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Is a new kind of “crash” on the horizon for real estate?

Posted on August 30, 2021 by Mike Kushner in Blog, Commercial Real Estate, Local Market, Trends No Comments

It doesn’t take more than a quick glance through the news to read something about the fast and wild real estate market that has risen from the chaos of a global pandemic. Listings are selling within days of hitting the market, well above asking price, and construction can hardly keep up with the demand for new residential and commercial properties. There are many factors impacting the temperature of the market which make it quite different than the real estate “boom” we know all too well from 2008 – as well as the crash that followed.

Should real estate professionals as well as buyers, sellers, and builders be wary of a similar crash on the horizon? Without a doubt, the market cannot sustain this pace indefinitely, but it also doesn’t mean it will end in a crash-and-burn (or rather explosive) style that it did in 2008. Keep reading for a high-level overview of why the 2021 real estate boom is unique, and what we can expect as the tides inevitably turn.

Noteworthy Differences Between 2021 and 2008

Lower leverage and higher down payments – When the market corrected itself in 2008, overleveraged home buyers brought down the housing market, and some of that contagion spread throughout the rest of the property markets quickly causing a “wildfire” of sorts. As we now approach Q4 of 2021, the housing market is robust with buyers coming in with lower leverage than ever. Despite record-high housing prices, we’re also seeing a record-high percentage of house buyers bringing in 20% down payment or better. Meanwhile, 26% of all houses are sold to cash buyers. With so much money being printed by the Federal Reserve and still tight underwriting standards, only the most well-qualified house buyers are getting a chance to buy and even they are swamping the available inventory.

Slow and low construction – Housing construction levels remain well below that of the 2005–2007 period, which preceded the 2008–2010 correction. Part of that is due to wary housing builders who lived through the chaos of 2008. Another consideration is the disrupted supply chains due to COVID-19 deaths, illnesses, and lockdowns. Until we can fully resolve the prolonged impact of COVID-19 on a global basis, we can expect to deal with supply chain issues and higher prices from inadequate supply. And unfortunately, with the way that variants are arising from all the global hot spots, combined with anti-vaxxers, it’s going to be a long haul out of this storm.

Falling interest rates – Right now interest rates remain at record lows and falling. Interest rates will continue to fall during the current inflation spike and after; that’s how the mechanism of Federal Reserve money printing works. But it’s not advised to expect interest rates to climb just because rates are low today. Until the Federal Reserve changes its policy direction, there is no catalyst for higher interest rates, at least not yet.

Preparing for Impact: What kind of crash to expect?

Collectively, real estate professionals agree that a crash is on the horizon for office and retail real estate. Although “crash” may be too strong of a word – rather we should view it as a natural flow to the ebb we’ve experienced, and a course correction like what must occur after any major market shift.

Here are some important things that are boiling under the surface that will have an impact on the market sooner than later. Even with the general reopening of the U.S. economy, nationally office space demand is nowhere near what the still high asking prices for office buildings would imply. Furthermore, retail is getting crushed by online shopping, which reached escape velocity during the COVID-19 lockdowns. So, those two property segments have a lot of room to fall until property owners figure out how to adapt. The hard reality is that many commercial property owners may simply run out of cash before they can adapt and some of that price drop may spread to neighboring housing in 2022–2023.

Our current market is driven by supply and demand. While no one can predict the future with 100% accuracy, I don’t think we are heading for a catastrophic “crash” per se. Rather, I see the housing market continuing strong for at least eight to ten months before we see a significant slowdown and evening out.

Key Takeaways

The bottom line is that there is a property market readjustment coming, but it’ll be quite different from what the United States experienced in 2008. Those circumstances were uniquely reckless and volatile. Though real estate will always be (not crazy about this wording), often at a rapid pace, the market right now is not a castle built on quicksand as it was 13 years ago. As a whole, the nation has learned from these mistakes and is not endorsing overleveraging of buyers. Additionally, construction has slowed for various reasons, most beyond our control, which has naturally put some “brakes” on the market.

The most important takeaway is for potential real estate buyers. As it stands, there is no general advantage to wait. As interest rates fall, housing becomes more affordable at ever-higher prices. If you are in the market for property right now, then buy right now. Simply put, the market will continue to shift and where some pros lessen, others will emerge in your favor. The best move is to hunt for opportunities overlooked by others, so you don’t end up in an impossible bidding war or jump into a property that really isn’t the right fit for you. Don’t get caught up in the manufactured chaos but remain steady in your thinking and purchasing. Most importantly, link arms with a trusted real estate professional who can help you navigate the choppy waters of the market – now and into the future.

What is your take on the current real estate market and the potential for a crash in the future? Do you agree with this prediction or have one of your own to share? Join the conversation by leaving a comment!

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Commercial Real Estate’s Impact on Last Mile Logistics

Posted on July 15, 2021 by Mike Kushner in Blog, Commercial Real Estate, Industrial, Retail No Comments

Logistics is the relay race that materials and goods compete in every day moving across land, sea, and air cargo to the end-user, and commercial real estate is the field on which it all plays out.

The ability for the items we need to make it from the place in which they are created to where the end-user can access them is essential to our existence. When logistics are inefficient or disrupted on even the smallest scale, it takes virtually no time until the world feels the impact of delayed goods. At a minimum, it’s an inconvenience, but it can quickly escalate into a global panic where progress is delayed and prices skyrocket.

We need no better example as to how this plays out in real life than to look at the impact of COVID-19 on the world’s shipping and distribution, specifically here in the United States. The challenges we continue to face with shipping and receiving items overseas, combined with unprecedented labor shortages have caused scarcity, unlike anything our modern world is used to. And the ripples caused by this disruption left virtually no industry unscathed.

This also shines a spotlight on the importance of last mile logistics, which is the final step of the delivery process from a distribution center or facility to the end-user. Many items delayed by COVID-19 were within miles of reach, but without labor and infrastructure to deliver these items within their usual time frame, basic building materials and household items couldn’t be restocked fast enough to keep shelves full.

Shifting the Modern Logistics Model

How does this relate to commercial real estate? Redundancy and the ability to process disruption are two key elements required to support the fast-moving, high-volume requirements of modern-day logistics. And that is particularly true of the “shop-online-and-deliver-to-me” era in which we find ourselves.

Based upon the challenging lessons learned from the global pandemic, logistics are shifting toward a new model that replaces the decades-old “just-in-time” supply-chain model rooted in tens of thousands of physical retail stores in order to meet the demands of a “shop and take home” economy. Therefore, we should expect to see a disruption in commercial real estate demand and use. There will be less dependency on physical stores and more on modern eCommerce warehouses that will be increasingly automated with less reliance on labor.

The Golden Triangle

We can then expect the rapid continuation of traditional retail big-box stores being replaced by hundreds of millions of square feet of eCommerce warehouses in an effort to follow the modern logistics infrastructure. These new eCommerce warehouse locations are being developed in what some economists have coined as the “Golden Triangle.” The Golden Triangle refers to an area of the East Midlands that has become renowned for its high density of distribution facilities and being home to some of the biggest names in retail.

The Golden Triangle is the epicenter of last mile logistics. This area that makes up the nation’s logistics infrastructure has never been more vital in a post-WWII era, and this includes a dependency on commercial real estate. As thousands of retail stores shutter their brick and mortar locations in the coming months, the demand for commercial real estate space shifts from retail to industrial with thousands of new logistics and eCommerce fulfillment warehouses opening and expanding within the Golden Triangle.

Impact of Current Events

These trends in commercial real estate and logistics will be further exacerbated by current events such as Biden’s plan for a “go-broad” infrastructure bill. This plan proposes a massive $2.25 trillion to fix America’s rundown infrastructure, “green up” the economy and invest in new technologies. Furthermore, there is the pending mega rail merger between Kansas City Southern and Canadian National that will create the first true Class 1 railroad in North America extending from the deep interior of Canada, down through the center of the United States, and on south to the most vital ports and manufacturing regions in Mexico.

And if that wasn’t enough to ensure massive changes coming down the line that will impact commercial real estate and logistics, there is also the industrial REIT merger between Monmouth MREIC and Sam Zell’s EQC in which he is trading in his office commercial real estate model for a new hybrid-powered industrial real estate model that is going all-in on logistics.

What we’re witnessing is a shattered economy that is rapidly adjusting in order to right the many ships that have veered off course in the wake of the pandemic. While there are many unknowns, what we can be sure to expect is widespread, lasting changes sweeping the commercial real estate market – some we’ve seen coming for quite a while, and others that will completely take us by storm.

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Economic Impact of Rising Commercial Construction Costs

Posted on July 14, 2021 by Mike Kushner in Blog, Commercial Real Estate, Local Market, Trends No Comments

When a global pandemic first hit, the main concern was rightfully on the health and wellbeing of our population. As we slowly gained knowledge and tools to bring the spread of this virus under control, something equally as powerful and disruptive was already burning through the economy like wildfire.

Ongoing pandemic-related disruptions in the supply chain of a range of construction materials are undermining project demand and this has trickled down to impact just about every industry imaginable. Most directly, the delays and cost increases fall on construction businesses, their workers, and their clients who are waiting on them to complete projects varying from a single-family home to mega complexes that have been in the works for years.

These mass shortages caused by the inability to ship or receive some of our economy’s most essential materials, such as lumber and steel, have the construction industry in between a rock and a hard place. And we can be sure that they will not be the only sector to feel the blow of delayed project timelines and skyrocketing costs. How does all of this stand to impact the progress and financial health of our economy? Keep reading for key insights.

Understanding the Impact

According to construction project estimators, one of the biggest reasons for material shortages is the inability to ship available materials by rail or truck. Due to container and trucking shortages being felt across the country, anything with significant shipping and logistics components is highly likely to cause lead time issues. If the easing of tariffs is put into place, pricing and availability should begin to return to normal levels, which would have a positive impact on current projects and the market as a whole. However, with the shipping container and freight backlog that currently exists, bringing in significant quantities of overseas material only adds to the current challenge.

GRAPH COURTESY OF AGC OF AMERICA

Shortages Drive Cost

While general contractors can usually protect against the expectation that costs will increase, the construction industry has not experienced such dramatic material cost increases in recent history. Material cost increases, coupled with the already existing labor and housing shortages, will continue to impact the industry, domestically and globally, for the foreseeable future. Such shortages could delay the start of new projects around the country and may trigger additional claims on projects that are currently underway.

These increases and challenges are cause for concern; it’s important for business owners to consider the types of materials that their project will require. While commercial construction material costs have risen as well, it is not to the extent that residential construction costs rose due to its heavy reliance on softwood lumber. For commercial construction, steel prices generally have a greater impact.

Delays Across the Board

Some material suppliers have completely canceled their bids or contracts due to the lack of materials. While others have indicated delays of six months or more and are currently quoting prices for materials (like engineered wood products) that will not ship until early 2022! Because of these setbacks, the industry can expect an increase in claims and disputes over material prices and associated delays.

Getting Creative with Contracts

Project participants might consider amending their contracts, incorporating new or modified cost-escalation provisions, or adding riders for adjustments to contract terms based on certain material cost increases, such as based on express percentage increases. Parties might also negotiate contract allowances for certain materials or incorporate cost-sharing for material price increases that exceed certain thresholds.

Push On or Wait?

Borrowing is very inexpensive right now, and even a slight increase in lending rates down the road could add hundreds of thousands of dollars in overall costs, depending on the length of the loan agreement. Project owners need to weigh the risks of waiting for material prices to come down against the probability of rising inflation and interest rates. Likewise, if waiting means you can’t expand your production capacity, grow your business, or address the needs of those you serve because of your facility’s limitations, the long-term implications could negate and even overshadow any potential savings.

What’s most important to keep in mind is that the market has demonstrated again and again that everything flows. Trends (and troubles) will come and go, and when the market experiences a negative impact caused by something else, it will look to correct itself almost immediately. To address the delay of construction materials and labor, and the rise in construction costs, as a result, we can see solutions already emerging. These range from using alternate materials, negotiating more flexible terms within a contract, phasing out projects, and getting creative with how and when to borrow money to take advantage of low-interest rates.

The commercial construction industry will rebound, if not even stronger than it was before the pandemic hit. The lesson here is to remain patient, seek innovative and collaborative solutions, and keep your eyes set on the long-term evening-out of any negative impact you may be experiencing today.

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This Election Day will impact everything – including real estate

Posted on November 2, 2020 by Mike Kushner in Blog, Commercial Real Estate No Comments

Another reminder about the importance of the 2020 Presidential Election? Yes, but with good reason. We’ve been inundated with news, ads, and messages forcing very carefully crafted information upon us. There’s a lot we know about each candidate and their platform, but there is much more than we don’t know. This applies to all candidates and political parties. Tomorrow, the nation will vote for the candidate who represents the values and policies that best align with our own. However, I doubt anyone will say they agree 100% with any, one candidate. So instead, we’ll vote based upon the criteria that are most important to our own views. And if this happens to include the creation of new taxes, particularly on real estate, then there is something very important to consider.

Should Joe Biden become the next President of the United States, his plan includes a new probate real estate tax hidden in his platform that could cause a massive hit on capital gains.

Taxing Appreciation

As proposed by Biden, his new probate real estate tax would end the process of real estate heirs taking probated property on a stepped-up basis and instead require them to pay capital gains taxes on all appreciation that accrued on the property before their inheritance. This would put heirs on the hook for paying capital gains taxes on the appreciation of a property, plus any other profits earned above the current market value once the heir sells the asset.

Existing law is much more favorable to those who inherit real estate. For example, if someone purchased a property when it was valued at $100,000 and died when it had reached a fair market value of $1M, the owner’s heirs would inherit the property at a stepped-up basis of $1M. As a result, heirs under current law do not have to pay capital gains on the $900,000 in appreciation that accrued before the original owner’s death, and if they were to sell the property down the road, they would only pay capital gains taxes on any value above $1M.

Biden’s proposed tax changes as a whole would essentially add a fourth tax bracket to the capital gains schedule of 39.6% on income above $1M, meaning the top rate could reach 43.4% when we include the 3.8% net investment income tax.

How This Affects You!

When your parents pass and leave you the family house normally you inherit that property at what it is worth today. If you would sell that house, you would only pay taxes on what it is worth today and what it sells for. If Biden does away with the stepped-up basis you will inherit the property for what your parents paid for the property. If you decide to sell you will pay taxes on the difference between the original purchase price and what it sells for today.

In addition, a Biden presidency would greatly harm multigenerational ranches and farms by killing the next generation with taxes. Simply put, this election stands to drastically change the transfer of generational wealth as we know it.

It’s Not a Done Deal

First, nothing is known until after November 3 and the election results are tallied. Should Biden win, the change is far from a done deal as his plan could change or be voted down by the legislative branch.

Then there are some unknowns in Biden’s proposal, and how those are worked out could make the tax changes less of a blow, or even worse. For one, it’s unclear if death itself becomes a “taxable event” that forces heirs to pay capital gains taxes on all appreciated value at the time of their inheritance. It’s also possible the Biden plan may allow heirs to inherit real estate on a carry-over basis, so they only have to pay for the years of appreciation when they sell the asset, not at the time of inheritance. Another option is that heirs could spread their taxes out over time.

What is known is that if you care about these changes, and stand to be negatively impacted by them, casting a vote is the best way to voice your opinion on the matter. This is not to say any other candidate does not also plan to change other aspects of the tax structure, which will have a negative impact on at least one sector of the population. This is all the more reason to do your research before taking to your polling location.

The Big Takeaway

Regardless of candidate or political affiliation, the thing that matters most is that you cast a vote, and you do so being as well informed as possible. If you have chosen to vote in person, you still have ample time to do your own research and look for reliable sources. And when you do vote, consider what is most important to you and the candidate most likely to uphold this viewpoint when in office.

No matter the outcome – November 3, 2020 will be a historic day for the world!

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COVID-19 and the Economy: Changes Coming to Commercial Real Estate

Posted on March 27, 2020 by Mike Kushner in Blog, Commercial Real Estate, Local Market No Comments

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

No matter where you go to consume news, you will be bombarded by anything and everything related to COVID-19. The impact of this novel virus on our world is impossible to fully understand or appreciate at this time. The term “unchartered water” is being used quite frequently and it couldn’t be more accurate.

Every industry is wondering how this will impact their business, both immediately and long-term. The simple truth is that no one really knows right now. The best we can do is look to history to see how the world has reacted to similar pandemics, economic crisis, and panic. Though the world has not seen a virus causing a global shut down like we are seeing with COVID-19, we can anticipate the significant changes we may expect to see take right here in Pennsylvania. Here’s how commercial real estate is getting pulled into the fold.

Economic Uncertainty. With so much uncertainty in the stock market these last few days, people get nervous. Talk to anyone working in the financial services industry, and he or she will tell you that most of their time right now is spent talking people off the ledge of making panicked decisions. And their fear is not unfounded. After all, trillions of dollars in paper wealth have essentially evaporated.

As people watch their diminishing 401K balances, they feel rightfully uncertain. And if such uncertainty causes consumers to hit the pause button on spending, a ripple effect is bound to take place. When attendees avoid concerts, sporting events, movies, or restaurants, businesses suffer a decline in sales. Operations who supply these enterprises, such as the trucking, food, linens, security, novelties industries then feel the pinch as the ripples become waves of lost revenue. How does this relate back to commercial real estate? All of these businesses rent or own commercial real estate, meaning CRE gets pulled into the downward spiral.

Supply chain disruption. Here are the facts (changing daily), steel production is down 90% in China. Auto sales in Asia is down 95%. One of the Port of LA’s largest exports is auto parts. Couple these factors with the typical container cancellations during the Chinese New Year and you create an immense lag in product delivery which will ripple out to impact just about every other industry imaginable.

Whole industries have come to a sudden halt. Hotels, restaurants, construction businesses, retail stores – and this is hardly scratching the surface of the businesses across the Commonwealth mandated to shutter their businesses for at least two weeks – likely more. The ripple effect this will have immediately and well into the future is near impossible to quantify. It’s not unlikely that some businesses may fold as a result. If such businesses owned or rented commercial real estate, this is space that will be vacated. Additionally, a lull in new construction will decrease the amount of new space delivered to the market at least through 2020.

Interest rates. There is much conversation and reason to believe that we will soon see more favorable interest rates, making commercial real estate financing more affordable. The reason is that mass stock market sell offs will generate proceeds which must be invested. Typically, a safe harbor for this cash is short term instruments such as Treasuries. However, this needs to be taken with a grain of salt. On March 3rd, The Federal Reserve lowered the federal funds rate by ½ of one percent which was met with much applause. The truth is that this is irrelevant. The federal funds rate refers to the interest rate that banks charge other banks for lending them money from their reserve balances on an overnight basis. The hard truth is that the federal funds rate has no impact on ten-year treasury yields.

The Silver Lining – Despite the doom and gloom being predicted for many industries as the result of the spread of COVID-19, there are (at least) three reasons why commercial real estate should look to the silver lining in all of this. Here’s what they are.

#1. Some stock market investors fleeing the equity markets may choose to start investing in real estate. Why wouldn’t they invest in CRE? After the rapid downturn that’s transpired in the last few weeks, it only seems logical that some would say enough is enough I’m going to pull my money out of the stock market and invest it in a lower risk type of investment.

#2. Treasury rates have hit historic lows. On March 9th, the ten-year treasury bottomed out at 0.569%, rising to 0.981% by Friday, March 13. For comparison, a year ago, the ten-year treasury closed at 2.592% so the decline has been dramatic to state the obvious. Those of us who have debt, whether it is a home loan or loans on our rental properties, are going to benefit by refinancing debt with significantly lower interest rates.

#3. If there is increased demand for CRE and interest rates remain low, the logical result will be that capitalization rates will continue to compress even further than they are right now. This means that even if a real estate investor doesn’t refinance his rental properties, the value of his real estate will still go up as cap rates continue to compress. So bottom line is that those of us who have invested in commercial real estate will inadvertently benefit from this black swan event.

#4. It’s now a tenant’s market. The speed at which the market shifted from a landlord’s market to a tenant’s market can hardly be overstated. COVID-19 has effectively caused a collapse of U.S. office demand, which ironically comes after the market set a post-recession record just last year. For tenants who are hunting for new office, retail, or industrial space, chances are you’re going to be able to negotiate favorable terms and pricing.

In trying and changing times like these, I am very glad I chose to be an exclusive tenant agent representative/buyer’s agent for commercial real estate. I can still be an asset to my clients, whereas other forms of brokerage are more greatly impacted by the COVID-19 pandemic. During this historic time, I can serve my clients through subleasing, lease restructuring, and negotiating better deals based on current market conditions.

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

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Growing U.S. Economy Drives Demand for Commercial Real Estate

Posted on February 13, 2020 by Mike Kushner in Blog, Commercial Real Estate, Trends No Comments

The current economic climate in the United States has been a bit of a roller coaster, and depending upon the industry you’re examining, you may find more ups than downs or vice versa. Trade wars, combined with a slowdown in the U.S. manufacturing sector and around the globe, shook up equity markets and businesses in 2019. But robust job growth has extended the spending power of American consumers, which is ultimately our nation’s economic engine, according to CoStar’s 2019 Year in Review of the U.S. Economy.

To put this into perspective, the United. States is currently experiencing the longest economic expansion since World War II. Additionally, key indicators point to the economy staying solid in 2020, which will extend the record bull run for U.S. commercial real estate. While there are some risks that could eventually move the nation toward a recession, as it stands, the growing U.S. economy is driving demand for commercial real estate, with many factors emerging as a result. Let’s take a look at what the most profound outcomes of this CRE growth.

The growing economy bodes well for demand for commercial and multifamily real estate.

What it means for CRE: Expanding payrolls will continue to fuel demand for office space, while rising incomes and consumption will boost demand in industrial and retail sectors. As job growth continues, consumers appear quite optimistic and unconcerned by the trade war and any economic slowdown abroad.

Migration of workers from the Northeast and Midwest is growing the labor markets, which is fueling real estate demand, specifically in the South and U.S. West.

What it means for CRE: With the increase in labor as well as a growing demand for real estate in the South and U.S. West regions, CRE developers and investors should look to these markets as viable areas of growth. An increase in job creation also means a rising demand for office spaces and apartments. Property management will benefit from high occupancy rates, and job growth will lead to an increase in leasing. With low interest rates, commercial prices will likely see some gains.

The answer to combat rising development costs and rental prices in urban areas may be micro-apartments.

What it means for CRE: Simply put, micro-apartments extract the most value from every square foot. Standardized designs and “pre-fab” or modular construction cut development costs and shorten construction time, meaning developers could reduce expenses and start generating rental income more quickly. Some developers are designing studio apartments that are one-fifth the size and 40% of the cost of a typical studio, netting out to as little as 175 square feet.

Investing in industrial real estate, over retail, is the safer bet.

What it means for CRE: The industrial vacancy rate is extremely low, in many cities it’s below 5%, even 1% to 2% in some areas. Meanwhile, internet sales are cannibalizing traditional retail spaces, such as department stores, malls, and shopping centers. A unique aspect of this changing market is the emergence of “click-to-brick” retailers, like Amazon, that are establishing small retail stores in key areas. These spaces don’t carry much inventory, but they give customers the opportunity to interact with physical products and place an order. So for CRE investors and developers, industrial real estate carries more certainty and less risk than retail at this time.

Moving into the new decade, economists expect economic growth to slow somewhat as the labor market cools.

What it means for CRE: Consumer spending may lose some momentum and persistent global and trade policy headwinds weigh on business sentiment and investment. For commercial real estate, 2020 should remain a solid year of growth, especially for the industrial market. Though real estate professionals should remain strategic and always be looking ahead to factors that could impact economic growth, and CRE growth as a result.

What is your view of the current state of the nation’s economy right now? How do you anticipate this changing in 2020? Share your thoughts and insights by leaving a comment below.

[Online Resources] Real Estate, buyers agent, central pennsylvania, Commercial Real Estate, Construction, demand, economic impact, Economy, growth, industrial, jobs, Mike Kushner, office, Omni Realty Group, pennsylvania, retail, tenant adviser, trends, united states

Why Banks are Cutting Back on Commercial Real Estate Lending

Posted on January 17, 2020 by Mike Kushner in Commercial Real Estate, Construction, Guest Blogger, Local Market, Trends No Comments

Commercial real estate lending, the bread-and-butter business for many smaller and regional banks, could further decrease in 2020. The cause is a combination of a few different factors – intense competition from non-bank lenders and rising delinquency rates to name a few. Mortgage lending is also predicted to be impacted by rising interest rates and tight housing supplies in many major markets.

This trend is not new, but rather has been slowly creeping in for years. In 2017, U.S. banks reported that demand for commercial real estate loans weakened in the second quarter, though foreign banks reported strengthened demand. Furthermore, loan growth slowed to 4.2 percent in 2018, down from 5.6 percent in 2017, according to bank call reports and Federal Deposit Insurance Corp. data.

Why exactly are banks cutting back on commercial real estate lending? And should this call for concern that a potential economic downturn is in the near future?

Rory Ritrievi, President and CEO of Mid Penn Bank

To lend some expertise on this topic, Omni Realty Group turned to Rory Ritrievi. Rory has more than three decades of experience in banking, specifically in Pennsylvania. For the last 11 years, Rory has served as President and CEO of Mid Penn Bank. Under his direction, the bank has grown from $550 million in assets and 14 retail locations to over $2 billion in assets and 39 retail locations.

Throughout his banking career, Rory has gained deep insight into when and why banks provide commercial real estate loans – and when they do not. Let’s learn what he thinks is going on in the current market, and the pending economic impact.

Omni Realty: How has commercial lending changed in the last 5 years?

RR: In the last 5-10 years, we have seen, for the most part, a return to credit fundamentals that seem to have been abandoned in the years leading up to the Great Recession. Back then it seemed like almost any deal made sense to Bankers. Now, the focus has been returned to analysis of absorption rates, discounted cash flows, borrower experience, reasonable cap rates, and strength of guarantors.

Omni Realty: In your opinion, what are the main causes of these changes?

RR: Losses. Loan losses of 2008-2012 gave a renewed focus to bankers on the true meaning of credit fundamentals.

Omni Realty: What changes would need to take place in the commercial estate market, or economy as a whole, to further improve commercial lending?

RR: Lenders need to evolve their underwriting and analytics to keep up with the evolving demographics. Baby Boomers are aging out so there is a need for more senior housing, multifamily rentals, luxury apartments, and assisted living. Additionally, high student loan balances are making the need for affordable housing in urban areas more prevalent. There is also a growing focus on renewable energy and green spaces. Finally, work from home is more prevalent which challenges the demand for traditional office space. When we look to retail, the shift toward online decreases the demand for mall space, while increasing demand for warehouse space. And we can’t overlook technology. Bankers need to not only know about emerging technology that stands to impact the market, but they must embrace it as a highly valuable tool to help them “keep up.”

Omni Realty: What do you anticipate the trend to be for commercial lending in 2020?

RR: In my opinion, 2020 will be a positive year in the lending business, particularly in Central Pennsylvania. We are in a good credit cycle and the interest rate yield curve is in decent shape compared to last year. There are geopolitical issues such as the impact of the general election, instability in the Middle East, and trade with China but I do not believe any of those issues will halt the progress of our local economy in 2020. Challenge it, yes and maybe slow it a bit, but not halt it entirely.

Omni Realty Group thanks Rory for sharing this valuable information and helping us to further understand the factors impacting how banks view commercial lending. Though banks are, for the most part, treading lightly in the market since the Great Recession, it’s encouraging to hear their renewed commitment to credit fundamentals, and helping both individuals and businesses make well-educated lending decisions.

Amidst a year that will no doubt bring change, it’s important we remain aware of the lasting impact factors such as elections and geopolitical issues may bring to our economy, both immediately and for years to come. Rory provides sound reason as to why we should not fear such changes, but rather maintain confidence in the banking economy, particularly here in Central Pennsylvania.

Do you agree with these insights, or have others to share? We welcome your feedback in the comments below!

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Census Data: National and Local Trends You Need to Watch

Posted on June 3, 2019 by Mike Kushner in Blog, Commercial Real Estate, CPBJ Articles, Local Market, Trends No Comments

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

Census data provides a fascinating look into population growth trends that stand to have a profound impact on our economy, both locally and nationally. More than just being “interesting” data to study, population growth and decline points us to important trends that will reshape supply and demand in various industries, one of the most prominent being real estate.

Just last month, the US Census Bureau released new population estimates. These estimates account for and compare the resident population for counties between the dates of April 1, 2010 to July 1, 2018. The outcome? There are shifts in population taking place across the nation that may differ from what you might assume. Let’s take a look at some of the highlights from this data from a national and local level.

At a National Level

South and West Lead Population Growth

The census data confirmed that counties with the largest numeric growth are located in the south and the west regions. In fact, Texas claimed four out of the top 10 spots. Looking at population growth by metropolitan area, Dallas-Fort Worth-Arlington, Texas, had the largest numeric growth with a gain of 131,767 people, or 1.8 percent taking place in 2018. Second was Phoenix-Mesa-Scottsdale, Arizona which had an increase of 96,268 people, or 2.0 percent. The cause of growth in these areas is the result of migration, both domestic and international, as well as natural increase. In Dallas, it was natural increase which served as the largest source of population growth, whereas in Phoenix I was migration.

Fastest Growth Occurred Outside of Metropolitan Areas

Surprisingly, no new metro areas moved into the top 10 largest areas. Of the 390 metro areas within the US (including the District of Columbia and Puerto Rico), 102 of these areas, or 26.2 percent experienced population decline in 2018. The five fastest-decreasing metro areas (excluding PR) were Charleston, West Virginia (-1.6 percent); Pine Bluff, Arkansas. (-1.5 percent); Farmington, New Mexico (-1.5 percent); Danville, Illinois (-1.2 percent); and Watertown-Fort Drum, New York (-1.2 percent). The population decreases were primarily due to negative net domestic migration.

North Dakota Claims Fastest Growing County

Among counties with a population of 20,000 or more, Williams County, North Dakota claimed the top spot as the fastest-growing county by percentage. This county increased by 5.9 percent between 2017 and 2018 (from 33,395 to 35,350 people). The rapid growth Williams County experienced was due mainly to net domestic migration, 1,471 people, in 2018. The county also experienced growth between 2017 and 2018 by both natural increase of 427 people, and international migration of 52 people.

More Growth than Decline

Out of 3,142 counties, 1,739 (or 55.3 percent) gained population between 2017 and 2018. Twelve counties (0.4 percent) experienced no change in population, and the remaining 1,391 (or 44.3 percent) lost population. Between 2010 and 2018, a total of 1,481 (or 47.1 percent) counties gained population and 1,661 (or 52.9 percent) lost population. Though there has been more growth than decline overall, the numbers indicate that this can easily shift year over year.

At a Local Level

Dauphin County

Lancaster County

York County

Cumberland County

Cumberland, Dauphin, Lancaster and York Experience Consistent Growth

The most notable trend to take place between 2010 and 2018 in Central PA is that these counties all experienced consistent growth year-over-year. Moreover the growth occurred fairly evenly over the last 8 years. This provides consistency and enables the economy to respond to the growth over a reasonable amount of time.

Counties Also Maintain Same Order of Ranking in Population

Another trend worth noting is that the counties have maintained the same order of ranking based upon population for 8+ years. For example, in 2010 these counties in order of smallest population to largest population was Cumberland, Dauphin, York, Lancaster. This is the same ranking we see in 2018, and every year in between. No county surpassed another at any point.

Lancaster Remains Largest and Fastest Growing County

Lancaster County has a major lead in population over the others. At 984 square miles, it is also the largest of the 4 counties. Between 2010 and 2018 it also experienced the largest numeric growth at 24,112 people. Number two in numeric growth was actually the smallest of the four counties, Cumberland County, which grew by 16,017 people. York County grew by 13,301 people and Dauphin County grew by 8,997 people.

Overall, the latest US Census offers valuable and insightful information related to population growth between 2010 and 2018. Understanding the cause of either growth or decline provides framework for how these shifts may continue on their course, or change in the future.

A deeper dive into the census data reveals several demographic changes impacting commercial real estate development: household formations, aging baby boomers, growing millennials, women in the workforce, and migration toward the South.

Today’s demographic changes present challenges for commercial real estate developers, but they also offer lucrative opportunities to firms creatively adapting to new demands.

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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 No 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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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!

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