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Office Space Will Be The Next Frontier Post-Pandemic

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Japan Sofbank WeWork

We know some people are going to go back to some offices. We know those office spaces will be different than they used to be. And we know the commercial real estate industry is facing one of its most serious challenges in modern history.

But there’s so much more we don’t know and that will make the next 12 to 18 months an unprecedented time both for companies moving back into office spaces and the businesses that own and lease these spaces.

Forget about outer space being the final frontier: inner space in offices is certainly shaping up as the next frontier as the country starts to enter the post-pandemic era.

The quantitative and qualitative reports already coming out from across business indicate that we’re starting to see the first real signs of how this next phase may play out. At the height of the pandemic last year, it’s estimated that more half of the entire U.S. workforce did their jobs at home, up from single digits previously, according to IDC, a market research company. Emergent Research says that 15 to 18% of the workforce is likely to remain home-based once the pandemic subsides with most workers operating on a hybrid model, with some time spent in the office and some at home.

In the meantime, major companies like JPMorgan Chase
JPM
, Salesforce
CRM
and PricewaterhouseCoopers are all looking to sublet major portions of their existing office space, according to the Wall Street Journal. At the end of last year the amount of space available for sublet was up 40% from the prior year and at its highest level since 2003, CBRE Group
CBRE
reported.

Prices of existing premium office space dropped 17% over the past year in New York and San Francisco, worse than the national average of 13% said real estate firm JLL
JLL
.

So, there’s no doubt the office market is going to be challenged. But property owners and real estate leasing companies alike are working to figure out how to navigate these new conditions and both see a very different commercial space landscape going forward. Among the key new characteristics are:

• More use of flexible office space providers like WeWork as employers look for short-term solutions until more regular office work patterns return. Green Street, a real estate analytics company, estimates that flex leases will grow from their current share of 2% of the overall market to as much as 10% by the end of this decade.

• Some office space will converted to alternative uses and while that might include the obvious choice of residential use, a less apparent reuse could be as distribution centers for e-commerce companies. With office space centrally located and adjacent to transportation these buildings could be attractive choices rather than warehouses away from major population areas, especially as same-day and even two-hour delivery becomes more common. Prologis
PLD
, which services the field, says a lot of its demand in the past decade has “been focused in major 24-hour cities.”

• When office buildings do start to welcome daily workers back, chances are they will look and feel differently than in the past, says Gabe Marans, executive managing director for Savills, a major real estate leasing company. Like other businesses that have been challenged they will learn to adapt to new conditions. “Remember when movie theaters upgraded? They put in reclining seats, better food and drink service. They had no choice but to offer an experience customers couldn’t achieve at home,” said Marans.

“My prediction is that offices will be next to undergo a similar transformation. If companies want employees back in the office, everything will need to be reimagined. And employees will expect a workplace that they can’t achieve remotely.”

Marans says that means more services like child care, in-office health providers and even “nap spaces.” Individual work spaces will get bigger again, reversing a trend that had seen them decline over the past decade and there will be more collaborative “huddle” spaces.

Depending on the size of the office, these services will be provided by either the individual tenant or the office building itself. “This will be the office 2.0, providing an experience and working environment that can’t be replicated at home. We’re starting to see this happening already.”

• While offices will need to adapt they also must be able to provide some of the comforts of home that workers have gotten used to over the past year. That’s the opinion of Gensler, the renowned architectural firm that has just issued an 81-page report on how office space will evolve going forward. It will put extra focus on health, wellness and flexibility, according to published reports. “There’s going to be a lot of emphasis on technology to keep us connected and also new policies from both building operators and companies to allow that flexibility and virtual work to thrive,” said Bill Baxley, managing director of Gensler’s Minneapolis office.

He added that Gensler learned that people miss the “human experience” of the traditional office setting, and that the hybrid working model is “here to stay.”

The return back to the office will no doubt be a long, slow process and as with most predictions about the impact of Covid, subject to constant revision. Even as many workers tell survey takers they like working from home others says they are anxious to get back to the office — and out of their homes.

However many do come back — and when — when it happens they are likely to find the offices very different places from when they abruptly left more than a year ago.

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Real Estate

Kimco Realty Adds Weingarten Realty To Its Shopping Cart

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Empty shopping cart in the supermarket shopping mall

Today Kimco Realty
KIM
, one of the largest shopping center REITs in the US, announced it was merging with Weingarten Realty
WRI
for $5.9 billion in a mix of stock (90%) and cash (10%).  Each WRI share will be converted into 1.408 newly issued KIM stock plus $2.89 in cash per share and upon closing the combined entities will have an enterprise value of just under $20 billion.

Kimco and Weingarten are highly complementary as they own high-quality grocery anchored shopping centers, and the combined portfolio will consist of 559 properties in top MSAs.

One obvious benefit for Kimco is the fact that Weingarten’s portfolio is focused on coastal and Sunbelt markets that have performed relatively well during the pandemic. This merger creates significant synergies (around $30 million to $34 million) as the costs can now be spread across a $20 billion portfolio.

In addition Kimco expects to benefit from debt synergies, thanks in large part to the fact that Kimco is using most of its currency (90%) in stock and the balance in stock (10%).

I spoke with Kimco’s CEO, Conor Flynn and he explained that this merger will generate “lower leverage and enhance the long-term NOI profile” for the combined companies.

Kimco is currently rated BBB+ with S&P and Baa2 with Moody’s
MCO
and Flynn told me that the “next leg up is the A-rating” that the CEO is hoping to see in 2022 or 2023.

The cap rate on the Weingarten transaction should be immediately accretive and I view the 5.8%-ish cap rate to be extremely attractive and Flynn told me that “you can’t get that (cap rate) in the private market right now”.

According to Nareit data there are 18 shopping center REITs with a combined market capitalization of $52.5 billion. In 2020 the shopping center sector generated the second worst total return (-27.6%) behind regional malls (that returned -37.2%).

Although shares in shopping center REITs have rallied year-to-date (+26.1%) Kimco opted to purse Weingarten so it could use its cost of capital to transact the deal (purchase price was 90% in stock).

Another catalyst worth noting is Kimco’s  ability to drive NAV (net asset value) through a collection of mixed-use projects and redevelopment. The combined company has a potential of 41 projects that consist of 34 mixed-use and 7 master planned projects that include 1.7 million square feet in retail and 9,000 multi-family units.

Conor Flynn will remain the CEO of the combined company and Milton Cooper will remain as Executive Chairman. Weingarten will have one Kimco board seat. There is a break up fee of around 2.5% but I don’t anticipate another bid given the fact that it will take a large player like Kimco to execute on such a large transaction.

KIM closed up 2.31% and WRI closed +12.5%.

I own shares in KIM.

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Real Estate

Vacation Home Checklist: Keep Your Place in Perfect Shape

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Vacation home checklist items to keep in mind

Everyone loves a good vacation, and the option of having a private retreat is one of the many perks of owning a vacation home. With the soaring demand and interest in vacation towns and affordable suburbs, there’s no better time to jump on the opportunity to own a vacation home than now.

Whether you’re taking in the last snowy days at your retreat in Whistler, BC, or you’re looking to invest in a sunny escape in Fort Worth, TX, it’s critical to close up your vacation home properly at the end of the season to ensure your property is safe when you’re back at your permanent residence. To help you get started, this eight-point vacation home checklist will make it easier to maintain your vacant home while you’re away.

Vacation home checklist: what to keep in mind

A home away from home can be a great investment and a handy retreat for vacations. However, making sure you’re sustaining and securing your property during vacant months will help prevent potential problems while you’re away. These can include:

  • Frozen pipes and leaks
  • Downed wires
  • Fallen trees
  • Pests and animals
  • Mold
  • Theft and vandalism

Thankfully, there are steps you can take to prevent these potential issues from becoming a vacation homeowner’s nightmare.

Secure your vacation home

1. Install a home security system

Leaving your home unoccupied for a season could leave it more vulnerable to burglaries or vandalism. A home security system is your first line of defense when you’re away, whether it’s your vacation home or full-time residence, and will allow you to monitor your home remotely. Some security systems can also include flood monitoring or smoke detection, giving you additional peace of mind. Depending on the system you choose, some may even come with an automation function that will allow you to schedule lights or turn a TV on and off, giving the appearance of an occupied home.

Have sufficient lighting in your vacation home checklist

2. Make sure you have sufficient lighting

To deter opportunists from approaching your vacation home at night, illuminate walkways, entryways, windows, and any dark corners with outdoor motion-sensor lights to startle would-be intruders. Indoor lighting is also critical in ensuring your home looks occupied from the outside as well. Simple outlet timers can help turn lamps on and off at intervals to make your vacant home look occupied. Keep in mind that when using outlet timers indoors that you ensure it’s visible from the outside, even through curtains or shades.

3. Consider smart locks

An essential step in your vacation home checklist is ensuring all windows, especially those on ground level, and doors have secure locks. Alternatively, you may also consider installing smart keyless locks that will allow you to grant remote access to neighbors or housekeepers. These locks provide additional control, security, and convenience, and may give you better peace of mind knowing you won’t need to keep track of any keys.

4. Adjust any blinds or shades and secure the windows

The key to deterring any surprises while you’re away is to make your vacation home look as if it’s being regularly visited, so be sure to include leaving any blinds or shades partially open in your vacation home checklist. Doing so gives the impression that your vacation home is occupied, and those passing by will see the lights through the blinds at night without being able to see fully into the house.

5. Ask your neighbors for help

Getting to know your neighbors can offer another line of defense while you’re away. Instead of leaving your key in a well-known hiding spot, give a spare set to a trusted neighbor so that they have access to the home in case of emergencies. Plus, it’ll ensure that you have another set of eyes watching over your home for suspicious activity.

Assemble a team of professionals

6. Consider hiring a landscaping service

Untidy hedges, overgrown grass, weed-infested gardens, or even overgrown shrubbery are dead giveaways of an unoccupied home. While a lakefront home in Seattle, WA might not need frequent upkeep compared to a beach house with a large lawn in Orlando, FL, investing in a routine landscaping service to maintain your property while you’re away will keep up the appearance of it being regularly visited. Plus, trimming trees and shrubs around the house will prevent them from blocking views of the house and removes any hiding spots for burglars.

Secure windows and adjust blinds in your vacation home checklist

7. Invest in a quality housekeeping service to maintain your home’s interior

If you’ll be leaving your vacation home unoccupied for an extended period, adding a regular cleaning service to your vacation home checklist will make returning even more welcoming. In fact, your housekeepers will be able to deep clean the hard-to-reach areas that are usually left out when your home is occupied for the season – like laundering the curtains, cleaning air conditioning vents, and shampooing the carpets. When you return to your vacation home, you won’t have to worry about dust build-up or stale odors from your home being left unoccupied.

8. Find a reputable property management company

The final item on your vacation home checklist is to find a property manager. If you lack a flexible schedule or don’t live locally, a property manager can relieve the everyday stress of maintaining a vacation home from afar. Property managers act as the point of contact to manage your home and can conduct regular walkthroughs to ensure your home is protected. Some companies may offer seasonal services such as preparing your home for winter.

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Real Estate

Median Home Listing Prices Hit Historic High Of $370,000 According To Realtor.com

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Golden Austin Texas sunset over Cityscape

Median home listing prices hit a historic high of $370,000 according to Realtor.com. Recently releasing its latest Monthly Housing Trends report, realtor.com saw year-over-year median listing prices rise 15%.

While that’s good news for sellers buyers continue to compete in markets where multiple offers often come in six figures above asking price especially in those desirable California markets like Silicon Valley and Los Angeles. Competition remains stiff with 117,000 fewer homes “being listed each month compared to recent years,” according to the report.

In Silicon Valley recently there were 76 all-cash offers on a home as it went on the market according to CNN Business. A fixer-upper in Silver Spring, Maryland a Washington DC suburb boasted 88 offers, 75 were all-cash. Fifteen of those buyers had not even set foot in the home.

Realtor.com tracked the 50 largest metros in its data. Some metros saw those listing prices shoot even higher than the national average increase of 12%. Consider that Austin’s listing prices increased by almost 40%. Right behind it was Buffalo at 28.3% and Los Angeles with a 24.8% median listing price increase. Despite these price increases homes are selling a week faster than a year ago.

Listen to realtor.com Senior Economist George Ratiu. “The trillion-dollar question is of course how long can this continue? It’s the market reflecting typical economic problems.” Ratiu goes back to econ 101 on the law of supply and demand. “I do think as we move through summer sellers will be confident to list their properties as vaccination rollouts increase.”

The news gets even worse when you dig a bit deeper. Consider that nationally, the number of homes for sale in March decreased by 52% compared to March 2020. That’s even lower than this past February when inventory fell 48.6%. Crunch the numbers and that means there were 534,000 fewer homes for sale in March 2021 compared to March 2020 as we were just beginning the pandemic.

Since Austin is the best market in the country it’s no surprise inventory declined there 72.7% from last March. Other metros with strong declines included Jacksonville, Florida down almost 71%, and Raleigh, North Carolina where homes for sale fell 70.3%.

Here’s a deeper dive into realtor.com’s numbers. The supply and demand fundamental is evident in markets across the country. The Austin metro saw the year-over-year median listing price increase almost 40 % to $520,00. Median prices rose 18 % in Phoenix to $477,000. Raleigh once considered “affordable” had a 12% increase to a median listing price of $420,000.

“I think as mortgage rates creep up as well as home prices, we will see the number of people who can qualify for mortgages dwindling,” Ratiu forecasts. If that’s true then we may see a shift away from a sellers’ market. Now that could be good news for buyers.

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