood and sold to GLP in 2016, this property is located at 1605 Bartlett Drive, Manchester. Starbucks occupies the entire 1,209,000 square-foot building.

# 4: The Urban Outfitters Distribution Center located at 766 Brackbill Rd, Gap, is 1,200,000 square-feet. Completed in 2015, this property is owned by Urban Outfitters.

# 5: The Nordstrom Fulfillment Center is located at 30 Distribution Dr., Elizabethtown. This 1,142,000 square-foot facility was constructed in 2015 and is located in a designated foreign trade zone (FTZ).

Take a look at all 8 warehouse properties in Central PA that are over 1 million square-feet.

Right Here In Central PA, We Are The Hub Of All The Action!

Central Pennsylvania remains a premiere market for industrial space and it’s easy to see why. To businesses that rely upon the ease and affordability of shipping their products to make a living, Central Pennsylvania possesses four main components that drive the decision – a great roadway system, an abundant work force, relatively inexpensive and available raw land, and the ability to reach 70 to 80 percent of the U.S. population in 24 hours. Additionally, our government regulations on warehousing and distribution are comparatively easy and straightforward compared to other states or regions.

Currently, there is one mega warehouse under construction in Central PA. The Goodman Logistics Center located in Carlisle. The property is fully leased and will be occupied by Syncreon, a third-party logistics company, in early 2018. In addition, there are five proposed buildings in excess of 1 million square-feet.

Central Pennsylvania is well poised to harness the economic boost from the e-commerce boom. We have a unique opportunity to serve this industry that we can’t afford to miss!

Learn more from past market reports:

Central Pennsylvania Industrial Real Estate Report for Q2 2017

Influx of New Construction Impacts Central PA’s Industrial Real Estate Market

Central Pennsylvania Industrial Real Estate Report for Q1 2017

brick and mortar, central pennsylvania, Commercial Real Estate, Construction, distribution, ecommerce, Economy, industry, large, market, mega warehouse, Mike Kushner, news, Omni Realty, pennsylvania, report, shipping, space, square feet, top 5, transportation, trend, warehouse

Amidst Massive Retail Closings, Central PA Commercial Real Estate Continues to Grow

Posted on June 26, 2017 by Mike Kushner in Blog, Local Market, Trends No Comments

We’ve watched it on the news, read about it in the papers and have seen it in person. Several large retailers in Central Pennsylvania have made the decision to close their doors, such as Sears, Kmart, and hh gregg, as well as a growing list of other retailers struggling to stay in the black.

The landscape of retail real estate is changing, and with that the market is reacting. While some retailers are looking to move out of brick-and-mortar locations, other mega brands like Amazon are looking to move in. What does this mean for the future of retail real estate, specifically here in Harrisburg, York and Lancaster? Let’s take a look at changes that have taken place and trends that have emerged over the last 12 months.

Harrisburg

The Harrisburg retail market has gained 162,000 square-feet of new space in the last 12 months. However, in this same amount of time, the market was only able to absorb 110,000 square-feet, causing the total net absorption for the quarter to drop to a negative 153,000 square-feet. The 4.2% vacancy rate is an increase from the recent low we saw in Q1 2017, when it dipped down to 3.7%. Though the market has 0.0% rent growth, there has been $82M in sales that is almost double the historical average of $52M. Harrisburg has just 1 under-construction retail property that will be delivered in 2017 and will add 12,000 square-feet of unleased space to the market. Though we have recently seen quite a few closings of retail locations, there remains more than 20 proposed projects for new retail space including general retail, community centers and strip malls.

York

The York retail market has gained 27,000 square-feet of new retail space over the last year, with a 12-month net absorption of 152,000 square-feet. The total net absorption for the current quarter is negative 10,000 square-feet. York’s vacancy rate is a bit higher than Harrisburg’s at 5.7%, but over the past 12 months, it has decreased by 0.6%. The market experienced a very small rent growth of 0.1% and did $19M in sales in 12 months’ time. York County has 4 under-construction retail properties that will be delivered in 2017-2018 and will add 264,217 square-feet of mostly unleased space to the market.

Lancaster

In Lancaster County, 34,000 square-feet of new retail space was delivered to the market in the last 12 months. The 12-month net absorption is 169,000 square-feet and the total net absorption for the current quarter is negative 13,000 square-feet. Lancaster’s vacancy rate is much lower than York and Harrisburg, coming in at 2.4%. In the last 12 months the vacancy rate has decreased by 0.6%, reaching its lowest point back in Q4 2016 when it was 2.3%. Like Harrisburg, Lancaster did not experience a rent growth in the last 12 months, but did do $39M in sales. Lancaster County has 5 under-construction retail properties that will be delivered in 2017-2018 and will add 159,500 square-feet of space to the market, more than half of which is preleased.

Trends & Overview

In the current market, each city has its strengths and weaknesses. Harrisburg has the highest 12-month sales of the three, but the lowest net absorption for the current quarter. Lancaster has the lowest vacancy rate of the three, but has relatively unimpressive new construction projects, sales and rental growth. York has the most new retail space scheduled to be delivered in the next few years, but has the lowest 12-month sales of the three.

All things considered, each market appears to be stable and poised for additional growth. Vacancy rates have remained mostly the same or experienced a decrease, the markets are demonstrating their ability to absorb most of the new space that is being delivered, and there continues to be under-construction projects and plan for new space. These indicators provide us with confidence that real estate investors, developers and retailers continue to see value in doing business in Central Pennsylvania.

Between Harrisburg, York and Lancaster, the area offers some unique benefits including more space and at a lower cost compared to big cities. We are also a main corridor for commuters and travelers going to New York, Philadelphia, Baltimore and Washington, D.C. Simply put, Central Pennsylvania has the right combination of resources and advantages to remain a vibrant location for retail growth.

Do you agree? What Central PA market is having the best year so far? Share your thoughts by commenting below!

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