Multifamily Sector Update 11/1/2015

There are rezoning concerns in the Bronx about whether the new apartment buildings, meant to replace older auto-repair shops on Jerome Avenue, will be too expensive for the residents who live nearby. There are further concerns that the loss of the auto-repair shops will lead to a loss of local jobs as well. This re-zoning arose from Mayor Bill de Blasio’s strategy to improve poorer neighborhoods with “higher-density development” that will increase the number of affordable homes and improve neighborhoods. This strategy includes doubling the budget to $600 million per year in subsidies for developers to build affordable housing, and $1 billion for new parks and playgrounds. South Bronx residents are now protesting the new development, as a recent study taken claimed 80% of residents fear displacement due to rezoning. The Bronx Coalition for a Community Vision released a report asking the government to make a larger percentage of the apartments permanently affordable, to set aside 50% of the units for current residents of the neighborhood, and to both protect and create local jobs. In response, City Planning commissioner Carl Weisbrod made the valid point that housing can never be affordable to everyone who lives in a certain neighborhood, although they were trying their best. http://www.wsj.com/articles/rezoning-worries-in-south-bronx-1445387982

The Stuyvesant Town and Peter Cooper Village complex, which consists of 11,200 apartments in multiple separate buildings, was inches away from foreclosure five years ago, with its value down to $3 billion from its sale price of $5.4 billion. This past Tuesday, however, Blackstone Group LP and Ivanhoé Cambridge (a Canadian pension investor) announced that they are in a deal to buy the 80-acre complex for $5.3 billion. Some investors have said this deal showcases the “remarkable recovery” of the Manhattan real estate market since the downturn, which can be explained by two main reasons. Firstly, investors who left during the downtown are hungry for anything in Manhattan, especially investors from Norway and Middle Eastern countries. Secondly, there is a growing demand due to a growing population. This, in turn, is driving average rent prices up to over $4,000 a month. Tishman Speyer, who purchased the property in 2006 and handed it over to creditors in 2010, over-projected the amount of income that would come in from converting rent-regulated apartments to market-rate. Now, about 45% of residents pay a regulated rent, down from 71% in 2006, which has led to a doubling in income since the ‘unregulated rent’ (market rate rent) is significantly higher. However, a large chunk is required to be rent-regulated for at least 20 years under government mandates. The deal is unusual in the fact that it is between Blackstone and New York City officials, instead of a real estate development firm like Tishman Speyer. Jonathon Gray, head of Blackstone real estate, has said they will not move forward until the tenants’ association, which wants to ensure that rents are kept affordable for current residents and those in the neighborhood, approves the deal.

http://www.wsj.com/articles/stuyvesant-sale-typifies-boom-in-real-estate-1445388300

Industrial Sector Update 11/1/2015

A report from CBRE stated that, as of second quarter 2015, an increasing number of automotive companies are reshoring manufacturing in the U.S. This has significantly affected international industrial markets, as the restructuring continues to restore America to its role as a center for production. Companies like Volvo Car Corp., which will begin operations at its first U.S. manufacturing facility in 2018, are relocating from Asia, where there are growing production costs and supply chain complexity, to the U.S. and Mexico. The American South (particularly cities near seaports) has leveraged its productive advantages — particularly its port infrastructure, comparatively low costs of labor, and government incentives — to become a growing industrial hub. Mexico has seen the greatest benefit of all, experiencing a dramatic increase in auto production through 2015, and a significant future investment from the auto manufacturers. This will prompt long-term growth of U.S. distribution and logistics, especially in Texas and the Midwest, where there will be increasing auto distribution demand.

http://www.worldpropertyjournal.com/real-estate-news/mexico/mexico-city-real-estate-news/auto-manufacturing-reshoring-data-2015-mercedes-benz-bmw-cbre-trey-pennington-9092.php

Rapidly increasing occupancy and absorption rates are making it difficult for industrial properties to be built fast enough to meet demand. With such high demand and low vacancy rates, the industrial sector continues to see a higher average cap rate (the potential percentage return an investor would receive on his or her investment) of any asset class. In addition to new developments currently under construction, a growing share of supply is speculative development, indicating expected future growth. Following the recent recession and its accompanying supply shut-off, companies focused on acquisitions because of an increase in vacant space and a difficulty in leasing property. Now, in light of improved leasing, most industrial firms are redirecting focus to construction. This can be attributed largely to e-commerce, which has changed the speed at which orders are processed and goods are transported, and has consequently necessitated acquisition of industrial space. In addition, an upsurge in U.S. development, especially in major distribution centers like Dallas, Los Angeles, and Kansas City, has resulted from the rising demand for industrial manufacturing space, and companies are acting quickly to buy and develop the land in light of this growth.

http://nreionline.com/industrial/strong-demand-leads-developers-pursue-new-industrial-projects

Office Sector Update 11/1/2015

A recent report from CBRE indicated that office vacancy rates across the U.S. fell to 13.5 percent during the third quarter of 2015. Vacancy rates have fallen in every quarter since the recession, and the most recent data shows a yearly decrease of 80 basis points from this time last year. Growth in the demand for office space is expected to continue to outpace growth in supply as firms are leasing more space than is being delivered by new construction. As a result, vacancy should continue to decline, keeping rent growth above inflation in most U.S. office markets. The report stated that office rents increased by 1.6 percent during the third quarter, resulting in a yearly increase of 4.3 percent since the beginning of the year. Groundbreakings for new office developments will begin to accelerate in the coming months, fueled by the Federal Reserve’s decision to delay a hike in its interest rate. The Fed’s low interest rate makes borrowing money relatively cheap, incentivizing new construction as developers can more easily repay construction loans. Landlords of new spaces will likely charge rents well above market rate, as more companies are relying on their office space as a recruitment tool in the increasingly competitive employment market. With job growth occurring in all professional services sectors, office demand is expected to be tight through at least the middle of 2016.

http://nreionline.com/office/tight-office-demand-continue-through-mid-2016-new-research-reports-promise

Brandywine Realty Trust, Philadelphia’s largest office landlord, has recently agreed to sell some of its properties at the Laurel Corporate Center in Mount Laurel, New Jersey. The offices at those properties encompass more than 560,000 square feet of Class A office space. The price of these sales have not yet been disclosed, though it is speculated that the company will use the cash raised to fuel development projects it is planning for several recently acquired properties in Philadelphia. The company sold another office building in Mount Laurel for $16.5 million last month. Brandywine is also rumored to be searching for a purchaser for the IRS Building across from 30th Street Station, on which the company spent $252 million in renovations in 2010. The properties for which Brandywine is currently developing plans include parcels on the 2100 block of Market Street, a parking garage on the 700 block of Market, and a plot on JKF Boulevard across from 30th Street Station. The first image below shows the completed Cira Complex with Brandywine’s currently under construction FMC Tower and its yet-to-be-developed Cira II tower behind 30th Street Station. The second image below shows conceptual renders of a mixed-use residential and creative office building it has planned for the 2100 block of Market Street.

http://www.philly.com/philly/business/homepage/20151021BrandywinesellssomeMt_Laurelholdingstoraisecashforcityprojects.html