Category: National Economy

Working Through the Fear and Some Construction News

On March 20 I posted about how difficult the coming weeks were going to be. As expected, the past week brought much worse news than the previous week.

News about the spread of COVID-19 has followed the same pattern as the news that has come from the rest of the world. As states have responded to the outbreak with shelter-in-place orders, the economy has slowed. The huge jump in first-time unemployment claims filed – some 3.28 million new claims – shocked the public but was also not a surprise to economists tracking the pandemic.

The next few week’s news will be bad too. That’s how the fear stage of a crisis works out. It is likely that the news won’t improve much for a while. That doesn’t mean we won’t work through the fear stage. We’ll accept the gravity of the situation, or get used to the bad news, and then work our way through the crisis. Business owners I know started doing that very thing this week and it was a tough week for that reason. Working through this means layoffs and pay cuts. Small business owners hate taking those steps but they are the first steps in recovering. You have to survive to recover. And there will also be good news too. Last week Congress passed a package of measures that will help with some of the economic damage from the outbreak. Federal guidance on isolation were extended and showed the government was taking the outbreak seriously as a public health threat. Even the stock market showed signs that the selloff may have stopped.

One thing that helps with the fear stage is being informed. That has its own set of challenges. You have to work hard at deciphering information from opinion but here’s a tip: avoid any article that has the words “could,” “might,” or “may” in the title. These are attempts at predicting how this crisis will play out. They are most certainly going to be wrong. The forecasts will be both too gloomy and too optimistic, but almost certainly wrong. It’s not that the articles won’t be well-researched or the forecasts unfounded; it’s that the most important variables are so far from being understood that you can’t reliably predict an outcome.

As an example, some very smart people earlier this week predicted that unemployment “could” reach 30 percent as a result of the shutdown. That was the Federal Reserve Bank of St. Louis. That’s 47 million people, or six times the number of people thrown out of work in 2008-2009. Several industry categories would have to go to zero employment for that to come true. More importantly, that kind of forecast leaned on variables about infectious rates and quarantining that aren’t even known in countries that faced the virus a month before the U.S.

Why does this matter? In the fear stage, our minds gravitate towards the negative emotions. We envision the worst that could happen as our likeliest future. Christy Uffelman from Align Leadership shared this Harvard Business Review article on the emotions of fear last week. It’s OK for leaders to embrace the grief that this kind of crisis brings; it’s not OK for leaders to embrace opinions and feelings as facts. Better we should stick with what we know, rather than search for what experts think might happen. Reflecting again on the financial crisis, many of the experts who were forecasting the end of the world in September 2008 were telling us that the panic was overblown in July 2008.

The course of events over the next few months is unclear. Uncertainty helps feed fear too. But some things that are uncertain will have positive outcomes too. There will be resources thrown at developing a vaccine as quickly as possible. It won’t take as long as we fear. Prior to World War II, it took three years to build an Essex class air craft carrier. By 1943, shipbuilders were launching one every 3 ½ months.

We simply don’t know what we don’t know about this pandemic. Stick with resources that inform you, rather than those trying to tell you what will happen or how to feel. Here are a couple of suggestions:

Allegheny County established a rumor control website for public health concerns.

Newmark Knight Frank issued a clear-eyed and objective report on how the pandemic is impacting commercial real estate and construction.

U.S. Senate Committee on Small Business and Entrepreneurship posted a useful guide to the benefits in the $2 trillion CARES Act for businesses.

There is construction news, even in a shutdown. First, the shutdown of construction may be short-lived. Speaker of the PA House, Mike Turzai, is introducing HB2400 next week to allow all construction projects to move forward with mitigation efforts in place. Industry associations have been working to draft mitigation plans this week to make job sites safe for workers. It is not known if Gov. Wolf will support such a bill. The General Contractors Association of PA – working closely with the MBA – developed a COVDID-19 exposure mitigation plan that will inform PA policy.

In project news, Mascaro Construction is coming out of the ground on the $12 million Steelers Pro Shop addition to Heinz Field. Carl Walker Construction has started work on the $11 million renovation of the UPMC parking garage at 3500 Terrace Street. Omega Building Co. is underway on the $7.9 million kitchen and restroom renovations at the Cork Factory. M*Modal is taking 53,000 square feet in the $20 million expansion/renovation of 7514 Penn Avenue that Franjo Construction is doing. Lone Pine Construction was awarded the Westmoreland County Municipal Authority’s $5.5 million office and garage in New Stanton.

Shutting Down Construction and Thinking About What’s Next

The order to shut down all PA businesses except those that are life sustaining is a splash of cold water on the construction industry. While the order has caused dismay in parts of the industry, it has removed uncertainty about how construction companies should react to the pandemic. This week I’ve talked to a lot of old friends/customers and talked more than a few off the ledge. There is some comfort in not having to make the tough choice between keeping people working and keeping people safe from infection.

This week definitely had the feel of the first week of the financial crisis in mid- September 2008. There was bad news every day and the whole thing is evolving rapidly. We’re in the fear phase of the crisis. We don’t know what’s about to happen and we don’t know what will solve the crisis. Judging from the data from other countries where the outbreak happened first, we’re going to get worse news next week and maybe worse the week afterwards. And that’s only if we get the ability to start testing widely. At the same time, the bad news about how the infection is spreading should not be a surprise. COVID-19 will behave much the same way in the U.S. as in other countries. After a few weeks, we will begin to accept the news and the fear of the unknown (at least) should recede.

There was an interesting graphic I saw this AM, maybe on Twitter? It showed the rapid increase in research on COVID-19, which looked very much like all the graphs on the rapid spread of the virus itself. There is a cottage industry of sorts blossoming in coronavirus articles. It reminds me of the flood of research and articles during the financial crisis, many of which had the same feel as those today that predict how this virus will develop. All of those articles – about the huge toxic asset balance, the trillions in CDOs, or the tidal wave of refinancing that would break the market in 2012 and 2013 – were based in reality in 2008. All were also ultimately wrong. Why? Things changed.

Setting aside articles written from one bias or the other, many well-meaning nand bright people are going to write predictions about how another wave of infections is coming, or how the virus will mutate and return in 2021, or how it will all blow over in 45 days. We don’t know enough about COVID-19 to make predictions. We also don’t know what will change with a little more time. Really smart people are trying to develop treatment or vaccines. Applying the same assumptions to this effort as if people were trying to develop an acne medicine is foolish. Maybe COVID-19 can’t be treated but the evidence suggests that a vaccine is possible. I’m betting that the trial period won’t be too long. Don’t put too much stock in predictions when we know things are going to change.

One article I do suggest you read is this article by a bunch of engineers and doctors that are trying to draw conclusions from what little data we have. The goal: buying more time.

Speaking of buying time, while you are waiting for the March/April BreakingGround to appear at your office, you can get a peak at it online at the Tall Timber Group website. We take a whack at trying to update you on the economy in a rapidly-changing environment.

Interest Rate Cut Boosts Housing Market, Other Pittsburgh Construction Market News

Right off the bat, let me offer a disclaimer about the Fed’s rate cut. It’s going to help certain (very limited) parts of the US economy but will do nothing to help with whatever economic headaches result from the coronavirus. You can read more of this rant in the Publisher’s Note of the March/April BreakingGround in a couple weeks. The economy doesn’t need stimulus. What will be needed is a safety net for those who get thrown out of work. That will probably be cheaper for us taxpayers and way more effective than measures that will mainly please big donors to political parties. The oil and gas industry is getting clobbered further because the Russians and Saudis have started an oil price war. If the coronavirus was cured tomorrow that wouldn’t change. Likewise, giving people payroll tax relief helps those who are on someone’s payroll, not those who are laid off. That’s the disclaimer. I didn’t say it would be short.

Cutting rates is bad overall for banking because it reduces bank interest income from lending. Rate cuts are good for banks and lenders, however, when the cuts stimulate mortgage loans. Boy, has last week’s cut worked in that regard. The Mortgage Bankers Association reported this morning that there was a 79% jump in refinancing activity since last week. SINCE. LAST. WEEK. Refinancing activity is up 479% compared to last year. Refinancing is a zero sum game, which in the long run reduces the interest income for lenders overall. But, in the meantime, a 479% increase in refinancing will mean a significant increase in fees associated with the new loans. And, for the consumer, the refinancing means a big improvement in the household balance sheet. Cost of home ownership is lower. There’s more discretionary income. Mortgage indebtedness is cut to 15 years or less for millions.

Source: Federal Reserve Bank of St. Louis

The Mortgage Bankers also reported that there had been a 6% increase in home purchase mortgage applications, which was a 12% increase year-over-year. That pales in comparison to refinancing applications but there isn’t a Realtor in America who wouldn’t take a 12% jump in home sales. Likely that increase would be greater if there was a normal inventory of homes for sale.

On to Pittsburgh construction contracts. The Builder’s Exchange is reporting that Mistick Construction is taking bids on its $13 million 49-unit Clairton Inn mixed-use project. PBX also reported that Watson Institute is taking bids from A. Martini & Co., PJ Dick and TEDCO. Turner Construction was awarded the $12 million Price Waterhouse TI at One Oxford Centre. PJ Dick will be the contractor for the $10 million conversion of the Roundhouse at Hazelwood Green. Volpatt Construction was awarded the $4 million Carnegie Library Downtown Branch renovation. Stevens and Chapman Corp are building the new 250,000 sq. ft. plant for AmeriPrecision Metals in Canonsburg. Landau is the CM for Grove City College’s $8 million library renovation. And in non-Pittsburgh construction news, Mascaro Construction is the CM for the $90 million Carolina Panthers headquarters and training center just south of Charlotte in Rock Hill, SC.

Will Cannabis Legalization Present CRE Investment Opportunities?

Will Cannabis Legalization Present CRE Investment Opportunities?

No matter what your personal views on the matter, the cannabis legalization discussion is here to stay. As of the writing of this article, marijuana is fully legal in 11 states and legal for medical use in over half the states in the US. Those numbers are not expected to diminish, with additional states considering full or partial cannabis legalization. What has followed has been a growth in a previously non-existent industry that has affected both micro and macro economics in the US. The question we now ask is: will cannabis legalization change the commercial real estate market?

To answer this question, today we will explore the current state of marijuana legislature as well as future projections, the likelihood that cannabis will become fully legalized in the state of Pennsylvania, and discuss how federal and state legislation on cannabis has and will continue to impact the CRE industry.

The Latest on Cannabis Legalization

First and foremost, the federal government considers marijuana a class 1 controlled substance. This puts marijuana at the same tier as LSD, heroin, ecstasy, peyote, and methaqualone.

There is nothing clear about the current state of cannabis legalization. So let’s stick with the facts. First and foremost, the federal government considers marijuana a class 1 controlled substance. This puts marijuana at the same tier as LSD, heroin, ecstasy, peyote, and methaqualone. While legislation has been proposed, the nationwide legalization of marijuana is likely very far off.

11 states have fully decriminalized marijuana

It should be noted that although we consider these states part of a group, their individual laws on cannabis regulation vary dramatically. What remains constant is that users must be over the age of 21, and distribution is still highly regulated. The states that have legalized marijuana include Washington, California, Maine, Michigan, Alaska, Nevada, Colorado, Oregon, Illinois, Massachusetts, and Vermont.

33 states currently allow the legal use of marijuana for medical purposes

33 states plus the District of Columbia allow residents to own and use marijuana when it is prescribed by a physician. Pennsylvania is one of these states. These laws become even cloudier than the “fully legal” 11 states listed above, as the medical red tape can be quite complex.

33 states plus the District of Columbia allow residents to own and use marijuana when it is prescribed by a physician. Pennsylvania is one of these states.

Fully illegal vs. decriminalized and beyond

For the 39 states that have not legalized marijuana, there are varying degrees of criminality associated with possession and distribution charges. Some states including Delaware, Connecticut, Maine, and New York, have reduced cannabis charges, meaning previous punishments have been diminished for those.

Will Cannabis be Legalized in Pennsylvania?

Pennsylvania’s laws on cannabis allow for medical use only. Unlike some other states, Pennsylvania has not enacted laws to decriminalize marijuana possession or distribution charges. As we discuss the possibility of the marijuana business impacting commercial real estate in our region, the next logical question becomes: how likely is it that cannabis will become legal in Pennsylvania?

The answer is as complex as you might imagine. Politicians including Governor Tom Wolf and Lieutenant Governor John Fetterman have both gone on record stating that they would consider the legalization of marijuana in the future. In the case of Fetterman, he is openly in favor of full legalization on the state and federal level.

Pennsylvania’s laws on cannabis allow for medical use only. Unlike some other states, Pennsylvania has not enacted laws to decriminalize marijuana possession or distribution charges.

Recent polls suggest that 59 percent of Pennsylvanians support the recreational use of marijuana. This is in stark contrast to a similar poll in 2006, in which only 22 percent of registered voters were in favor of recreational marijuana use becoming legal. The biggest considerations continue to be:

  1. Pennsylvania’s mix of conservative and liberal ideals clashing at the state levels and
  2. Money. If other states see a windfall from marijuana legalization (including commercial real estate), the likelihood of full legalization grows.

How Cannabis Legalization Has Impacted the Commercial Real Estate Market

The legal marijuana industry has already eclipsed $10 billion in the US. The cannabis market is potentially the fastest growing industry in the nation. Commercial real estate investment is a huge part of that growth. Here are a few ways in which marijuana impacts local CRE markets:

  • The demand exists for large facilities. Cannabis production facilities are quite large, and often include both farming and processing capabilities.
  • Regulations are a blessing and a curse. CRE investors would be wise to understand state and local laws before entering the cannabis arena. Cannabis producers must jump through hoops at the state level to gain site approval before beginning any type of production.
  • Cannabis retail is big business. Of course, production is only one side of the equation. Marijuana has a strong retail presence which has injected life into a stagnant retail market.
  • Local and state economies have been boosted by legal marijuana. Even if you want nothing to do with the cannabis industry, there is now sufficient evidence to make the claim the legalizing pot boosts the economy at the micro and macro level. As we know, stronger economies often create stronger CRE markets.

Going Forward

At the moment, legalized marijuana in Pennsylvania is all a hypothetical. The benefits of legalized marijuana for business and for commercial real estate are well documented. If and when our state (or the fed) chooses to adopt cannabis, there will certainly be an opportunity to pounce. The question going forward will become when that happens and what regulations will come along for the ride.

Uber Purchases 600 Acres in Findlay Township, PA

Uber Purchases 600 Acres in Findlay Township, PA

Uber is a now well-known ride sharing service which has 100’s of millions of active users. Uber has been a major disrupter of the taxi and car service industries by offering a unique (at the time) business model of matching passengers to drivers with independently owned vehicles. Today, those 100’s of millions of active users have adopted ride sharing into their daily lives for commuting, when traveling, or even just getting home responsibly from a night on the town. In the Pittsburgh area, Uber is also known as a pioneer in autonomous vehicles and has established a technological headquarters where they are testing their new self-driving cars and trucks.

 

As part of this testing process, Uber recently made another large commercial real estate purchase west of Pittsburgh. Today we will review the details of that purchase, give some background on Uber, and explore how Uber’s presence in Pittsburgh might impact the local CRE industry.

 

Details on Uber’s Recent CRE Purchase near Pittsburgh

Details on Uber’s Recent CRE Purchase near Pittsburgh

Uber’s autonomous car shop in the Strip District is expanding its reach. Uber had been looking for additional facilities to test its self-driving vehicles. In late 2019, it found a new home by purchasing a nearly 600 acre lot in Findlay Township, PA. The land was sold for approximately $9.5 million by Imperial Land Corporation. The new facility will replace the old Uber testing ground at Hazelwood Green along the Monongahela River. Uber’s current lease at the Hazelwood Green expires in 2023. However, the pace at which the Findlay facility is advancing makes it likely that some portion will open as soon as 2021.

 

As part of the deal, Uber will be testing its autonomous vehicles in a newly constructed facility. The land was vacant at the time of purchase. Uber has not yet publicly announced the details of their plans for the location, but they have announced that their autonomous car facility in the Strip District will remain operational. 

 

Uber’s Pittsburgh Presence has Grown in Recent Years

Uber’s Pittsburgh Presence has Grown in Recent Years

By now, most Pittsburgh locals have seen the Uber self-driving cars patrolling the streets from their strip district research facility. Yet the testing of these experimental vehicles is only a small part of their Pittsburgh footprint. Uber has made it no secret that they intend to grow their Pittsburgh presence around their autonomous testing facilities. The latest land purchase is part of Uber’s plan to add more facilities, employees, and testing to the area. Uber is based in San Francisco, and has found Pittsburgh to be a desirable mix of affordability and access to highly skilled and educated employees.

 

According to Mobility21.cmu.edu: “The [Findlay Township] facility is expected to employ as many as 200 people and come with an observation (sic) tower and other developments to create a 24-hour simulated environment in which to test Uber’s autonomous vehicle technology that brought it to Pittsburgh in 2015.” The decision to purchase land and build a test track rather than leasing one is significant.

 

From a commercial real estate perspective, Uber’s expanded investment in the local economy will likely lead to related projects. As for the Findlay Township facility, much more than a test track is planned. While Uber has made no announcements, plans are being reviewed for entitlement and permit purposes. The first phase includes a 140,000 square foot testing facility with entrance doors that are tall enough to accomodate trucks. The site plan shows more buildings in the future, in excess of one million square feet under roof. 

 

Uber by the Numbers

Uber by the Numbers

To understand how Uber might impact Pittsburgh in the near and distant future, it can be helpful to understand a bit more about Uber’s story and their impact by the numbers. Here are some highlights which give recent events some context:

 

  • Uber was founded in 2009, and has since become the most highly valued private startup company in the world.
  • Recent estimates place the valuation of Uber at around $90 billion.
  • Uber is currently operating in 700 cities and 63 countries across the globe.
  • While Uber’s employee numbers range from 19,000 to 27,000 thousand, the total number of Uber drivers likely exceeds 4 million
  • Uber generates approximately $12 billion in gross bookings per quarter.
  • Uber has completed over 5 billion trips since its inception.
  • While these numbers are declining as the market matures, Uber has enjoyed a 70-75% market share of ride sharing services for several years.

 

These numbers illustrate the impact of Uber as a market disruptor and an economic force. Uber’s corporate decision to invest in the Pittsburgh area has already had a material impact on local economy and CRE landscape. While a 600 acre construction project might not be the biggest in the city this year, the real question becomes what will come next for the ride sharing service.

 

Going Forward

Uber’s preeminence in autonomous vehicles was short-lived. Shortly after establishing Pittsburgh as its global AV headquarters, Uber was joined in the region by Argo AI, Aurora, and Aptiv, along with the testing that Carnegie Mellon does on its own. As an employer and consumer of commercial real estate space, Uber has grown by leaps and bounds. Its competitors have expanded their presence as well. Autonomous vehicles appear to be an inevitability, maybe even morphing into fling vehicles or some other form of mobility we can’t as yet imagine. The beachhead that Uber has established by building a major testing facility makes it that much more likely that whatever the future of AV brings, Pittsburgh will be at the heart of it.

Real Estate Investment Trusts (REITs) Continue to be a Great Choice for Small Investors

Real Estate Investment Trusts (REITs) Continue to be a Great Choice for Small Investors

Perhaps the biggest problem being a modern real estate investor, or any type of modern investor for that matter, is an overabundance of choices. Stocks, bonds, mutual funds, options, annuities, direct real estate purchases, REITs, retirement accounts — the list seems to have no end. This leads to a situation where investors might miss out on potentially great opportunities in a sea of options. One such option is a real estate investment trust, frequently shortened to REIT. 

 

Today, we will explore REITs, how they differ from direct real estate investment, and review why REITs remain a perfect choice for individuals in 2020 and beyond.

 

What are Real Estate Investment Trusts (REITs)?

What are Real Estate Investment Trusts (REITs)

According to reit.com: “REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges, and they offer a number of benefits to investors.”

 

Let’s break that down. REITs are a unique way of investing in commercial, industrial, and/or residential real estate that is available to investors of all wealth levels. REITs are generally hands off, meaning that investors may have a vote, but will not directly control the buying and purchasing of real estate assets held within their REIT. 

 

Real estate investment trusts are generally used as investment opportunities to grow the investor’s wealth. Most REITs focus on a particular subset of properties such as commercial apartment building, medical properties, data centers, hotels, and so forth. In this way, investors can choose the area of real estate they believe will make the best investment.

 

REITs vs. Traditional Commercial Real Estate Investment

REITs vs. Traditional Commercial Real Estate Investment

So how exactly do real estate investment trusts compare to direct real estate investment? There are several ways we can compare and contrast the two:

 

REITs are the mutual funds/ETFs of the real estate world

As we described above, REITs give investors access to a multitude of properties through a trust. This means that REITs are more stable than direct real estate investment as one-off losses or gains will be balanced out by a larger portfolio. This also means that the potential for extreme gains with an REIT is generally lower than direct real estate investment. 

 

Direct commercial real estate investment gives investors all the power

If you own a piece of real estate, you are in full control of that asset. You are free to buy, rent, renovate, or whatever else you might choose assuming you don’t have a contractual or legal obligation preventing such an action. REIT investors do not share this level of control or power. Instead, they buy into REITs which are managed by industry experts. A loss of control might be a non-starter for some investors, but the ability to diversify real estate holdings with REIT gives investors a much safer bet in the long term.

 

Direct real estate investment generally comes with a larger buy-in

REITs are extremely affordable. Much like stocks, bonds, or mutual funds, investors need only to be able to afford shares rather than making massive investments to purchase a real estate property. In this way, individuals and organizations of all levels of wealth can invest in the real estate market. This is a primary reason why REITs are perfect for individuals and small investors (more on this below).

 

REITs have guaranteed dividends

REITs have guaranteed dividends

Another huge advantage of REITs is that a minimum of 90% of all payouts must come by way of dividends. This is a legal obligation based on federal REIT law. It is important to note that according to investor.gov: “The shareholders of a REIT are responsible for paying taxes on the dividends and any capital gains they receive in connection with their investment in the REIT. Dividends paid by REITs generally are treated as ordinary income and are not entitled to the reduced tax rates on other types of corporate dividends.”

 

REITs Remain a Solid Investment Opportunity

REITs are not meant to replace a solid investment portfolio by way of a retirement account and/or traditional investment account. Instead, they should be thought of as a perfect supplement to those investment opportunities which allows individuals of all levels of available capital to invest in the real estate market. A few reasons why REITs will remain a great investment opportunity include:

 

  • Guaranteed dividends
  • Real estate investment without the need for industry expertise
  • REITs are completely hands off/passive (unlike direct real estate investment)
  • REITs are liquid just like stocks or other traditional investments. Again, this differs dramatically from typical real estate investments
  • A traditionally strong performance compared to other investments

 

Going Forward

REITs were first introduced in the early 1960’s, and they don’t show any signs of going away any time soon. In fact, the total monies invested in REITs around the world has exploded from $300 billion in 2003 to a massive $1.7 trillion in 2017. Real estate investment is not just for the wealthy or the connected thanks to REITs. Anyone looking to build equity or expand their investment portfolio should consider a real estate investment trust.

What to do with America’s Dead Malls

What to do with America’s Dead Malls

It wasn’t long ago that the traditional American mall was the staple of retail commerce. In 2020, it can feel like you are equally likely to find a mall completely abandoned than thriving with shoppers. In reality, recent estimates project that almost one in four malls will close or have closed all within a five five year period. Yikes. Commercial real estate investors have been taking huge losses in the brick and mortar space in recent years. Yet some investors have viewed losses like mall closures as opportunities to transform these spaces into revenue generating properties.

 

With this in mind, what can be done about the epidemic of American mall closures? 

 

Option 1: Find New Tenants for Mall Spaces

Option 1 Find New Tenants for Mall Spaces

In a perfect world, mall owners would simply find new tenants to fill their existing vacancies. The obvious benefit of this plan is that it does not require a massive renovation or redevelopment. Redeveloping a space as large as a mall would take years and incredible investment dollars to complete. Repopulating existing spaces with new renters is certainly a simpler undertaking. Despite all of the upsides, the question then becomes: is this a reasonable expectation? 

 

One of the key factors that led to the downfall of the American mall was the rise of e-commerce. E-commerce giants like Amazon and eBay have syphoned sales away from brick and mortar retailers since their inception in the 90’s. The problem with finding new tenants for existing mall spaces is that most spaces were designed for flagship renters including department stores, clothing stores, and other struggling industries. 

 

Option 2: Double Down on Amenities

Option 2 Double Down on Amenities

The American mall infrastructure is dated, and it shows. It isn’t just the concept of shopping in an indoor mall that is old, it is also the gargantuan redundant architecture. Some malls have doubled down on the retail mall concept by renovating their facilities with modern amenities. Of course, this is an additional financial risk being put towards an already-dying industry. Yet many success stories are floating around about dead malls being brought back to life.

 

A key here is understanding the mall’s location, key demographics, and potential for growth. An example of a subset of malls who continue to thrive are upscale, “luxury” malls which cater to the upper class. The Bal Harbour Shops in Miami rent spaces to some of the most famous and expensive designer outlets in the world. This works for the Miami strip, but it of course will not translate across most of America.

 

Option 3: Repurpose Dead Malls

Many dead malls have found a new purpose after slight modifications turned their defunct spaces into fitness centers, medical clinics, places of worship, and even educational facilities. Despite the death of brick and mortar businesses being largely exaggerated, there are still plenty of industries starving for large, accessible spaces. Ample square footage is still desirable for gyms and churches, and these types of demand are not as volatile to market changes when compared to department stores and retailers.

 

As with our previous option, repurposing dead malls often includes renovation and/or redevelopment that could eat up a chunk of time and money. Mall ownership groups are often diverse and heterogeneous. Deciding to embark on such a dramatic shift in strategy is often what stalls these types of projects.

 

Option 4: Sell the Mall and Associated Properties to Developers

Option 4 Sell the Mall and Associated Properties to Developers

At some point, all investors and/or owners of struggling commercial real estate properties have to make a decision to fish or cut bait. Many mall owners are doing just that and selling these massive properties. Of course in order to sell you must first find a buyer. The benefit of selling to a new group is that modern commercial real estate investors may be better equipped to face the challenges of finding new tenants, improving amenities, or repurposing existing infrastructure to make a dead mall profitable again.

 

The downside of selling a dead mall in today’s real estate market is that the valuations have gone down in recent years. Where some dead malls have shown signs of life through creative problem solving, the majority of malls continue to struggle, dead or not. The business of major retailers has changed since the invention of the internet and it will likely never fully recover. The decision facing mall owners and managers now is which of these (and other) options will offer the best return on investment in a bleak marketplace.

 

Going Forward

Malls aren’t what they used to be. It is very unlikely they ever will return to their glory days as the hub of modern commerce. Instead, these massive structures have been repurposed, renovated, and updated to bring their aging architecture into the modern era. Thriving malls have one major concept in common: they are being proactive rather than reactive in their approach. The “do-nothing” method simply is not an option for today’s dying malls. While the four options presented above are certainly not the only options on the table, they lay out the basic concepts of how current malls can retain their relevance for years to come.

Lower Federal Funds Rate Impacts Real Estate

Federal Funds Rate Expected to Drop in 2020 ft

Like it or not, federal regulations play a huge role in commercial real estate investment, construction, sales, and everything in between. Perhaps no singular federal policy has more of a direct impact than the federal reserve cutting or raising the federal funds rate. Separate but related to the federal discount rate, the federal funds rate dictates interest charged on a number of loans. The fed has recently decided to once again cut the federal funds rate in late 2019/early 2020. The impact on real estate will certainly be felt, but this is nothing new.

 

With this in mind, today we define the federal funds rate, discuss the details of the latest rate cuts and a brief history of past cuts and hikes, and finally identify how these changes will likely impact the commercial real estate sector.

 

Understanding the Federal Funds Rate

Federal Funds Rate Expected to Drop in 2020 2

According to investopedia.com: “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. By law, banks must maintain a reserve equal to a certain percentage of their deposits in an account at a Federal Reserve bank. Any money in their reserve that exceeds the required level is available for lending to other banks that might have a shortfall.”

 

The federal funds rate can be changed as many as eight (8) times per year as decided by the Federal Reserve. The actual rate can be influenced by buying and selling government bonds or other investment securities. The federal funds rate is determined separately from the federal discount rate, but these two figures generally have a symbiotic relationship.

 

As part of the regulations surrounding the federal funds rate, banks and other financial institutions are required to meet reserve requirements that must include non-interest bearing accounts. This secures short term loans and provides assurances for financial institutions and loan recipients alile. 

 

Details on the Latest Fed Funds Rate Cuts

Normally three straight fed funds rate cuts is not a great sign for the economy overall. The last time this many consecutive rate cuts took place was in 2008 amidst the housing crisis and Great Recession. The latest cuts move the effective rate from 1.75% to 1.5%. 

 

Generally, cutting the federal funds rate is intended to spur economic growth. These cuts come at a time when more observers are predicting that a recession is looming in the next year or two. Yet not everything is doom and gloom. Opportunist investors can take advantage of low fed funds rates to secure loans, make investments, and much more. Individuals who are looking to refinance mortgages or open home equity loans are perhaps the biggest winners from these fed rate cuts. 

Federal Funds Rate Expected to Drop in 2020 3

Lower fed funds rates only impact those who are looking to open new loans or refinance existing loans. For this reason, pre-existing loans and mortgages will be unaffected by the cuts. This essentially means that those who are locked into unfavorable loan situations might want to jump on this opportunity to refinance. 

 

How Federal Rate Cuts Impact Commercial Real Estate

There are several ways in which federal rate cuts might impact commercial real estate, including:

 

Interest rates can impact local property values

Commercial real estate does not exist in a vacuum.The estimated values of surrounding properties go a long way towards CRE valuations. Federal funds rate changes can impact the calculations used to determine property values. Therefore, a change in interest rate can materially impact the value of commercial real estate properties without any other changes.

 

Interest rates, cap rates, and the spread

Commercial real estate investment can sometimes rely on what is known as “the spread”. The spread is determined by finding the difference between the cap rate and the finance rate. As federal funds rates influence finance rates, this can make CRE investments more or less attractive over time. 

 

Federal funds rates cuts have a trickle down effect

It would be convenient to say that fed rates have a 1-1 impact on commercial and other forms of real estate. In reality, the relationship is far more complicated. Consider the fact that rate cuts are tied closely to poor economic performance. This in and of itself has reduced the positive impact of past rate cuts. Current and future rate cuts seem like they should have a straightforward, positive impact on commercial real estate investment. This simply is not always the case. Rate cuts might boost property values, but also may reduce demand, be tied to inflation problems, and many other potential impacts which are too complex to properly describe (or understand) in a single article.

Federal Funds Rate Expected to Drop in 2020 4

Going Forward

It is yet to be determined whether the recent trend of consecutive rate cuts will continue as 2020 progresses. Rates are already very low, and can be reasonably expected to stagnate or bounce back in the future. This may also be reactive based on overall economic performance. Metrics point to mild recession in the next few years. How this will impact the federal funds rate will certainly continue to be a major factor in the commercial real estate investment space.

Why the Next Recession Won’t be as Hard on the Real Estate Market

Why the Next Recession Wont be as Hard on the Real Estate Market ft

The Great Recession of 2008 has its name for a reason. It has been measured to be the largest economic disaster in American history since the Great Depression of the 1920’s-30’s. The recession was so large that a ripple effect caused a global recession just a year later. While no industry was unaffected, the real estate market took a particularly hard hit. In fact, a collapse in the housing market and other real estate markets in 2007 was one of the falling dominos that led to the inevitable recession just a year later.

 

Despite all of this (or perhaps because of it), there is reason to believe that our next recession will not take nearly as significant a toll on the commercial real estate market. This is partially due to the fact that the next recession will likely not be as damaging to the overall economy. It is also thanks to administrative efforts to protect the real estate market from present and future turmoil. With this in mind, here is why the next recession likely won’t be as hard on the real estate market.

Why the Next Recession Wont be as Hard on the Real Estate Market 2

Why the 2008 Great Recession Crushed the Real Estate Market

There can be no question that any recession would be expected to have a negative impact on the real estate market. The 2008 great recession was particularly damaging to house costs, commercial real estate, and rental vacancy numbers specifically because it was partially caused by a looming housing crisis. After all, when 8.7 million jobs are lost and house prices drop by approximately 28 percent across the country, the value of real estate is going to take a hard hit. 

 

While the housing crisis gets all the press, commercial real estate was heavily impacted by the 2008 Great Recession. It is important to understand that many of the same issues which plagued residential real estate such as lax policies from the Federal Reserve including offering so called “exotic mortgages” did touch the commercial real estate market, but not to the same degree. 

 

The primary cause of the commercial real estate crash in 2008 was an overall recession. Less money for businesses led to lessened spending. Lessened spending led to fewer employees. Fewer employees led to fewer jobs. Fewer jobs led to less need for commercial real estate and/or developing commercial real estate projects. And the list goes on. Still, CRE is heavily tied into federal policy which has been adjusted to be more conservative in the years since 2008. More on this below.

Why the Next Recession Wont be as Hard on the Real Estate Market 3

Inevitability of the Next American Recession

It is only natural that the US will soon experience its next recession. There is no economy on earth which is immune to bull and bear markets — such is the way of any large economy. Unfortunately, many economic metrics are pointing towards the next recession coming sooner than later. Here are a few reasons why:

 

New York Federal Reserve recession probability model: The New York Federal Reserve is one of the most well respected authorities on predicting recessions. Their model has accurately predicted past recessions both in real time and retroactively. The accuracy and detail of this model shows that we are more likely to see a recession in 2020 than any year since 2009.

 

Inverted yield curve: You may have heard or read something about the inverted yield curve popping up for the first time since the great recession in 2019. Essentially, when short term yields are outperforming long term yields, that is a major red flag of a coming recession.

 

Unduly inflated economic numbers: The US is currently enjoying low unemployment rates. This is generally great news for CRE investors hoping that a recession is far away. Unfortunately, unemployment is not such a simple statistic. Underemployment numbers and part time employment numbers are on the rise. This is another staple of an upcoming recession.

 

The Next Recession Won’t be the Same as 2008 for Real Estate

Now that we have established that:

 

  1. A recession will be upon us at some time in the relatively near future and 
  2. The last recession was devastating for the real estate market

 

Why exactly should we expect the next recession to be any different? The simplest answer is that the federal government and banking institutions have (mostly) learned their lessons. The ridiculous lending practices of the early to mid 2000’s have either been eradicated or constricted. The supplemental answer is that the 2008 was one of the most significant economic events in the past 50 years. It is extremely unlikely that the next recession will be as impactful overall. Whether we are talking about the housing market or commercial real estate, a repeat of 2008 is likely very far off.

Why the Next Recession Wont be as Hard on the Real Estate Market 4

Going Forward

The best laid plans of mice and men often go awry. Even with a looming recession, it is probably a good idea for commercial real estate veterans to go about their business as usual. The next recession will almost certainly not be the same cataclysmic event as the last one, and the real estate market is expected to remain much more stable this time around. Obviously, all recessions have an economic impact. History may not be repeating itself, but learning from our past mistakes is always wise.

84 Lumber Looks to Expand After Huge Cash Injection

84 Lumber Looks to Expand After Huge Cash Injection

84 Lumber was founded in 1956 by Joe, Norman, and Bob Hardy in the Southwestern PA town of Eighty Four. In 60 plus years of operation, the lumber company has added hundreds of locations across the country including New York, Massachusetts, Florida, and more. As part of this expansion effort, 84 Lumber has recently secured a $310 million loan which will replace a pre-existing $400 million dollar loan secured in 2016. Since that time, the company’s performance has exceeded expectations and its market competition, leading to the opportunity for a more favorable loan arrangement.

 

Today, we will review the details of 84 Lumber’s $310 million dollar cash injection, review the business history of 84 Lumber, and discuss the impact that this deal and ongoing 84 Lumber projects will continue to have on the local commercial real estate market. 

 

84 Lumber Looking to Expand with $310 Million Loan

84 Lumber wants to use funds to expand into new territories.

There are several key reasons why 84 Lumber’s loan restructuring is significant for the company:

 

84 Lumber is looking to improve their IT capabilities. Regardless of industry, information technology is a part of any large business. One of the primary drivers of this new $310 million loan is 84 Lumber’s desire to modernize their IT infrastructure to improve client relations and their internal systems.

 

84 Lumber wants to use funds to expand into new territories. While 84 Lumber has traditionally been a Western PA organization, it has already expanded across the country into several states. This new influx of capital will allow the company to potentially expand into new territories including Sacramento, CA and Northern Virginia.

 

The loan will allow for financial restructuring. According to recent reports, the final primary reason for this new loan is to refinance. “The proceeds will be used to refinance the $307.5 million outstanding Term Loan B and $400 million ABL Revolver. In addition to extending the maturities, the Term Loan B reduced pricing by 100 basis points to LIBOR plus 425 basis points. As a result of the refinancing, the company now has no debt maturities prior to 2024.”

 

A Brief History of 84 Lumber’s Business Expansion

A Brief History of 84 Lumber’s Business Expansion

To understand the significance of this new loan, we can also explore the history of 84 Lumber’s presence both locally and nationally.

 

  • 84 Lumber is founded in 1956 by Joe Hardy alongside his two brothers Norman and Bob, and close friends Ed Ryan and Jack Kunkle. The initial business model was a “cash and carry” lumber yard where industry professionals and handymen could come buy affordable, high quality products. The business was modest but immediately successful.
  • In the 1960’s, the business experienced its first major expansion by growing their local business with new locations, bigger warehouses, and a larger inventory supply. The first years of 84 Lumber’s history involved fast yet sustainable growth.
  • The 1970’s saw 84 Lumber opening an additional 229 locations, expanding beyond the immediate Western Pennsylvania market for the first time. 
  • The 80’s and 90’s were an era of revamping the 84 Lumber business model. Instead of exclusively catering to professionals, they remodeled many of their stores to make them friendlier for a broader demographic. 
  • 84 Lumber hit $1 billion in sales for the first time in 1993.
  • In 1997, 84 Lumber opened its 400th store.
  • Today, 84 Lumber is refocusing on its information technology sector to move the business into the next decade seamlessly. The company accrued $3.86 billion in sales in 2018, and continue to enjoy healthy growth.

 

Impact of 84 Lumber on Local Commercial Real Estate

Impact of 84 Lumber on Local Commercial Real Estate

The relationship between 84 Lumber and local commercial real estate is actually somewhat complex. On one hand, 84 Lumber contribute massively to the local economy by creating jobs, owning local properties, and generally injecting cash into the region. On an entirely different level, having the “nation’s leading privately held supplier of building materials, building supplies, manufactured components and industry-leading services for single- and multi-family residences and commercial buildings” in our backyard has a material impact on the CRE market as well.

 

Due to this unique circumstance, 84 Lumber is as entrenched as any local company when it comes to commercial real estate. While other organizations like PNC and UPMC may own and operate significantly more locations, 84 Lumber is a major player within the CRE industry itself. Pittsburgh commercial real estate can certainly look to 84 Lumber’s continued success and expansion with recent deals like this $310 million loan restructuring as a sign that our market will continue to hold strong.

 

Going Forward

84 Lumber’s steady growth and solid leadership is encouraging. With favorable loan agreements and new stores going up every year, the banks clearly agree. Having such a large commercial real estate building supply provider in Western PA offers a unique advantage to local construction crews. While the company continues to expand across the country and perhaps internationally, they retain a large presence in the Pittsburgh area and have no plans to relocate any time soon. 84 Lumber’s continued success can only be a positive sign for commercial real estate in our region.