Category: Real estate news

Some Insight on Downtowns During COVID-19

Don’t read any further if you are looking for insight into the office market or long-term migration trends in or out of cities. We don’t know yet. We won’t know until COVID-19 is no longer a public health threat. (If you’d like to read what some smart people think about the office market, read the feature article in the Fall DevelopingPittsburgh.)  After six months of data, however, it’s possible to begin to see the impact on commercial real estate located in downtowns. Wells Fargo Economics Group published research on the debilitating impact of the pandemic on central business district (CBD) businesses that is worth a read.

The upshot of the report is that occupancy in downtown workplaces is so much lower that the ripple effect is reaching wider than most of us think. It’s easy to understand that bars, restaurants, and hotels will be hard hit by the lost traffic due to work from home. Travel is picking up slightly but it does not appear that the uptick is being felt in CBD hotels. The impact on apartments is more derivative. Downtown apartments are popular for a variety of reasons but central to their appeal is the proximity to work. People who rent apartments are willing to pay a bit more for a downtown location. With work from home rendering the proximity attraction null and void, it appears people are choosing to move to the suburbs to save a few bucks or get more space for the buck. I don’t have any local data to see how that’s playing out or not in Pittsburgh, but the chart below show the sharp divergence in trend for suburban vs. urban apartment vacancy.

Pittsburgh’s downtown has been impacted like most major metropolitan areas. Commercial office brokers estimate that buildings are at about 20% of the normal occupancy. That means most workers aren’t coming into downtown (NOT that there is an 80% vacancy rate!).Until that changes there will be no recovery to normal for hospitality businesses. The lost traffic for restaurants and hotels translates into lost revenue for parking garages, and has a significant drag on revenues the city collects. Lost nights in the Cultural District magnify that ripple effect.

There is no silver lining if you are operating in one of those businesses being hard hit by the drop in demand. The only upside comes after a medical solution to the virus is widely-distributed. Notwithstanding idle speculation about some shift in where people will live/work/play, downtowns will be attractive for the reasons they have been attractive since the Middle Ages. It’s a question of when not if.

One of the winning sectors in this losing economic moment has been the industrial warehouse sector. Driven by spiking online shopping, the demand for distribution space has jumped by double digits in 2020. That’s showing up in permits around Pittsburgh. Last month Al. Neyer started work on a 400,000 square foot build-to-suit distribution center at Clinton Commerce Park in Findlay Township and a 150,000 square foot warehouse at the Hempfield Commerce Center in Westmoreland County. Also in Findlay Township, Buncher started work on Neighborhood 91, the advanced manufacturing campus being developed on behalf of Allegheny County and University of Pittsburgh. The first building is a 44,000 square foot multi-tenant facility that will be anchored by Wabtec. In other construction news, Rycon Construction has started work on the $6.5 million adaptive re-use of 2400 Smallman Street, which will be home to Pro Bike & Ride. MBM Contracting is doing the $3.1 million AGH pathology lab renovation. Omega Building Co. is renovating the space above Nakama Steak House into 23 residential units, a $4 million project. Sota Construction is general contractor for the $3.6 million renovation for the new office/studio for Headwaters Films in Bloomfield.

CORRECTION: The Oct 22 post (The Case for Getting the Stimulus Done) incorrectly listed DiMarco Construction as the contractor for Robinson Township’s new $3.8 million police station. The general contractor is Masco Construction.

The Case for Getting the Stimulus Package Done

Congress and the White House seem to be ready to get a second major economic aid package done (or not). I have to admit that I don’t understand the politics of this latest round of stimulus talks. An unpopular sitting president, struggling in the polls, would normally be cheerleading a bill home that put thousands of dollars in the hands of voters in the last weeks before an election. But these aren’t normal times. This morning’s press conference by Speaker Nancy Pelosi characterized the negotiations as “just about there,” which gave Wall Street a boost after a brief plunge this morning. The S&P 500 fell 20 points by 10:00 but is now up 17 points from yesterday’s close. Reports from the Senate are less encouraging. Majority Leader McConnell is reported to be against passage of any aid ahead of the election, fearing it will limit Republican leverage in the event the Senate flips to a Democratic majority.

The best case for the stimulus came at 8:30 this morning, when the unemployment claims report for the week of Oct 17 was published. The good news: first time jobless claims fell under 800,000 for the first time in a while. The bad news: total unemployment insurance claimants have fallen by less than 8,000 since Oct. 3. The total number of people receiving unemployment claims was over 23 million.

Setting the politics aside (since politics will not feed the family or pay the rent), the need for more aid is clear as a third increase in infections and hospitalizations washes over the U.S. Doctors and researchers are still learning about COVID-19 but what is abundantly clear is that it will continue to drag down the economy until a vaccine is found. Because the opinions about how to deal with the outbreak have become politically polarized, a central economic reality has been glossed over. That is, that the steep decline in demand for services in major sectors of the economy is due to consumers avoiding those sectors to avoid the infection. Marker posted an excellent article about this demand shock. It’s not shutdowns that slowed the economy. Consumers have shown they will be wary, regardless of the government’s position. The best example of this is Sweden, where the official approach has been to allow the virus to move through the less vulnerable population to achieve herd immunity. Sweden’s GDP declined 8.9% in the second quarter without lockdowns. Its neighbors, Finland and Denmark, saw decline of less than 6%, even though they imposed short-term lockdowns and guidelines like mask-wearing and limited gatherings. A slower economy seems inevitable until a medical solution is found. Government aid for those impacted the most will help keep a floor under the economy until then. Absent such aid, evictions and foreclosures will begin to spike. What follows that is a double-dip recession. At this point, there aren’t any fiscal conservatives left in Congress. Moreover, there are some compelling cases made for the efficacy of borrowing money at near zero rates to stimulate growth above 3% again. Fiscal policy can tighten once the corner has been turned.

At the regional level, while unemployment in Pittsburgh is higher than most of its benchmark cities, the real estate market is recovering. Residential real estate has, in fact, seen growth across the board, with the exception of apartment construction. Sales of homes and home values have risen sharply. New construction of single-family homes is up over 29% year-over-year. New multi-family projects have fallen off last year’s pace. Through nine months, there were only 785 new apartments built in Pittsburgh, compared to 1,459 during the same period in 2019. Commercial real estate is beginning to reawaken as well, particularly in the industrial sector.

In construction news, Pittsburgh Glass Center took proposals from A. Martini & Co., Dick Building Co., A. M. Higley, and Massaro Crop. for its $6 million expansion. Burchick Construction is doing a $3 million build-out for Oculus on the 3rd floor of Schenley Place. Burns & Scalo Real Estate is building out a $12 million research space for Hillman Cancer Institute and a $4 million wet lab space for NeuBase at The Riviera. Al. Neyer was selected to build the second 60,617 square foot building for Elmhurst at the Heights of Thorn Hill. DiMarco Construction was awarded the general contract on the $3.8 million Robinson Township Police Station. Allegheny Construction Group is CM for the $4 million Jefferson Hospital chiller replacement. BJ’s Wholesale Club is taking bids on two 100,000 square foot-plus new stores in Ross and South Fayette. The $33 million New Kensington Wastewater Treatment Plant Upgrade is due Dec. 8.

 

Pittsburgh Office Market: Focus on Data – Not Speculation

Earlier this week, JLL issued its Skyline Report, which got a bit of media play, particularly in the doom-and-gloom Pittsburgh Business Times. JLL’s report highlighted concerns about the surge in sublease space and the media emphasized JLL’s opinions about the impact of tech work-from-home on future office demand and the uncertain future of office because of WFH. These concerns are legitimate. If WFH becomes another trend that leads to downsizing of office usage by even 10%, it will add five million-plus square feet to the vacant inventory. That stuff makes for good headlines and click bait. The problem is that we have no idea when we’re getting out of this pandemic, let alone what things will look like on the other side. The better course is to look at the data.

JLL’s headline data point, a vacancy rate near 20%, is not comforting either, but it’s only marginally higher than 90 days earlier. Newmark Knight Frank released its thrid quarter reports today, and the data is similar. According to NKF, the overall vacancy rate moved from 17.9% in July to 18.5% in October. The more troubling trend is the year-over-year decline of 2.2 points. New construction deliveries of a million square feet were the main reason for the jump, with lower occupancy having a small impact. Rents held steady, rising three cents to $24.10/square foot. Rent is a lagging indicator, however, and the likelihood is strong that rents will fall as leases renew during the next 12 months. One interesting view of the NKF data is the stability of the market overall. Occupancy is above 80% for almost all submarkets. The east market is an outlier to the downside, with vacancies at 26.5%, and Oakland/East End vacancy is the outlier to the upside, at 11.8%. These two are the smallest submarkets by far, at just over three million square feet each. The remaining suburban and urban markets are between 16% and 18% +/-.

Vacancy has been growing in Pittsburgh since mid-2019. Source: Newmark Knight Frank

Office occupancy is a function of employment. Until there’s a medical solution to the COVID-19 virus outbreak, employment will be significantly lower than in February 2020. At last week’s meeting of the Federal Reserve Bank, the governors looked forward to unemployment staying below eight percent at year’s end and a steady decline in unemployment that returned to the four percent range in late 2022 or 2023. It won’t take that long for office occupancy to tick back down in Pittsburgh, but it’s worth remembering that 1) Pittsburgh’s office market was much softer in February 2020 than in February 2017, and 2) the speculation about declining office demand because of COVID-19 response is not unfounded.

The Fed’s observations about the economy were made before the Trump administration walked away from negotiations over a third major economic safety net package. The House of Representatives hurriedly passed a $1.3 trillion bill last week that was set to provide direct aid to households, additional assistance to small businesses, and funds for state and local governments, which have seen their revenues decimated. Aid for local government is particularly critical to the economy, according to the Fed. The bill contained a number of non-economic provisions that the Senate was not likely to accept but there was the basis for negotiations to continue. Reactions to the president’s shutdown of negotiations have been strongly negative and the White House today hinted that discussions had re-started. That would be good news. Fed Chair Jerome Powell cautioned in the FOMC minutes that the risk from providing too little aid was much greater than overshooting government intervention, especially since inflation remains well below two percent. Absent more assistance, the economy is expected to remain in declining GDP growth through the winter.

Regional construction activity has begun to pick back up, with more bidding and RFP’s out. Carlow University is looking for developers to partner in its proposed 400,000 square foot research/mixed-use tower in Oakland. Cavcon Construction is starting work on a $4 million-plus Education and Tech Center in Indiana PA for Westmoreland Community College. New-Belle Construction was awarded the $4 million new manufacturing facility for Barchemy in Donora. Facility Support Services was awarded $2.7 million in contracts for renovations to the Dept. of Energy National Energy Technology Lab in South Park. PJ Dick is the contractor for $3 million in renovations to Aramark concession areas at PPG Paints Arena. A separate $1.5 million package of renovations for Rivers Casino at PPG Paints is out to bid to Mascaro, Massaro, and PJ Dick. Turner Construction is doing preconstruction on the $35 million AGH Neurology Center for Excellence.

Pittsburgh Planning Should Approve This Project

On September 15, the Pittsburgh Planning Commission will again hear from JMC Holdings about its plans for a $200 million mid-rise office building proposed for the for Wholey refrigerated warehouse site. The project , 1501 Penn Avenue, is a 525,000 square foot office building, with 12 floors of offices atop a podium that includes parking and retail. JMC has worked with Turner Construction on preconstruction, although the project is expected to eventually bid to Turner, Mascaro, Rycon, and a PJ Dick/Dick Building Co. joint venture.

Rendering by Brandon Haw Architecture

When the geometric 21-story structure was first revealed to the public earlier this year, Mayor Peduto panned the design and the Planning Commission was lukewarm about the project. One of the principal concerns is the building’s height, which will be roughly twice that of the next tallest building, the Penn-Rose Building one block east. The 1501 Penn project presents the city with the perfect opportunity to transition what is Pittsburgh’s second-hottest office market (and the one with actual land on which to build) towards Downtown. Real estate professionals have considered the Strip District to be the fringe of the Central Business District for a while now. The Pittsburgh Downtown Partnership includes it in its description of the Greater Downtown. If the vision of developers matches the demand from Pittsburgh’s emerging technologies, the Strip could ultimately look like what Fifth and Forbes are becoming in Oakland – blocks of 10-15 story tech “towers” that put thousands of well-paid people in proximity to the city’s center. The image above shows the glass tower rendered in the context of the 1500 block of Penn Avenue, with Downtown beyond. Its location does not threaten the character of the Strip’s iconic retail blocks to the east and provides a reasonable first step towards denser, taller construction between the 16th Street and Downtown.

Wholey’s warehouse

For those concerned about the cold, symmetrical architecture, let’s remember what building will be replaced by 1501 Penn (see above).

If your argument is that the project is overly ambitious for the times or the market, I understand. That’s the call the developers and their investors get to make, however. The same argument was reasonably made about Bakery Square in 2009. That turned out rather well. Like 1501 Penn Avenue, Bakery Square was the latest in a series of attempts to redevelop a legacy building that was unworkable in the 21st century. Bakery Square was also started during the depths of the Great Recession. The Wholey’s warehouse has been proposed as a telecomm center, apartments, condos, and offices over at least two decades. The structure is poured concrete. The concrete is meant to act as one of the insulating materials so the walls are extremely thick. It simply won’t be re-purposed within the bounds of economic sense. If JMC and its investors see a diamond in the rough, I hope the City of Pittsburgh allows them to polish it. The city may no longer need to offer enticements to attract developers like JMC Holdings from New York, but Pittsburgh isn’t Seattle. Planning Commission would do well to remember that we’re still the pursuer, not the pursued. JMC isn’t proposing a chemical plant, just a place where 1,500 or so people will work. After the obstacles that were put in front of McCaffery Interests for five years to make development of 1600 Smallman and the Terminal Building possible, it might be a good idea to put 1,500 customers one block away. How do you think McCaffery feels about the vision rendered below? Seems like the occupants of 1501 Penn Avenue might like having those lovely lifestyle amenities close by.

Rendering by Studio 97.

1501 Penn Avenue can be another linkage between Downtown and the burgeoning Strip District. The Downtown market has gotten softer in recent years. Allowing the Strip Dictrict to become more like Downtown will make for better connections and better rationale for renting Downtown. Planning Commission should let the rising tide continue.

Another interesting project on the agenda for September 15 is the Uptown Tech Flex development proposed by Westrise. The former commercial laundry on Jumonville Street will be converted by Omega Building Co. into a 63,000 square foot office/lab/shop for emerging tech companies. The property type is suddenly a hot item and the Uptown Tech Flex project is located about midway between Oakland and Downtown, just a block from the route of the Bus Rapid Transit (BRT). You can view Desmone Architects’ design at the Planning Commission’s website. The Westrise development is one more private investment that is slowly bringing Oakland and Downtown together, with Uptown and the Hill District standing to benefit. You can only imagine what might occur in this neighborhood if the BRT was running.

Healthcare Construction Update

One of the reasons the Pittsburgh construction market looks weaker for the next 12-18 months is the uncertainty in the healthcare market. Just two years ago, the major programs at UPMC and AHN were going to bring billions of dollars in construction projects to the region from 2019-2022. Some of those projects were being pushed back already (UPMC Heart & Transplant, UPMC Shadyside/Hillman were probably 2021-2022 starts at best), but the financial stress caused by the COVID-19 pandemic. If you want an in-depth look at what’s going on in the healthcare market in Pittsburgh (and beyond), the July/August BreakingGround dropped this week. Check out the feature.Earlier this week, AHN presented the updated institutional master plan for West Penn Hospital to Pittsburgh Planning Commission. Among the major highlights of the ten-year plan were a $100 million outpatient/medical office, a replacement for the Mellon Pavilion, and a 450,000 square foot inpatient tower. Along with the inpatient tower, a 100,000 square foot inpatient infill project will be built, an investment of $300-400 million for new or expanded inpatient facilities. AHN’s other major project on the boards is the $300 million cardiovascular tower planned as a vertical addition above the new cancer center (see cover above) at Allegheny General Hospital. No schedule has been set for construction but CM proposals are expected to be sought this summer.

Following up two projects that had been bid earlier in the spring, PJ Dick is doing preconstruction services for The Watson Institute’s $9 million expansion in Sewickley and Evans General Contracting is building the 250,000 square foot global distribution center for Komatsu. That’s being developed by SunCap Property Group at the Alta Vista Business Park in Fallowfield Township, Washington County. That’s a big win for Mon Valley Alliance and Washington County.

A Tale of Two Overlooked Trends

With two full months of pandemic mitigation under our belts, we are finally beginning to understand the secondary effects of the health crisis. Here are a couple of derivative financial impacts to consider. Unlike previous recessions, the peculiarities and uncertainty of the COVID-19 pandemic are creating unusual stresses on primary care medicine and bankruptcy. As the divergence grows between the health of the stock market and the health of the underlying economy, the shutdown is impacting each of these in an exceptional way.

The fact that there are likely to be a dramatic increase in bankruptcy filings is not unusual for the coronavirus-induced recession. Recessions create different winners and losers. Sometimes it’s just bad luck or timing for a firm that was doing well prior to a downturn. Regardless of the reasons, the steep reduction in business and disruption of credit that accompany recessions results in businesses having to declare bankruptcy. For many of those firms, the bankruptcy allows for reorganization and forbearance that leads to recovery, and ultimately to creditors being repaid. In many cases, the act of filing bankruptcy motivates creditors to reassess their positions and the bankruptcy is avoided altogether. Of course, a significant share of the bankruptcies filed during a recession is Chapter 7 filings, which result in liquidation.

This recession is causing a shakeup in the bankruptcy landscape and the pattern of financial distress is different from any post-World War II recession. One factor that leads to bankruptcy is corporate debt that can’t be paid. Coming into 2020, the levels of corporate debt held in speculative BBB or junk bonds were high, and the stress since then has elevated worries of default. As defaults increase, bonds will be further downgraded, meaning it will be harder for U.S. corporations to raise debt and more costly when they do.

One measure of this problem is the rise in distressed credits, or junk bonds with spreads that are ten points higher than the corresponding U.S. Treasury bonds. In other words, a distressed two-year corporate bond would yield 10.13% on May 20. Standard & Poors estimates that distressed credits as a share of junk bonds rose from 25% to 30% from March 16 to April 10. During that same period the default rate for junk bonds rose in the U.S. from 3.5% to 3.9%. Two-thirds of global defaults in April were by U.S. corporations. This is strong indicator of coming bankruptcies. Moody’s predicts that the global default rate for junk bonds will be twice the 10% rate that marked the financial crisis.

Should this trend play out to bring a steep rise in bankruptcy filings, another issue looms: inadequate bankruptcy court capacity. Courts are already stretched thin and the looming wave of bankruptcies threatens to overwhelm them. That would leave corporations and creditors floundering without resolution while the courts try to catch up.

These dynamics suggest that there will be an increase in pre-packaged bankruptcy agreements and other alternatives to dissolution. Unlike in 2009, liquidity is not a problem in capital markets. There has been dramatic growth in private equity rescue funds. Viable companies should be able to access credit to survive the business disruption or to negotiate satisfactory payments and refinance debt with creditors. But the peculiar nature of this recession makes it almost impossible to determine corporate value. That makes it tough to assign share prices for investors in exchange for equity, or to determine credit worthiness when there are limited revenues, cash flow and view to the future of the market.

Solutions to these challenges for bankruptcy and debt refinancing could keep businesses from closing their doors in the coming months.

The plight of hospitals during the pandemic has been well-documented. What has received less attention is the financial stress of the healthcare system’s foundational element, the personal care physician (PCP).

Mitigation measures in all states included avoidance of doctors’ offices for anything other than emergency or necessary visits. That has resulted in a massive loss in revenues for PCP practices across the U.S. Physicians switched gears fairly adroitly as the virus spread, moving quickly to telemedicine as a way to treat many patients; however, fees for telemedicine appointments are lower, as are reimbursements. Compounding the revenue problem are the delays in getting reimbursements from insurers during the shutdown and the delays in billing from the more limited staffing in PCP offices.

Losing PCP practices, either to closing doors or mergers with large practices, will be bad for healthcare consumers. If there are fewer PCPs competition is reduced, raising prices. In areas that are already underserved by PCPs, consolidation will just broaden these healthcare deserts. Losing more density of healthcare providers will reduce the number of referrals to specialists. More people will put off treating nagging ailments and chronic conditions if the PCP office is inconvenient. That will result in higher hospital admissions and escalating costs of treatment for serious conditions that could have been treated cheaper at an earlier stage.

The problems facing primary care and bankruptcy are downstream from the obvious healthcare and economic crisis. But they represent systemic weaknesses that will present challenges that are mostly unforeseen now.

Innovation Research Tower at Fifth & Halket. Image courtesy Walnut Capital.

Some construction news: PBX is reporting that the $55 million Evans City Elementary School is out to bid due June 19. Continental Building Co. is taking bids for the $12 million North Shore Lot 10 445-car parking garage on May 27. Rycon Construction was selected as CM for the $25 million redevelopment of the former Sears Outlet on 51st Street. Construction will resume on the $80 million, 280,000 square foot Innovation Research Center in Oakland being developed by Walnut Capital and built by PJ Dick Inc.

The Confusing Future of Office Space

Imagine you’re the owner or developer of office buildings. For the past two months most, if not all, of your properties have been nearly empty. A pandemic has forced the adoption of new work habits for tens of millions of people, now working from home and thinking differently about what their workplace should be. Some tenants may not survive the disruption. Those that do are going to have new needs. Think of the questions running through your mind as the landlord:

• When will my tenants come back to the building?
• What do they want from me that is different from what they wanted in January?
• How many of them will work from home now?
• Will they expect me to clean more often? How often?
• What do I do with that million-dollar amenity space I just renovated in the lobby?
• Will they need less space?
• Will they need more space?

This is hardly a parlor game for landlords. As two weeks of social distancing has turned into two months (or more) of shelter-at-home, experts have begun regularly speculating about what the post-pandemic office will look like. Since I’m on record opposing any kind of post-crisis predictions made while the crisis is ongoing, I’ll refrain from commenting upon the many predictions being offered, except to say that I agree the workplace will be different. Bear in mind, however, that there is rarely a time when it is untrue that the workplace of the future will be different. There were already a number of workplace-altering trends in place in 2020. The pandemic has accelerated, eliminated or exaggerated most of them.

First among the trends being accelerated is the move away from the open office plan. Hundreds of articles had been published about the fatigue that was setting in about open office plans. Whatever benefits came from that office design trend are currently being weighed against the fear of easier infection transmission. Likewise, the need to maintain a safe distance from co-workers is inspiring fresh looks at collaboration spaces and shared amenities, which were among the “must haves” for occupiers looking to use their real estate to attract talent.

Developer Jim Scalo is among those looking to understand what changes will be required of the post-COVID-19 workplace. He’s an advocate for the idea of attracting talent through better real estate. He also believes that on balance the pandemic will create demand for more space and he’s not alone. Former Google CEO Eric Schmidt recently made the same prediction on Meet the Press.

The rationale behind this theory is the need to make space less densely populated in order to reduce the risk of infection. Fewer people per square foot mean more space. This flies in the face of one of the primary motives driving the more dense open office plan: lower rent. Open plans may have been trendy for any number of reasons, but the most compelling (and mostly unspoken) was the decrease in space needed. CFOs became very trendy people once they realized the bottom line benefit of density was a smaller rent payment.

Countering the argument for more space is the change in perception about work from home (WFH). Forced to work from home for two months, the American office worker has adjusted very well. The same is true for employers. Most of them look at their next lease renewal with the new perspective on WFH and see the potential for a smaller office footprint. One big North Shore tenant was looking forward to expanding space to keep up with a growing workforce. A month into shelter-at-home, he wondered if he could get smaller space for the same number of people.

You can start to understand why office building owners and occupants are searching for answers. There isn’t much data on the subject and what exists adds to the dilemma. Continental Office did a survey of 424 people, ranging from admins to CEOs, during April and published the results today. Here are some highlights:

• 95% expect the office to be disinfected before returning to work and 96% expect the office to be cleaned and disinfected more often.

• 76% of people think shared seating should be eliminated. 71% think adding partitions to workstations is important.

• 58% of CEOs say they are re-thinking the amount of space they use.

• 74% of people aged 25-34 say they want a WFH option. 72% of all people said they were as productive or more productive working from home as from the office.

• 94% still want to have a physical workspace, regardless of how often they work from home.

• 72% said they missed the social interaction of an office.

Now try reconciling the last two bullet points with the three above them. Work from home can reduce the physical footprint of a business, but not if the company still needs to maintain a workplace for 94% of the workers! That’s probably the reason that Perkin Eastman’s Jeff Young guesses that some form of shared address seating will be part of the future office plan.

Young was one of just a few architects who said that clients had requested that they look at actual space requirements as a result of the pandemic. For their part, architects are being proactive and have generated some interesting guidelines for post-COVID offices, like The Post Quarentine Workplace from Dan Delisio at NEXT Architecture, or We are Here to Help from Perkins Eastman, or WELL Building Cleaning Protocol from Chip Desmone.

At the end of the day, it will be the occupants of the offices that drive whatever the office of the future looks like. Thus far, occupants are just as confused. Two veteran tenant reps, Kim Ford from COEO and Dan Adamski from JLL, were clear that it was too early to draw any conclusions. In fact, they both indicated a lack of specific requirements from tenants. Searches for space are on hold, except for those who absolutely must move.

It’s tough to count your blessings in the midst of a pandemic and business shutdown. You can, at least, thank your lucky stars that you don’t own an office building right now.

PropTech for CRE in 2020 and Beyond

PropTech for CRE in 2020 and Beyond

PropTech for CRE in 2020 and Beyond

PropTech might not be a deeply ingrained industry standard, but every indication is that it is here to stay. Short for property technology, PropTech is essential for commercial real estate professionals and average people alike. The name PropTech suggests some sort of trendy new thing, but it represents more of a shift in real estate thinking than any one technological advancement. PropTech allows the real estate industry to act intelligently, anticipate future trends, and even improve customer experience

With all of this in mind, today we will aim to define PropTech, identify how PropTech is being used today, and how PropTech has and will continue to impact the commercial real estate landscape.

What is PropTech

What is PropTech? (Property Technology)

According to techtarget.com: “PropTech (property technology) is the use of information technology (IT) to help individuals and companies research, buy, sell and manage real estate…PropTech uses digital innovation to address the needs of the property industry.” In other words, PropTech can be thought of as any software or data analysis application that can be utilized within the real estate sector. 

It can be tempting to assume that PropTech must utilize some cutting edge technology like advanced algorithms, artificial intelligence, or advanced cloud computing. Those technologies certainly can be used, but the everyday realities of PropTech are more about the utilization of any technology for real estate purposes than the nature of the underlying technology itself. 

Going back to the introduction, commercial real estate is an industry that relies on industry wisdom like the one percent rule, the 50 percent rules, vacancy rates, cash flow rules, and much more. This creates a situation where real estate firms and professionals willing to embrace PropTech have a unique leg up on the competition. 

How PropTech is Used for Real Estate Today

How PropTech is Used for Real Estate Today

How can PropTech be used in the real world? Here are some ways in which PropTech is already being used for commercial, residential, and industrial real estate today.

  • Handling big data in the real estate sector: before diving into specifics, one of the main benefits of integrating PropTech into real estate is the need for real estate investors and other industry professionals to leverage the big data available today. When information is cheap, utilizing this information in a profitable manner is essential.

  • Real estate rental and/or buying sites: there are dozens of legitimate real estate search sites out there where users can rent or buy properties. Most people think of these as being for individuals searching for residential real estate, but plenty of PropTech apps/sites exist for commercial real estate including Digsy and LoopNet.

  • Virtual tour applications: for premium real estate listings, virtual tours have become the expectation. Full 360-degree tours available in VR and through standard screens are certainly examples of PropTech. This application has become extremely valuable as social distancing and more severe isolation measures taken to mitigate the COVID-19 pandemic limit physical property tours.

  • Real estate investment technology: for the investor, there are plenty of CRE investment apps from which to choose. These apps might run the numbers on property valuations, give comparables, set realistic rent goals, and much more.

  • Blockchain technology: the technology which allows many cryptocurrencies to operate without government backing is also getting a stronger foothold into the world of real estate every day. For more on blockchain technology and commercial real estate, read on here.

  • Consumer technology that connects them to the world of real estate: just about anything can be PropTech if it is used for the purposes of real estate. This could include your smart device, a digital assistant, a web browser and more. 

Commercial Real Estate PropTech Today and Tomorrow

Commercial Real Estate PropTech Today and Tomorrow

Many of the aforementioned applications of PropTech tie in closely with commercial real estate. The integration between technology and commercial real estate investment and construction gets deeper by the day. One aspect that we have not yet mentioned is how the commercial real estate industry is investing in PropTech itself. In 2016, over $2.5 billion was invested in real estate tech organizations. 

It is next to impossible to predict the future of technology. What is more reliably true is that PropTech will continue to influence commercial real estate construction and investment. A notable downstream impact of PropTech that we did not yet mention is how technology tends to equalize the “have’s” and the “have not’s” in deeply seeded industries. Where commercial real estate information used to be very difficult to find and analyze, many PropTech solutions offer anybody with an internet connection a fairly comprehensive look at industry information. This might also encourage more commercial real estate investment through REITs, crowdfunding, and other modern options. 

Going Forward

Major commercial real estate firms are not only trying to develop their own PropTech, but they are also trying to locate and utilize the best PropTech solutions from startups and third-party companies. The world of commercial real estate is always looking out for the next big industry disruptors such as finding new talent, changing consumer behaviors, and the future of the economy. The emergence and evolution of PropTech is right there with the most significant disruptors to the future landscape of CRE.

Bed Bath & Beyond Nets $250 Million in Recent Retail Real Estate Deal

Bed Bath & Beyond Nets $250 Million in Recent Retail Real Estate Deal

Bed Bath & Beyond Nets $250 Million in Recent Retail Real Estate Deal

The stagnation or flat out devaluation of retail real estate values has been well documented in recent years. Dead malls and empty storefronts aren’t just headlines in the news, they are apparent for most of us in our daily lives. Yet it isn’t all doom and gloom. Brick & mortar retail is bouncing back in many regions and within many business sectors. Perhaps more importantly, commercial real estate owners are finding new and different methods to make retail spaces profitable again. In the case of Bed Bath & Beyond, their recent sale and leaseback arrangement could set a precedent for other struggling retailers to get an influx of liquid cash while also planning for the future. 

Details of the Recent $250 Million Bed Bath & Beyond Property Sale

Details of the Recent $250 Million Bed Bath & Beyond Property Sale

Bed Bath & Beyond sold a large portion of its owned commercial real estate in January for a grand total of $250 million. The sale included a wide range of properties including multiple retails stores, office space, and a distribution center, totaling 2.1 million square feet. The commercial real estate portfolio was purchased by Oak Street Real Estate Capital, a privately owned real estate firm operating out of Chicago. It is estimated that the 2.1 million square foot sale accounts for approximately 50% of the real estate owned by Bed Bath & Beyond.

As part of the sales agreement, Bed Bath & Beyond has agreed to lease these properties back from Oak Street Real Estate Capital for an undisclosed period of time. According to Bed Bath & Beyond CEO Mark Tritton: “This marks the first step toward unlocking valuable capital in our business that can be put to work to amplify our plans to build a stronger, more efficient foundation to support revenue growth, financial stability and enhance shareholder value.”

Why This Move is Being Viewed as a Positive for Shareholders

Why This Move is Being Viewed as a Positive for Shareholders

Bed Bath & Beyond, like many struggling retailers, has a debt problem. According to their own public financial reports, the retail giant had accumulated approximately $1.5 billion in total debts as of early 2019. This had investors concerned in previous years. The decision to dump about half of its real estate interests was viewed as a smart move by many in the investment industry based on the fact that Bed Bath & Beyond desperately needed liquid capital to reinvest in their business.

New CEO Mark Tritton prioritized the sale of this property to free up the value of the company’s portfolio. Of course, renting vs. owning creates its own set of headaches. Now Bed Bath & Beyond is on the hook to wisely use this influx of cash to turn a profit or risk wasting their previously owned real estate assets. 

Some Pros and Cons of “Sale-Leaseback” Deals

Some Pros and Cons of “Sale-Leaseback” Deals

Sale-leaseback agreements are relatively uncommon, but they can certainly be mutually beneficial under the right circumstances. With deals like the one struck between Bed Bath & Beyond and Oak Street Real Estate Capital, there are some key benefits and risks that come with the territory, including:

  • Pro: the new lessee frees up capital. As we have already reviewed, perhaps the most obvious and important benefit from the perspective of the seller is the injection of cash they receive from the sale of their real estate. This one in the hand is worth two in the bush only works if organizations reinvest their cash wisely.
  • Pro: sale-leaseback agreements are alternatives to loans. When companies need cash fast, they generally seek loans or equity financing. Sale-leaseback deals allow companies to raise their own capital using owned assets and save money in the long run.
  • Con: tax implications. $250 million in cash sounds like a great deal, but Bed Bath & Beyond may be responsible for paying property sales tax on their new cash injection. There are deductions and reinvestment options to save on taxes, but taxes will be part of the picture regardless.
  • Con: lost long term value. Owning property might not be as sexy as making a huge sale, but the value of real estate cannot be overstated in the long haul. Selling massive real estate interests can be detrimental overall.

Impact of the Deal on Commercial Real Estate Going Forward

Sale-leaseback deals are nothing new. The impact of Bed Bath & Beyond’s recent real estate dump might come down to how the move impacts the company’s financial standing in the next few years. Complicating matters further, the recent Coronavirus fueled bear market has muddied the public’s ability to track Bed Bath & Beyond’s financial health in March and beyond. Projections still suggest that the move will benefit Bed Bath & Beyond in the long term. This may prompt other cash strapped retailers to make similar decisions with their commercial real estate portfolios. 

It will also be telling to see whether the company continues to sell its remaining CRE assets. Other major retailers like Macy’s and Sears have also employed this in the past with mixed results. Whether the latest major sale-leaseback is a revitalization or a last gasp, it will likely inform the future decisions of other companies in similar situations moving forward.

Pittsburgh’s Tech Boom is Driving the Local Real Estate Market

Pittsburgh’s real estate landscape has changed significantly since the slowdown of the manufacturing and steel industry decades ago. The influx of technology giants such as Uber and Google has brought a rise in the demand for both commercial and residential real estate. The low cost of property relative to cities like New York and San Francisco has been attracting companies such as Duolingo, a language learning app that moved its headquarters to Pittsburgh and subsequently put up billboards in San Francisco in 2018 advertising, “Own a Home. Work in Tech. Move to Pittsburgh.” Although plenty of attention has been paid to the effects of the tech industry on residential real estate, not as much as has been placed on commercial real estate.

Today, we will try to connect the dots between the influx of high profile tech companies, trends in local employee behaviors, and how this new Pittsburgh business atmosphere is having a major impact on the local commercial real estate market.

The Current State of Pittsburgh’s Tech Boom

Most of us in Western PA have noticed the recent boost in high tech presence in our local regions. Splitting from our historical business ventures like steel and coal, Pittsburgh is becoming an affordable alternative for tech companies who are no longer willing or able to pay for spaces in Silicon Valley, San Francisco, and other bloated commercial real estate markets.

Much of this tech boom is reliant on the rich talent pool being churned out by local universities. In particular, computer science, robotics, and other high tech programs at Carnegie Mellon University are routinely ranked amongst the best in the world. In recent years, companies like Google and Uber have been working hard to keep these young tech professionals in the local Pittsburgh area after graduation. Those efforts are starting to pay dividends.

Today, there are significantly more jobs (approximately 41%) in research and development than there are in iron and steel mills. Pittsburgh is also experiencing attention from investors. “SoftBank Group Corp (9984.T) last year led a $93 million investment in Pittsburgh-based AI company Petuum. Innovation Works recently hosted 30 Chinese investors interested in robotics and health care start-ups.”

Office Spaces for Google, Uber, Duolingo, and More

While there are many players in the technological revitalization of Pittsburgh, there are a few key players who are leading the way.

Google has long made massive investments in Pittsburgh, particularly with their Bakery Square office spaces. The refurbished Nabisco factory is a fitting transition from the old to the new. Much like Duolingo, Google has actively pursued bringing tech talent to the Pittsburgh area to live and work in the East End.

Uber employs thousands of workers in the Pittsburgh area, which of course does not include the drivers themselves. Perhaps more importantly, Uber has selected Pittsburgh as a research center for self-driving cars. This move ties the ridesharing tech giant to our region for years to come.

Duolingo was founded and is currently headquartered in Pittsburgh. In December, Duolingo became Pittsburgh’s first tech “unicorn” when a fundraising round pushed the company’s value above $1 billion. Rather than going the route of other tech giants and selecting our region as an affordable alternative, Duolingo has always been committed to revitalizing the Pittsburgh area. Duolingo employs 200 workers in local offices.

The Impact of Tech Companies on Commercial Real Estate in Pittsburgh

Beyond the obvious connection of tech companies’ presence being an injection to the local economy, here are some concrete ways in which tech companies have impacted the local commercial real estate industry:

  • Office jobs are on the rise: commercial real estate value for office spaces have been increasing as tech companies continue to occupy more and more space. Thousands of jobs were added in the summer of 2019 as a continuing trend of higher occupancy rates for local office space.
  • Tech companies are investing in properties: not all CRE impacts are directly related to office spaces. For example, Uber recently purchased 600 acres of commercial real estate in Findlay County, PA. This space is going to be used for a self-driving test track for their latest vehicles.
  • Tech workers are driving occupancy in apartment complexes: large multi-family CRE complexes have been going up around the Pittsburgh area, particularly in areas like East Liberty, Lawrenceville, and South of downtown. These complexes are being built in part to accommodate a rising number of tech employees in our area.
  • More tech investment = more local wealth: last but not least, it is undeniable that tech dollars drive local economies. A strong local economy often means a strong commercial real estate market.

Going Forward

There are no signs that the trend of high tech companies choosing Pittsburgh will slow any time soon. An industry-wide trend of shifting away from California and other west coast markets towards traditionally affordable markets is driving the tech industry overall. Other cities experiencing similar growth include Nashville, TN and Austin, TX. The Pittsburgh commercial real estate market has responded in turn, focusing more on offering high scale amenities at premium prices.

What remains to be seen is whether any other large companies like Amazon will set up additional headquarters in our area. Regardless, the effort to keep local talent and recruit local talent to our area will certainly continue to have a major impact on our economy and real estate markets.