Category: Construction news

How Opportunity Zones Impact Property Investments

How Opportunity Zones Impact Property Investments

In today’s political climate, the swinging pendulum of regulation vs. deregulation can be difficult to track. Yet sometimes government programs are put into place which can truly benefit both investors and the community. When Opportunity Zones were implemented as part of the Tax Cuts and Jobs Act of 2017, real estate investors were incentivized to invest and/or reinvest into low income areas through tax breaks including deferred capital gains, eliminated capital gains, and/or cost basis changes.

 

While the full tax benefits of Opportunity Zones will be lost starting in 2020, the program will remain in effect. Here’s how it works. 

 

What are Opportunity Zones and Opportunity Funds?

All investors know the pain of capital gains tax. At its core, cap gains taxes are taxes paid on the net gain of an investment. A common example would be buying and selling stocks. If an individual purchases $1,000,000 in stock and later sells that stock for $1,500,000, he or she would be responsible for paying taxes on a capital gain of $500,000. Traditionally, the best way to avoid paying capital gains tax was to defer payment through reinvestment.

 

The Opportunity Zone program takes this idea and builds upon it. Let’s take the above example. Instead of collecting the full $1.5 million after selling this asset, the investor could instead reinvest the funds into an Opportunity Fund. It is important to note that to be eligible for tax breaks, this individual would only be required to invest the gains, not the full amount. 

 

Opportunity Zones are Defined as an Economically Distressed

Opportunity Zones are Defined as an Economically Distressed CommunityCommunity

In order for a real estate reinvestment to qualify for Opportunity Zones tax breaks, it must be determined that the real estate falls within a designated Opportunity Zone. The IRS defines an Opportunity Zone as “an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity ZELASTO_Media Report_052518.pdf ones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service.”

 

Qualified Opportunity Fund Reinvestment

Qualified Opportunity Fund Reinvestment

The other key component of the Opportunity Zone Program is participation in a qualified Opportunity Fund. It is not enough to simply reinvest capital gains into an Opportunity Zone community. Reinvestments must be made through the program. If these steps are followed, the initial investment gains and any gains made through the subsequent reinvestment within the Opportunity Zones Program may be eligible for significant tax breaks. 

 

One of the first Opportunity Zone projects in the Pittsburgh region, the construction of a 60,000 square foot indoor growing facility in Braddock for Robotany, will soon become one of the first projects to complete the investment cycle. Developer RDC Design + Build is nearing an agreement to sell the project to a permanent investor that will have the opportunity to reap the long-term tax benefits.

Opportunity Zones, Property Investments, and Capital Gains

There are four basic scenarios which can play out when an investor participates in an Opportunity Zone reinvestment:

 

 

  • If the investor sells the reinvested property in less than five (5) years: he or she will be responsible for paying capital gains tax at this time. Even without receiving the full tax benefits, this scenario does allow for tax deferment until the fund is sold or until December 31st, 2026 — whichever comes first.
  • If the Opportunity Fund investment is held between five (5) and seven (7) years: the full capital gain amount is deferred plus a 10 percent bump in cost basis. In our example, that would equal a saving of $100,000.
  • If the Opportunity Fund investment is held between seven (7) and ten (10) years: In addition to capital gains deferment, the cost basis is bumped a total of 15 percent, totalling a savings of $150,000 in our example.
  • If the Opportunity Fund investment is held for ten (10) or more years: the investor is responsible for paying nothing on the appreciation of the reinvested asset. This means that through the Opportunity Funds Program, it is possible to invest in real estate with zero liability for capital gains taxes on net gains.

 

 

2020 Changes to Qualified Opportunity Zone Funds

2020 Changes to Qualified Opportunity Zone Funds

As one last point, time is running out for investors to reap the full benefits of the Qualified Opportunity Zone Program. As of January 1st, 2020, the maximum cost basis deferment will shift from 15 percent to 10 percent. While this does not take away from the other benefits of the program, that 5% cost basis differential can equate to huge dollar volumes for investors. Despite this, real estate investors are always cautioned to never rush into a real estate investment to get under a time limit or deadline. The right investment with a slightly higher cost is likely more profitable that the wrong investment at a slightly lower cost.

Going Forward

With current regulations, Opportunity Zones and Opportunity Funds continue to be a great choice for real estate investors through 2019. However, starting in 2020, that appeal is somewhat diminished by lessened tax incentives. This may cause some real estate investors to panic and make unwise investments. We would caution that a smart investment is a smart investment and a poor investment is a poor investment. When it comes to real estate, a tax incentive should be viewed as the cherry on top, not a reason to invest.

 

Rather than rushing to make an Opportunity Zone investment before year’s end, going through your usual due diligence is almost certainly the right decision. Whether that misses the 2019 end-of-year cutoff or not, your interests will be better secured.

How Energy and Transportation Projects Came to Dominate Construction

How Opportunity Zones Impact Property Investments

Construction is the backbone of industry. Without construction there would be no homes, businesses, schools, or warehouses. In recent years, the construction industry has seen a marked increase in the share of projects that are large scale energy and transportation projects. This is true in the United States and across most advanced nations around the world. The question then becomes: how did this shift take place and why? 

 

The Current State of Infrastructure Construction

The Current State of Infrastructure Construction

The American infrastructure is aging. Most major infrastructure projects are upgrades to existing systems such as Tennessee’s $15.6 billion sewer project or Nebraska’s $12.5 billion highway maintenance effort. Let’s take a deeper dive to understand how modern infrastructure construction budgets are being allocated by examining the Nebraska transportation transportation update:

 

 

  • $7.1 billion is to be spent on highway maintenance, repaving, and other repairs. This asset preservation budget is primarily eaten up by $6.4 billion allocated to pavement repairs, with the remainder going towards the state’s bridge system.
  • $3.6 billion is to be spent on expanding roadways by way of building new roads, widening existing roads, and more.
  • $1.8 billion is slated for modernization of transportation services including rural roadways, bridges, highways, and railway crossing junctions.

 

 

This plan may be specific to Nebraska, but it is indicative of a typical mega-construction project in the US today. As you can see by the numbers, the number one concern for many areas is simply upkeeping the existing infrastructure. Modernization and expansion efforts take up less than half of the budget.

 

Construction Trends in 2019 and Beyond

Construction of rapid mass transit

Here are a few construction trends surrounding energy and transportation which we expect to continue beyond 2019:

 

Transportation construction projects at or near airports: even modern airports are in need of an upgrade in 2019. Most airports have a logistical problem moving people between terminals, parking lots, and other airport facilities. Chicago’s O’hare airport has undergone a massive construction project to replace their usual shuttles with a more sophisticated light rail system. More airports are likely to follow.

 

Construction of rapid mass transit: construction on heavy rail, light rail, and other municipal rapid transit is also on the rise. Even mid-sized cities like Pittsburgh have invested heavily into light rail transit to improve their public transportation offerings in recent years.

 

Massive energy projects including new power plants, refineries, and more: while the exact future of the energy industry is in a state of flux with new technology and legislations coming and going all the time, the demand for new energy solutions and the aging energy infrastructure all but demands massive overhauls. 

 

Why Energy and Transportation?

As mentioned in the previous section, the energy sector has an uncertain future. One reality which is having an immediate impact on US energy construction is global demand for natural gas. The US is uniquely positioned to extract, produce, and provide natural gas to the global market. Additional energy-related products such as plastic refineries and chemical processing plants have all seen a demand increase in recent years. 

 

As for transportation, we can primarily thank a crumbling infrastructure alongside population growth for construction demands. Whether it is maintaining existing roads, constructing light rail systems, or paving new roadways, the demand for transportation remains high in both urban and rural areas. 

 

Mega-Construction Projects are Taking over Mid to Small Sized Contracts

Mega-Construction Projects are Taking over Mid to Small Sized Contract

To understand why mega-construction projects are outpacing small and medium sized projects, we must first understand where the infrastructure spending budgets come from. While the federal spending budget is more easily tracked, the vast majority of infrastructure assets are owned and controlled by state and local governments. So why are these smaller governments suddenly funding more multi-billion dollar construction projects rather than many small ones?

 

There is no singular answer, but a major reason is that approving one project is easier than approving multiple individual construction efforts. These mega-construction projects with budgets in excess of $1 billion are also sold as economy-boosters. Whether they be a new sports stadium, improved transportation at the airport, or improving the current energy solutions, generating buzz around these projects is easier for politicians. 

 

There is every reason to expect this trend to continue and possibly even gain momentum moving forward. Consider California’s high speed rail authority project. The total project was quoted in the $50 billion range, but has since been re-estimated at nearly $100 billion. This publicly funded mega-construction project will someday connect most of the main cities in California including but not limited to San Francisco, San Jose, Los Angeles, and San Diego. California’s project is commensurate with the state’s enormous wealth. Yet it remains a sign of the future of transportation and energy construction in the US.

 

Going Forward

Unfortunately, the reality is that overall infrastructure spending is still down. Federal, state, and local governments had nearly $10 billion less in spending power for infrastructure projects in 2017 when compared to 2007. The good news is that Americans are growing more amenable to both increased spending on what is an increasingly outdated infrastructure including transportation and new energy solutions. 

 

The true trend is shifting from new construction to maintenance efforts. Despite the talk of modernizing transportation and energy infrastructure, most of those projects will be to retrofit current construction with modern solutions.

Hiring Bounces Back in November

Employers were signaling caution as summer wound down. The ADP private payrolls report for November showed a big drop early last week; and then on Friday, the Census Bureau released its Employment Summary for November and reported that 266,000 jobs were created. That’s about 40% more than the consensus forecast of Wall Street economists.

There were some details to unpack that moderated the gains a little. The great manufacturing number was inflated by 60,000 GM workers returning from strike (which dampened the October report). Construction jobs grew by only 1,000 from October, a surprise given the amount of activity; however, not a surprise given the severe shortage of workers. On the other hand, strong performance in the financial and business services sectors, and especially healthcare, showed there is still some life in the expansion. Some of the highlights:

  • Unemployment fell back to 3.5%. That’s the lowest for 50 years.
  • Wage gains were modest at 3.1% year-over-year but were much higher at the lowest end of the wage-earning spectrum.
  • The broadest measure of unemployment fell to 6.9%.

There are two significant positive conclusions that can be drawn from the November report (bearing in mind that it’s one month’s data of course). First is that consumers are in good standing. Virtually anyone who wants to work is working. Wages are growing at twice the rate of inflation. The consumer drives the economy and the consumer should be happy. The second conclusion is that businesses aren’t as negative as was thought. Because business investment has been declining, concerns about the economy were becoming self-fulfilling. So far there is no data showing that other business investment is ticking upward but the jobs report shows that businesses are still investing in their most expensive asset: people. Moreover, a Vestige survey showed that 60% of business owners plan to add staff in 2020, while only 4% say they are cutting.

In regional construction news, Thomas Construction was awarded a $7.5 million contract to repair the Somerset Lake Dam. Turner Construction was awarded $5 million buildout of Pitt’s BST. PJ Dick was selected for the $55 million Pennley Place East office/retail development in East Liberty. Metis Construction started work on the new $2.2 million JP Morgan Chase branch in McCandless Crossing. Continental Building Co. was issued a permit for $3.2 million buildout for ServiceLink at Pittsburgh International Business Park in Moon Township. Walnut Capital was selected to develop the lot adjacent the Children’s Science Center. Walnut was also chosen to develop the graduate student and faculty market rate housing in Pitt’s lower campus.

Suburban Office Growth

Suburban Office Growth

That morning commute from the suburbs into downtown might be getting a little easier in the coming years. Suburban office growth has taken off for investors and for businesses in recent years, and this trend appears to be strengthening over time. Yet some more conservative estimates warn that short term, overbuilding may lead to greater supply than current market demand. As is the case with many things, the truth likely resides somewhere in the middle.

 

Projected Value of Suburban Commercial Real Estate

Projected Value of Suburban Commercial Real Estate

Urban commercial real estate has become increasingly volatile in recent years. High cap rates and pricing in traditionally urban areas has driven many investors to the suburbs. Consider America’s biggest urban market: New York, which as recently experienced a 37 percent decrease in urban sales volume. This may be influenced by a lack of available real estate for sale, but a significant downturn also indicates a real lack of interest in high priced urban commercial real estate.

 

Instead, the projected value of the suburban commercial real estate market looks positive. This is particularly true for high value markets such as New York and San Francisco, where foreign buyers are effectively pricing out the competition in the urban space. The majority of Americans do live in suburban areas, which offers yet another unique advantage to employers looking to find their next commercial real estate rental or purchase.

 

A key factor in the value of suburban markets lies in their location and convenience. Commercial real estate within walking distance of retail amenities is projected to hold a higher value that suburban real estate that is more isolated. These mini-pockets of urban lifestyles allow for businesses to pay suburban prices with the convenience of an urban location.

 

The bottom line is that suburban commercial real estate is less expensive, has potentially high upside, and is becoming increasingly appealing to investors and businesses alike. The key is finding the suburban location and amenities which can sustain a commercial investment long term.

 

Suburban Offices vs. CBD

Suburban Offices vs. CBD

To a certain extent, urban sprawl has blurred the lines between urban and suburban real estate. Yet there remains a premium when it comes to traditional downtown work spaces that many companies and real estate investors are no longer willing to pay. The differences between suburban and central business district workspaces may be diminishing over time, but here are a few key factors which keep the distinction relevant:

 

Access to transportation: public transportation access is a huge driver of commercial property desirability and therefore it is a huge driver of commercial property value. While a massive amount of Americans enjoy access to public transportation including subway systems and city buses, nearly half have no access to public transportation. The value add of CBD is that properties are all but guaranteed the convenience of a nearby transportation option.

 

Walkability: along these lines, being within walking distance of retail amenities, restaurants, and other conveniences drives value. CBD again comes out ahead here, but modern suburban planning is catching up quickly. 

 

Price points: no matter how much we talk about how trendy and desirable suburban office space has become, central business district real estate pricing remains nearly double the cost of their suburban counterparts per square foot. This difference simply cannot be overlooked. The biggest difference between these two real estate options is, and will likely remain, the price.

 

The Advantages and Benefits of Suburban Office Growth

The Advantages and Benefits of Suburban Office Growth

As referenced above, the largest benefit of suburban office growth is undoubtedly the cost savings. Yet there are so many advantages that come with expanding beyond city limits. Here are just a few:

 

  • Commuting is easier for employees. Besides the issue of public transportation, suburban offices will reduce commute time for the vast majority of employees. Whether that comes via going against the flow of rush hour traffic or avoiding long commutes altogether, this is a huge plus.
  • Parking is cheaper, easier, and more accessible. Along those lines, suburbia comes with more space, and with more space comes more parking options. Employees will likely no longer have to shell out an hour’s pay just to find a spot to park.
  • Curb appeal is improved and often more prominent. Unless you are looking for a specific urban vibe to your workspace, properties in the suburbs generally afford greater curb appeal to visitors. Signage is more prominent and the options for landscaping and other exterior features are far greater.
  • Suburban offices tend to have a campus feel. The hustle and bustle of downtown life is appealing for many, but can certainly wear on already frayed nerves. Suburban office space offers a more serene, campus-like atmosphere which appeals to workers and employers alike.

 

Going Forward

The market is strong for suburban office growth. With lower barrier to entry and an increasing public interest in moving away from central business districts, the future of commercial real estate seems to be turning suburban. The key to smart investing is picking locations which are convenient with high quality amenities. If employers can offer the convenience of a downtown work environment without the hassle, all for a lower price? What is there to lose?

The Next Wave in the Strip District

Pittsburgh’s Strip District has seen a commercial real estate transformation that is nearly the equivalent of the changes in East Liberty. Once a wasteland of very profitable parking lots, the Strip has become a tech office hub. Thanks to two major master plan developments, Buncher’s Riverfront and Oxford’s 3 Crossings, more than one million square feet of office space and almost 2,000 units of new residential space will be occupied between the Convention Center and 31st Street Bridge. Other developers, including Jack Benoff, RDC/Orangestar, Chuck Hammel, and McCaffrey Investments, have also contributed major projects to the neighborhood.

Next week, Oxford Development is bringing an updated plan for 3 Crossings next phase to the planning commission. It includes 450,000 square feet of new offices (in addition to the 110,000 square foot Stacks under construction now), 300 apartment units, and a 606-space parking garage. Mascaro Cnostruction is the construction manager for the garage. Rycon Construction is CM for the remaining buildings. There will also be a presentation for 23rd & Railroad Apartments, a 220-unit apartment that Oxford is helping to develop on behalf of Steel Street Capital. That project, which Rycon is also building, will include 33 units of co-living apace. This is a relatively new concept to Pittsburgh, in which occupants share multi-bedroom apartments much like dormitories.

At least three other developers, including RDC/Orangestar and JMC Holdings, have proposed additional spec office buildings of between 150,000 square feet and 350,000 square feet.

Work is about to start on two other new condominium projects, both being built by Franjo Construction. Penn 23 is a $12 million, 21-unit condo being developed by Francois Bitz. Solara Ventures is developing a $17 Million, 50-unit condo three blocks further east at 26th and Smallman. Franjo is also expecting to get underway on the $50 million+ second phase of the Arsenal apartments near the 40th Street Bridge.

In other construction news, the Turner/Mosites Construction team was awarded the $100 million+ central utility plant at the University of Pittsburgh. PA Department of General Services has advertised the first major public project of the bidding season, the $21 million Greensburg DNA Lab, due Jan. 8. Massaro Construction Management Services was selected as CM for the $12 million Plum Town Center municipal complex. Franjo started construction on the first 20,000 square foot office building at the Rocks Multimodal Terminal being developed by Trinity Development in McKees Rocks.

An update on the construction news: Patriot Construction has started work on the $3.7 million buildout of Spaces, a 38,000 square foot Regus co-working office on the 2nd and 3rd floors of One Oxford Centre. Sota Construction is bidding the $5 million John Jay Center at Robert Morris University. Rycon Construction is building a new 6,200 square foot GetGo superstation in the Wexford Flats in McCandless. Walbridge is the construction manager for Elliott Company’s major new facility in Jeannette.

PIT Airport Modernization Update

In December, the Allegheny County Airport Authority will put the first packages out to bid for the Terminal Modernization Program (TMP). The packages will be access roadway and site work that are enabling projects for the main program. These packages will be worth roughly $15 million.

The TMP overall consists of two main components, the $750 million new terminal (including renovations to existing) and the $250 million Landside/Ground Transportation Center. PJ Dick/Hunt is the CM on the terminal. Turner Construction is CM on the Landside portion.

During the middle/latter portions of 2020, there will be multiple packages bid, many with multiple prime contracts (as required by the PA Procurement Code). By the end of 2020, more than $500 million in contracts will have bid. The packages have been designed so that there are opportunities for general contractors and specialty contractors of all sizes. Some of the contracts will exceed $50 million, and approach $100 million. There is a Project Labor Agreement being negotiated for the TMP.

One pre-TMP project has already been let to Mascaro Construction for $3.4 million worth of demolition and renovations to the access and passenger boarding bridge areas that will be adjacent to the new terminal.

In other project news, Thompson Thrift Construction took bids on the $50 million-plus Watermark at Meeder Apartments in Cranberry Township. Fontainebleu Development agreed to purchase the Kaufmann’s Grand project and complete the construction started by CORE Development. Sentinel Construction will manage the $8 million renovation. Trek Development’s $12 million Garden Theater redevelopment is being presented to Pittsburgh Planning Commission. Mistick Construction is the contractor for the mixed-use development, which includes 47 apartments. Franjo Restoration Services has begun the $2.2 million fire restoration of the Durham Court Apartments in McCandless Township.

Obama Era Executive Order to Raise Minimum Wage for Federal Contractors

Obama Era Executive Order to Raise Minimum Wage for Federal Contractors

The US Department of Labor’s Wage and Hour Division published a notice to announce that minimum wage for federal contractors will increase to $10.80 per hour from $10.60. A change that has become a regular occurrence thanks to the Obama Administration.

 

This regular minimum wage increase is the result of the Obama Administration’s Department of Labor’s final rule which implements Executive Order 13658. The order determined that a minimum wage would be set for contractors to pay their workers for work completed for federal contracts. This minimum wage started at $10.10, but has had consistent annual increases.

Explaining the Minimum Wage Increase

Explaining the Minimum Wage Increase

The executive order states:

 

This order seeks to increase efficiency and cost savings in the work performed by parties who contract with the Federal Government by increasing to $10.10 the hourly minimum wage paid by those contractors. Raising the pay of low-wage workers increases their morale and the productivity and quality of their work, lowers turnover and its accompanying costs, and reduces supervisory costs. These savings and quality improvements will lead to improved economy and efficiency in Government procurement.

 

As stated in the executive order, the original minimum wage standard was $10.10, and now (over the course of 5 years), it has grown to $10.80. Assuming that the executive order is not undone, there will be more minimum wage increases in the future. Is this what’s best for the construction industry though? Some people don’t think so. 

Opposition to the Executive Order

Opposition to the Executive Order

Associated Builders and Contractors, Inc. submitted a letter to the administration with concerns over the executive order. They claimed that it would cause confusion amongst government contractors, and lead to additional burdens thanks to unnecessary regulation. 

 

The regulation itself was seen as unnecessary due to the majority of government contractors already surpassing the $10.10 threshold in paying their workers. There were also concerns about setting a precedent where a government can come into an industry and tell them what to pay workers. Years later, the opposition to the executive order still exists, however, the order has not been rescinded.

Explaining the Execution of the Minimum Wage Increase

Explaining the Execution of the Minimum Wage Increase

The final rule/fact sheet attempts to address the concerns of contractors by breaking down the obligations that contracting agencies, contractors, and even the Department of Justice have. Not only does this attempt to address those concerns, but it also explains how the order is to be enforced. The final rule explains that the process itself “should be familiar to most government contractors and will protect the right of workers to receive the new $10.10 minimum wage. The Department of Labor generally has adopted existing mechanisms for enforcing long-established prevailing wage laws to enforce the provisions of the Executive Order”. It even confirms that around 200,000 workers will benefit from the order.

 

The obligations for contracting agencies, contractors, and the Department of Labor are broken down as follows:

 

Contracting agencies are responsible for ensuring that the contract clause implementing the Executive Order minimum wage requirement is included in any new contracts or solicitations for contracts covered by the Executive Order. Contracting agencies are also responsible for withholding funds when a contractor or subcontractor fails to abide by the terms of the applicable contract clause, such as by failing to pay the required Executive Order minimum wage, and for forwarding any complaints alleging a contractor’s non-compliance with Executive Order 13658 to the Wage and Hour Division.

 

Contractors and subcontractors must include the Executive Order contract clause in any covered lower-tiered subcontracts. They also must notify all workers performing on or in connection with a covered contract of the applicable minimum wage rate under the Executive Order. Contractors and subcontractors must pay covered workers the Executive Order minimum wage for all hours worked on or in connection with covered contracts, and must comply with pay frequency and recordkeeping obligations. Finally, the final rule prohibits the taking of kickbacks from wages paid to workers on covered contracts as well as retaliation against any worker for exercising his or her rights under the Executive Order or the implementing regulations.

 

The Secretary of Labor is required to determine the Executive Order minimum wage rate yearly beginning January 1, 2016, and publish this wage rate at least 90 days before the wage is to take effect. The final rule outlines the methods that the Department will utilize to notify the public of the Executive Order minimum wage,

 

Finally, the order explains how complaints against it can be taken up. It outlines a process for filing these complaints with the Wage and Hour Division. It also allows for investigations into instances of believed violations or abuses of the executive order, as well as resolutions/consequences for these violations. Lastly, the order provides an administrative process for resolving legal disputes over the order’s enforcement.

Going Forward

Despite opposition by contractors and contracting organizations, the executive order was submitted and enforced. This bill focuses on workers, and paying them a wage that the government believes to be fair. The final rule also states that it accomplishes this in a way that has long-been accepted, and in a way that multiple industries are familiar with. This should not only limit confusion, but prevent legal challenge due to the precedent of such laws being deemed as constitutional and acceptable.

 

There may still be opposition from contractors, however, the order is still in effect, and for now it looks like it will stay in effect moving forward.

Fannie Mae and Freddie Mac Now Retaining Profits

Fannie Mae and Freddie Mac Now Retaining Profits

In 2008 when the economy crashed, the housing market was not immune to its effects. Companies like Fannie Mae and Freddie Mac, which guarantee the majority of America’s mortgages, received bailouts in order to stay alive. At the time, the government made the decision to take control of the two companies in order to keep the housing market afloat. Now, however, it seems that action is finally being taken to free them from that control.

Bailing Out Fannie Mae and Freddie Mac

Bailing Out Fannie Mae and Freddie Mac

With two giants losing money as a result of the declining housing market, the government felt the need to step in in order to prevent further losses, and to ensure that Americans still had somewhere to turn for mortgages. In 2008, NPR discussed the news, saying:

 

In the short term, the rescue is meant to help calm the markets and to offer some measure of stability to help the U.S. economy weather the housing correction. In the longer term, the goal is to keep the two companies afloat so that they can continue to support the U.S. housing market.

 

The Treasury Secretary at the time, Henry Paulson, agreed stating that, “Action was taken to ensure the continued availability of mortgages and to protect taxpayers.”

 

What did these actions entail? This requires looking into the original agreement made between Fannie, Freddie, the Treasury, and the Federal Housing Finance Agency (the FHFA). The agreement that was put together took control away from the companies’ executives, and gave it to the FHFA. The agreement also gave the Treasury Department 80% of the common stock for both Fannie Mae and Freddie Mac, as well as stock agreements. Lastly, a 2012 addendum instituted a profit sweep, which prevented the two companies from retaining any profits. 

Freeing Fannie Mae and Freddie Mac from Government Control

Freeing Fannie Mae and Freddie Mac from Government Control

After a decade of working under these conditions, the call has finally been made to begin putting an end to this agreement. Earlier in the year, the Treasury Department was ordered to put a plan together with the Housing and Urban Development Department to reform financing for housing. Freeing Fannie and Freddie from government control was a part of that plan.

 

Giving Fannie Mae and Freddie Mac independence is not something that can happen all at once, however. This will be a process that takes several steps, and the first will involve altering profit structures. The aforementioned report was released recently, and in it, the Treasury Department recommended ending the profit sweep of both Fannie Mae and Freddie Mac.

 

The Treasury recommended ending the profit sweep as part of a comprehensive effort to shore up their finances and shrink their overall footprint in the market.

 

Pete Schroeder at Reuters commented, saying, “Ending the government’s sweep of their quarterly profits was widely seen as a first step in any effort to end the 2008 bailout.” He goes into further detail explaining that in order to remove Fannie Mae and Freddie Mac from government control, the two need to have their own cash reserves (as opposed to relying on government funds). The first step to accomplishing this is to allow them to keep profits. Specifically, Fannie Mae will be allowed to retain $25 billion, and Freddie Mac allowed to retain $20 billion. The original 2012 sweep barred the two companies from retaining profits, so undoing the sweep can only mean that the companies are moving forward towards independence.

 

When originally taken over by the government, Fannie Mae and Freddie Mac together received $191.5 billion in aid. Since then, the two companies have paid the Treasury Department back over $297 billion; a sign that the bailout was successful, and the two companies are back on their feet. These results contribute to the confidence that Fannie and Freddie can survive on their own now.

Fannie Mae and Freddie Mac together received $191.5 billion in aid

Going Forward

Now that Fannie Mae and Freddie Mac have regained some of the government’s trust, the two companies will now be able to regain the trust of homebuyers throughout the country. The further this plan for independence progresses, the more the landscape of the housing industry will change. Homebuilders should keep track of these changes, but also understand that more may be on the way.

 

There may still be more changes on the horizon for Fannie Mae and Freddie Mac. The current FHFA director, Mark Calabria, wants to explore other ways for the two to raise capital. In a statement he released, Calabria said that he did not see retained earnings alone providing the reserves that Fannie and Freddie would need to operate comfortably. This implies that the FHFA could be instituting more changes to the two companies’ operations throughout this independence process.

 

The landscape of the housing industry changed significantly when Fannie Mae and Freddie Mac were taken over by the government, and the landscape will change again now that they are regaining that control. The process will not be instant, and there will be many steps to accomplishing this. Homebuilders should stay on the alert so that they will be prepared for every change that is made to the current operational structure of the two companies.

Developing University Buildings for the Biotech Industry

Developing University Buildings for the Biotech Industry

The University of Pittsburgh is actively seeking proposals from developers for multiple parcels on or near the university. Part of Pitt’s master plan is the private development of property along Forbes and Fifth to be space used for research partners from industry and government. These projects won’t be university-owned but the tenants will be driven by the university’s technology transfer activity, much like as happened with the Murland building, which is being occupied primarily by Pitt users. This search is in addition to the Walnut Capital research tower and Wexford Science Technology research building that have been proposed to Pittsburgh Planning Commission. 

 

What is being proposed and envisioned for the future of Oakland’s “Main Streets” is very much part of a national trend for university-adjacent development.

 

Alexandria Real Estate Equities Inc. recently won the rights to develop a property in Stanford University’s research park. The company will be opening a San Francisco Bay location for its life science and biotech start-ups. This area of the country has a thriving life science industry, and could serve as a target demographic for developers moving forward.

Growth in Biotech and Life Science

Growth in Biotech and Life Science

A study by commercial real estate firm CBRE explains that the San Francisco area is the country’s second largest biotechnology/life science cluster (with Boston being number one). San Francisco’s growth as a biotech hub facilitates the creation and maturation of start-ups and businesses in these fields, while also attracting venture capitalists who are looking for investment opportunities. Many venture capital firms are located in the area because they anticipate investing in the biotech field, and want to be close to the start-ups that they foresee themselves investing in. This is in addition to the fact that Stanford itself is one of the top recipients of funding from the National Institutes of Health. This allows Stanford to provide additional support for biotech initiatives on its campus.

 

Clare Kennedy, a commercial real estate reporter at CoStar, addressed why biotechnology is an attractive investment for venture capitalists:

 

Some of the proliferation of these companies stems from the region’s robust venture capital, which built Silicon Valley and is now pouring money into biotech-oriented businesses in fields such as pharmaceuticals, genetic research and medical devices that don’t directly provide health care services, but serve a fast-growing life science industry developing treatments for an aging population, whose need for medical interventions is expected to rise in coming decades.

Developing for Biotech and Life Science

Developing for Biotech and Life Science

How is Alexandria going to take advantage of this space? Currently, their plans are to use the facilities to house its many life science start-ups. Alexandria has a program called LaunchLabs, which provides member companies access to multiple perks as described in its press release:

 

The unique, full-service platform will provide member companies with highly flexible, move-in-ready office/laboratory space, sophisticated mentorship and access to strategic investment capital through the Alexandria Seed Capital Platform, the company’s innovative seed-stage funding model.

 

Alexandria has put LaunchLabs into practice in other areas of the country and is now expanding it to one of the top biotech hubs. The culture, infrastructure, and assistance that they provide does, in fact, facilitate the growth of its member companies, so expanding it to San Francisco is the next logical step. The start-ups and small businesses that take advantage of this opportunity will find themselves benefiting thanks to the LaunchLab philosophy.

 

According to Alexandria, biotech companies are best able to succeed “when they are in close physical proximity to capital, academia and other firms that have a complementary purpose.” Jennifer Cochran, the Shriram chairwoman of bioengineering at Stanford, adds in that, “biotech entrepreneurs often need to commit to multi-year leases, large footprints and expensive lab build-outs when they aren’t even sure they have a viable product yet.” Stanford and Alexandria believe that the addition of LaunchLabs should serve as a lifeline to these small and mid-sized companies.

Partnership with Stanford University

Partnership with Stanford University

Alexandria’s confidence is clear. There was a bidding process to determine who would be able to develop this property within Stanford’s research park, and Alexandria won. At a cost of $26 million, the company was able to get the rights to use, and redevelop the land over the course of the next 51 years. Stanford discussed the thought process behind this move, and what lead to its deal with Alexandria.

 

When the building was recently vacated, Stanford saw an opportunity to create a flexible and vibrant space that would enhance the connections between the existing life science ecosystem of medical facilities, researchers and companies in the surrounding area, while also encouraging progress toward an even more diverse life science community. The university held a competition for firms that specialize in this work and chose Alexandria, an experienced developer and operator of successful life science communities near academic campuses.

 

Together, Stanford and Alexandria are aiming to continue the growth that the biotech and life science industries are seeing in San Francisco.

Going Forward

What the partnership between Alexandria and Stanford shows us is that the life science and biotech field is growing rapidly, and developers would do well to consider how that may benefit their own business moving forward. A growing industry that requires specific infrastructure to be able to fully act on its growth potential could serve as a prime target demographic for developers who operate in any of the growth regions in the country as listed by CBRE. By developing buildings for universities and/or for biotech/life science companies, developers can find a niche demographic to market, design, and build for.

Pittsburgh’s Regional Update (A Preview)

Today’s groundbreaking for the new milllion-square-foot Amazon fulfillment center at Chapman Westport is an example of how the commercial real estate market has driven construction in Pittsburgh over the past decade.

The November/December edition of BreakingGround is in production now. For those who want a sneak preview of what’s inside, below is an excerpt from the Regional Market Outlook that deals with commercial real estate:

 

In the September Metro Mix publication by the Federal Reserve Bank of Cleveland, Pittsburgh’s employment situation was characterized as “steadily advancing.” Among the data cited by the Fed are an unemployment rate that fell 0.4 points to 3.8 percent from September 2018 to 2019, and total payroll employment of 1.123 million, a net gain of more than 10,000.

Metro Mix also took a look at the income and balance sheet of Pittsburgh residents. The real income per capita of a Pittsburgh resident was nearly $56,000, a 2.1 percent increase from 2017. This is above the income per capita for Pennsylvania and the U.S. Consumer debt in Pittsburgh is significantly below the Pennsylvania and U.S. levels as well. Debt per capita for the average Pittsburgh consumer was $26,968 after the first quarter of 2019, following one percent growth in 2018. Not surprisingly, the credit card delinquency rate for a Pittsburgh resident was only 6.6 percent, lower than the 7.5 percent U.S. average.

A strong economy is a good indicator for commercial real estate development. The resurgence of Pittsburgh’s economy over the past decade has been matched by a strong, if not booming, commercial real estate market. A number of factors suggest that commercial real estate will continue to be a positive driver of construction in 2020.

Pittsburgh’s industrial market is extremely robust as the third quarter ends. Normally a slower season, summer saw unusually high activity for leasing and acquisition. The latter is getting a boost from capital sources outside of Pittsburgh, which love the steady returns and strong fundamentals. Among the metrics that are tempting investors and developers are the low vacancy rates, especially for Class A warehouse, and the steady increase in rents. Occupancy levels for Class A reached 97 percent through the end of September and the overall industrial vacancy rate was 6.4 percent. Rents for Class A space rose to $5.70/square foot. Most impressive was the net positive absorption of 1.9 million square feet, which threatens to eclipse the highest annual total on record.

According to Newmark Knight Frank’s analysis of the industrial market, the high absorption, coupled with increased users in the market for space, will drive construction of build-to-suit opportunities in 2020. They specifically forecast increased activity for users of 200,000 square feet or more.

One of the factors driving industrial development in Pittsburgh is the growing demand for smaller warehouses to meet the demands for e-commerce fulfillment. Heretofore, fulfillment centers, like the one million square foot warehouse under construction for Amazon at Chapman Westport, were large and sited close to interstate transportation hubs. The growth of e-commerce volume is accelerating delivery times and pushing warehousing and fulfillment to smaller facilities located closer to denser population centers. This shift in logistics is making Pittsburgh more feasible for warehouse development than it was when the previous logistics models drove construction.

Pittsburgh’s office market held strong through three quarters, despite increases in space available for sublease. Through September 30, net absorption stood at 160,000 square feet, according to CBRE. The increases in absorption were mainly due to strong activity in the Central Business District (CBD) fringes – primarily the Strip Distict – and in the Airport Corridor, which saw positive absorption of 130,000 square feet. The occupancy level rose to 86.3 percent, with a total Class A direct vacancy rate of 12.5 percent.

Vacancy increased in Downtown proper due to large corporate consolidations, including BNY|Mellon, PNC and Bank of America. Falling vacancy rates in the Strip District and Oakland helped offset these holes in the market. According to CBRE, Oakland’s Class A direct vacancy rate fell to one percent. Even with more than 550,000 square feet of new space under construction, occupancy levels are expected to remain constant. Rents rose for the sixth consecutive quarter, hitting $27/square foot overall and topping $30/square foot in the CBD.

The office market is less supportive of new construction than industrial, primarily because of the available space and the high cost of construction in the most desirable locations. The continuing growth in employment in the emerging technology, healthcare, and research fields will create more demand for space and new construction. The market for tenant improvements should be more robust in 2020 and, depending upon how much of the proposed spec development proceeds, new construction in the Strip and Oakland could top two million square feet.

Not a lot of construction news. Volpatt Construction was selected as CM for $3.5 million Mellon Institute 1920 Lab Renovations. PJ Dick will build the $20 million natural gas power plant that will generate electricity for the airport’s microgrid. EIS Solar will design/build the 7,800-panel solar farm.