REDnews September 2020 Magazine

DFW’S DIRECTION

EXPERTS SHARE THEIR INSIGHTS IN REDNEWS FORECAST SUMMIT PAGE 16 THE TEXAS COMMERCIAL REAL ESTATE NEWS SOURCE | SEPTEMBER 2020

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IN THIS ISSUE Features Industrial investors remain bullish on DFW The DFW industrial market saw over 8.2 MSF of absorption during the first two quarters of 2020, nearly on par with this time last year. Projections suggest things will only improve in the quarters ahead.

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Hard stop to full throttle: Houston’s land market generates career firsts in 2020 The commercial real estate industry, like the overall economy, was humming at the beginning of the year. That all changed in March with COVID-19, and new trends have emerged as players look to snap up land.

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SEPTEMBER 2020

Agile office: What is next for office? The flexibility of a property—both the physical space and economic lease terms—was a differentiator before the pandemic.

In a post-COVID world, the ability to be responsive in order to meet dynamic needs is more important than ever.

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DFW’s direction: Experts share their insights in REDNews forecast summit Predicting where the market is headed is tough enough during more stable times; it’s even harder to do during a pandemic. Even so, several Dallas-area CRE pros recently gave their thoughts on the hospitality, industrial and multifamily markets.

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REDNews Post COVID Summit Several CRE experts forecast how the fallout from the COVID-19 pandemic will effect commercial real estate, capital markets and the overall economy.

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Letter from the Editor

E

THE TEXAS COMMERCIAL REAL ESTATE NEWS SOURCE

asily one of the biggest issues wrought by the recession and market turbulence that has come in the pandemic’s wake is the confusion and uncertainty that pervades so many business decisions. For example, investors are weighing which sectors, if any, into which they should place capital. Meanwhile, tenants are trying to balance their current leases against unknown future needs.

For property owners and managers, there are voluminous decisions to make, yet they have a dearth of verifiable data upon which to base those decisions. Case in point: the pandemic is calling out for these owners to make capital improvements to their buildings, but will those expenditures have any payoff after a vaccine has been found?

NAIOP recently surveyed its members to see how they are responding to the immediate health impacts of COVID-19 within their properties. Are they investing in big budget items like HVAC system upgrades, UV lighting technologies, antimicrobial building materials and touchless technologies? Or are they opting instead to focus on cheaper solutions like enhanced cleaning schedules?

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Upgrading to a hyper-efficient air handler that can sift out the smallest virus would be a reasonable markup, assuming that a building’s HVAC system is already due for replacement.

Pushing up that timeline because of the pandemic, however, doesn’t make as much sense. After we have a vaccine in place for COVID-19, will tenants still be attracted to properties that market these vigilant health-saving measures?

and developers throughout Texas and the US.

Right now, there simply isn’t enough data to support the long-term ROI—let alone the efficacy against transmission, as our understanding of the COVID-19 virus changes daily. Because of this uncertainty, even a once-in-a-century pandemic isn’t enough to provoke a substantial capital outlay. The NAIOP survey found most owners are deferring large capital investments, instead emphasizing operational measures. That said, all are encouraged to take this time to thoroughly evaluate their portfolios for weaknesses, and not just those precipitated by the pandemic.

I hope you can find some certainty and stability in the months ahead.

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I-35 Logistics Crossing, 2801 N. Houston School Road in Lancaster, Texas.

Industrial investors remain bullish on DFW

BY MATT BAKER

Don’t look now, but some sectors in some markets aren’t just weathering COVID-19, they’re settling in for years of growth.

Consider the DFW market where, during the first half of 2020, more than 8.2 million square feet of industrial space was absorbed. This data, which was culled from recent CBRE research, held close to the year-over-year absorption of 8.7 million square feet that the area experienced in 2019.

While the pandemic is causing disruptions in sectors and markets throughout the country, the DFW industrial market appears to be quite healthy. CBRE tracked 71 transactions of 100,000 square feet or larger that closed during the first two quarters. Half of these, comprising 12.6 million square feet, were new leases, with 5 million square feet of that going under contract during Q2 as the pandemic was well under way.

Steve Trese, senior vice president with CBRE in Dallas, believes that supply and demand are still fairly in balance across the metro. This holds true both for industrial product in general and for large logistical warehouses.

“Smaller, front-park, rear-load product is flying off the shelf in infill areas.

Partly because of the lack of quality sites, developers are capitalizing on challenging small land, and getting higher rents than ever before,” Trese said. “Big box is equally successful, but is venturing out farther than our 8

SEPTEMBER 2020

“We are forecasting some of the strongest industrial metrics over the next couple years that we’ve ever seen in North Texas.” more traditionally tracked submarkets, seeking quality labor, less congested infrastructure and slightly more affordable land basis.”

According to Trese, this migration is leading to cheaper rent via developer yield. That said, location is still key; the cost of real estate is less of a concern when compared to optimal distribution position and deployment.

As location is so paramount, where are developers, investors and users focusing their efforts? DFW Airport, Great Southwest/Arlington and most of Northwest Dallas are effectively built out and have little availability. Northeast Dallas is an established market and is very stable, but it’s much more of a localized

submarket with smaller tenants. A lot of new activity is occurring in the area’s southern submarkets.

“Fort Worth was the new frontier and is now very desirable. Alliance has always been a destination, thanks to developer Hillwood, but South Fort Worth has recently become a land grab area, and the best sites are now spoken for,” said Trese. “We expect the growth to continue to trend south.

South Dallas had a glut of big box spec vacancy, which concerned Majestic Fort Worth South, located in Fort Worth, Texas. everyone in the know, but was Nearby, an undisclosed tenant recently inked a deal for 610,806 square feet at quickly corrected with recent absorption.”

I-35 Logistics Crossing, leasing all of the site’s Building A. Located at 2801 N. Houston School Road in Lancaster and marketed by Cushman & Wakefield, FedEx was the source of one of those major South Dallas deals as the shipping this development of Crow Holdings includes 36-foot clear heights, 185-foot giant took the entirety of Trammell Crow Company’s first phase at Cedardale truck courts and trailer storage. The tenant plans to conduct a $12 million Distribution Center. The 776,630-square-foot cross-docked distribution build-out before moving in by the end of this summer. center features 130 dock doors and 234 parking spots. Trammell Crow cited the property’s location, directly south of I-20 between I-35 and I-45, as a strategic opportunity for growth over the next two decades due to relatively inexpensive land and easy access to transportation lines.

In South Fort Worth, packaging firm Ball Corp. agreed to occupy 678,000 square feet of space at Majestic Realty's Majestic Fort Worth South. The 320-

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“The organic growth of small industrial business gives me the most confidence that we ... are in the right part of the country for this snapshot in time.” acre master-planned business park, which will comprise 1.8 million square feet of rentable space when the first phase is completed, has direct access to I-35 with freeway frontage opportunities available.

There was a spate of spec development leading up to the pandemic and approximately 20 percent of industrial space now under construction in the DFW metro has been preleased. According to Trese, he sees little reason to worry about filling this new product.

“We have had more new spec development deal activity during the shutdown than the previous 24 months,” Trese said. “Market fundamentals before the pandemic were pushing users to migrate to our region, and it has only accelerated with the conditional forces at hand.”

The pandemic has given a boost to the already accelerating e-commerce and logistics sector as stay-at-home orders have turned online shopping late adopters into converts. Other benefactors are the possible onshoring of manufacturing jobs as businesses flee China and the stockpiling of healthrelated materials.

“Multiple big e-commerce deals have landed here versus other markets,” said Trese, “but the organic growth of small industrial business gives me the most confidence that we are in the right asset class of real estate and in the right part of the country for this snapshot in time.”

Industrial net absorption is very predictably tied to job growth. As DFW was the fastest-growing metro over the past decade, industrial absorption follows suit. Job creation has come to a halt, however, as COVID-19 causes companies to stall or cease operations. While the immediate reality may seem grim, Trese has confidence in the future.

“We have obviously lost a ton of jobs globally, nationally and locally, but we are forecasting some of the strongest industrial metrics over the next couple years that we’ve ever seen in North Texas,” said Trese. “Because of the paradigm shift on consumer spending, onshoring and new American manufacturing— as well as the fact that the state of Texas has demonstrated a pro-business attitude—the mold has been shattered.”

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PROPERTY

PROPERTY SIZE SITE SIZE PROPERTY TYPE NUMBER OF STORIES YEAR BUILT % OCCUPIED SUBMARKET

SNAPP Building 11555 W. Fairmont Parkway La Porte, TX +/- 122,600 sf +/- 9.85 acres Warehouse 1 2019 100% Southeast Ind

Newly built Class A concrete tilt-wall warehouse High end office finish with reception area, conference rooms & full breakroom 9 drive-In doors including 2 oversized doors & 2 truck well doors Fully fenced in 130’ deep truck apron 52’ x 41’ column spacing (with 60’ deep loading bay) +/- 32’-42’ ceiling height 6 helicopter fans in warehouse 100% sprinklered – office & warehouse 52 parking spaces – 4 handicapped +/- 1.5-acre detention pond on site

SINGLE TENANT NNN INVESTMENT OPPORTUNITY • Offers a stabilized income stream secured by a single tenant “absolute net” lease with over 10 years of remaining term.

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• SNAPP - Stainless & Nickel Alloy Piping Products is a national master distributor operating 11555 W. Fairmont Parkway as its sole Texas operations facility.

• Newly constructed Class A industrial facility occupied by its original build-to-suit tenant, requiring little or no maintenance and ownership responsibility over the life of the term.

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Hard stop to full throttle: Houston’s land market generates career firsts in 2020

BY BRANDI SMITH

Kirk Laguarta, Land Advisors

Kristen McDade, Berkadia

“When dealing with clients or other brokers, have empathy. You never know what challenges each of us are going through.”

Rounding the corner into 2020, things were looking good for the Houston-area land market.

“Retail was strong, multifamily was acquiring sites for new development, listings were moving and buyers were very active,” said Kristen McDade, who leads Berkadia’s land services team.

As soon as the pandemic took hold, though, the market came to a grinding halt.

“Everyone stomped on the brakes as nobody has ever been through a pandemic in the U.S. before,” said Kirk Laguarta, broker at Land Advisors.

He said that one thing did accelerate: the home-buying process. Laguarta suggested the increase was due to low interest rates and many people wanting to get out of apartments into new homes.

“Bottom feeders” also emerged in the spring, looking to capitalize on what they viewed as a wounded market.

“In April, I had a group make a $25,000 offer on a site listed around $3 million,” McDade said. “When we all finished laughing, they made another similar offer on another tract. I finally told the guy, ‘Even in the worst of times, this is ridiculous.’”

She said a couple of her deals dropped, but most buyers paused to evaluate whether to close deals they had under contract. McDade said the majority worked out extensions that allowed them to get a better handle on the market moving forward.

As for Laguarta, he and colleague Duane Heckman have been selling land in the Houston area for more than 35 years. The post-pandemic market offered the pair a career first.

“We had one transaction that had all approvals and we were waiting to close in early April. When they didn’t close in late April, they wanted their earnest money back. The seller said, ‘Sorry, but no way,’ so the buyer sued the seller to get their earnest money back,” Laguarta said. “By the end of May, the same buyer came back and agreed to go hard with the earnest money, released the lawsuit and closed on the property in less than two weeks. We’ve never had that happen before.”

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SEPTEMBER 2020

Now, he and McDade agree, while prices are flat, there are opportunities in the land sector. McDade just listed 15 acres on the north side of Beltway 8 at Kirby, which is just west of SH 288.

“Because it’s in the city of Houston ETJ, it’s not subject to Pearland zoning. The redesign of the on and off ramps of Beltway 8 provide fantastic access to the site and will be completed by the end of this calendar year,” she said. “The site also has great visibility and plenty of frontage.”

Home builders have also gotten super aggressive in purchasing land for future lot development, according to Laguarta.

“With homebuilders pulling back for two months and now selling more homes and lots faster than they projected, they realize they need to speed up the land buying process to keep pace with the increased rate of home sales,” said Laguarta.

He added that he doesn’t think the home-buying pace will hold for long because of a lack of job creation. That, combined with questions about how retail will function and how long employers stick with a work-from-home model, does add some challenges to the marketplace.

“It could potentially necessitate smaller retail spaces as storefronts due to less demand or the opposite—larger spaces to accommodate social distancing but lower rents to facilitate keeping those doors open,” said McDade. “Office space is moving back to traditional offices, so there will be less open gathering spaces. As more people get a handle on officing from home, less office space may be needed.”

Despite uncertainty, she expressed confidence in Houston’s resilience.

“This is a new test, but we work well for such a large community,” she said.

“When dealing with clients or other brokers, have empathy. You never know what challenges each of us are going through both personally and professionally. Have patience. The deals will come around, maybe just a little slower pace. And be happy that we have all learned to be professional and productive in shorts and tee shirts.”

Some heartfelt advice when navigating the land market or life in general!

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LMEDC’S COVID-19 RESPONSE

$974,000 REINVESTED INTO LA MARQUE BIZ. La Marque Economic Development Corporation stepped up and worked fast to help La Marque business owners stay afloat after statewide closures due to Coronavirus.

Just two weeks after the Governor’s March 18 order, the Emergency Business Retention Program launched. LMEDC provided nearly $550,000 in business grants to 64 La Marque business owners. The fırst-round checks were issued on April 15, less than a month after the fırst businesses were forced to close.

ALEX GETTY, EXECUTIVE DIRECTOR La Marque Economic Development Corporation agetty@lmedc.com 409-938-9258 LMEDC.com

On Thursday, May 21, 2020, the LMEDC Board of Directors approved Round Two of the COVID Emergency Grants, and the committee awarded an additional $426,500 to 61 businesses. That’s a total of $974,000 reinvested into La Marque businesses.

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Agile office: What is next for office?

BY MANDI WEDIN, CEO, FEROCE REAL ESTATE ADVISORS Agile office. Is that an oxymoron? Can a structure built of steel and concrete be agile? The answer is yes, emphatically yes, when there is agility in both the physical space and economic lease terms. In both cases, agility means being flexible and responsive in order to meet dynamic needs. Agility is also required for employers and people leaders to adapt, innovate and evolve during this time of transition.

adjustments and limited capital investments in the near future. Agility means delivering spaces that are multi-purpose. Design an internal office so that it can also be used for video presentation space and small team pods.

Mandi Wedin, Feroce Real Estate Advisors

Before the global pandemic of COVID-19, agile office was already a differentiator for office building owners to win tenants, smart business solutions for office occupiers and a competitive advantage for talent acquisition and retention. In today’s world, the need to be agile is crucial for the near- and long-term success of office building owners and occupiers.

Agile physical space

For the physical space, consider agility from the perspective of delivering space that is useful today and can be useful for another purpose with moderate

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Agility means using furniture solutions and interior design principles to define spaces instead of building out walls and permanent structures. Think of how a hotel lobby contains seating areas that delineate separate spaces. Envision cafe spaces that also accommodates training sessions.

Agile lease terms

For the lease economics, agility is delivering a business solution that allows enough flexibility balanced with enough certainty to meet the needs of both the landlord and the tenant. Companies use real estate as a tool to achieve business results. As the path to achieve those results is changing, the role of real estate is changing.

As tenants determine where they need flexibility—length of lease term, amount of space leased, space utilization—landlords can meet that demand for flexibility with agile lease terms. Yes, that agility in lease terms and options includes costs for the landlord, both in direct costs and the valuation impact of that lease. The pricing of that flexibility is reflected in the rental rate and accompanying lease terms, to capture both the cost to the landlord and the value to the tenant.

Work from anywhere

Companies are preparing for their employees to continue to work from home into 2021 or whenever an applied medical intervention addresses the pandemic.

Working from home has worked because we had no choice. Now is the time to plan for what it will look like when employees do choose to go back to an office.

Both employees and companies have learned that where an employee completes their work is a variable, known as workplace mobility. When employees do have the choice again, they can choose to work from anywhere—from home, from HQ, from a satellite office, from a coffee shop. Companies want to provide that mobility in order to retain an important asset, their talent pool.

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Which spaces employees choose to work at will depend on what type of work they will be completing that day—concentration work, team sessions, client meetings.

That choice will also be rooted in prioritizing wellness and health, for themselves, their families and others. Employees will select spaces (and companies) that they trust to meet their needs for both health and wellness concerns and the type of work to be completed.

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To be considered as a quality workplace solution, office buildings first need to address the threshold question of wellness and safety. The definition of a quality building is rapidly crystallizing in the age of COVID-19, with an intense focus on up-to-date building systems, technology and operations, including HVAC upgrades, touchless solutions and occupancy and traffic flow mitigation efforts in

common areas. Buildings that both meet this definition of quality and effectively communicate around wellness and health will be ahead of the game.

Through the lens of workplace mobility, companies are evaluating what purpose they need their office space to serve in order to meet their business goals. If companies need space for employees to complete heads down work, the space will need to include private, quiet space that enables concentration. If the business needs collaboration and creativity space, they will pursue space that facilitates groups working together both in person and with video capabilities.

The business need may include both concentration and collaboration spaces, so companies will find quality buildings with space that is agile enough to meet both of those needs. Now layer on lease transactions that provide enough flexibility that companies can adjust the term or size to address changing business needs.

As companies are pursuing agile office solutions, landlords are assessing their paths forward to meet that demand and be in a position to win. Landlords begin by meeting the quality building definition noted above. They also determine how to meet the agile physical space needs of tenants through a smart allocation of capital. The capital spend can address designing and building agile, pre-built space or building amenities like conference centers that support tenant business needs. Landlords also evaluate the ability of their current capital structures to accommodate the tenant demand for flexibility.

Agile office in practice

Agile office is already happening. Coworking companies like Industrious, Convene

and WeWork offer it through their enterprise solutions. Yes, coworking has been significantly impacted during COVID-19 as individuals with memberships have chosen to not go into shared office space and companies with flexible lease terms have exercised termination and downsizing options. Yet, coworking is a significant component of the existing agile office supply and will continue to be a solution for companies looking for flexibility.

Landlords like WashREIT with Space+ directly offer high quality, pre-built, ready to move in, flexible term and space solutions. Additionally, landlords partner with coworking providers (Hines’ The Square partnerships with Industrious and Convene) or real estate service providers who offer a branded product, such as CBRE’s Hana. These offerings meet the demand of both existing tenants and new tenants who value relationships with landlords who offer both long-term, traditional leases and shorter-term, agile leases.

Ride the wave

While the lasting impacts of COVID-19 are not yet clear and that uncertainty poses challenges for both office building owners and occupiers, the demand for agile office was here before the pandemic and that demand is accelerating. In JLL’s July 2020 report, The Impact of COVID-19 on Flexible Space, they note that “67 percent of CRE decision makers are increasing workplace mobility programs and incorporating flexible space as a central element of their agile work strategies.”

Landlords—get in the way of that wave of demand. Tenants—find the building owners with agile office space that can meet your needs.

City Management SEPTEMBER 2020

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DFW’s direction: Experts share their insights in REDnews forecast summit

BY BRANDI SMITH

Susan Arledge ESRP Real Estate

Art Barkley Prologis

Hope for hospitality?

“We’ve been devastated.”

Brutal honesty from Craig Davis, CEO and president of VisitDallas, set the tone in a discussion about the state of the Dallas retail, restaurant and hospitality market. Joined by United Commercial Development president Robert Dorazil, Steve Williamson 16

SEPTEMBER 2020

Jeffrey Binford CBRE

Robert Dorazil United Commercial

Craig Davis VisitDallas

(Transwestern’s senior vice president in agency leasing, retail services and land services) and Jeff Binford (managing director of CBRE’s Hotels Advisory South Central Division), the group dug into the challenges facing a market dependent on people going out during a time when they’re being told by health experts to stay in to slow the spread of COVID-19.

Alfredo Gutierrez SparrowHawk, LLC

Emily Hoffman Cushman & Wakefield

Davis said that Dallas tourism has taken a big hit, especially because so few people are flying to their destinations these days. Instead, he said Dallas has seen people driving into town and VisitDallas has repositioned its marketing to target the drive market.

“We know there is a backlog and people will travel when the time comes,” said Davis.

SparrowHawk specializes in strategic industrial real estate investment throughout the United States. Through a hands on and developmental approach, SparrowHawk enhances asset value and assembles properties into prized Class-A portfolios.

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“I think in ten years, people are going to be talking about Dallas rather than LA as a distribution hub. You’re going to see cap rates like we see in California.”As industrial rates increase, office rents are going the opposite direction.”

He said he expected that bump to come within the next six months, though he added that research suggests large conferences likely won’t return until there is a sweeping change, such as a COVID-19 vaccine.

Industrial investments and office opportunities

As a result, the hotel industry is struggling. Davis said occupancy rates plummeted from 85 percent pre-pandemic into the single digits. That led to at least 20 hotels in Dallas proper to close their doors, which echoes what other Texas communities are experiencing.

“The online world just picked up a whole generation of people who never shopped online,” said Conrad Madsen III, founder of Paladin Partners.

“This is the worst setback by far,” said Binford.

Lenders are stepping up to help hotel properties that haven’t been able to get visitors in the door, he said. Rather than foreclose, many are refinancing or modifying loans to keep the industry afloat for the time being. The reason, Binford said, was that there are few bad actors in this case. COVID-19 is exclusively to blame for the lack of income and few lenders want to be stuck with a property in the current environment.

Similarly, landlords for retail centers are largely working with their tenants to help ease the burden of the pandemic’s impact.

“Most of the landlords I talk to are doing what makes sense to keep everybody healthy,” said Dorazil, adding, “In my world, most of my tenants are going to make it.”

To date, he said two restaurants have closed in his centers, but diversity of tenants has helped draw foot traffic when it is so sorely needed. Along with grocery anchors, he said nail salon, workout studio and fast food business are picking up.

Those businesses that have failed, Williamson suggested, were likely undercapitalized or had a poor concept or poor management.

“Any kind of weakness they had, this is exacerbating it,” he said.

Responding to the challenges faced by tenants, Williamson says Transwestern offered them a moratorium on base rent, but asked them to continue paying triple-net charges on their space. He said that provided at least some income and a commitment from the tenants that they intended to remain open.

“If you own retail centers, you’re in business with your client, whether you want to be or not, because their entire livelihood depends on people walking in and buying stuff,” Williamson said.

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As the pandemic created new challenges for the traditional retail sector, e-commerce sales boomed and generated opportunities for industrial growth.

He explained how his parents, who are part of the Boomer generation, had never purchased anything on Amazon or used an app such as UberEats before the pandemic. Madsen laughed as he shared what they told him: that it was amazing to be able to order something one day and have it delivered the next.

“Right now, e-commerce is only 11 percent of the total retail sales in the United States. Only 11 percent is online today,” he said.

“It’s never going to go 100 percent, but think about how far we’ve come and it’s only 11 percent.”

With more consumers relying on e-commerce for their needs, online retailers are searching for distribution centers, driving the industrial sector.

“I think we’re going to end up with another outstanding year,” said Art Barkley, Prologis senior vice president.

He said he expects Dallas will wrap up 2020 with 20 million square feet of industrial absorption, twice what the region reported when he moved there in 2005.

“It’s definitely trending in the right direction,” Barkley added.

What will no doubt help with that trend is the anticipated increase in nearshoring and onshoring as a result of the U.S.’s tumultuous trade relationship with China.

“We’re realizing as a nation that we can’t depend on China. Onshoring is going to happen in the United States, but Mexico is going to be the biggest beneficiary,” Madsen said, explaining that labor costs would keep most manufacturing south of the border.

That has the potential to fuel the industrial sector in North Texas as manufacturers examine the best markets through which they can distribute

Suzanne Jones

Michael Kolshak Cortland Partners

Conrad Madsen Paladin Partners

Ari Rastegar Rastegar Property Company

their goods, according to Alfredo Gutierrez, founder of SparrowHawk Real Estate Strategists.

“I think in ten years, people are going to be talking about Dallas rather than LA as a distribution hub,” he said. “You’re going to see cap rates like we see in California.”

As industrial rates increase, office rents are going the opposite direction.

“How long that lasts, we don’t have those answers,” said Susan Arledge, executive managing director of site selection for ESRP Real Estate. “With the uncertainty in the market, every client we have is asking, ‘Is my office space going to be obsolete?’”

She said it’s not a question of if employees will continue to work from home as millions are doing now, but how much of the workforce will never return to the traditional office.

Greg Willett RealPage

Steve Williamson Transwestern

“Right now, I have clients who want to downsize immediately because they found working from home to be productive for their employees,” said Emily Hoffman, director of Cushman & Wakefield’s tenant advisory group. “I think that it’s probably best to wait and see exactly what you want to do with that office space, whether you want to grow or shrink.”

That wait-and-see approach emphasizes the importance of flexibility in lease negotiations. Companies that would typically commit to a five-or-more-year lease are hesitant to do so, leaning instead on short-term extensions.

“Right now, companies don’t want to make long-term commitments based on the cost of bringing people back,” Arledge said, citing a Deloitte study that found it could cost anywhere from $12,000 to $18,000 to bring each employee back into an office.

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Moving in on multifamily

“It’s as competitive as ever. It seems like every day, we’re seeing properties going under construction in Dallas. The market is still moving.”

Property owners are also looking at added costs, including improvements to HVAC systems to prevent the spread of the virus. Arledge said it remains to be seen if those costs will be viewed as operating expenses that can be passed along to tenants or if they’re simply improvements that incentivize tenants to come on board.

“That conversation about what the pass-through cost will be for the tenants is just beginning,” said Hoffman, who stressed that the focus now is getting tenants into office spaces rather than discussing operating expenses. Looking ahead, she anticipates renewed interest in subleases as well as satellite offices in suburban areas.

Similarly, suburbs are where multifamily developers are shifting their focus as people relocate from the urban core.

“I’m not sure there are going to be a lot of capital sources eager to do an urban core tower at this point,” said Greg Willett, chief economist at RealPage. “I think it will be more suburban-focused and there is going to be some sensitivity about the price point.”

One reason for the exodus, he suggested, was the prevalence of roommate households in urban areas. If one roommate loses his or her job, the household disintegrates and, depending on the age of the tenants, they may return to their parents’ home.

Another trend Rastegar Property Company founder and CEO Ari Rastegar has noticed is an increased interest in vintage multifamily properties, which his firm focuses on.

“On these garden-style properties, you walk up the stairs [instead of taking the elevator],” he said. “It has this kind of inherent social distancing built into it that has boded well. Our tenants find a lot of safety there.”

Michael Kolshak, director of investments for Cortland Partners, pointed out the emphasis on design goes beyond just the overall layout of a multifamily

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property. In deals where Cortland has influence, he said the company is encouraging developers to plan for more tenants working from home.

“The thinking is that work-from-home is not going away,” Kolshak said.

That means closet space is less of a draw compared to office space or a builtin desk. Technology access also has increased importance and not just for tenants. Property managers are shifting to virtual leasing, offering up digital tours of vacant units.

“I’m pretty impressed how the entire industry adapted almost overnight,” said Kolshak. “It’s a paradigm shift for the industry that probably doesn’t go back regardless of how long this lasts.”

According to Willett, occupancy took a small hit because of the pandemic and he’s watching Class C properties closely. Those tenants, he explained, are more likely to face economic challenges during a downturn.

“I think people who live in bread-and-butter Class B product are pretty well positioned and I don’t think affordability will be a challenge in the Class A product,” said Willett. “It’s the new supply coming in. It’s going to be a competitive leasing environment in the A product because of the new supply.”

And there is a lot of new supply. He said of the approximately 600,000 units under construction across the country, 44,000 are in Dallas alone. It’s an indicator to him and Kolshak that deals aren’t slowing down.

“Deal flow is back. Folks who were on the sidelines are all pretty aggressive,” Kolshak said. “That’s what we’re seeing in real time.”

“It’s as competitive as ever,” said Suzanne Jones, senior vice president of NorthParq Capital. “It seems like every day, we’re seeing properties going under construction in Dallas. The market is still moving.”

She said she’s closely monitoring the moves lawmakers are making related to evictions, hopeful some kind of assistance program is approved so the multifamily sector doesn’t take a harder hit. But ultimately, she’s staying positive.

“To me, when we experience these downturns or uncertainty, that’s when there are the most opportunities,” she said. “I think it’s a safe bet to come.”

If you’d like to join the discussion, visit REDNews.com and check out our calendar of events, including weekly webinars and summits.

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REDnews Houston CRE Market Update and Forecast July 31 2020

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Kaci Hancock, Emcee, REIS Associates.

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Sponsor and Panelist Alfredo Gutierrez, SparrowHawk

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Tami Pearson Waterman Steele, Real Estate Advisor

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Sponsor and Panelist Rhonda Sands Veritex Community Bank

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REDnews Houston CRE Market Update and Forecast July 31 2020 SEPTEMBER 2020

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Ray's Buzz

REDnews Post COVID Summit: Economic Forecast; Capital Markets Update; Commercial Real Estate Forecast

BY RAY HANKAMER

Economic Forecast

Moderator: Carlton Schwab, Texas Economic Development Council. Panelists: Regina Lindsey, Economic Alliance Houston Port Region; Jess Thompson, Federal Reserve Bank of Dallas; Bethany Miller, Greater Houston Partnership; Lance Lacour, Katy Area Development Council; Tim Jeffcoat, Small Business Administration •

There is a high degree of uncertainty now in forecasting the future

•

The United States GDP dropped 32 percent in last quarter, the sharpest drop in the history of the country; the next quarter should be better with a slow rebound starting

Is Your Team Up for the Hunt?

SEPTEMBER 17, 2020 NORTH TEXAS GIVING DAY

Normally, our Young Leaders in the Real Estate Council play serious dodgeball on North Texas Giving Day and raise funds for Read Fort Worth.

This year is different. We’re hunting for the best team — do you have what it takes to win our scavenger hunt and trivia night?

Visit RECouncilGFW.com for more details and join us September 17.

THE HUNT

IS ON!

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•

Forecasts are for six quarters to recover to where we were before COVID

•

Houston has an international economy which is tied to the whole world

• The Purchasing Managers Index, a good tool, shows that the lines have stopped declining and are starting a slow upward trend • Restaurants, bars and hospitality have showed a sharp upward bounce with re-openings although now, at end of July, we seem to be seeing a leveling off in many CRE sectors •

We have recovered one-third of jobs which were initially lost

• In Houston, the local payroll should only be down about 4.8 percent for the year 2020 compared to 2019 • Houston is seeing a recovery based on life sciences, industrial/logistics and advanced manufacturing; post-COVID we will see more focus on medical-oriented entrepreneurship, labs, research, etc., and we will try to attract these and associated industries to Houston • Businesses are now transforming from survival mode to adaptation mode, as customers are changing habits…there will be a whole new paradigm and businesses will have to adapt to it • Our port is working on its plan to deepen and widen the Ship Channel, and is working to bring in new chemical industries; election year caution and worldwide conflicts among energy producers have slowed things down; cold storage facilities are coming to the port • Mid-stream in O&G remains strong, and oil prices should remain depressed until the end of 2020; working from home cuts down on energy consumption in autos and planes, and is contributing to lower prices for oil • Green energy companies are expanding their footprints; nimble companies are adjusting • Sales tax collection from a combined 12 cities in our area is down only 2 percent, surprising many; the state’s Rainy Day Fund was depleted by Hurricane Harvey so it is not at full strength for the COVID pandemic

• Katy is seeing new business formation and government help for existing businesses such as retail, leisure, restaurants, hotels; officials are looking to expand industrial/distribution, with new furniture warehouses, along with Costco and Ross expansions; there is expansion in energy efficiency technology; the future is positive for the Katy area, which encompasses part of Ft. Bend, Harris and Waller counties • Around the state there is ample reason to be optimistic: a new Tesla plant announced for Austin, new aerospace and medical projects, PPE manufacturing; there was a surge of entrepreneurship in Texas following the Oil Recession of the ‘80s and there will be one this time as well, as soon as COVID comes under control; there are many plans for new start-ups and there have been over 50,000 online attendees on New Business webinars; so not all is doom and gloom

Capital Markets Update

Moderator: Reid Wilson, Wilson Cribbs & Goren PCN. Panelists: Greg Young, Grandbridge Real Estate Capital; Larry Peters, NorthMarq; Rhonda Sands, Veritex Community Bank •

Landlords need to be adaptive to the new circumstances and realize that it is smarter to do what has to be done to keep an existing tenant than to find a new one; smart landlords are finding many ways to accommodate temporarily stressed existing tenants; so far most landlords have collected the vast majority of rents due, up to 95 percent; this is not a time to scream at your tenants, but to listen to them and strengthen your

relationship, finding a middle ground that works for both sides • So far there are almost no “distressed loans,” foreclosures and the like, as lenders as well as landlords are trying to patch over these rough times with their borrowers; the government aid in the first 90 days has helped, but now that it has run out, the future is less clear; the lenders represented by the panelists have either no or very minimal delinquent loans so far; various workouts are starting to emerge with life companies, banks and other lenders; for now at least accommodating the borrower is the rule of thumb, although there is a lot of vulture money waiting on the sidelines should foreclosures begin later in the year; and the federal bank regulators support this approach, for now • The “agencies”—Fannie Mae, Freddie Mac and HUD—were created to

SEPTEMBER 2020

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provide capital in difficult circumstances and they are doing just that in today’s circumstances; CMBS lenders are harder to contact and less flexible

good ones and are working with them to help them through this, with rent concessions/modifications, since restaurants draw a lot of traffic into their centers

• Overall loan-to-value ratios (LTV) are inching downward, and interest rates are inching upward, but there are still non-recourse loans widely available; interest rates have trended up very marginally but remain very low by historical standards

• In 2019 there was positive office absorption in Houston, but the oil price crash and COVID have made 2020 a much different and more negative story; layoffs abound, and with them the declining demand for space; tenants are re-thinking their need for space, while realizing that workers are social animals and that interaction is good and necessary; tenants are realizing that there are inefficiencies connected with workfrom-home, and that will be curtailed to some extent moving forward; aggressive office landlords are proposing lease renewals favorable to their tenants far ahead of lease expiration, in order to retain tenants before they are lured away by other buildings

• Relationships between borrowers and lenders are more important than ever, and if you have an ongoing one with a lender you are in a better place to be considered for a new loan than a new borrower is • Although lenders are still seeking and closing new loans “with gusto,” closing takes a little longer and underwriting standards are a little more demanding; there is a lot of refinance demand • Multifamily and industrial are the most competed-for loans by lenders and hotel and office building loans are at the bottom of the list; lenders want the best borrowers and the best assets

Commercial Real Estate Forecast

Moderator: Kaci Hancock, REIS Associates. Panelists: Keith Edwards, Caldwell Companies; Jonathan Horowitz, Convive Hospitality; Robert Cromwell, Moody Rambin; Alfredo Guitierrez, SparrowHawk; Tami Pearson, Waterman Steele Real Estate Advisors • Office tenants are re-thinking a lot about their operations: return to private offices from open plans and cubes? Scale back work-from-home plans? Reduce large common areas, lobbies, break rooms, etc? How to “right-size” going forward?

• Houston industrial has pointedly not been impacted by COVID, and if anything, it has profited as more e-commerce has resulted in more demand for warehouse space; however, spec industrial development has slowed down somewhat; Dallas is booming in its industrial/distribution sector •

Residential land development is still going strong

•

Hotels are beginning to see an uptick in occupancy as people venture out on “road trips” near their home cities and worry less about catching the virus from surfaces

• Restaurants are adapting to survive and landlords are working with them where possible to add drive-thru windows and to create more patio/outdoor dining spaces; restaurants had to pivot quickly to survive, but many customers remain wary of going out to eat •

Restaurants have very thin margins and usually low or no cash reserves, so it has been a struggle for them until customers get comfortable again being around other customers; there have been and will be a lot of permanent closures; retail landlords of restaurants want to keep the 26

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• Flood control regulations have increased the cost of land radiating out from the CBD; many commercial real estate users are shifting to smaller footprints/smaller premises as costs go up •

Retail is seeing a trend towards brick and mortar locations as being “tryon stations” with the garment shipped to you in 48 hours from a central warehouse; this enables locations to be smaller, carry less inventory, and pay less rent

• Overall Houston and Texas and other southern cities and states are expected to gain from the fallout from COVID, as companies and their employees move out of the heavily congested cities where subway commuting is required

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September 10: Capital Markets Summit

September 1: Industrial Summit

October 15: Multifamily Virtual Event

October 15: Multifamily Virtual Event

November 12: Women in Real Estate Summit: South Texas

November 19: Women in Real Estate Summit: North Texas

December 10: Clink! Toast to Houston Women in Commercial Real Estate

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